Mt. Hawley Insurance Company v. Slay Engineering, Texas Multi-Chem and Huser Construction, LLC
Filing
19
MEMORANDUM OPINION AND ORDER, Motions terminated: GRANTING 11 MOTION for Summary Judgment on the Duty to Defend filed by Slay Engineering, Texas Multi-Chem and Huser Construction, LLC, DENYING 13 MOTION for Summary Judgment and Brief in Support filed by Mt. Hawley Insurance Company.. Signed by Chief Judge Orlando L. Garcia. (mgr)
FILED
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF TEXAS
SAN ANTONIO DIVISION
Mt. Hawley Insurance Company,
AUG
CLERK.
U.S.
52018
1
DISTRICT
COURT
ISTRJ.QJ(XAS
EPUffRK
§
Plaint?ff
§
§
V.
Slay Engineering, Texas Multi-Chem, and
Huser Construction Company, Inc.,
Civil Action No. 5-18-cv-00252-OLG
§
§
§
Defendant.
§
§
MEMORANDUM AND ORDER
On this day, the Court considered Defendant's Motion for Summary Judgment on the
Duty to Defend (docket no. 11) ("Defendant's Motion") and Plaintiff's Motion for Summary
Judgment (docket no. 13)' ("Plaintiff's Motion," and collectively with Defendant's Motion, the
"Motions"). After considering the Motions and for the reasons set forth below, the Court finds
that Defendant's Motion should be GRANTED and Plaintiff's Motion should be DENIED.
BACKGROUND
The present case concerns a coverage dispute between a general contractor, Defendant
Slay Engineering / Texas Multi-Chem / Huser Construction ("Defendant" or "Huser"), and its
insurer, Plaintiff Mt. Hawley Insurance Company ("Plaintiff' or "Mt. Hawley"). Before
beginning its substantive analysis of the Motions, the Court will first briefly summarize the
relevant factual background and the parties' underlying insurance agreements.
Plaintiffs Motion for Summary Judgment is asserted, in the alternative, as a Motion for
Judgment on the Pleadings. See docket no. 13.
1
1
A. Project Background and Relevant Chronology
On July 20, 2015, the City of Jourdanton (the "City") entered into a construction contract
with Defendant Huser (a joint venture) to design and construct a municipal sports complex (the
"Project"). The Project consisted of four little league baseball fields, a softball field, parking lots,
and a new swimming pooi. Huser entered into a subcontract with Cody Pools, Inc. ("Cody
Pools") to design and build the swimming pool. Huser also entered a subcontract with Q-Haul,
Inc. ("Q-Haul") to perform earthwork, grading, and storm drainage work at the site, including for
the planned paved parking lots.
On January 10, 2015, after substantial completion of the Project, a Huser employee
noticed cracks in the pool and in the parking lot paving. Huser placed Cody Pools on notice of
the defective work and requested that Cody Pools provide a repair solution. Huser did not
immediately place Q-Haul on notice because the parking lot cracks appeared to be minor. Cody
Pools began repair work on the pool shortly thereafter. However, in early March 2015, a Huser
employee again noticed that the pool cracks appeared to be worsening. Cody Pools and Huser
were unable to agree on a future repair solution for the pool.
On May 3, 2017, the City notified Huser of several alleged deficiencies involving the
swimming pooi structure, asphalt paving, concrete flatwork and curbing, and overall site
drainage. Throughout the summer of 2017, the City, Huser, Cody Pools and Q-Hall engaged
engineers and conducted ongoing discussion as to how any defects to the Project could best be
cured. Cody Pools
assertedthrough an engineer it had hired to evaluate the poolthat the pool
structure was stable and that minor crack repairs would allow the pool to be operational for
several years. However, on August 30, 2017, the City rejected Cody Pools' repair proposal.
On December 21, 2017, the City filed a lawsuit against Huser alleging breach of contract
and negligence claims. See City
of Jourdanton v. Slay Engineering / Texas Multi-Chem / Huser
Construction, LLC and North American Specialty Ins. Co., No. 17-12-1181-CVA (8 1st Judicial
District Court of Atascosa County, Texas) (hereinafter, the "Underlying Suit"). On February 13,
2018, the City filed its First Amended Petition, which
allegedin partthat
the "work
performed by [Huser], its subcontractors and suppliers, was [] defective and not in compliance
with the requirements of the agreement with the City or with the duties of care arising
thereunder." Docket no. 11-12 ¶ 4.7. Specifically, the City alleged "substantial cracks in the
swimming pool, parking lot, drives and other paved surfaces.
. .
and deficient site drainage." Id.
at ¶ 3.3.
