City of Coll. Station v. Star Ins. Co.

• Decision Date: 14 November 2013
• Docket Number: No. 12-20746,12-20746
• Parties: THE CITY OF COLLEGE STATION, TEXAS, Plaintiff - Appellant v. STAR INSURANCE COMPANY, Defendant - Appellee
• Court: U.S. Court of Appeals — Fifth Circuit

THE CITY OF COLLEGE STATION, TEXAS, Plaintiff - Appellant v. STAR INSURANCE COMPANY, Defendant - Appellee

No. 12-20746

UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

FILED: November 14, 2013

Appeal from the United States District Court

for the Southern District of Texas

Before HIGGINBOTHAM, CLEMENT, and PRADO, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

Star Insurance Company ("SIC") refused to defend or indemnify its insured, the City of College Station ("the City"), in a lawsuit brought by Weingarten Realty Investors ("WRI"), a real-estate investment trust not party to this appeal. The City settled the underlying litigation with WRI and sued SIC to recover defense costs, indemnification, and statutory penalty interest. Applying Texas law, the district court concluded that SIC had no duty to defend or indemnify the City in the litigation with WRI and, consequently, no penalty liability for late payment. We reverse and remand for further proceedings.

I.

In 2008, WRI sued the City in federal district court. WRI's suit arose out of a dispute over the re-zoning of a tract of land that WRI hoped to develop into a shopping mall centered around a Walmart store. As alleged in WRI's second amended complaint, WRI purchased the tract in reliance on the City's 1990 Comprehensive Plan, which designated the tract for "regional retail use," as well as the City's 2001 land use study, which designated the tract for a "power" retail center. According to WRI, the "regional retail use" designation in the Comprehensive Plan was legally binding on the City and meant that it could only zone the property as "General Commercial (C-1)" — the designation WRI needed to develop its mall. However, when WRI requested C-1 zoning in 2006 — a request that "should have been a mere formality" — the City denied it.

WRI nevertheless continued to work with the City "in an effort to salvage its investment." WRI met with a member of the City council, who advised WRI that it might get approval by replacing Walmart with HEB and by breaking its zoning request into several smaller applications so as to arouse less opposition from neighboring landowners. WRI followed these instructions, negotiating an agreement with HEB to be the new anchor tenant and submitting a revised zoning request for only 16 acres of its 76-acre tract. However, the City "tabled" the request, purportedly to conduct a transportation study. Though the study concluded in November 2007, the City did not take any action for another year and a half, until WRI sued the City in 2008. Finally, in 2009, the City introduced a new Comprehensive Plan that re-designated portions of WRI's property as "suburban commercial" and "general suburban" — designations that, according to WRI, will make it more difficult to develop the property.

WRI asserted four distinct causes of action against the City. First, WRI claimed that the City's actions were discriminatory and lacked a rational basis, violating its Fourteenth Amendment right to equal protection and entitling it todamages and injunctive and declaratory relief. WRI supported its equal protection claim with detailed factual allegations:

[The City's] denials of WRI's zoning requests were unreasonable and constitute treatment different than that given by [the City] to individuals and entities situated similarly to WRI. One such example is the development directly across the street from [WRI's] [p]roperty. This development is similar to the development planned by WRI in that both are retail developments. [The City] approved the zoning for that development but not for WRI. Generally speaking, upon information and belief, many individuals and entities have come before [the City] and requested zoning that is in accordance with the Comprehensive Plan, and [the City] has granted such zoning requests. Here, [the City] denied WRI's requests despite the fact that they comply with the Comprehensive Plan. [The City] has also passed a [n]ew Comprehensive Plan . . . directed at blocking WRI's development in the future, while at the same time granting zoning to property owners who are developing their properties with the same tenants previously interested in WRI's [p]roperty at the intersection just south of [WRI's] [p]roperty.

According to WRI, the real reason for this disparate treatment was the City's irrational bias against WRI, Walmart, and "big box" retail.

