Catlin Specialty Insurance Company v. Montelongo, Inc. et al

Filing 45

ORDER DENYING in part 32 MOTION for Default Judgment. This case is administratively CLOSED. Signed by Judge Xavier Rodriguez. (rf)

UNITED STATES DISTRICT COURT FOR THE
WESTERN DISTRICT OF TEXAS
SAN ANTONIO DIVISION
CATLIN SPECIALTY INSURANCE
COMPANY,
Plaintiff,
v.
MONTELONGO, INC. d/b/a
MONTELONGO HOMES &
REMODELING, MARIA MONICA
AYALA, FRANK KINGMAN, and
CLEMENTE LOPEZ d/b/a CL STUCCO,
Defendants.

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Civil Action No. 5:12-CV-711-XR

ORDER
On this day the Court considered Plaintiff’s motion for default judgment (Doc. No. 32). For
the following reasons, the Court denies the motion in part and finds that this case must be stayed
pending the outcome of Ewing Construction Co., Inc. v. Amerisure Insurance Co. in the Texas
Supreme Court.
I. Background
This insurance coverage declaratory judgment action, filed by Plaintiff, Catlin Specialty
Insurance, Co., arises out of Plaintiff’s coverage of Montelongo Homes and Remodeling (“MHR”).
Plaintiff is seeking a declaratory judgment that Plaintiff has no duty to indemnify or defend MHR in
MHR’s underlying action. The underlying action was brought by Ayala and Kingman (“the
homeowners”) against MHR, alleging causes of action for breach of contract, breach of warranty,
construction defects, DTPA violations, and negligence. The underlying action arose out of a contract

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between the homeowners and MHR, in which MHR contracted to construct a home for the
homeowners. The petition in the underlying action alleges that the exterior of the home, which is
made of stucco over OSB sheathing and a vapor barrier, began cracking. Despite assurances by MHR
that the stucco and exterior building were “performing properly,” the cracks in the stucco appeared
to be getting worse until it actually began falling off the home, leaving the vapor barrier and OSB
sheathing exposed to the elements and allowing water to enter the home and cause additional damage.
The petition further alleges that the problems in the home are “latent defects that are caused by
defective construction of the home by [MHR] and its subcontractors.” According to the homeowners,
as a result of these defects, portions of the home became uninhabitable. In response to the
homeowners’ complaints that the stucco was falling off the home, MHR reported the homeowners’
assertions to Plaintiff, who issued a first, and then a second, reservation of rights letter, requesting
information from MHR. To date, MHR has failed to comply with these requests.
Catlin filed its Complaint for Declaratory Judgment on June 23, 2012, although MHR was not
served with process until December 7, 2012. MHR failed to answer Plaintiff’s complaint within
twenty-one days of service of process, and accordingly, Plaintiff filed its Motion for Entry of Default
on January 22, 2013 (Doc. No. 30). The Clerk of the Court entered default as to MHR that same day.
Plaintiff filed this motion for Default Judgment seeking an order finding and declaring that Catlin
Specialty is under no duty to defend or indemnify MHR in connection with any of the claims brought
against MHR in the underlying action. The homeowners filed a response in opposition to Plaintiff’s
motion for default judgment (Doc. No. 36).
Catlin asserts that several exclusions in its policy with MHR apply to the allegations in the
underlying action and that, therefore, it has no duty to defend or indemnify MHR in connection with
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the underlying action. Specifically, Catlin urges that the Contractual Liability Exclusion (CLE) and
the Exterior Insulation and Finish System Exclusion (EIFS) bar coverage of the damages alleged by
the homeowners. The homeowners counter that the EIFS exclusion does not apply because the
petition in the underlying action alleges other latent defects, aside from the exterior, which have led
to the complained-of damage. Further, the homeowners argue that, because the law in Texas
regarding the Contractual Liability Exclusion is currently unsettled, the Plaintiff’s motion for default
judgment should be denied, or at least stayed until the issue is settled.
Regarding the EIFS exclusion, the Court finds that Plaintiff’s motion for default judgment
should be denied because the homeowners’ pleadings in the underlying action do not unambiguously
fall within the scope of the exclusion. However, because the law in Texas is unsettled on the
interpretation of the CLE, the Court finds that Plaintiff’s motion for default judgment should be
stayed pending a decision by the Texas Supreme Court in Ewing Construction Co., Inc. v. Amerisure
Insurance Co..
II.

Analysis

a.

