Colony Ins. Co. v. Peachtree Constr.

• Decision Date: 19 July 2011
• Docket Number: No. 09–11106.,09–11106.
• Citation: 647 F.3d 248
• Parties: COLONY INSURANCE CO., Plaintiff–Intervenor Defendant–Appelleev.PEACHTREE CONSTRUCTION, LTD., Defendant–Appellant.Great American Insurance, Co., Intervenor–Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

647 F.3d 248

COLONY INSURANCE CO., Plaintiff–Intervenor Defendant–Appellee
v.
PEACHTREE CONSTRUCTION, LTD., Defendant–Appellant.Great American Insurance, Co., Intervenor–Appellant.

No. 09–11106.

United States Court of Appeals, Fifth Circuit.

July 19, 2011.

[647 F.3d 250]

David C. Colley (argued), Underwood, Perkins & Ralston, Dallas, TX, for Plaintiff–Intervenor Defendant–Appellee.Kevin Lamar Sewell (argued), Daniel Lee Gus, Walker Sewell, L.L.P., Dallas, TX, for Defendant–Third Party Plaintiff–Appellant and Intervenor–Appellant.Appeal from the United States District Court for the Northern District of Texas.Before GARZA and BENAVIDES, Circuit Judges, and LYNN ^*, District Judge.EMILIO M. GARZA, Circuit Judge:

Appellants Peachtree Construction, Ltd. (“Peachtree”) and Great American Insurance Company (“Great American”) appeal the district court's grant of summary judgment in favor of Appellee Colony Insurance Company (“Colony”). Great American also appeals the lower court's Fed.R.Civ.P. 12(b)(6) dismissal of Great American's complaint in intervention.

This appeal raises two issues: (1) whether, under Texas law, an insurer's duty to indemnify an insured is subordinate to the insurer's duty to defend that insured; and (2) whether an excess-liability insurer can maintain a subrogation claim against a primary-liability insurer after the insured has been fully indemnified. The district court answered these questions, “yes,” and “no,” respectively, based on the court's interpretation of then-existing Texas law. After the district court ruled, however, the Texas Supreme Court took up the first question

[647 F.3d 251]

in D.R. Horton–Texas, Ltd. v. Markel Int'l Ins. Co., 300 S.W.3d 740 (Tex.2009), while we addressed the second in Amerisure Ins. Co. v. Navigators Ins. Co., 611 F.3d 299 (5th Cir.2010). Both appellate courts reached holdings contrary to the district court on the issues now before us. Accordingly, we VACATE the district court's orders granting summary judgment for Colony and dismissing Great American's complaint in intervention, and REMAND for further proceedings.

I

Peachtree was hired by the Texas Department of Transportation as the general contractor for a highway repaving project. Peachtree subcontracted with CrossRoads, L.P. (“CrossRoads”) to provide construction signs, barricades, and warning devices for the project site. As mandated by the parties' contract, CrossRoads obtained general-liability and excess-liability insurance and named Peachtree as an additional insured under both policies. The parties further agreed that CrossRoads' insurance would be “primary over any other insurance carried separately by [Peachtree].” Colony provided CrossRoads' primary-liability coverage.¹

In addition to being covered under the CrossRoads policies, Peachtree also maintained its own primary and excess-liability insurance. Travelers Insurance Company (“Travelers”) served as Peachtree's primary insurer, covering claims up to $1 million, while Great American provided Peachtree's excess coverage.

Not long after the repaving project began, Kari Lee's husband died after losing control of his motorcycle and crashing at the construction site. Lee filed a wrongful death suit (“the underlying suit”) against Peachtree for negligence and gross negligence in causing her husband's death by, among other lapses, “failing to use required and reasonable signage, barricades, and warnings to drivers of the hazardous drop-off.” Peachtree joined CrossRoads as a third-party defendant and, as an additional insured under CrossRoads' primary policy, asked Colony to defend the underlying suit. Colony agreed, but paid the costs of Peachtree's defense with a reservation of rights.

While the underlying suit was pending, Colony filed a separate declaratory judgment suit against Peachtree and Travelers. Colony maintained that it had no duty to defend or indemnify Peachtree in the underlying suit because Lee's petition only named and alleged negligence by Peachtree. CrossRoads, Colony's named insured, was not mentioned in the petition. Peachtree and Travelers counterclaimed, seeking a declaration of Colony's duties to defend and indemnify Peachtree as an additional insured.