On February 21, 2018, following receipt of the First Amended Petition, Huser notified
Plaintiff Mt. Hawley of the claims filed by the City and provided Mt. Hawley with the First
Amended Petition. Five days later, the City filed a Second Amended Petition, which contained
allegations substantially similar to those in the First Amended Petition. See docket no. 1-1 (the
"Second Amended Petition" or "Petition"). Huser also provided Mt. Hawley with the City's
Second Amended Petition, and it is the live pleading in the Underlying Suit. See id.
On March 14, 2018, Mt. Hawley acknowledged that it had received the Second Amended
Petition and that its coverage analysis would be conducted based on the updated complaint,
rather than based on the City's prior pleadings. See docket no. 11-15. On March 16, 2018,
Mt. Hawley denied coverage to Huser based on certain exclusions in Huser's insurance policies
with Mt. Hawley. See docket no. 11-16.
On March 16, 2018, Mt. Hawley filed this instant lawsuit seeking a judgment declaring
that it has no duty to indemnify or defend Huser with respect to the allegations in the City's
3
Underlying Suit. See docket no.
1.
On April 6, 2018, Mt. Hawley served Huser with this federal
lawsuit. Defendant's Motion notes that on the same day, Mt. Hawley also served Huser with a
separate federal complaint seeking a similar declaratory judgment (that will require the
interpretation of the same underlying contract language) with respect to a separate Huser-related
state court litigation in Harris County,
Texas.2
See docket no. 11 p. 6.
On April 27, 2018, Huser answered Mt. Hawley's federal complaint and filed
counterclaims asserting that Mt. Hawley breached its agreement with Huser and violated the
Texas Insurance Code by denying coverage and failing to pay Huser's claims and defense costs.
See docket no. 6.
B. Governing Mt. Hawley Insurance Policies
With respect to the relevant period, Mt. Hawley issued two types of policies providing
certain insurance coverage to Huser (collectively, the "Policies"): Commercial General Liability
Policies spanning December 31, 2014 through January 1, 2019, see, e.g., docket no. 1-2, and
Commercial Excess Liability Policies issued for the same period, see, e.g., docket no. 1-6. The
terms of each of the Policies appear to be the same or substantially similar.
As a general matter, the Policies provide insurance coverage for "bodily injury" and
"property damage." See, e.g., docket no. 1-2 p. 4. Coverage under the Policies applies only if the
"bodily injury" or "property damage" is caused by an "occurrence" that takes place in the
"coverage territory" during the "policy period." Id. An "occurrence," under the Policies, is
defined as an accident, including continuous or repeated exposure to substantially the same
Defendant's Motion states that Huser's other underlying casefor which it seeks coverage
from Mt. Hawleyis Eagle Heights Pleasanton, LLC v. Schaffer Mech. Co., Inc., No. 201809694, in Harris County, Texas. Upon a review of the court docket for the United States District
Court for the Southern District of Texas, it appears that the associated federal action in which
Mt. Hawley seeks similar declaratory relief is Mt. Hawley Ins. Co. v. Huser Constr. Co., Inc.,
No. 4:18-CV-787 (S.D. Tex. filed Mar. 13, 2018).
2
4
general harmful conditions.
See
id.
at pp. 18-19. "Property damage," as defined by the Policies,
is (a) physical injury to tangible property, including all resulting loss of use of that property, and
(b) loss of use of tangible property that is not physically injured. See
id.
at p. 19.
Further, pursuant to Section l.A of the Commercial General Liability Policies,
Mt. Hawley "will have the right and duty to defend the insured against any 'suit' seeking.
damages" related to any such covered "property damage" or "bodily injury." Id. at p. 4.
However, the Policies state. that Mt. Hawley has no duty to defend against any suit seeking
damages for any "bodily injury" or "property damage" that is excluded from the Policies'
coverage.
See
id.
The Policies' coverage has two relevant exclusions for the purpose of resolving the
instant Motions. First, pursuant to Section
1.2.1,
coverage excludes "Damage To Your Work:
[p]roperty damage" to 'your work' arising out of it or any part of it and included in the
'productscompleted operations hazard." Id. at p.
8
(hereinafter, the "Your Work Exclusion").
However, the Policies provide that "[t}his exclusion does not apply if the damaged work or the
work out of which the damage arises was performed on your behalf by a subcontractor." Id.
Second, each of the Policies contains a separate endorsement that specifies that coverage
does not extend to any suit for "bodily injury" or "property damage" arising directly or indirectly
out of a breach of "express or implied contract, breach of express or implied warranty, or fraud
or misrepresentation regarding the formation, terms or performance of a contract."
See
id.
at
p. 52 (hereinafter, the "Breach of Contract Exclusion")
STANDARD OF REVIEW
Summary judgment is appropriate as to a claim or part of a claim if "the pleadings,
depositions, answers to interrogatories, and admissions on file, together with the affidavits, if
5
any, show that there is no genuine issue as to any material fact and that the moving party is
entitled to judgment as a matter of law." Celotex Corp.
v.
