American Home Assur. Co. v. United Space Alliance

• Citation: 378 F.3d 482
• Decision Date: 29 July 2004
• Docket Number: No. 03-20241.,03-20241.
• Parties: AMERICAN HOME ASSURANCE COMPANY, et al., Plaintiffs, American Home Assurance Company, Plaintiff-Counter Defendant-Appellant, v. UNITED SPACE ALLIANCE, LLC, Defendant-Counter Claimant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

378 F.3d 482

AMERICAN HOME ASSURANCE COMPANY, et al., Plaintiffs, American Home Assurance Company, Plaintiff-Counter Defendant-Appellant, v. UNITED SPACE ALLIANCE, LLC, Defendant-Counter Claimant-Appellee.

No. 03-20241.

United States Court of Appeals, Fifth Circuit.

July 29, 2004.

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Thomas C. Wright (argued), Harvey Grannis Brown, Jr., Lucy Haroutunian, Wright & Brown, Houston, TX, David John Kennedy Metzler, Benjamin Love, Cowles & Thompson, Dallas, TX, for American Home Assur. Co.

Curtis D. Porterfield (argued), Stephen V. Masterson, Howrey, Simon, Arnold & White, Los Angeles, CA, for United Space Alliance LLC.

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

Before BENAVIDES, STEWART and DENNIS, Circuit Judges.

CARL E. STEWART, Circuit Judge:

Appellant-Plaintiff-Counter Defendant, American Home Assurance Company ("AHAC"), appeals the district court's denial of its motion for summary judgment which sought a declaratory judgment. Specifically, AHAC contends that it does not have a duty to defend Appellee-Defendant Counter Claimant, United Space Alliance, LLC ("United Space") under the terms of a general liability insurance policy (the "Policy") against a third-party lawsuit. AHAC also appeals the district court's sua sponte grant of summary judgment for United Space which found that AHAC does have a duty to defend. Additionally, AHAC appeals the district court's denial of its motions for judgment as a matter of law which sought reversal of a jury verdict which: (1) found that AHAC had breached its duty to defend United Space against the third-party lawsuit; (2) awarded United Space the amount of attorney's fees spent and expects to spend in the defense of that lawsuit; and (3) awarded attorney's fees spent and expected to be spent on the action involving whether AHAC has a duty to defend, and breached that duty, under the Policy. For the reasons enunciated below, we affirm in part, reverse in part, and remand.

FACTUAL AND PROCEDURAL BACKGROUND

This case involves an underlying third-party lawsuit (the "Hi-Shear suit") arising out of a contract dispute between Hi-Shear Technology Corporation ("Hi-Shear") and United Space. USBI Company ("USBI") and then subsequently United Space, were general contractor's for the National Aeronautics and Space Administration's ("NASA") space shuttle program. Hi-Shear is a NASA subcontractor that supplied separation bolts used to detach the shuttle's solid rocket boosters from the shuttle after launch. In 1997, Hi-Shear and USBI entered into a contract under which Hi-Shear would provide delay cutter assemblies that are used to deploy the parachutes on the solid rocket boosters. United Space assumed this contract from USBI in late 1999. Hi-Shear alleges that after entering into the contract, USBI materially altered its scope by adding work that Hi-Shear was to perform. Hi-Shear performed this additional work, but its payment requests were refused.

In its suit against USBI and United Space, Hi-Shear set forth, inter alia, causes of action relating to USBI's and United Space's alleged breach of contract or fraudulent inducement. United Space had previously purchased the Policy from AHAC as well as umbrella and miscellaneous professional liability policies from the National Union Fire Insurance Company of Pittsburgh ("NUFIC").¹ United Space's requests to AHAC and NUFIC to be defended and indemnified under the policies were refused. AHAC's and NUFIC's motions for summary judgment seeking a declaration that they did not owe a duty to defend were denied by the district court. Instead, the district court, sua sponte, granted summary judgment to United Space holding that AHAC and NUFIC had a duty to defend against the Hi-Shear action under their respective policies. The district court also held that the issue as to whether AHAC or NUFIC had breached their duty was to be determined by a jury. Finally, the district court held that United Space could recover attorney's fees from both companies for defending the Hi-Shear suit, as well as for prosecuting counterclaims against both. At trial, the jury found that AHAC breached the Policy and awarded United Space the following: (a) $307,071 for the amount paid defending against the Hi-Shear suit (less a $500,000 self-insured retention); (b) $760,000 for future costs to complete the defense of the Hi-Shear suit; (c) $762,554 for attorney's fees expended in the instant coverage action against AHAC; and (d) $200,000 for attorney's fees through completion of the instant coverage action. The jury found that NUFIC was not liable to United Space. During trial the district court denied AHAC's judgment as a matter of law motions which sought, inter alia, set aside of the jury's verdict.

