Data Specialties, Inc. v. Transcontinental Ins. Co.

• Decision Date: 27 October 1997
• Docket Number: No. 96-11582,96-11582
• Citation: 125 F.3d 909
• Parties: DATA SPECIALTIES, INC., Plaintiff-Appellee, v. TRANSCONTINENTAL INSURANCE COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 909

125 F.3d 909

DATA SPECIALTIES, INC., Plaintiff-Appellee, v. TRANSCONTINENTAL INSURANCE COMPANY, Defendant-Appellant.

No. 96-11582.

United States Court of Appeals, Fifth Circuit.

Oct. 27, 1997.

Rehearing Denied Nov. 25, 1997.

Patrick J. Wielinski, Ford, Yungblut, White & Salazar, Dallas, TX, for Plaintiff-Appellee.

Leo John Jordan, Frank M. Kennedy, Thompson, Coe, Cousins & Irons, Dallas, TX, for Defendant-Appellant.

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

Before KING, DUHE and WIENER, Circuit Judges.

DUHE, Circuit Judge:

Defendant-Appellant Transcontinental Insurance Company ("Transcontinental") appeals the district court's grant of summary judgment for Plaintiff-Appellee Data Specialities, Inc. ("DSI"). The district court concluded that Transcontinental was obligated to provide coverage to and reimburse its insured DSI for construction expenses under its standard commercial general liability policy ("CGL"). This case requires us to determine how a Texas court would construe the scope of coverage of a CGL policy when the insured is not at fault but seeks to recover expenses incurred in completing its contractual obligations, an apparent res nova issue in that state. We conclude that there is no coverage under a CGL policy when the insured is not at fault and thus reverse the district court.

I.

DSI is an electrical contractor. Transcontinental is DSI's general liability insurer. The Haggar Clothing Company hired DSI to reconstruct the electrical system at its damaged manufacturing facility in Texas.

While DSI and representatives of TU Electric were testing the electrical switchboard DSI had installed as part of its subcontract, a short circuit resulted in an explosion. The switchboard and other property in the Haggar plant were damaged. Investigators determined that a defective General Electric circuit breaker caused the explosion.

Following the explosion, DSI completed its contract by hiring a local electrical contractor, McBride Electric, to repair and rebuild portions of the electrical system. DSI paid McBride Electric for its work. DSI incurred additional overhead expenses for its supervision of the McBride work. DSI sought reimbursement for these expenses under its CGL policy. After investigating the explosion, Transcontinental determined there was no coverage under the CGL policy and denied the balance of the claim.

DSI sued seeking a determination of its rights under the CGL policy and a finding that Transcontinental breached the policy by not reimbursing DSI the expense it incurred to complete its contract with Haggar. Transcontinental denied coverage on two grounds: (1) that DSI was seeking to recover its own out-of-pocket expenses arising from the explosion, and (2) no one claimed that DSI was potentially at fault for the explosion. Transcontinental also pled DSI's breach of the "no-voluntary payment" provision of the policy. ¹

Both parties moved for summary judgment. Both motions were granted in part and denied in part. ² The district court concluded that the policy covered DSI's claim. Transcontinental appealed.

DSI argues that it was contractually obligated to repair the damage at the plant and, because there was "property damage," the policy affords coverage. Transcontinental argues that the DSI expenditure was made merely to preserve DSI's reputation and good business relationship with Haggar. We need not consider these arguments because we conclude that Transcontinental's policy provides coverage only for damages which the insured is legally obligated to pay as a result of its tortious conduct. Whether DSI had a contractual obligation to complete additional work following the explosion or breached the no-voluntary payment clause are moot issues in light of the lack of coverage.

II.

We review the district court's grant of summary judgment de novo. Davis v. Illinois Cent. R.R., 921 F.2d 616, 617-18 (5th Cir.1991). Summary judgment is appropriate if the record discloses "that there is no genuine issue of material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The underlying facts of this action are not disputed. Therefore we are left with determining whether the district court erred, as a matter of law, in interpreting the terms of the insurance policy. See Guaranty Nat. Ins. Co. v. North River Ins. Co., 909 F.2d 133, 135 (5th Cir.1990) (holding that the "[i]nterpretation of an insurance policy is a question of law.").

III.