Catrett, 477 U.S. 317, 322 (1986)
(quoting Fed. R. Civ. P. 56(c)). A dispute about a material fact is genuine
"if the evidence is such
that a reasonable jury could return a verdict for the nonmoving party." Anderson
v.
Liberty
Lobby, Inc., 477 U.S. 242, 248 (1986).
"Once a movant makes a properly supported motion, the burden shifts to the nonmovant
to show that summary judgment should not be granted." S& W Enterprises, L. L. C.
Bank of Alabama, 315 F.3d 533, 537 (5th Cir. 2003) (citing Celotex Corp.
v.
v.
South Trust
Caltrett, 477 U.S.
317, 321-25 (1986)). "The nonmovant may not rest upon allegations in the pleadings or
complaint, but must utilize summary judgment facts demonstrating the existence of a genuine
issue for trial." Id. (citing Anderson
v.
Liberty Lobby, Inc., 477 U.S. 242, 255-57 (1986)). "All
evidence and reasonable inferences to be drawn therefrom must be viewed in the light most
favorable to the non-movant." Id. (citing United States
v.
Diebold, Inc., 369 U.S. 654, 655
(1962)).
IJfitI)1
Plaintiffs Motion and Defendant's Motion each ask the Court to interpret the Policies,
and upon doing so, determine whether the damages claimed in the Underlying Suit are covered
by the Policies. Specifically, Plaintiffs Motion seeks an order from this Court declaring that the
Policies exclude coverage for the damages arising in the Underlying Suit, and therefore,
Mt. Hawley has no duty to defend and no duty to indemnify
Huser.3
See docket no. 13 p. 17. On
the other hand, Defendant's Motion seeks an order from this Court finding that the Policies
On the same basis, Mt. Hawley also seeks summary judgment on Defendant's Texas Insurance
Code counterclaims. See docket no. 13 pp. 16-17.
require Mt. Hawley to defend Huser in the City's Underlying
Suit.4
See docket no. 11 p. 20.
Given that both Plaintiff's Motion and Defendant's Motion address identical issues related to the
scope of the Policies' coverage and Mt. Hawley's duty. to defend, the two Motions will be
addressed together.
I. Insurance Policy Interpretation Under Texas Law
The parties agree that Texas law governs the Court's substantive analysis in this diversity
case. See docket nos. 11 p. 6, 13 p. 6 & 7 pp. 2-3; see also Northfleld Ins. Co.
v.
Loving Home
Care, Inc., 363 F.3d 523, 527-28 (5th Cir. 2004). Under Texas law, the interpretation of an
insurance policy is a question of law for the court to determine. Am. Int'l Specialty Lines Ins.
Co. v. Rentech Steel LLC, 620 F.3d 558, 562 (5th Cir. 2010). The traditional rules for
construction of contracts are applicable to an insurance contract. Forbau v. Aetna Life Ins. Co.,
876 S.W.2d 132, 133 (Tex. 1994). "No single provision taken alone will be given controlling
effect; rather, all the provisions must be considered with reference to the whole instrument."
Rentech Steel LLC, 620 F.3d at 562. "An interpretation that gives a reasonable meaning to all
provisions is preferable to one that leaves a portion of the policy useless, inexplicable, or creates
surplusage." Liberty Mut. Ins. Co.
v.
Am. Emp 'rs Ins. Co., 556 S.W.2d 242, 245 (Tex. 1977).
When construing a policy, all parts of the policy are read together to ascertain the agreement of
the parties. Forbau, 876 S.W.2d at 133.
'
The Court notes that Huser' s counterclaims do not explicitly assert a claim for declaratory
judgment in its favor with respect to the duty to defend. See docket no. 6. Thus, although the
Court will necessarily determine whether Mt. Hawley has a duty to defend the Underlying Suit in
resolving the instant Motions, the Court's Order will be limited to adjudicating Mt. Hawley's
claim for declaratory relief. See Chen v. Am. Family Mut. Ins. Co., No. 12-cv-1942-REB-MJW,
2013 WL 4434370, at *1 (D. Cob. Aug 15, 2013) (noting that a court may not issue a
declaratory judgment in favor of party that had not asserted a claim for declaratory relief when
resolving cross-motions for summary judgment in insurance coverage dispute). However, this
treatment does not affect the Court's merits analysis, nor does the Court expect that it will impact
the practical effect of this Order.
':4
Moreover, if policy language is ambiguous, courts construe any ambiguity "strictly
against the insurer and liberally in favor of the insured," Barnett
v.
Aetna Life Ins. Co., 723
S.W.2d 663, 666 (Tex. 1987), and an "even more stringent construction is required' where the
ambiguity pertains to an 'exception or limitation on [the insured's] liability under the
policy'." Rentech Steel LLC, 620 F.3d at 562-63 (quoting Gulf Chem. & Metallurgical Corp.
