Trinity Universal Ins. Co. v. Employers Mut. Cas.

• Decision Date: 04 January 2010
• Docket Number: No. 08-20532.,08-20532.
• Parties: TRINITY UNIVERSAL INSURANCE COMPANY; Utica National Insurance; National American Insurance Company, Subrogees of Lacy Masonry, Inc., Plaintiffs-Appellants-Cross-Appellees, v. EMPLOYERS MUTUAL CASUALTY COMPANY, Defendant-Appellee-Cross-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

592 F.3d 687

TRINITY UNIVERSAL INSURANCE COMPANY; Utica National Insurance; National American Insurance Company, Subrogees of Lacy Masonry, Inc., Plaintiffs-Appellants-Cross-Appellees, v. EMPLOYERS MUTUAL CASUALTY COMPANY, Defendant-Appellee-Cross-Appellant.

No. 08-20532.

United States Court of Appeals, Fifth Circuit.

January 4, 2010.

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

Brian S. Martin (argued) and Kevin Frank Risley, Thompson, Coe, Cousins & Irons, L.L.P., Houston, TX, for Trinity Universal Ins. Co., Utica Nat. Ins. and Nat. American Ins. Co.

Aaron Linzy Mitchell (argued) and Stephen A. Melendi, Tollefson, Bradley, Ball & Mitchell, Dallas, TX, for Employers Mut. Cas. Co.

Levon G. Hovnatanian and Christopher Weldon Martin, Martin, Disiere, Jefferson & Wisdom, L.L.P., Houston, TX, for Continental Cas. Co., Amicus Curiae.

Lee Howard Shidlofsky, Visser Shidlofsky, L.L.P., Austin, TX, pro se, Amicus Curiae.

Dennis D. Gibson, Gibson, McClure, Wallace & Daniels, L.L.P., Dallas, TX, pro se, Amicus Curiae.

Craig Lee Reese, Fletcher, Farley, Shipman & Salinas, L.L.P., Dallas, TX, pro se, Amicus Curiae.

Augustus William Arnold, III, A. William Arnold, III & Associates, Dallas, TX, pro se, Amicus Curiae.

David Morgan Pruessner (argued) and Jes Alexander, Law Offices of David M. Pruessner, Dallas, TX, for Amerisure Ins. Co., Amicus Curiae.

Before JOLLY, DeMOSS and PRADO, Circuit Judges.

PRADO, Circuit Judge:

This appeal presents an issue of first impression. In Mid-Continent Insurance Co. v. Liberty Mutual Insurance Co., 236 S.W.3d 765 (Tex.2007), the Texas Supreme Court held that if relevant insurance policies to a dispute contain pro rata or "other insurance" clauses, and a co-primary insurer pays more than its pro rata portion of a settlement to indemnify an insured and another co-primary insurer underpays, then the overpaying insurer cannot seek reimbursement from the underpaying insurer under theories of contribution or subrogation. In this appeal, we must decide whether the holding in Mid-Continent extends to an insurer's duty to defend its insured. If Mid-Continent does not apply, then we must decide whether insurance companies that pay defense costs may recoup a portion of those costs from a co-insurer that fails to defend a common insured.

For the following reasons, we affirm the district court's finding that Defendant-Appellee-Cross-Appellant Employers Mutual Casualty Co. ("EMC") has a duty to defend its insured in the underlying suit. However, because the district court erred in applying the rule of Mid-Continent to prohibit Plaintiffs-Appellants-Cross-Appellees Trinity Universal Insurance Co. Utica National Insurance, and National American Insurance Co. (collectively "Appellants") from recovering defense costs, we remand for a determination of those costs. We do not reach the parties' ancillary subrogation issue.

I. FACTUAL AND PROCEDURAL BACKGROUND

A. Factual Background

Appellants and EMC each issued commercial general liability ("CGL") insurance policies to Lacy Masonry, Inc., covering Lacy Masonry while it was engaged as the mason in the design, construction, and renovation of McKenna Memorial Hospital ("McKenna") in New Braunfels, Texas. Each policy obligated the issuing insurer to indemnify Lacy Masonry for "sums that [Lacy Masonry] becomes legally obligated to pay as damages because of `bodily injury' or `property damage'" to which the policy applied. Each policy further obligated the issuing insurer "to defend [Lacy Masonry] against any `suit' seeking those damages." The four policies contained materially identical pro rata or "other insurance" clauses under which "each insurer contributes equal amounts until it has paid its applicable limit of insurance or none of the loss remains, whichever comes first." EMC's policy contained a "Designated Work endorsement/exclusion" (the "Designated Work exclusion") limiting its coverage by excluding any injuries arising out of Lacy Masonry's construction, installation, application, or other service of an "exterior insulation and finish system" ("EIFS"), or any work Lacy Masonry performed on any exterior component of a building if an EIFS was used on any part of that structure.

