Federated Mutual Ins. v. Grapevine Excavation

• Citation: 197 F.3d 720
• Decision Date: 01 December 1999
• Docket Number: No. 98-10904,98-10904
• Parties: (5th Cir. 1999) FEDERATED MUTUAL INSURANCE COMPANY PLAINTIFF, v. GRAPEVINE EXCAVATION INC.; ET AL, DEFENDANTS, GRAPEVINE EXCAVATION INC., DEFENDANT - THIRD PARTY PLAINTIFF - APPELLANT, v. MARYLAND LLOYDS, A LLOYDS INSURANCE COMPANY, THIRD PARTY DEFENDANT - APPELLEE
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 720

197 F.3d 720 (5th Cir. 1999)

FEDERATED MUTUAL INSURANCE COMPANY PLAINTIFF, v. GRAPEVINE EXCAVATION INC.; ET AL, DEFENDANTS, GRAPEVINE EXCAVATION INC., DEFENDANT - THIRD PARTY PLAINTIFF - APPELLANT, v. MARYLAND LLOYDS, A LLOYDS INSURANCE COMPANY, THIRD PARTY DEFENDANT - APPELLEE.

No. 98-10904

U.S. Court of Appeals, Fifth Circuit

December 01, 1999

Rehearing Denied Jan. 5, 2000.

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

Before Jones and Wiener, Circuit Judges, and Walter, District Judge. ^*

Wiener, Circuit Judge

In this breach of contract and declaratory judgment action arising out of an insurance defense dispute, Defendant-Third Party Plaintiff-Appellant Grapevine Excavation, Inc. ("GEI") appeals the district court's grant of summary judgment in favor of Third Party Defendant-Appellee Maryland Lloyds ("Maryland"). Following a de novo review of the record, we reverse and render judgment in favor of GEI, but remand the case to the district court for a determination of the appropriate remedy. In addition, we retain jurisdiction for the limited purpose of deciding whether GEI is entitled to recover the attorney's fees incurred in this case, a question that we have certified to the Supreme Court of Texas.

I. FACTS AND PROCEEDINGS

The present controversy arises out of a suit filed by Tribble & Stephens, Co. ("T&S") against GEI and various other defendants. T&S, a general contractor, was hired by Wal-Mart to construct a parking lot at its store in Burleson, Texas. T&S subcontracted with GEI to perform excavation, backfilling and compacting work in connection with T&S's construction of the lot. ¹

In August 1995, approximately six months after GEI completed work on the project, Wal-Mart discovered that the select fill materials provided and installed by GEI failed to meet specifications and, as a result, had caused damage to the work of T&S's paving subcontractor, Moore Construction, Inc. ("Moore"). Although Wal-Mart initially contemplated requiring T&S to correct the deficiency by installing an asphalt overlay on the lot, it ultimately opted to withhold from T&S partial payment of the balance due under its construction contract.

Thereafter, T&S filed suit in state court against GEI. ² In that suit T&S sought a declaratory judgment on the issue of GEI's financial responsibility for damage to the parking lot, and alleged claims of breach of contract, negligence, and violations of the Texas Deceptive Trade Practices Act ("DTPA").

On being named a defendant in the T&S litigation, GEI called on its commercial general liability insurance ("CGL") carriers, Federated Mutual Insurance Company ("Federated") and Maryland, to provide a defense. Federated acquiesced in the demand, subject to a reservation of its rights, but Maryland refused. Thereafter, Federated filed this declaratory judgment action in federal district court in Texas seeking a determination of its obligations under its policy. GEI counterclaimed against Federated and filed a third-party complaint against Maryland alleging breach of contract and seeking declaratory judgment that Maryland had a duty to defend.

The parties filed cross motions for summary judgment and the court ruled in favor of Federated and Maryland, concluding that neither insurer had a duty to defend GEI in the T&S lawsuit. The district court based its ruling, in pertinent part, on a determination that GEI's performance under its subcontract was an intentional act and, therefore, did not constitute an "occurrence" as that term is defined in the Federated and Maryland CGL policies. GEI now appeals, seeking reversal of the district court's grant of summary judgment in favor of Maryland. ³

II. ANALYSIS

A. Standard of Review

We review a grant of summary judgment de novo, applying the same standard as the district court. ⁴ Summary judgment is appropriate when the evidence, viewed in the light most favorable to the nonmoving party, presents no genuine issue of material fact and shows that the moving party is entitled to judgment as a matter of law. ⁵

