Nautilus Ins. Co. v. Country Oaks Apartments Ltd.

• Citation: 566 F.3d 452
• Decision Date: 22 April 2009
• Docket Number: No. 08-50652.,08-50652.
• Parties: NAUTILUS INSURANCE COMPANY, Plaintiff-Appellee, v. COUNTRY OAKS APARTMENTS LTD., Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

566 F.3d 452

NAUTILUS INSURANCE COMPANY, Plaintiff-Appellee, v. COUNTRY OAKS APARTMENTS LTD., Defendant-Appellant.

No. 08-50652.

United States Court of Appeals, Fifth Circuit.

April 22, 2009.

John C. Tollefson (argued), Stephen A. Melendi, Tollefson, Bradley, Ball & Mitchell, Dallas, TX, for Nautilus Ins. Co.

Jeffrey E. Dahl (argued), Harkins, Latimer & Dahl, San Antonio, TX, for Country oaks Apartments, Ltd.

Alex M. Miller (argued), Watts Law Firm, San Antonio, TX, for Kaia Alvarado.

Laura Anne Foggan, Wiley Rein, LLP, for Complex Ins. Claims Lit. Ass'n.

Appeal from the United States District Court for the Western District of Texas.

Before GARWOOD, OWEN and HAYNES, Circuit Judges.

HAYNES, Circuit Judge:

Once again we address the scope of the absolute pollution exclusion in an insurance policy under Texas law. Concluding that the exclusion unambiguously applies to exclude liability coverage for injuries caused to Kaia Alvarado by the pollutant carbon monoxide seeping, discharging, releasing and dispersing into an apartment owned by Appellant and leased by Kaia's mother, we AFFIRM the district court's grant of summary judgment.

I. Background

Appellant Country Oaks Apartments Ltd. (Country Oaks) purchased a Commercial General Liability (CGL) policy from Appellee Nautilus Insurance Company (Nautilus). Some time during the policy period, some workers accidentally blocked the vent to the furnace in several Country Oaks apartments, including the one in which Kelly Schenks, who was pregnant with Kaia, lived. As a result, carbon monoxide that otherwise would have been dispersed into the outside atmosphere was dispersed into the apartment. Tragically, young Kaia was born with a number of difficulties that continue to this day, including almost daily seizures; her family attributes these conditions to her in utero exposure to the carbon monoxide.¹

Schenks sued Country Oaks in a Texas state court on behalf of Kaia, and Country Oaks tendered the defense of that case to Nautilus. Nautilus, in turn, refused to defend, contending that it owed no duty to defend or indemnify due to its policy's absolute pollution exclusion. That exclusion says that coverage does not apply to:

f. Pollution (1) "Bodily injury" or "property damage" which would not have occurred in whole or in part but for the actual, alleged, or threatened discharge, dispersal, seepage, migration, release, or escape of "pollutants" at any time.

The policy defines the term "pollutant" as "any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes material to be recycled, reconditioned or reclaimed."

The exclusion quoted above was added to the policy by way of an amendatory endorsement. The original text of the policy contained a pollution exclusion clause that was amended by the above-quoted endorsement. The pollution exclusion clause in the original text of the policy included the following language: "However, this subparagraph [the original exclusion] does not apply to: (i) bodily injury if sustained within a building and caused by smoke, fumes, vapor or soot from equipment used to heat that building;...."

Nautilus then filed the instant declaratory judgment action to determine its duties. Nautilus moved for summary judgment on the duty to defend and indemnify. Country Oaks cross-moved on its counterclaim seeking a defense and associated fees and costs. The district court granted summary judgment in full to Nautilus, and denied summary judgment to Country Oaks which timely appealed. Though not a party to the declaratory judgment action, Kaia's family filed an amicus brief before the district court, as well as this court, and participated in oral argument in this court.

II. Standard of Review

This court reviews the district court's grant of summary judgment de novo, applying the same standards as the district court. Adams v. Travelers Indem. Co., 465 F.3d 156, 163 (5th Cir.2006). Summary judgment is appropriate "if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." FED.R.CIV.P. 56(c).

III. Discussion

A. Rules of Insurance Contract Construction

Under Texas law, which applies to this diversity case,

[t]he eight-corners rule provides that when an insured is sued by a third party, the liability insurer is to determine its duty to defend solely from terms of the policy and the pleadings of the third-party claimant. Resort to evidence outside the four corners of these two documents is generally prohibited.

GuideOne Elite Ins. Co. v. Fielder Rd. Baptist Church, 197 S.W.3d 305, 307 (Tex. 2006). The duty to defend does not depend upon the truth or falsity of the allegations: "A plaintiff's factual allegations that potentially support a covered claim is all that is needed to invoke the insurer's duty to defend[.]" Id. at 310 (citing Heyden Newport Chem. Corp. v. S. Gen. Ins. Co., 387 S.W.2d 22, 26 (Tex.1965)).