Exterior Insulation and Finish Systems Exclusion
As Plaintiff recognizes, the duty to defend and the duty to indemnify are two separate and

distinct duties under Texas law. See Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d 819, 821–22
(Tex. 1997) (“[T]he duty to defend and the duty to indemnify by an insurer are distinct and separate
duties.”). The duty to defend is determined solely by the pleadings, without regard to the truth or
falsity of the allegations made. See Am. Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 848
(Tex.1994) (“If a petition does not allege facts within the scope of coverage, an insurer is not legally
required to defend a suit against its insured.”). In contrast, the duty to indemnify is not triggered until
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the actual facts establishing liability are determined. Trinity Universal, 945 S.W.2d at 821. It could
be that there is a duty to defend, yet later, upon a finding of no liability, for instance, no duty to
indemnify. Farmers Tex. Cnty. Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 82 (Tex. 1997). Plaintiff
correctly states that “the duty to indemnify is ‘justiciable before the insured’s liability is determined
in the liability lawsuit when the insurer has no duty to defend and the same reasons that negate the
duty to defend likewise negate any possibility the insurer will even have a duty to indemnify.’” Id. at
84 (emphasis in original). Further, “[a] court ‘resolves all doubts regarding the duty to defend in
favor of the duty and . . . construes the pleadings liberally.’” Trinity Universal Ins. Co. v. Employers
Mut. Cas. Co., 592 F.3d 687, 691 (5th Cir. 2010) (citing Zurich Am. Ins. Co. v. Nokia, Inc., 268
S.W.3d 487, 490–91 (Tex. 2008)). “Where the complaint does not state facts sufficient to clearly
bring the case within or without coverage, the general rule is that the insurer is obligated to defend
if there is, potentially, a case under the complaint within the coverage policy.” Id. at 691 (quoting
Heyden Newport Chem. Corp. v. S. Gen. Ins. Co., 387 S.W.2d 22, 26 (Tex. 1965)).
Plaintiff argues that the “Exterior Insulation and Finish Systems Exclusion,” which was made
part of the Catlin Specialty Policy, bars coverage in the present case. The EIFS exclusion bars
coverage for:
‘bodily injury,’ ‘property damage,’ or ‘personal and advertising injury arising out of,
caused by, or attributable to, whether in whole or in part, the following: [1.] The
design, manufacture, construction, fabrication, preparation, distribution and sale,
installation, application, maintenance or repair, including remodeling, service,
correction or replacement, of any ‘exterior insulation and finish system’ or any part
thereof, including the application or use of conditioners, primers, accessories,
flashings, coatings, caulking or sealants in connection with such a system . . . .
Doc. No. 1 at 8.
In their underlying action, the homeowners allege damage to exterior walls as well as “latent
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defects that are caused by defective construction of the home,” and also allege that such latent defects
“are causing extensive damage to the exterior, the interior components, and to the structural members
of the home.” Plaintiffs’ Original Petition and Requests for Disclosure at 2, Ayala v. Montelongo,
Inc. d/b/a Montelongo Homes & Remodeling, No. 2012-CI-01953 (407th Dist. Ct. filed July 23,
2012). Plaintiff Catlin urges that the court must not “‘read facts into the pleadings,’ ‘look outside
the pleadings,’ or ‘imagine factual scenarios which might trigger coverage.’” (Doc. No. 37 at 5)
(quoting Town Ctnr. Mall v. Zurich Am. Ins. Co., 797 F. Supp. 2d 786, 792 (S.D. Tex. 2011)).
However, the homeowners allege, in their pleadings in the underlying action, other latent defects aside
from the exterior walls that have led to the complained-of damage.
Moreover, the damage could be related to the installation of traditional stucco, which may not
fall under the EIFS exclusion in the policy. See Ins. Corp. of Hannover v. Skanska USA Bldg., Inc.,
No. B-05-304, 2008 WL 2704654 at *8 (S.D. Tex. July 3, 2008) (treating installation of “masonry,
plaster, stucco and exterior insulation and finish system” as separate and distinct, and finding that
“[s]ince the damage [to the exterior of the building] could be related to the installation of traditional
stucco, masonry or plaster” there were “several potential claims unrelated to any work involving
EIFS.” (emphasis added)).
Plaintiff cites Pine Oak Builders, Inc. v. Great American Lloyds Insurance Co. as support for
an interpretation excluding coverage. However, Pine Oak is distinguishable from the facts in the
current case for several reasons. First, the suits in Pine Oak alleged “improper installation of a
synthetic stucco product known as an Exterior Insulation and Finish System,” clearly bringing the
complaint within the EIFS exclusion. Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co., 279
S.W.3d 650 (Tex. 2009) (emphasis added). Second, as noted by the district court in Hannover, “[t]he
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EIFS exclusion in Pine Oak Builders was far more broad than the EIFS exclusion in the CGL policy
[in Hannover] . . . .” Hannover, 2008 WL 2704654 at * 7, n.5. In this case, the definition for an
“exterior insulation and finish system” included in the Catlin Policy does not specifically mention
stucco. (Doc. No. 1). Thus, the Court cannot declare that the homeowners’ allegations in the
underlying state court petition necessarily fall within the EIFS exclusion. Accordingly, the motion
for default judgment on the issue of the EIFS exclusion is denied.
b.