McKenna sued Lacy Masonry and several other companies, alleging each was responsible for property damage caused during the design, construction, and improvement of the hospital building. Lacy Masonry tendered the defense of the suit to its insurers. Appellants, along with a fourth insurer that is not involved in this case, agreed to defend Lacy Masonry and shared the defense costs. EMC, however, denied that it had a duty to defend the suit under its policy and refused to participate in or contribute to the defense. The participating insurers settled with McKenna while this appeal progressed.

B. Procedural Background

Appellants sued EMC in the district court, alleging claims for breach of contract, contribution, and attorney's fees, and seeking a declaration that EMC owes a duty to defend Lacy Masonry in the McKenna suit. The parties cross-moved for summary judgment. The district court granted Appellants' motion for a declaratory judgment in part, finding that EMC had a duty to defend Lacy Masonry in the underlying suit. The district court denied Appellants' request for a discretionary award of attorney's fees, citing the Texas Declaratory Judgment Act. See TEX. CIV. PRAC. & REM. § 37.009. Despite finding that EMC had violated its duty to defend, the district court dismissed Appellants' claims on the merits, finding that, under Mid-Continent, Appellants could not recover defense costs from EMC under either contribution or subrogation theories. Both parties timely appealed.

II. JURISDICTION AND STANDARD OF REVIEW

We have jurisdiction over this appeal from a final order of the district court under 28 U.S.C. § 1291. We review de novo a district court's award of summary judgment, applying the same standard as the district court. Ford Motor Co. v. Tex. Dep't of Transp., 264 F.3d 493, 498 (5th Cir.2001). Summary judgment is proper when "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). "A genuine issue of material fact exists when the evidence is such that a reasonable jury could return a verdict for the non-moving party." Gates v. Tex. Dep't of Protective & Regulatory Servs., 537 F.3d 404, 417 (5th Cir. 2008) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)). "On cross-motions for summary judgment, we review each party's motion independently, viewing the evidence and inferences in the light most favorable to the nonmoving party." Ford Motor Co., 264 F.3d at 498.

III. ANALYSIS

A. EMC's Duty to Defend Lacy Masonry

EMC asserts that we need not reach the application of Mid-Continent because the district court erred by finding that EMC had a duty to defend Lacy Masonry in McKenna's suit. EMC contends that the Designated Work exclusion exempts it from defending Lacy Masonry. This argument lacks merit.

1. An Insurer's Duty to Defend

Under a typical CGL policy an insurer assumes two distinct duties: the duty to indemnify and the duty to defend. See Ohio Cas. Ins. Co. v. Time Warner Entm't Co., 244 S.W.3d 885, 890 (Tex. App.—Dallas 2008, writ denied). Whereas the "duty to indemnify protects insureds `from payment of damages they may be found legally obligated to pay,'" the duty to defend "`protects the same parties against the expense of any suit seeking damages' covered by the policy." Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co., 279 S.W.3d 650, 655 n. 28 (Tex. 2009) (quoting Heyden Newport Chem. Corp. v. S. Gen. Ins. Co., 387 S.W.2d 22, 25 (Tex.1965)).

The Texas Supreme Court recently summarized the duty to defend under Texas law. See Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487, 490-91 (Tex. 2008). "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." Id. (citing GuideOne Elite Ins. Co. v. Fielder Rd. Baptist Church, 197 S.W.3d 305, 310 (Tex.2006)). Therefore, "an insurer may have a duty to defend but, eventually, no obligation to indemnify." Id. (citing Farmers Tex. County Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 82 (Tex.1997)).

Texas follows the "eight-corners rule," in which "`an insurer's duty to defend is determined by the third-party plaintiff's pleadings, considered in light of the policy provisions, without regard to the truth or falsity of those allegations.'" Id. at 491 (quoting GuideOne, 197 S.W.3d at 308). A court "resolve[s] all doubts regarding the duty to defend in favor of the duty and ... construe[s] the pleadings liberally." Id. (citations omitted). "`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.'" Id. (quoting Heyden Newport, 387 S.W.2d at 26 (citation omitted)).

The court must resolve all doubts regarding coverage in favor of the insured, but it cannot "look outside the pleadings, or imagine factual scenarios which might trigger coverage." Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. Merchs. Fast Motor Lines, Inc., 939 S.W.2d 139, 141-42 (Tex.1997). Although the burden is typically "on the insured to show that a claim against him is potentially within the scope of coverage under the policies," when "the insurer relies on the policy's exclusions, it bears the burden of proving that one or more of those exclusions apply." Federated Mut. Ins. Co. v. Grapevine Excavation, Inc., 197 F.3d...