Downhole Navigator, L.L.C. v. Nautilus Ins. Co.

• Decision Date: 29 June 2012
• Docket Number: No. 11–20469.,11–20469.
• Citation: 686 F.3d 325
• Parties: DOWNHOLE NAVIGATOR, L.L.C., Plaintiff–Appellant v. NAUTILUS INSURANCE COMPANY, Defendant–Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

686 F.3d 325

DOWNHOLE NAVIGATOR, L.L.C., Plaintiff–Appellant

v.NAUTILUS INSURANCE COMPANY, Defendant–Appellee.

No. 11–20469.

United States Court of Appeals,Fifth Circuit.

June 29, 2012.

Anne Marie Finch, Brian Charles Poldrack, Zimmerman, Axelrad, Meyer, Stern & Wise, P.C., Houston, TX, for Plaintiff–Appellant.

Levon G. Hovnatanian, Jamie Penton Cooper, Martin, Disiere, Jefferson & Wisdom, L.L.P., Houston, TX, for Defendant–Appellee.

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

Before REAVLEY, PRADO, and OWEN, Circuit Judges.

EDWARD C. PRADO, Circuit Judge:

Plaintiff–Appellant Downhole Navigator, L.L.C. (“Downhole”) appeals from the magistrate judge's grant of partial summary judgment for Defendant–Appellee Nautilus Insurance Company (“Nautilus”).¹ Nautilus (the insurer) had issued Downhole (the insured) a commercial general liability policy; after a third party, Sedona Oil and Gas Corporation (“Sedona”), sued Downhole, Downhole rejected the representation offered by Nautilus under the policy on the ground that Nautilus'sreservation-of-rights letter had created a conflict of interest. Downhole hired its own independent counsel; when Nautilus refused to reimburse Downhole for the cost of its independent counsel, Downhole filed this action, seeking a declaratory judgment that Nautilus had a contractual duty to defend and indemnify Downhole in the Sedona lawsuit. The magistrate judge rejected Downhole's claim, ruling that Nautilus was not required to reimburse Downhole for the cost of independent counsel. Downhole timely appealed that ruling. For the reasons stated below, we AFFIRM.

I.

Downhole services the oil drilling industry. Sedona, an oil well operator, hired Downhole around November 2008 to help redirect an oil well toward a better location within a desired reservoir. According to Sedona's complaint, Downhole developed the plan to conduct the deviation and participated directly in the deviation process, but around December 2008, Downhole negligently executed the deviation plan, causing damage to the well. On March 3, 2009, Sedona brought a negligence action against Downhole in Texas state court.

Downhole had a one-year general commercial liability policy with Nautilus, running from mid-June 2008 to mid-June 2009. Downhole submitted its notice of claim and indemnification to Nautilus on March 24, 2009. Nautilus responded on March 30, 2009, and tendered a qualified defense under a reservation of rights. Nautilus reserved its right to decline indemnity coverage if, after further investigation, the underlying suit fell under one of three policy exclusions: (1) the “expected or intended injury” exclusion, which excludes “ ‘bodily injury’ or ‘property damage’ expected or intended from the standpoint of the insured”; (2) the “property damage” exclusion, which excludes certain “physical injury to tangible property”; (3) the “testing or consulting” exclusion, which excludes damages arising from “[a]n error, omission, defect, or deficiency in ... any test performed or ... [in] [a]n evaluation, a consultation or advice given, by or on behalf of any insured.” Additionally, though not referenced in the letter, two other exclusions are relevant to this case: the “professional liability” exclusion, which excludes damages arising from “the rendering of or failure to render any professional services,” including “the preparing, approving, or failing to prepare or approve ... opinions, reports, surveys, ... or drawings and specifications,” and “supervisory, inspection, architectural or engineering activities”; the “data processing” exclusion, which excludes damages arising from “the rendering of, or failure to render, electronic data processing ... services, advice or instruction....”

