Century Sur. Co. v. Hardscape Const. Specialties

• Decision Date: 07 August 2009
• Docket Number: No. 06-10930.,06-10930.
• Parties: CENTURY SURETY COMPANY, Plaintiff-Appellee, v. HARDSCAPE CONSTRUCTION SPECIALTIES, INC., Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

578 F.3d 262

CENTURY SURETY COMPANY, Plaintiff-Appellee, v. HARDSCAPE CONSTRUCTION SPECIALTIES, INC., Defendant-Appellant.

No. 06-10930.

United States Court of Appeals, Fifth Circuit.

August 7, 2009.

Robert A. Schults (argued), Houston, TX, for Plaintiff-Appellee.

George Grant Liser, III (argued), Naman, Howell, Smith & Lee, LLP, Fort Worth, TX, for Defendant-Appellant.

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

Before KING, DENNIS and ELROD, Circuit Judges.

JENNIFER W. ELROD, Circuit Judge:

In this Texas insurance coverage case, the scope of a commercial policy exclusion turns on the difference between tort and contract allegations in an underlying lawsuit. Because we conclude that the underlying suit alleges only breaches of contract, we hold in favor of the insurer.

I.

A.

Hillwood Residential Services, L.P. and Hardscape Construction Specialties, Inc. executed a contract wherein Hardscape agreed to construct a swimming pool facility for Hillwood at one of Hillwood's residential developments. The project included two pools, a bath house and pool equipment building, sidewalks, fences, a playground, landscaping, and other improvements to Hillwood's property. The Hillwood-Hardscape contract contained the following indemnity provision:

Contractor [Hardscape Construction, Inc.] shall indemnify and hold Hillwood Property Company, its employees, shareholders, agents, officers and directors harmless from and against any damage, liability or cause of action arising directly or indirectly out of or in connection with the performance of Contractor's services.

On the same day, Hardscape and Elite Concepts by Michale Nantz¹ executed a contract wherein Elite agreed to construct the swimming facility pools. The Hardscape-Elite contract contained the following provision:

The Subcontractor [Elite Concepts] agrees to be bound to the Contractor [Hardscape Construction specialties, Inc.] under this Agreement according to the same terms and conditions as the Contractor is bound to the Owner under the Contract Documents which pertain or relate to the scope of work in this Subcontract as described in the Subcontract Work paragraph above.

Elite, in turn, hired Wang Engineering, Inc. to design the pools and Tornado Excavation, Inc. to construct piers and beams for one of the pools.

Elite held an insurance policy issued by Century Surety Company that covered certain "occurrences," which the policy defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." The policy excluded "`bodily injury' or `property damages' for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement," but excepted from that exclusion certain contractual obligations to pay for another party's tort liability.

After the subcontractors completed the swimming facility, Hillwood sued Hardscape, Elite, Wang, and Tornado in a Texas state court, and alleged that faulty design and construction had caused physical and aesthetic damage to the pool and some of its surroundings. The petition asserts claims of negligence, gross negligence, breach of contract, breach of implied warranty, and breach of express warranty. In response, Hardscape demanded that Elite defend and indemnify Hardscape, citing the Hillwood-Hardscape and Hardscape-Elite contracts, and Elite forwarded the demand to Century. After Century failed to respond, Hardscape made the demand directly upon Century, who failed to respond.

B.

Century then sued Hardscape, Hillwood, and Elite in the United States District Court for the Northern District of Texas. Century's complaint invoked the district court's diversity jurisdiction, see 28 U.S.C. § 1332, and sought a declaratory judgment relieving Century of any duty to defend Elite in the Hillwood lawsuit and of any duty to indemnify Elite or Hardscape, see 28 U.S.C. § 2201; Fed.R.Civ.P. 57. In cross-motions for summary judgment, Hardscape and Century sought judgment as a matter of law on issues of coverage and exclusion. The district court concluded that the Century policy's "occurrence" term did not cover the lawsuit-triggering construction errors, granted Century's motion, and denied Hardscape's. Hardscape now appeals from the final judgment. See 28 U.S.C. § 1291.

II.