B. Maryland's Duty to Defend GEI

The parties agree that Texas law controls whether Maryland has a duty to defend GEI in the T&S litigation. Texas courts follow the "eight corners" or "complaint allegations" rule in making this determination. ⁶ Under this rule, courts compare the words of the insurance policy with the allegations of the plaintiff's complaint to determine whether any claim asserted in the pleading is potentially within the policy's coverage. ⁷ The burden is on the insured to show that a claim against him is potentially within the scope of coverage under the policies; however, if the insurer relies on the policy's exclusions, it bears the burden of proving that one or more of those exclusions apply. ⁸ Once the insurer proves that an exclusion applies, the burden shifts back to the insured to show that the claim falls within an exception to the exclusion. ⁹

Maryland's CGL policy provides liability coverage to GEI for "property damage" caused by an "occurrence." As defined in the policy, "property damage" means "[p]hysical injury to tangible property, including all resulting loss of use of that property." The term "occurrence" means "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." The term "accident," however, is not defined. Maryland concedes that the damage to the parking lot constitutes "property damage" within the meaning of its policy. Hence, Maryland's duty to defend turns on (1) whether T&S has alleged in its state court petition that this damage was caused by an "occurrence," i.e., an "accident," and, if so, (2) whether Maryland's policy nevertheless contains one or more exclusions that explicitly eschew coverage of T&S's claims. ¹⁰

1. Damage Caused by an "Occurrence"

There are two lines of Texas cases construing the definition of "occurrence" for the purpose of insurance coverage. The first pertains to coverage of claims against an insured for damage caused by its alleged intentional torts. According to this body of law, damage that is the natural result of voluntary and intentional acts is deemed not to have been caused by an occurrence, no matter how unexpected, unforeseen, and unintended that damage may be. ¹¹

This principle was first enunciated by the Texas Supreme Court in Argonaut Southwest Insurance Co. v. Maupin. ¹² In that case, Maupin Construction Company sued Argonaut for refusing to defend it in a trespass suit brought by the owner of a parcel of real property from which Maupin had removed dirt pursuant to a contract with the owner's tenant. Argonaut's policy provided coverage for "injure[ies] to or destruction of property . . . caused by [an occurrence]." ¹³ The policy defined "occurrence" as "(a) an accident, or (b) in the absence of an accident, a condition for which the insured is responsible which during the policy period causes physical injury to or destruction of property which was not intended." ¹⁴ Maupin contended that its removal of dirt constituted accidental damage to the owner's property and, as such, fell within the scope of coverage. The supreme court disagreed. ¹⁵ An actor is deemed to have committed the tort of trespass, reasoned the court, if he intentionally and without the owner's consent enters onto a piece of property, regardless whether he was aware of the property's ownership at the time. ¹⁶ As Maupin voluntarily, intentionally, and without the true owner's consent removed dirt from property belonging to the owner, and as trespass in Texas is a strict liability tort without a scienter element, the court concluded that inquiry into whether Maupin expected or intended to cause damage to the owner was not relevant in determining if a tort had been committed.

Both state and federal courts sitting in Texas have relied on Maupin to deny insurance defense and coverage in a steady stream of cases (the "Maupin line"), all of which involve the alleged commission of an intentional tort by an insured. ¹⁷ In cases involving claims against an insured for damage arising out of his alleged negligence, however, a second line of cases has developed, following Massachusetts Bonding & Ins. Co. v. Orkin Exterminating Co. ¹⁸ (The "Orkin line").

In Orkin, the Texas Supreme Court was called on to resolve an insurance dispute arising out of a suit brought by Gulf Coast Rice Mills against an exterminator for damage to rice caused by the application of pesticide in the rice mill's facilities. A jury in the underlying case found that Orkin had acted negligently in its application of the pesticide in Gulf Coast's premises and that such negligence was the proximate cause of damage to the rice. In the insurance litigation that ensued, the supreme court concluded that the damage for which Orkin had been held liable was caused by an "accident" within the meaning of the applicable insurance policy. In reaching this Conclusion, the court construed the term "accident" to "include negligent acts of the insured causing damage which is undesigned and unexpected." ¹⁹

Following Orkin, both state and federal courts in Texas have interpreted the terms "accident" and "occurrence" to include damage that is the "unexpected, unforeseen or undesigned happening or consequence" of an insured's negligent behavior. ²⁰ Many of these cases have involved claims for damage caused by an insured's defective performance or faulty workmanship. ²¹ Furthermore, within this genre, courts have consistently held that damage wreaked on the work product of a third party -- as opposed to that of the insured ²² -- is presumed to have been unexpected and, therefore, constitutes an accident or an occurrence. ²³

In granting summary judgment in favor of Maryland, the district court rejected the applicability of the Orkin negligence line of cases and relied instead on the Maupin line of cases which pertain to intentional torts. On...