On April 27, 2009, in response to the reservation-of-rights letter, Downhole notified Nautilus that it was rejecting Nautilus's proffered defense, writing: “Your decision to act under a reservation of rights has created a material conflict with respect to the selection of counsel.... Downhole has been left with no choice but to select its own representation. Pursuant to Texas law, Downhole expects and demands that you cover all damages related to this claim, including attorneys' fees, up to the applicable limits of [the policy].” On May 11, 2009, Nautilus responded that it had “reserved [its] rights while investigating the matter,” and insisted that “[u]ntil or unless a coverage issue develops, Downhole is not entitled to separate counsel.”

On March 3, 2010, Downhole filed this action, seeking a declaratory judgment that Nautilus has a contractual duty under the policy to defend Downhole, cover the cost of Downhole's independent counsel, and indemnify Downhole in the underlying Sedona suit. The parties filed cross-motions for summary judgment. The magistrate judge denied Downhole's motion for summary judgment, and granted in part and denied in part Nautilus's motion: the magistrate judge granted the portion of Nautilus's motion relating to its duty to defend, ruling that Nautilus was not required to reimburse Downhole for the cost of hiring independent counsel to defend Downhole in the Sedona suit; but the magistrate judge denied the portion of the motion related to indemnity, ruling that it was premature to rule on the issue of indemnification.

II.

The parties agree that Texas law governs this dispute. Because federal jurisdiction in this case is based on diversity, we follow Texas's substantive law. See Preston Exploration Co., L.P. v. GSF, L.L.C., 669 F.3d 518, 522 (5th Cir.2012) (citing Erie R.R. v. Tompkins, 304 U.S. 64, 78–79, 58 S.Ct. 817, 82 L.Ed. 1188 (1938)). We review a district court's grant of summary judgment de novo, applying the same standards as the district court. Hernandez v. Yellow Transp., Inc., 670 F.3d 644, 650 (5th Cir.2012). Summary judgment is appropriate where the movant shows that there is no genuine issue of material fact and that the movant is entitled to judgment as a matter of law. Id. (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Fed.R.Civ.P. 56(a)). In reviewing the record, all facts and inferences are construed in the light most favorable to the non-movant. Id. Nonetheless, “[i]f the record, taken as a whole, could not lead a rational trier of fact to find for the non-moving party, then there is no genuine issue for trial.” Id. (internal quotation marks omitted).

III.

Under Texas law, it is well-settled that the insurer owes a duty to defend its insured against any allegation that is potentially covered by the policy. See Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. Merchants Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex.1997). It is also well-settled that an insurer's “right to conduct the defense includes the authority to select the attorney who will defend the claim and to make other decisions that would normally be vested in the insured as the named party in the case.” N. Cnty. Mut. Ins. Co. v. Davalos, 140 S.W.3d 685, 688 (Tex.2004). “Under certain circumstances, however, an insurer may not insist upon its contractual right to control the defense.” Id. In Davalos, the Texas Supreme Court noted one such circumstance:

In the typical coverage dispute, an insurer will issue a reservation of rights letter, which creates a potential conflict of interest. And when the facts to be adjudicated in the liability lawsuit are the same facts upon which coverage depends, the conflict of interest will prevent the insurer from conducting the defense.

Id. at 689 (citation omitted).²

Applying the principle from Davalos to this case, we agree with Nautilus and with the magistrate judge below that “the facts to be adjudicated” in the underlying Sedona litigation are not the same “facts upon which coverage depends.” The underlying Sedona litigation concerns whether Downhole negligently performed its deviation work. If the insurance policy between Downhole and Nautilus excluded coverage for Downhole's negligent conduct, and Nautilus accordingly reserved its right to disclaim coverage based on whether Downhole had negligently performed its work, then the “facts to be adjudicated” in the Sedona litigation would be equivalent to the “facts upon which coverage depends.” But no such equivalency exists, as Downhole's negligence is not a coverage issue between Downhole and Nautilus. Indeed, although the policy excludes coverage for “testing” or “consulting” services, the facts about whether Downhole breached a duty to Sedona by failing to act as a reasonably prudent provider of deviation-correction services are not equivalent to the facts that could determine whether Downhole was “testing” or “consulting” for Sedona. Unlike the former category of facts, the latter category of facts will not be adjudicated in the Sedona litigation; the underlying fact-finder will not decide whether Downhole's work constituted “testing” or “consulting.” Likewise, while several other...