Second, WRI alleged, the City's repeated denials of its requests for re-zoning were "arbitrary and capricious," violating its Fourteenth Amendment right to substantive due process and entitling it to money damages and injunctive relief. WRI urged that it had "requested the only type of zoning that can possibly be applied to the Property." Nevertheless, the City repeatedly denied WRI's requests, purportedly because of concerns about "traffic and timing." WRI claimed that these concerns were mere pretext, as they could "all have been mitigated at the permit stage before any permit for development was issued." Ultimately, the City council members denied WRI's requests "because of their dislike for Walmart, [and] their own personal or political interests." According to WRI, "none of these reasons for the denial were [sic] legitimate."

Third, WRI claimed that the City's "intentional actions in denying WRI's zoning requests constitute a taking under Article I, Section 17 of the Texas Constitution." WRI reasoned that in light of the City's 1990 Comprehensive Plan as well as its 2001 land use study, WRI "had reasonable expectations that it could develop the [p]roperty for retail use." Hence, WRI reasoned, the "denial of WRI's zoning proposals . . . had a significant negative impact on WRI's investment-backed expectations and have [sic] resulted in a taking without compensation to WRI." Moreover, WRI urged, the City's new Comprehensive Plan, adopted in 2009, was "designed to ensure that WRI cannot develop its [p]roperty in the future."

Fourth, WRI claimed that the City's individual council members had "intentionally interfered with WRI's existing and prospective contracts and business relationships for its development," entitling WRI to compensatory and punitive damages. According to WRI, it "lost some of [its prospective] tenants to new developments nearby that [the City's council members] approved." Moreover, WRI alleged, the council members "may have interests in these other developments or improper contacts with the other developers that have motivated them to approve the other developments while denying the request[s] of WRI without a legitimate basis or reason."

The City requested that SIC fund its defense of WRI's lawsuit. However, SIC refused, claiming that the general commercial liability policy it had issued to the City did not provide coverage. The policy covered liability arising out of "wrongful act[s]" by city officials, including errors, misstatements, misleading statements, neglect, breach of duty, misfeasance, malfeasance, and nonfeasance. However, the policy excluded "any liability . . . actually or allegedly arising out of or caused or contributed to by or in any way connected with any principle of eminent domain, condemnation proceeding, [or] inverse condemnation . . . bywhatever name called." According to SIC, WRI's lawsuit fell within the inverse-condemnation exclusion.

After settling WRI's lawsuit, the City sued SIC under the policy to recover defense costs, indemnity, and statutory penalty interest. SIC moved for summary judgment, urging that the allegations in WRI's second amended complaint conclusively negated the possibility of coverage under the policy and that it therefore had no duty to defend or indemnify the City. The district court agreed that SIC was not liable for the City's defense costs, reasoning that:

WRI's allegations raised a taking/inverse condemnation claim in the underlying lawsuit. . . . Although . . . WRI labeled its other claims as violation of substantive due process, equal protection . . . and . . . tortious interference with WRI's contracts, the core or nucleus of the underlying dispute between WRI and the City is the City's refusal to grant WRI's zoning requests. In other words, these are derivative claims and do not constitute justiciable causes of action apart from WRI's inverse condemnation claim.

The court also agreed that SIC had no duty to indemnify the City for its settlement with WRI, reasoning that "given the broad and comprehensive nature of the exclusion provision, . . . there could be no facts in the settlement agreement that would alter the Court's conclusion that all of WRI's claims originate from its alleged inverse condemnation claim." The court therefore granted SIC's motion for summary judgment. The City appeals.

II.

The first issue on appeal is whether SIC is liable for the City's defense costs. In determining whether an insurer's duty to defend is triggered, Texas courts strictly apply the "eight-corners rule," which looks only to the four corners of the most recent complaint in the underlying action as well as the four cornersof the insurance policy.¹ If the underlying complaint pleads facts sufficient to create the potential of covered liability, the insurer has a duty to defend the entire case,² even if the allegations are demonstrably false, fraudulent, or groundless,³ and even if some of the injuries alleged are not covered or fall within the scope of an exclusion.⁴ However, if the insurer can show that all of the alleged liability falls outside of the scope of coverage or within the scope of an exclusion, the insurer has no duty to defend.⁵ In other words, "[w]hile the duty to defend is triggered by a single alleged injury that falls within the scope of the coverage provision, exclusions negate the insure[r]'s duty to defend only when all of the alleged injuries that fall into the coverage provision are subsumed under the exclusionary provision."⁶

Below, SIC contended that the eight-corners rule did not govern its liability...