Texas law clearly states that for an insurance company to be liable for a breach of its duty to satisfy a claim presented by its insured, the insured must prove that its claim falls within the insuring agreement of the policy. Employers Casualty Co. v. Block, 744 S.W.2d 940, 944 (Tex.1988)(overruled on other grounds by State Farm Fire and Casualty v. Gandy, 925 S.W.2d 696 (Tex.1996)). The insurer's duty to indemnify, or provide coverage, is triggered by the actual facts establishing liability in the underlying suit. Heyden Newport Chem. Corp. v. Southern Gen. Ins. Co., 387 S.W.2d 22, 25 (Tex.1965). DSI must prove that the money it spent hiring McBride and overseeing its work is reimbursable under the CGL policy. Both parties stipulated that the explosion occurred during the policy period, was caused by a faulty switch (circuit breaker), and was not the result of any DSI negligence.

What is not clear under Texas law is whether a standard CGL policy covers a contractual obligation triggered by an event for which the insured was not at fault. We must determine how a Texas court might answer this res nova issue. To do so, we must interpret, as a Texas court would, the following language in Transcontinental's CGL policy: "We will pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies." (emphasis supplied).

Sitting as an Erie court, we may consult a variety of sources: dicta in Texas court decisions, the general rule on the issue, and the rules in other states that Texas might look to, as well as treatises and law journals. State Farm Fire and Casualty Co. v. Fullerton, 118 F.3d 374, 378 (5th Cir.1997), citing Hill v. London, Stetelman, & Kirkwood, Inc., 906 F.2d 204, 207 (5th Cir.1990). After reviewing these sources, we conclude that a Texas court would rule that the CGL policy language "legally obligated to pay as damages" applies only to tort-based obligations.

Although Texas courts have not directly ruled on the meaning of the phrase in question, they have discussed the purpose of standard liability insurance and CGL insurance. In Brightwell v. Rabeck, 430 S.W.2d 252, 255 (Tex.Civ.App.--Fort Worth 1968, writ ref'd n.r.e.), the court stated that the basic premise behind liability insurance is that the insurance company accepts "the responsibility to discharge the insured's obligation, if any, arising through negligent tort committed by the latter." In reviewing a CGL policy in a factually similar case, ³ a Texas court noted that a CGL policy is intended to cover claims made against the insured by third parties. Charter Roofing Co., Inc. v. Tri-State Insurance Co., 841 S.W.2d 903 (Tex.App.--Houston [14th Dist.] 1992, writ denied). The Texas Supreme Court has indirectly addressed the purpose of a CGL policy. The court pointed out that the "insurer does not pay because (the assured) is alleged to be legally responsible but because (the assured) has been adjudicated to be legally responsible." Heyden Newport Chem. Corp. v. Southern Gen. Ins. Co., 387 S.W.2d 22, 25 (Tex.1965). It did not, however, define "legally responsible." Most recently, the Texas high court in National Union Fire Ins. Co. of Pittsburgh, Pa. v. Merchants Fast Motor Lines, Inc., 939 S.W.2d 139 (Tex.1997), noted that under a trucker's liability policy the insurer's duty to defend ⁴ rests upon allegations in the suit filed against the insured, the policy language, and the requirement of a causal connection between the accident and the insured's action. Thus, Texas courts seem to say that an insurer is obligated under a CGL or a standard liability policy when the insured's conduct is tortious in nature, a claim has been made against the insured for this tortious activity, and there has been an adjudication of the insured's liability.

The parties stipulated that DSI was not negligent. Haggar made no claim against DSI as a result of the explosion. The only claim presented was DSI's demand for reimbursement from Transcontinental for the costs DSI incurred in completing its construction contract following the accident. No suit was filed nor did Haggar and DSI enter a settlement agreement. Under the Texas cases discussing liability insurance, DSI's claim for coverage under its CGL policy would fail.

For this Court to determine how a Texas court would rule on this issue, we must also look to other sources to glean the meaning of "legally obligated to pay as damages." Other states have more clearly described the purpose of a CGL policy and the context in which the phrase "legally obligated to pay as damages" is to be read. The Ninth Circuit, in reviewing California law on this point, noted that state courts uniformly interpret such language to cover tort but not contract liability. Chamberlain v. Allstate Ins. Co., 931 F.2d 1361 (9th Cir.1991). In International Surplus Lines Ins. Co. v. Devonshire Coverage Corp., 93 Cal.App.3d 601, 155 Cal.Rptr. 870 (Cal.App. 2 Dist.1979), the state appellate court stated that "legally obligated to pay as damages" is synonymous with "damages for a liability imposed by law." It recognized that the latter phrase has been uniformly interpreted as referring to a liability arising ex delicto as distinguished from ex contractu. Citing Ritchie v. Anchor Casualty Co., 135 Cal.App.2d 245, 286 P.2d 1000.

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