Contractual Liability Exclusion
Plaintiff also asserts that the CLE is a bar to coverage. Plaintiff’s Policy states that coverage

does not apply to “‘[b]odily injury’ or ‘property damage’ for which the insured is obligated to pay
damages by reason of the assumption of liability in a contract or agreement.” (Doc. No. 1 at 7).
Plaintiff argues that, under Texas law, the contractual liability exclusion bars coverage of the
homeowners’ claim. The Texas Insurance Code states that “any contract of insurance payable to any
citizen or inhabitant” of Texas is considered to be governed by Texas laws. TEX. INS. CODE ANN. art.
21.42. Therefore, because MHR is a Texas corporation, Texas law governs in this case. However,
the issue is currently unsettled law in Texas. In Ewing Construction Co., Inc. v. Amerisure Insurance
Co., the United States District Court for the Southern District of Texas concluded that “the
contractual liability exclusion applies when an insured has entered into a contract and, by doing so,
has assumed liability for its own performance under that contract.” Ewing Constr. Co., Inc. v.
Amerisure Ins. Co., 814 F. Supp. 2d 739, 747 (S.D. Tex. 2011). The Fifth Circuit originally affirmed
the Southern District’s ruling. Ewing Constr. Co., Inc. v. Amerisure Ins. Co., 684 F.3d 512 (5th Cir.
2012). On August 8, 2012, however, the Fifth Circuit withdrew its opinion in Ewing and certified
the following questions relevant to this case to the Texas Supreme Court:
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(1) Does a general contractor that enters into a contract in which it agrees to perform its
construction work in a good and workmanlike manner, without more specific provisions
enlarging this obligation, “assume liability” for damages arising out of the contractor’s
defective work so as to trigger the Contractual Liability Exclusion.
(2) If the answer to question one is “Yes” and the contractual liability exclusion is triggered,
do the allegations in the underlying lawsuit alleging that the contractor violated its common
law duty to perform the contract in a careful, workmanlike, and non-negligent manner fall
within the exception to the contractual liability exclusion for “liability that would exist in the
absence of contract.”
Ewing Constr. Co., Inc. v. Amerisure Ins. Co., 690 F.3d 628, 633 (5th Cir. 2012).
Because the Texas Supreme Court’s decision in Ewing will clarify the issue of the contractual
liability exclusion under Texas law, the Court’s holding will determine whether Catlin Speciality
Insurance Co. has a duty to defend or indemnify MHR in this case. Briefing before the Texas
Supreme Court is complete and the Court held oral argument on February 27, 2013. Consequently,
the issue of whether the CLE bars coverage in the case should be stayed pending the issuance of the
Ewing Construction Co., Inc. opinion.
III. Conclusion
For the reasons stated above, the Court denies Plaintiff’s motion for default judgment to the
extent that it is seeking a declaration that the Exterior Insulation and Finish System exclusion applies.
In regard to whether the Contractual Liability Exclusion applies, the Court finds that this case must
be stayed pending the outcome of Ewing Construction Co., Inc. v. Amerisure Insurance Co. in the
Texas Supreme Court.
Accordingly, the Court ORDERS that this case is hereby STAYED. The parties are directed
to file an advisory with this Court when an opinion in Ewing Construction Co. is delivered by the
Texas Supreme Court. The Clerk is DIRECTED to administratively close this case until further order
of the Court.
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It is so ORDERED.
SIGNED this 18th day of April, 2013.

_________________________________
XAVIER RODRIGUEZ
UNITED STATES DISTRICT JUDGE

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