Before the district court resolved the declaratory judgment suit, the underlying suit settled for $2 million. Travelers and Great American contributed $1 million and $650,000, respectively, on behalf of Peachtree, while Colony contributed $350,000 on behalf of CrossRoads. The settlement meant that Peachtree was fully indemnified for the claims asserted in the underlying suit. Meanwhile, the insurers continued to dispute which company was liable for the amount in excess of the $1 million paid by Travelers.

After the settlement, Great American intervened in the declaratory judgment suit, asking the court to find that Colony had a duty to defend and indemnify Peachtree

[647 F.3d 252]

in the underlying suit, and seeking reimbursement from Colony for Great American's $650,000 settlement contribution. The district court dismissed Great American's complaint in intervention under Fed.R.Civ.P. 12(b)(6). Relying on the Texas Supreme Court's decision in Mid–Continent Ins. Co. v. Liberty Mut. Ins. Co., 236 S.W.3d 765 (Tex.2007), the court found that Great American's reimbursement claims were foreclosed as a matter of law.

The district court also entered summary judgment for Colony in the declaratory judgment action, finding that because Colony had no legal duty to defend Peachtree in the underlying suit, it could have no duty to indemnify Peachtree either. The district court struck, and refused to consider, summary judgment evidence offered by Peachtree and Great American to establish Colony's duty to indemnify.

On appeal, Peachtree and Great American challenge the district court's finding that Colony owed no duty to indemnify Peachtree. They do not contest the court's ruling on the duty to defend. Great American also appeals the district court's Fed.R.Civ.P. 12(b)(6) dismissal of its complaint in intervention. Travelers is not participating in this appeal.

II

We review a district court's grant of summary judgment de novo. Am. Nat'l Gen. Ins. Co. v. Ryan, 274 F.3d 319, 323 (5th Cir.2001) (citation omitted). Summary judgment is appropriate if “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). Where federal jurisdiction is based on diversity of citizenship, as it is here, a federal court looks to the substantive law of the forum state. See Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); Tex. Indus., Inc. v. Factory Mut. Ins. Co., 486 F.3d 844, 846 (5th Cir.2007). The parties agree that the substantive law of Texas applies here.

We also review a district court's dismissal for failure to state a claim de novo. Gen. Star Indem. Co. v. Vesta Fire Ins. Corp., 173 F.3d 946, 949 (5th Cir.1999). When considering a Rule 12(b)(6) motion, we liberally construe the complaint in favor of the plaintiff and accept all well-pleaded factual allegations as true. See Woodard v. Andrus, 419 F.3d 348, 351 (5th Cir.2005). While a complaint need not contain detailed factual allegations, it must set forth “more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). Factual allegations must be sufficient to raise a non-speculative right to relief. Id. To survive a Rule 12(b)(6) motion to dismiss, the plaintiff must plead “enough facts to state a claim to relief that is plausible on its face.” Id. at 570, 127 S.Ct. 1955.

III

This appeal requires us to determine: (1) whether the district court erred in granting summary judgment for Colony based on the court's finding that, as a matter of law, Colony had no duty to indemnify Peachtree; and (2) whether Great American can maintain a subrogation claim against Colony after Peachtree has been fully indemnified.

A

In Texas, an insurer's duties to defend and indemnify its insured are “distinct and separate duties.” Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d 819, 821–22 (Tex.1997). The duty to defend

[647 F.3d 253]

means the insurer will defend the insured in any lawsuit that “alleges and seeks damages for an event potentially covered by the policy,” while the duty to indemnify means the insurer will “pay all covered claims and judgments against an insured.” D.R. Horton–Texas, Ltd. v. Markel Int'l Ins. Co., 300 S.W.3d 740, 743 (Tex.2009) (quoting 14 Lee R. Russ & Thomas F. Segalla, Couch on Insurance § 200:3 (3d ed.2009)). The difference between the two is a matter of timing.

When an insured party is sued, an insurer's duty to defend is determined solely by the facts alleged in the petition and the terms of the policy. See Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co., 279 S.W.3d 650, 654 (Tex.2009). This is known as the eight-corners rule. Id. “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). Moreover, the duty to defend does not rely on the truth or falsity of the underlying allegations; an insurer is obligated to defend the insured if the facts alleged in the petition, taken as true, potentially assert a claim for coverage under the insurance policy. Id. at 308; see also 14 Couch on Insurance § 200:19 (“Even if the allegations are groundless, false, or fraudulent the insurer is obligated to defend.”). Because the only two documents relevant to the duty-to-defend inquiry are the insurance policy and the petition, an insurer's duty to defend can be determined at the moment the petition is filed.

In contrast, an insurer's duty to indemnify generally cannot be ascertained until the completion of litigation, when liability is established, if at all. See Farmers Tex. Cnty. Mut....