In this case, Nautilus is not arguing about whether the incident in question was an "occurrence" under the policy. It rests its denial solely upon the single exclusionary endorsement. "[W]hen the plaintiff's petition makes allegations which, if proved, would place the plaintiff's claim within an exclusion from coverage, there is no duty to defend[.]" Gulf States Ins. Co. v. Alamo Carriage Serv., 22 F.3d 88, 90 (5th Cir.1994). Texas law places the burden of proving that an exclusion applies on the insurance company. TEX. INS.CODE ANN. § 554.002 (Vernon 2005). "Exclusions are narrowly construed, and all reasonable inferences must be drawn in the insured's favor." Gore Design Completions, Ltd. v. Hartford Fire Ins. Co., 538 F.3d 365, 370 (5th Cir.2008) (citing Gen. Star Indem. Co. v. Gulf Coast Marine Assocs., 252 S.W.3d 450, 458-59 (Tex.App.-Houston [14th Dist.] 2008, pet. denied)).

However, Texas courts construe insurance contracts under the same rules applicable to contracts generally. Nat'l Union Fire Ins. Co. v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex.1995). This court's "primary goal, therefore, is to give effect to the written expression of the parties' intent." Balandran v. Safeco Ins. Co. of Am., 972 S.W.2d 738, 741 (Tex.1998). "[T]he parties' intent is governed by what they said, not by what they intended to say but did not." Fiess v. State Farm Lloyds, 202 S.W.3d 744, 746 (Tex.2006) (emphasis in original). If a written contract is amenable to a definite legal meaning, then it is unambiguous and will be enforced as written. Coker v. Coker, 650 S.W.2d 391, 393 (Tex.1983).

An insurance policy is only ambiguous if its plain language is amenable to more than one reasonable interpretation. Certain Underwriters at Lloyd's London v. C.A. Turner Constr. Co., 112 F.3d 184, 186 (5th Cir.1997). An ambiguity in a contract can be either patent or latent. CBI Indus., 907 S.W.2d at 520. A patent ambiguity is evident from the face of the contract. Id. "A latent ambiguity arises when a contract which is unambiguous on its face is applied to the subject matter with which it deals and an ambiguity appears by reason of some collateral matter." Id. If an insurance contract is ambiguous, courts must adopt the construction favored by the insured. Don's Bldg. Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20, 23 (Tex.2008). Where the language of a contract is clear, a court's inquiry should begin and end with the policy's language. See Constitution State Ins. Co. v. Iso-Tex. Inc., 61 F.3d 405, 410 n. 4 (5th Cir.1995) (noting that "Texas law does not recognize coverage because of `reasonable expectation' of the insured.").

Thus, this case presents purely legal questions: is carbon monoxide a "pollutant" within the meaning of the policy and, if so, did it "discharge," "disperse," "release," or "seep" into the apartment in question? We address each question in turn.

B. Is Carbon Monoxide a "Pollutant"?

Country Oaks contends that carbon monoxide, even at toxic levels, is not a "pollutant" within the meaning of the pollution exclusion. Under the pollution exclusion, "pollution" means "any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acid, alkalis, chemicals, or waste."

Country Oaks admits that carbon monoxide is a gas. It contends, however, that carbon monoxide is not an "irritant or contaminant," because it does not generally or probably irritate or contaminate. Rather, Country Oaks notes that carbon monoxide is a naturally occurring substance in the environment that individuals encounter at various concentrations on a daily basis.

This circuit has explicitly rejected the argument that a substance must generally or usually act as an irritant or contaminant to constitute a "pollutant" under the pollution exclusion. In Am. States Ins. Co. v. Nethery, 79 F.3d 473 (5th Cir.1996), our court reviewed a district court's conclusion that paint and glue fumes do not constitute irritants because they do not normally inflict injury. Id. at 476 (addressing an almost identically worded pollution exclusion). We rejected this argument concluding that the plain meaning of "irritant" is a "substance that produces a particular effect, not one that generally or probably causes such effects." Id. (emphasis in original); see also United Nat'l Ins. Co. v. Hydro Tank, Inc., 525 F.3d 400, 401-02 (5th Cir.2008) (noting that allegations of injury caused by "toxic levels" of unknown "chemicals or vapors" alleges injuries from a "pollutant" as defined by the pollution exclusion); Am. Equity Ins. Co. v. Castlemane Farms, Inc., 220 F.Supp.2d 809, 814 (S.D.Tex.2002) (concluding that "salt-water is a `contaminant' when it is introduced, accidentally, onto property that is not meant to receive it.").²

It is true, as Country Oaks notes, that Nethery applied Mississippi, as opposed to...