Associated Metals & Minerals Corp.,
1
v.
F.3d 365, 369 (5th Cir. 1993)). Consequently, the court
must adopt the "construction of an exclusionary clause urged by the insured as long as that
construction is not itself unreasonable, even if the construction urged by the insurer appears to be
more reasonable or a more accurate reflection of the parties' intent." Glover
v.
Nat '1 Ins.
Underwriters, 545 S.W.2d 755, 761 (Tex. 1977).
Finally, when an insurance policy contains an endorsement that directly conflicts with the
general policy language, the endorsement is controlling. Westchester Fire Ins.
v.
Heddington Ins.
Ltd., 883 F. Supp. 158, 165 (S.D. Tex. 1995). However, when possible, endorsements and policy
provisions must be read and construed together. Mid-Continent Cas. Co.
v.
Bay Rock Operating
Co., 614 F.3d 105, 115 (SthCir. 2010).
II. Mt. Hawley's Duty to Defend and/or Indemnify Huser
"In liability insurance policies generally, an insurer assumes both the duty to indemnify
the insured
. . .
and the duty to defend any lawsuit brought against the insured that alleges and
seeks damages for an event potentially covered by the policy, even if it is groundless, false, or
fraudulent, subject to the terms of the policy." D.R. Horton-Texas, Ltd.
v.
Markel Intern. Ins.
Co., Ltd., 300 S.W.3d 740, 743 (Tex. 2009) (citations omitted).
However, the duty to defend and the duty to indemnify "are distinct and separate duties."
Utica Nat'l Ins. Co. of Tex.
v. Am.
Indem. Co., 141 S.W.3d 198, 203 (Tex. 2004) (citation
8
omitted). "An insurer must defend its insured if a plaintiff's factual allegations potentially
support a covered claim, while the facts actually established in the underlying suit determine
whether the insurer must indemnify its insured." Zurich Am. Ins. Co.
v.
Nokia, Inc., 268 S.W. 3d
487, 490 (Tex. 2008). "Thus, an insurer may have a duty to defend but, eventually, no obligation
to indemnify." Id. at 490-91.
A. Duty to Defend
1.
"Eight Corners"Rule and Burden-Shfling Framework
To determine whether Mt. Hawley has a duty to defend Huser in the Underlying Suit, the
Court must apply the "eight corners" rule. Guide One Elite Ins. Co.
v.
Fielder Rd. Baptist
Church, 197 S.W.3d, 305, 308 (Tex. 2006). "The rule takes its name from the fact that only two
documents are ordinarily relevant to the determination of the duty to defend: the policy and the
pleadings of the third-party claimant." Id.
When applying the "eight corners" rule, any ambiguities regarding the duty to defend are
liberally construed in favor of the insured and are generally resolved in favor of the duty. See
Zurich Am. Ins. Co.
v.
Nokia, Inc., 268 S.W.3d 487, 491 (Tex. 2008). The duty to defend exists if
the third-party plaintiff's factual allegations in the underlying suit "potentially support a covered
claim." Id. at 490; see also Heyden Newport Chem. Corp.
v. S.
Gen. Ins. Co., 387 S.W.2d 22, 26
(Tex. 1965) ("Where the complaint does not state facts sufficient to clearly bring the case within
or without the coverage, the general rule is that the insurer is obligated to defend if there is,
potentially, a case under the complaint within the coverage of the policy."). As a result, if the
third-party complaint potentially includes a covered claim, the insurer must defend the entire
suit. Zurich Am. Ins. Co., 268 S.W.3d at 491. The district court must focus its inquiry on the
alleged facts and circumstances of the origin of the damages, not on the asserted legal theories.
See Am. Home Assur. Co.
v.
United Space All., LLC, 378 F.3d 482, 487 (5th Cir. 2004).
In determining whether Mt. Hawley has a duty to defend under the agreement, the initial
burden is placed on Huser to demonstrate that coverage exists considering only the Policies and
the City's Petition. See Federated Mut. Ins. Co.
723 (5th Cir. 1999).
v.
Grapevine Excavation, Inc., 197 F.3d 720,
If the first step of the analysis is satisfied, the burden then shifts to Mt.
Hawley to establish that one or more of the policy exclusions apply to negate any otherwise
applicable duty to defend. See id.
In light of the allegations contained within the four corners of the petition in the
Underlying Suit, Mt. Hawley concedes thatat least for the purposes of instant
first step of the analysis is
satisfied.5
Motionsthe
For that reason, resolution of the duty to defend issue in
Defendant's Motion and Plaintiffs Motion only requires the application of the second step of the
applicable framework, and more specifically, an analysis of the impact of the Breach of Contract
Exclusion in the Policies.
