Mid-Continent Casualty Co. v. Chevron

• Decision Date: 29 February 2000
• Docket Number: No. 98-40831,MID-CONTINENT,98-40831
• Citation: 205 F.3d 222
• Parties: (5th Cir. 2000) CASUALTY COMPANY, Plaintiff-Counter Defendant-Appellant, v. CHEVRON PIPE LINE COMPANY, ET AL., Defendants, CHEVRON PIPE LINE COMPANY, Defendant-Counter Claimant-Appellee
• Court: U.S. Court of Appeals — Fifth Circuit

Page 222

205 F.3d 222 (5th Cir. 2000)

MID-CONTINENT CASUALTY COMPANY, Plaintiff-Counter Defendant-Appellant, v. CHEVRON PIPE LINE COMPANY, ET AL., Defendants, CHEVRON PIPE LINE COMPANY, Defendant-Counter Claimant-Appellee.

No. 98-40831

UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

February 29, 2000

As Revised March 15, 2000.

[Copyrighted Material Omitted] Brian Lynn Blakeley, Blakeley & Associates, San Antonio, TX. Christopher L Burke, Brian L Blakeley & Associates, San Antonio, TX, For Plaintiff - Counter Defendant - Appellant. .

James C Winton, Lilly Evelyn Thrower, Baker & Hostetler, Houston, TX, For Defendant - Counter Claimant - Appellee

Appeal from the United States District Court for the Eastern District of Texas. 1:97-CV-95. Joe J Fisher, US District Judge.

JUDGES: Before DUHE, BARKSDALE, and DENNIS, Circuit Judges.

RHESA HAWKINS BARKSDALE, Circuit Judge:

At issue in this Texas diversity action is whether an injury to an employee of Power Machinery, Inc. (PMI), the named insured for Mid-Continent Casualty Company, "arose out of" PMI's independent contractor work for Chevron Pipe Line Company (CPL), Mid-Continent's additional insured, and is, therefore, covered under PMI's liability policy; and whether the attorney's fees and costs awarded CPL are reasonable, their having been set in the light of a settlement agreement and following a subsequent bench trial on the issue. Regarding coverage, we AFFIRM; for fees and costs, we REVERSE and REMAND.

I.

Earl Fant, a PMI employee working on CPL's premises pursuant to a labor services contract between CPL and PMI, was injured on 26 July 1994 while removing a valve in a vessel storage area. As his employer, PMI was immune, under the Texas Workers' Compensation Act, from suit by Fant. In August 1995, Fant and his wife sued CPL in federal court, claiming that its negligence caused his injury (Fant action).

The CPL-PMI services contract required PMI to: (1) provide laborers to perform CPL's work; (2) indemnify and hold CPL harmless from claims for injury or death resulting from PMI's performance (except those caused by CPL's wilful or sole fault); (3) insure PMI's contractual indemnity obligations; and (4) name CPL (which PMI did) as an additional insured under PMI's policy with Mid-Continent.

Pursuant to the additional insured endorsement, Mid-Continent provided a defense for CPL for the Fant action. By bench trial, the district court in late 1996 ruled: (1) when injured, Fant was an independent contractor, with the PMI foreman controlling the manner and details of Fant's work; and (2) the design of the valve configuration in the area where Fant was injured was faulty, because it required the PMI crew to manhandle the valve in a cramped area. The court rejected CPL's "borrowed servant" defense; concluded that its negligence was the proximate cause of Fant's injury; and awarded $ 435,000 to the Fants. Fant v. Chevron USA, Inc., No. 95-CV-899 (E.D. Tex. 19 Nov. 1996).

Understanding the court to hold that CPL's liability rested solely on the negligent design of its facility, and interpreting the endorsement as covering liability arising only from PMI's negligence, Mid-Continent refused either to further defend or to indemnify CPL. Accordingly, CPL substituted counsel for the appeal in the Fant action.

Concomitantly, in the light of its coverage-refusal, Mid-Continent filed this action in December 1996 against Chevron and the Fants. It sought a declaratory judgment, based on a Texas intermediate appellate decision which foreclosed coverage for the additional insured under a similar endorsement: Granite Constr. Co. v. Bituminous Ins. Cos., 832 S.W.2d 427 (Tex. App. 1992, no writ).

CPL and the Fants counterclaimed, inter alia, for bad faith and violation of Article 21.21 of the Texas Insurance Code (prohibiting unfair or deceptive trade practices in the insurance business); and sought a declaratory judgment on coverage. In addition, CPL filed a third-party claim against PMI, based on its services contract.

Pursuant to the Fants' motion, this action was transferred from the Southern District of Texas, in Houston, to the Eastern District of Texas, in Beaumont. There, it was assigned to the district judge who had presided over the underlying Fant action.