"We review a district court's grant of summary judgment de novo," and apply the same Rule 56 standard as the district court. Stover v. Hattiesburg Pub. Sch. Dist., 549 F.3d 985, 991 (5th Cir.2008); see also Ford Motor Co. v. Tex. Dep't of Transp., 264 F.3d 493, 498 (5th Cir.2001) ("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."). "We may affirm summary judgment on any legal ground raised below, even if it was not the basis for the district court's decision." Performance Autoplex II Ltd. v. Mid-Continent Cas. Co., 322 F.3d 847, 853 (5th Cir.2003).

Texas law governs this case, and places the burden of establishing coverage upon the insured, the burden of establishing an exclusion upon the insurer, and the burden of establishing an exception to an exclusion back upon the insured. See, e.g., Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523, 527-28 (5th Cir.2004) ("This Court reviews whether an insurer has a duty to defend its insured in an underlying suit as a de novo question of law."). In the motions for summary judgment and supporting briefs filed below, Century and Hardscape disputed both the scope of the policy's coverage and the scope of the exception to one of the policy's exclusions. The parties present the same arguments here, and we address each in turn.

A.

First, the parties dispute whether Hardscape demonstrated that the Hillwood suit falls within the policy's definition of a covered "occurrence." Century argued below that the suit does not, because "occurrence" does not encompass damage to a contract's object; Hardscape argued that "occurrence" need not be so limited, and that the term includes all negligent acts not expected by the insured.

Although Texas courts were divided on this question at the time of the district court's decision, Lamar Homes, Inc. v. Mid-Continent Casualty Co., 242 S.W.3d 1 (Tex.2007), has since resolved the split by holding that "allegations of unintended construction defects may constitute an `accident' or `occurrence'" under commercial general liability (CGL) policies. Id. at 4-16 ("[A] claim does not involve an accident or occurrence when either direct allegations purport that the insured intended the injury (which is presumed in cases of intentional tort) or circumstances confirm that the resulting damage was the natural and expected result of the insured's actions, that is, was highly probable whether the insured was negligent or not."); accord Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co., 279 S.W.3d 650, 652 (Tex. 2009). Lamar Homes addressed the terms of an industry-standard CGL policy, and thus it is no surprise that the relevant policy terms in Lamar Homes and this case are identical. See Lamar Homes, 242 S.W.3d at 5 & n. 1. Both policies cover bodily injury or property damage that is "caused by an `occurrence,'" and both policies define "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." See id. at 6 & n. 4. Furthermore, because the Hillwood suit allegations align with the Lamar Homes allegations, we are bound to hold that the Century policy's "occurrence" term covers the Hillwood suit. See id. at 9 ("Here, the complaint alleges an `occurrence' because it asserts that [the underlying defendant's] defective construction was a product of its negligence. No one alleges that [the underlying defendant] intended or expected its work or its subcontractors' work to damage the [underlying plaintiff's] home.").

B.

Second, the parties dispute whether Hardscape met its burden of demonstrating that the Hillwood suit falls within the policy's "insured contract" exception to the "contractual liability" exclusion.² That exception provides, in part, that the contractual liability exclusion does not apply to damages assumed in "any other contract or agreement pertaining to your business ... under which you assume the tort liability of another party to pay for `bodily injury' or `property damage' to a third person or organization," and defines "tort liability" as "a liability that would be imposed by law in the absence of any contract or agreement." Accordingly, the Hillwood petition triggers the exclusion's exemption only if it properly alleges a tort cause of action against Hardscape under the "eight corners"³ rule applied by Texas courts.⁴

In its simplest form, the eight corners rule provides that "the petition's allegations and the policy's language determine the insurer's duty to defend," Farmers Tex. County Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 82 (Tex.1997); accord Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487, 490-91 (Tex.2008); Nat'l Union Fire Ins. Co. of Pittsburgh, PA v. Merchs. Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex.1997).⁵ Texas courts also adhere to a specific pleading requirement: "A court must focus on the factual allegations rather than the legal theories asserted in reviewing the underlying petition." Griffin, 955 S.W.2d at 82; accord Merchs. Fast Motor Lines, 939 S.W.2d at 141-42 ("We will not read facts into the pleadings."); see also Heyden Newport Chem. Corp. v. S. Gen. Ins. Co., 387 S.W.2d 22, 26 (Tex.1965) ("While we have said above that the court is limited to a consideration of the allegations and the insurance policy in determining an insurer's duty to defend, we wish to point out that in considering such allegations a liberal interpretation of their meaning should be indulged."); Zurich, 268 S.W.3d at 491 ("We resolve all doubts...