The parties' asserted interpretations of the Breach of Contract Exclusion and the Court's
analysis of the exclusion's impact are discussed in detail below.
2. Analysis of the Breach of Contract Exclusion
In this case, Mt. Hawley argues that it "does not have a duty to defend Huser in the
Underlying Action because all of the allegations in the Underlying Action are excluded by
Mt. Hawley's Breach of Contract Exclusion." Docket no. 12 p.8. On the other hand, Huser
Specifically, Mt. Hawley's response to Defendant's Motion states that "[f]or purposes of this
summary-judgment motion, Mt. Hawley agrees the Underlying Action potentially alleges
property damage covered by the policy's insuring agreement." Docket no. 12 p. 8. Similarly, in
its own motion, Mt. Hawley states that the "claims against Huser potentially state a covered
claim for property damage under the Mt. Hawley Policies." Docket no. 13 p. 9.
10
contends that the Breach of Contract Exclusion should not be interpreted so broadly as to
preclude coverage related to damages caused by Huser's subcontractors. See docket no.
11
pp. 8-
18.
For the reasons set forth below, the Court concludes that Mt. Hawley has not met its
burden of demonstrating that the Breach of Contract Exclusion negates its duty to defend the
Underlying Suit.
a.
Causal Link Between Huser 's Breach and the Underlying Suit
As discussed above, the Breach of Contract Exclusion reads, in relevant part, that
coverage "does not
apply...
directly or indirectly out
'suit' for
[to] any claim or
.
.
.
'property damage'
.
.
.
arising
of' a breach of contract or breach of express or implied warranty. See,
e.g., docket no. 1-2 p. 52 (emphasis added).
The Court first must determine the appropriate scope of the term "arising out
Breach of Contract Exclusion. Texas courts read the phrase "arising out
of' in the
of' to require "but for"
causation. In interpreting another general commercial liability insurance policy, the Supreme
Court of Texas has held that "arise out of' means that there is simply a 'causal connection or
relation,' which is interpreted to mean that there is 'but for' causation, though not necessarily
direct or proximate causation." Utica Nat'! Ins. Co., 141 S .W.3d at 203 (internal citations
omitted). Relying on Sport Supply Group, Inc.
v.
Columbia Cas. Co., 335 F.3d 453, 458 (5th Cir.
2003), Mt. Hawley contends that a policy exclusion preventing coverage for injuries "arising out
of' particular conduct "need only bear an incidental relationship to the described conduct for the
exclusion to apply." However, since Sport Supply, courts have made clear that any such
"incidental relationship" must still be a causal one. See Nat '1 Fire Ins. Co.
RadiologyAssocs., L.L.P., 439 Fed. App'x 293, 296 (5th Cir. 2011).
11
of Hartford
v.
Apparently recognizing that some "causal" connection must be shown, Mt. Hawley
appears to argue that the existence of the contract between Huser and the City may be a
sufficient causal link between the alleged property damage and the underlying contract, such that
the policy exclusion is triggered. Specifically, Mt. Hawley asserts that "but for the Contract,
there would be no cause of action to bring against Huser." Docket no. 13 P. 12; see also docket
12 p. 13 ("[Huser's] liability would not exist but for the Contract.").
The problem with Mt. Hawley's comparison is that it conflates Huser's causation of
"property damage" with Huser's ultimate contractual liability for economic losses. However,
merely because Huser may ultimately be liable for certain of the City's economic losses under a
breach of contract theory does not necessarily mean that all of the alleged property damage was
causally attributable to Huser' s alleged breach of its contract with the City.
Indeed, on that basis, another court has specifically rejected such a broad interpretation
of "arising out of' as it is contained in the Mt. Hawley policy. In Mt. Hawley Ins. Co.
v.
Aguilar,
No. SACV 07-00969, 2008 WL 11342656 (C.D. Cal., Feb. 2, 2008), the court considered
Mt. Hawley's precise argument regarding the scope of the breach of contract exclusion contained
in Mt. Hawley's insurance agreements. The Aguilar court rejected Mt. Hawley's proposed
interpretation of the exclusion because it "would essentially defeat coverage in all instances
because virtually all property damage that [the insured] would seek coverage for could be
characterized as arising directly or indirectly out of a breach of contract or implied warranty." Id.
at * 3. Instead, the Aguilar court reasoned that "a more reasonable interpretation of this exclusion
is that it pertains to [the insured's] liability for repairing its own deficient work or to specific
contractual obligations that [the insured] has assumed." Id. Accordingly, the Aguilar court found
12
thatat the
summary judgment
stageit
could not conclude that coverage was excluded just
because the insured contractor had been sued for a breach of contract by the property's owner.