STANDARD OF REVIEW

This court reviews a district court's grant of summary judgment de novo, applying the same legal standards as the district court. American International Specialty Lines Insur. Co. v. Canal Indem. Co., 352 F.3d 254, 260 (5th Cir.2003). We also review a district court's interpretation of an insurance policy de novo. Id. (citing Potomac Ins. Co. of Ill. v. Jayhawk Med. Acceptance Corp., 198 F.3d 548, 550 (5th Cir.2000)). A summary judgment motion is properly granted only when, viewing the evidence in the light most favorable to the nonmoving party, the record indicates 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. Id. (citing Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)). The sua sponte nature of a district court's summary judgment does not alter this court's standard of review. Harken Exploration Co. v. Sphere Drake Ins. P.L.C., 261 F.3d 466, 477 (5th Cir.2001). Rather, Fed.R.Civ.P. 56 requires the prompt disposition of cases in the absence of any genuine issues of material fact for the court to consider. Exxon Corp. v. St. Paul Fire and Marine Ins. Co., 129 F.3d 781, 786 (5th Cir.1997). Rule 56 requires a court, under the proper conditions, to grant relief to that party which is entitled to such even if it has not been demanded. Id.

Furthermore, a court of appeals reviews a district court's denial of a motion for judgment as a matter of law de novo by reapplying the same standard used by the district court. Cybor Corp. v. FAS Technologies, Inc., 138 F.3d 1448, 1454 (Fed.Cir.1998); Wayne v. Village of Sebring, 36 F.3d 517, 525 (6th Cir.1994). We can reverse a denial of a motion for JMOL only if the jury's factual findings are not supported by substantial evidence or if the legal conclusions implied from the jury's verdict cannot in law be supported by those findings. Id. Additionally, this court's standard for reviewing a jury verdict is whether "the state of proof is such that reasonable and impartial minds could reach the conclusion the jury expressed in its verdict." Liberty Mut. Ins. Co. v. Falgoust, 386 F.2d 248, 253 (5th Cir.1967). A jury verdict must stand unless there is a lack of substantial evidence, in the light most favorable to the successful party, to support the verdict. Id.

DISCUSSION

I. "Personal Injury" coverage²

We find that the district court was correct to apply the "eight corners rule," and in determining that AHAC has a duty to defend United Space under the Policy. Am. States Ins. Co. v. Bailey, 133 F.3d 363, 369 (5th Cir.1998) (quoting National Union Fire Ins. Co. v. Merchants Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex.1997)) ("In determining an insurer's duty to defend, Texas courts utilize the eight corners rule."). The eight corners rule provides that an insurer's duty to defend is determined by the language of the insurance policy and a "liberal" interpretation of the allegations against the insured, that if true, potentially state a cause of action covered by the policy. Nat'l Union Fire Ins. Co. v. Merchs. Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex.1997); Am. Guar. & Liab. Ins. Co. v. Shel-Ray Underwriters, Inc., 844 F.Supp. 325, 329 (S.D.Tex.1993). In determining coverage Texas state courts focus on the factual allegations that show the origin of the damages rather than on the legal theories alleged. Adamo v. State Farm Lloyds Co., 853 S.W.2d 673, 676 (Tex.App. — Houston [14th Dist.] 1993, writ denied). An insured bears the initial burden of showing that there is coverage. Guar. Nat'l Ins. Co. v. Vic Mfg. Co., 143 F.3d 192, 193 (5th Cir.1998). United Space satisfied its burden because the alleged facts giving rise to Hi-Shear's causes of action include conduct that potentially falls within the enumerated offenses in that policy.³

We are not persuaded by AHAC's argument that a potential cause of action covered under the Policy does not exist because any alleged disparagement of Hi-Shear by United Space occurred only after the alleged breach of contract and fraudulent inducement, and thus were not within the coverage period. Hi-Shear filed its complaint against United Space on November 9, 2000. Its complaint includes allegations of conduct by United Space both before and after the May 17, 2000 termination of the contract, as well as prior to October 1, 2001, the date the Policy coverage expired. Thus, the potential stated causes of action against United Space are covered under the Policy period, and United Space has satisfied the requirements of the eight corners rule.

II. Policy Exclusions

We also find the district court was correct to hold that the policy exclusions,⁴ such as the "knowing falsity exclusion," listed in the Policy did not preclude AHAC's duty to defend because some of the Hi-Shear allegations against United Space fell outside of the listed policy exclusions. An insurer must defend when there is at least one cause of action within the policy coverage, Brooks, Tarlton, Gilbert, Douglas & Kressler v. United States Fire Ins. Co., 832 F.2d 1358, 1367 (5th Cir.198...