Among the motions regarding the parties' claims, Mid-Continent and CPL moved for summary judgment on coverage. This was granted CPL in October 1997, the district court holding that the endorsement unambiguously covered the judgment in the Fant action. Noting that the endorsement does not expressly limit coverage only for when PMI is at fault, the court held that the "arising out of" clause in the policy "means 'originate from' the named insured's, PMI, work for the additional insured, CPL". (Emphasis added.) The court held, in the alternative, that CPL was also entitled to coverage on the bases of (1) Mid-Continent's waiver of its defenses, due to its failure to issue an effective reservation of rights; and (2) CPL's status as a third-party beneficiary under the policy's contractual indemnity provision. Mid-Continent Cas. Co. v. Chevron Pipe Line Co., No. 97-CV-00095, at 27 (E.D. Tex. 10 Oct. 1997).

Following the partial summary judgment, CPL's third-party claim against PMI was dismissed. And, with the appeal in the Fant action pending, settlement was reached between CPL, Mid-Continent, and the Fants. In that regard, and for the action at hand, CPL and Mid-Continent settled all issues except coverage and attorney's fees and costs; the latter issue was reserved for a bench trial. Following same, approximately $ 560,000 was awarded CPL in mid-1998. Chevron Pipe Line Co. v. Mid-Continent Cas. Co., No. 97-CV-00095 (E.D. Tex. 2 June 1998).

II.

Mid-Continent contests several rulings concerning coverage. In the alternative, although it does not challenge CPL being entitled to fees and costs, it does challenge the amount awarded.

A.

Coverage was decided by summary judgment. The application of Texas law in interpreting the "additional insured" endorsement and the coverage holding are reviewed de novo. Sharp v. State Farm Fire & Cas. Ins. Co., 115 F.3d 1258, 1260 (5th Cir. 1997); see Liberty Mutual Ins. Co. v. Pine Bluff Sand & Gravel Co., 89 F.3d 243, 246 (5th Cir. 1996) (on summary judgment, questions of law, including interpretation of agreements, are reviewed de novo).

The endorsement states: "WHO IS AN INSURED ... is amended to include [CPL], but only with respect to liability arising out of 'your [PMI's] work' for [CPL] by or for you [PMI]". (Emphasis added.) "Your [PMI's] work" is defined in the policy as "work or operations performed by you [PMI] or on your behalf; and materials, parts or equipment furnished in connection with such work or operations".

The dispute turns on interpreting "arising out of". Mid-Continent would limit coverage to CPL's vicarious liability for PMI's negligence, and contends, therefore, that the phrase should be narrowly interpreted to have a meaning akin to "caused by". CPL counters that its negligence, as well as PMI's, is covered; and that the injury or accident need only "originate from" or be "related to" the named insured's (PMI's) work for the additional insured (CPL). CPL urges that, if the endorsement is ambiguous, then, under Texas law, we must apply the construction favoring it, the insured. See National Union Fire Ins. Co. v. Kasler Corp., 906 F.2d 196, 198 (5th Cir. 1990).

When summary judgment was rendered, only one reported Texas appellate decision, noted supra, addressed the scope of coverage under a similar endorsement: Granite, 832 S.W.2d 427. Mid- Continent principally relies on it, while CPL seeks to distinguish it. The Texas Supreme Court has not ruled on this issue.

As here, Granite concerned a services contract by which an independent contractor agreed to include the other party as an additional insured. Pursuant to its contract to remove asphalt from Granite's construction site, Joe Brown Company so named Granite under its policy with Bituminous, "but only with respect to liability arising out of operations performed for such insured [Granite] by or on behalf of the named insured [Brown]". Id. at 428. A Brown employee, injured when his truck overturned, sued Granite, claiming that its negligence in loading his truck caused his injury. Id.

Granite contended that coverage was available under the endorsement, because the claim arose out of operations performed under the services contract; Bituminous, that the endorsement covered liability only for activities performed by its named insured, Brown. Id. at 429. After examining both the services contract and the endorsement, the Granite court ruled against coverage. Id. at 430. It acknowledged that the parties presented "contradictory interpretations" of the endorsement; and that, if both were reasonable, Granite's had to be adopted. Id. It reasoned, however, that, in this instance, limiting coverage would best effect the parties' intentions because, under the services contract, the loading operation was delineated as Granite's sole responsibility. Id. The court noted that the allegations in the employee's action made it "obvious" that the claim "arose out of the loading operations performed by Granite ...", during which Brown had no role. Id.

Northern Ins. Co. of New York v. Austin Commercial, Inc., 908 F. Supp. 436, 437 (N.D. Tex. 1994), applying Texas law, interpreted Granite to require a claim of direct negligence against the named insured in order to trigger coverage. Noting that the named insured was not a defendant, and that there were no allegations of negligence against it, the court concluded that, under Granite, there was no coverage for the additional insured. Id. Mid- Continent urges that this Austin-holding is the correct interpretation of Texas law; CPL, that Granite was misinterpreted.

The parties' clearly demarcated legal positions regarding the policy language are...