The Court agrees with the general analysis by the Aguilar court (albeit in a slightly
different posture), and the Court finds that the "directly or indirectly" and "arising out
of'
language requires that Mt. Hawley demonstrate that Huser 's breach of contract was a "but for"
(though not necessarily proximate) cause of the alleged property damage. The fact that all claims
contained in the Underlying Suit have some relation to Huser's contract with the City or that
Huser has been sued for breach of contract are not alone enough to trigger the Breach of Contract
Exclusion. See Scottsdale Ins. Co.
v. Mt.
Hawley Ins.Co., No. M-l0-58, 2011 WL 9169946 (S.D.
Tex. June 15, 2011) (same breach of contract exclusion does not apply where allegations of
property damage are incidentally related to "the existence of a contract, [but] they do not
necessarily bear an incidental relationship to a breach of that contract") (emphasis in original).
Applying that standard, the Court agrees with Mt. Hawley that Huser' s breach of contract
itself may have been one "but for" cause of the underlying "property damage." For example, the
City's complaint specifically alleges that Huser breached the contract by failing to correct the
defective, non-conforming work performed at the site, and presumably, some of the "property
damage" may have arisen from Huser's alleged inaction. See docket no. 1-1 at
Thus, in an absolute sense, certain of the allegations
mightin
¶IJ
3.5 & 4.2.
a vacuumsupport
Mt. Hawley's exclusion argument.
Unfortunately for Mt. Hawley, however, that alone is not enough to negate Mt. Hawley's
duty to defend. For Mt. Hawley's duty to be erased, it would have to also be true that the facts
alleged in the Underlying Suit demonstrate that there are no other independent, covered (nonexcluded) "but for" causes of the alleged property damage. See Section II.B.2, infra. Therefore,
13
the Court must determine (i) whether there were other independent "but for" causes of the
"property damage" at the basis of the Underlying Suit, and (ii) jf so, whether those causes of the
"property damage" are also excluded by the Policies.
b. Subcontractors Independent Causation ofthe Injury
"When two separate
liability
eventsone that is
excluded and one that is covered by the general
policymay independently have caused
the accident, Texas law mandates that the
general liability policy also provide coverage despite the exclusion." EMCASCO Ins. Co.
v. Am.
Intern. Specialty Lines Ins. Co., 438 F.3d 519, 528 (5th Cir. 2006); Utica, 141 S.W.3d at 204
("In cases involving separate and independent causation, the covered event and the excluded
event each independently cause the plaintiffs injury, and the insurer must provide coverage
despite the exclusion."). The City's Petition in the Underlying Suit specifically asserts that "work
performed by [Huser], its subcontractors and suppliers, was [] defective." Docket no. 1-1 p. 5
(emphasis added). As such, the face of the Petition clearly alleges that entities other than Huser
are responsible for the allegedly defective work and the resulting damage, either in whole or in
part.6
Therefore, the Court finds that the allegations in the City's Petition in the Underlying Suit
leave open the possibility that the property damage may have occurred "even in the absence
6
of' a
The fact that the property damage was caused by Huser's subcontractors is also what makes
this case distinguishable from two cases cited repeatedly by Mt. Hawley in its briefing. In both
Sport Supply Group, Inc. v. Columbia Cas. Co., 335 F.3d 453 (5th Cir. 2003) and Scottsdale Ins.
Co.v. Mt. Hawley Ins. Co., No. M-10-58, 2011 WL 9169946 (S.D. Tex. June 15, 2011), the
damage and injuries that were the basis for the underlying lawsuits were allegedly caused by
faulty workmanship (and the resulting breach of contract) by the insured party. In this case, the
allegations in the Underlying Suit make clear that Huser' s subcontractors are allegedly
responsible for the alleged faulty workmanship that resulted in the "property damage." Neither
the Sport Supply or Scottsdale opinions involve an analysis of whether a non-excluded cause also
independently resulted in the underlying "property damage".
14
breach of contract or implied duty by
Huser.7
See Utica, 141 S.W.3d at 205 (concluding that
insurer had duty to defend when injury or damage "could" have occurred even absent the
excluded conduct). Thus, Mt. Hawley has a duty to defend Huser in the Underlying Suit, unless
the other alleged "but for" causesdefective work by Huser's subcontractors and
suppliers
would also be excluded under the contract. The Court analyzes that issue below.
c.
The Subcontractor Exception to the "Your Work" Exclusion
As discussed above, the Policies contain the Your Work Exclusion which bars coverage
for certain "property damage" arising directly from Huser's own work. See Background, supra.
However, the Your Work Exclusion contains an exception that explicitly states that coverage is
not excluded "if the damaged work or the work out of which the damage arises was performed
on your behalfby a subcontractor." Docket no. 1-2 p. 8 (emphasis added).
Mt. Hawley argues that the subcontractor exception to the Your Work Exclusion is
"irrelevant" because it has been overridden by the endorsement containing the Breach of
Contract Exclusion. See docket no. 12 p. 14. Thus, according to Mt. Hawley, Huser's
subcontractors' alleged failures are also subsumed by the Breach of Contract Exclusion because
their work was incidentally related to Huser's work and breach of contract. See id. In response,
Huser asserts that such an interpretation would be improper because it would require the Court to
read the subcontractor exception out of the Policies. See docket no.
11
p. 19.
Although it is true that policy endorsements control over general policy language in cases
of direct conflict, Westchester Fire Ins., 883 F. Supp. at 165, the Court is obligated to read
endorsements and policy provisions together and attempt to give meaning to all component parts
The Court reiterates that this conclusion is based on the allegations in the City's Petition, and
the Court is mindful that the evidence in the Underlying Suit may ultimately show otherwise. As
an example, the Court is not privy to the details regarding Huser's agreement with the City or
Huser's exact obligations pursuant to that contract.
15
of the agreement. See Mid-Continent Gas.
Go., 614 F.3d at 115. Thus,
if the endorsements and
the general policy language can be reasonably read in a way such that they can both be given
meaning without forcing a direct conflict, the Court should do so. See id.
Under Section 1.2.1 of the Policies, the coverage provided by Mt. Hawley excludes
damage to "your work arising out of it or any part of it." Id. at p. 8. Courts interpreting "your
work" exclusions have stated that they are intended to preclude coverage for property damage to
the insured's work. See Am. Home Assur. Co.
v.
Cat Tech, L.L.C., 660 F.3d 216, 222 (5th Cir.
2011). However, the Supreme Court of Texas has also explicitly described the purpose of the
subcontractor exception to "your work" exclusions, how the exception should be interpreted, and
how it is intended to distinguish between work conducted by the insured and work performed by
its subcontractors. See Lamar Homes, Inc., 242 S.W.3d at 11. Specifically, in Lamar Homes, the
Supreme Court of Texas stated that:
[T]his exception was added to protect the insured from the consequences of a
subcontractor's faulty workmanship causing 'property damage.' Thus, when a
general contractor becomes liable for damage to work performed by a
subcontractor . . . the subcontractor exception preserves coverage that the 'yourwork' exclusion would otherwise negate.
Id.
As discussed above in Section II.A.2.a of this Order, a natural reading of the Breach of
Contract Exclusion is that "it pertains to [the insured's] liability for repairing its own deficient
work or to specific contractual obligations that [the insured] has assumed." See Aguilar, 2008
WL 11342656, at *3 On the other hand, it is not natural to interpret the Breach of Contract
Exclusion such that it encompasses all work incidentally related to the Project regardless of the
party that performed the work or the capacity in which it did so. Indeed, doing so in this case
would both (i) unnecessarily render the subcontractor exception to the Your Work Exclusion
16
without meaning, and (ii) mean that the Court has impermissibly resolved any potential
ambiguity related to the scope of the exclusions in favor of the insurer, rather than the
insured.
Accordingly, the Court declines to adopt the sweeping interpretation asserted by
Mt. Hawley, and instead finds that the Policies should be interpreted such that the subcontractor
exception to the Your Work Exclusion still has
3.
meaning.8
Conclusion
In sum, the Court finds that the allegations in the underlying Petition demonstrate that
(i) Huser's subcontractors may have been an independent "but for" cause of the "property
damage," and (ii) if so, coverage for that damage is not excluded by the Policies' Breach of
Contract Exclusion. For that reason, the Court concludes that the allegations in the Underlying
Suit "potentially support a covered claim," Zurich Am. Ins. Co., 268 S.W. 3d at 490, and thus,
that Mt. Hawley has a duty to defend Huser in the Underlying Suit.
B. Duty to Indemnify
Unlike an insurer's duty to defendwhich is determined on the facts alleged in the
underlying
complaintan insurer's duty to indemnify
established in the underlying suit."
D.R.
is determined by the "facts actually
Horton-Texas, 300 S.W.3d at 744. Specifically, the
Supreme Court of Texas has stated that:
The insurer's duty to indemnify depends on the facts proven and whether the
damages caused by the actions or omissions proven are covered by the terms of
8
It also appears that the Policies contain copyrighted material from (or are otherwise based on
standard material from) the Insurance Services Office. See, e.g., docket no. 1-2 ("Includes
copyrighted material of Insurance Services Office."). Other courts have noted that that the
Insurance Services Office issues an endorsement that may be included in commercial general
liability policies that explicitly eliminates the subcontractor exception to the "your work"
exclusion. See Lamar Homes, 242 S.W.3d at 12. Had the parties intended to eliminate coverage
for all damage caused by subcontractors' performance, the inclusion of that endorsementin
addition to the Breach of Contract Exclusion endorsementmay have been a more
straightforward approach. See id.
17
the policy. Evidence is usually necessary in the coverage litigation to establish or
refute an insurer's duty to indenmify.
Id. As such, "[n]o duty to indemnify arises unless the underlying litigation establishes liability
for damages covered by the insuring agreement of the policy." Great
Mittlestadt, 109 S.W.3d 784, 786 (Tex.
Am. Lloyds Ins. Co. v.
App.Fort Worth 2003, no pet.) (emphasis in original);
see Farmers Texas Cnty. Mut. Ins. Co.
v.
Grffln, 955 S.W.2d 81, 84 (Tex. 1997) ("It may
sometimes be necessary to defer resolution of indemnity issues until the liability litigation is
resolved."). It is on this basis that Huser asserts that Mt. Hawley's request for judgment with
respect to the issue of indemnification is premature until liability has been determined in the
Underlying Suit. See docket no. l'7pp. 6-7.
Mt. Hawley's request for summary judgment notes that there is an exception to the
general rule that indemnification can only be determined once the scope of liability has been
established. Indeed, the Supreme Court of Texas has held that the duty to indemnify may be
justiciable before liability is determined "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 ever have a
duty to indemnify." See GrfJIn, 955 S.W.2d at 84. Thus, for the same reasons Mt. Hawley
contends that coverage is excluded and it has no duty to defend, Mt. Hawley also contends it has
no duty to indenmify.
As set forth in the prior sections, the Court has concluded that the facts alleged in the
underlying third-party Petition do not demonstrate that Mt. Hawley's duty to defend has been
negated, and instead demonstrate that Mt. Hawley must defend Huser in the Underlying Suit. See
Section II.A, supra. Accordingly, the narrow exception set forth in GrfJIn does not apply, and
the Court believes that it would be premature at this stage to determine to what
Mt. Hawley must indemnify Huser for damages from the Underlying Suit.
18
extentif any
For that reason, Plaintiff's Motion must be denied to the extent it seeks judgment with
respect to the question of indemnification. However, the Court's denial is made without
prejudice to Mt. Hawley again seeking judgment with respect to its indemnification duty if "the
facts actually established" in the Underlying Suit demonstrate that the underlying "property
damage" is not in fact covered under the Policies.
III. Huser's Texas Insurance Code Claims
Mt. Hawley also seeks summary judgment as to Huser's counterclaims under the Texas
Insurance Code, which assert that Mt. Hawley acted in bad faith in denying coverage. See docket
no. 13 pp. 16-17. Mt. Hawley's argument is premised on the fact that summary judgment is
generally appropriate on statutory bad-faith denial claims if the insurer has prevailed in the
dispute regarding coverage. See USAA Texas Lloyds Co.
1866041, *5 (Tex. April 13, 2018) ("[Am
v.
Menchaca, No. 14-0721, 2018 WL
insured cannot recover any damages based on an
insurer's statutory violation if the insured had no right to receive benefits under the policy and
sustained no injury independent of a right to benefits.") (emphasis in original). Thus, because
Mt. Hawley asserts that the Policies do not provide coverage for Huser, it also asserts that
Huser's Texas Insurance Code claims must fail.
As discussed in the prior sections, at this stage, the Court is unable to conclude that the
"property damage" in the Underlying Suit is not covered by the Policies. Because no other
specific bases have been provided as to why Mt. Hawley is entitled to summary judgment with
respect to Huser' s statutory claims, the Court will deny Plaintiff's Motion as to the Texas
Insurance Code claims. However, as with its denial on the issue of indemnification, the Court's
denial of Plaintiff's Motion with respect to Huser's Texas Insurance Code claims is also made
without prejudice to Plaintiff again seeking judgment on the issue at a later date, if appropriate.
19
CONCLUSION AND ORDER
As set forth above, the Court finds that Plaintiff Mt. Hawley has a duty to defend Huser
in the Underlying Suit. Accordingly, IT IS THEREFORE ORDERED that Defendant Huser's
Motion for Summary Judgment (docket no. 11) is GRANTED, and summary judgment is issued
in favor of Huser with respect to Mt. Hawley's request for declaratory judgment on the issue of
the duty to defend.
IT IS FURTHER ORDERED that Plaintiff Mt. Hawley's Motion for Judgment on the
Pleadings or in the Alternative Motion for Summary Judgment (docket no. 13) is DENIED.
However, with respect to the issues of (i) Plaintiff's indemnification of Defendant and
(ii) Defendant's Texas Insurance Code counterclaims, the denial of Plaintiffs Motion is made
without prejudice to Plaintiff again seeking judgment on those issues at a later date, if
appropriate in light of the proceedings in the Underlying Suit.
IT IS SO ORDERD.
SIGNED this
\day of August, 2018.
ORLANDO L. GARCIA
Chief United States District Judge
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