Green v. Aetna Insurance Company

• Decision Date: 27 July 1965
• Docket Number: No. 21184.,21184.
• Citation: 349 F.2d 919
• Parties: A. C. GREEN, Jr., and H. H. Parker, Individually and as Partners, G & G Machine Works, et al., Appellants, v. AETNA INSURANCE COMPANY, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

349 F.2d 919 (1965)

A. C. GREEN, Jr., and H. H. Parker, Individually and as Partners, G & G Machine Works, et al., Appellants, v. AETNA INSURANCE COMPANY, Appellee.

No. 21184.

United States Court of Appeals Fifth Circuit.

June 29, 1965.

Rehearing Denied July 27, 1965.

William Q. Boyce, Amarillo, Tex., Jack Banner, Wichita Falls, Tex., for appellants.

David Bland, Houston, Tex., for appellee.

Before RIVES, BROWN and WISDOM, Circuit Judges.

JOHN R. BROWN, Circuit Judge.

This appeal challenges a declaratory judgment rendered on the Insurer's motion for summary judgment, F.R.Civ.P. 56, declaring that the Insurer is not obligated to defend a damage suit or pay any judgment rendered therein. Although the specific issue presented is the construction and application of policy terms, our disposition is affected by principles which bear on granting declaratory relief. 28 U.S.C.A. § 2201.

The Insurer¹ issued to the Assured² a standard Texas Comprehensive General Liability (CGL) policy. Consistent with its name, its coverage for personal injuries and death under Part I was virtually unlimited.³ Limited only with "respect to such insurance as is afforded by this policy," the obligation to defend under Part II was likewise broad.⁴ But structured as one now comes to expect, cf. Ocean Acc. & Guar. Corp. v. Aconomy Erectors, Inc., 7 Cir., 1955, 224 F.2d 242, 247, what was given in Parts I and II, notes 3 and 4, supra, shrunk considerably as tabular spaces on attached schedules were filled in or left blank. As a consequence, the Insurer asserts, the coverage was limited to "(a) Premises — Operations"; "(c) Independent Contractors"; and contractual liability under "(e) Contracts as Defined in Condition 3(a)."⁵ And it contends that coverage for "Products (Including Completed Operations)" was expressly negatived both by the tabular language⁶ and by formal endorsement which excluded liability for "Products Hazards."⁷

This coverage and duty-to-defend controversy arises out of a damage suit filed December 7, 1961, by Billy Lee Schafer in the State Court. Schafer, an employee of Luke Grace Drilling Company, claimed to have been seriously injured January 22, 1961, on a drilling rig located in Hansford County, Texas, when a drill collar, which had previously been taken to the machine shop of the Assured Rotary Tool & Joint Company in Perryton, Texas, for reworking and return, broke.⁸ Because the State Court suit charged that the Assured Rotary Tool & Joint Company had delivered the drill collars back to the premises of the Drilling Company, its customer, the Insurer urged that this claim was not within the policy coverage since the occurrence was within "Products Hazards" as defined in the policy⁹ which had been expressly excluded, notes 7 and 6, supra.

The problem of policy coverage was early recognized and raised. After obtaining a reservation agreement¹⁰ the Insurer employed an Amarillo firm to defend the suit. This firm filed an answer on behalf of the Assured and undertook (and apparently still continues in) the defense of this case. The case was twice set for trial and during this time all depositions of several persons were taken in connection with the investigation of the facts in preparation for trial of the State Court suit. Just shortly before the second setting of the damage suit for trial during the month of October, the Insurer filed this declaratory judgment action in the Federal Court. The complaint precisely asserted nonliability, noncoverage on the ground that the State Court suit charged a claim of a kind within the "Products Hazard" definition which risks had been purposefully excluded. It sought a declaration that the Insurer had no duty to defend or pay any judgment.¹¹ The Federal District Court held with the Insurer and made the declaration precisely as sought.

We are, of course, Erie-Texas bound both as to the substantive construction of the policy contract and as to the substantive nature of the test to determine whether the damage claim comes within the coverage thus construed. Unlike some where the lights are dim, United Services Life Ins. Co. v. Delaney, 5 Cir., 1964, 328 F.2d 483, or where the wick sputters from doubtful fuel, Kay v. Home Indem. Co., 5 Cir., 1964, 337 F.2d 898, 900, the lights here are bright, clear, and contemporary.

As to coverage, we think the Supreme Court of Texas by its decision in Pan American Ins. Co. v. Cooper Butane Co., 1957, 157 Tex. 102, 300 S.W.2d 651, makes several things quite clear. First, the liability at issue is a matter of contract upon which contract principles apply. Second, policy provisions excluding liability for damages occurring after an assured's activity has ceased are perfectly valid. And third, the plain meaning of language comparable to that of "(2) Operations", note 9, supra, excludes occurrences taking place after operations have been completed. Although some distinctions exist between the Cooppolicy and the one involved here,¹² we think that for our Erie purposes, the path to follow is plainly marked. And in any event other Texas writing Courts who also mark our way, Ford Motor Co. v. Mathis, 5 Cir., 1963, 322 F.2d 267, 269, give Cooper a broad reading to deny coverage under "Premises — Operations" for damages growing out of failures occurring away from premises owned, rented, or controlled by the assured and happening after operations had been completed since such liabilities are covered expressly under "Products — Completed Operations". Maryland Casualty Co. v. Knorpp, Tex.Civ.App., writ refused n. r. e., 1963, 370 S.W.2d 898; Pan American Ins. Co. v. White, Tex.Civ.App., no writ history, 1959, 321 S.W.2d 337.

This means that as to coverage under "(2) Operations" we reject, as did the trial Court, the cases from other jurisdictions which in effect tie the "(2) Operations" coverage into some kind or character of a product which is manufactured, sold, handled or distributed as dealt with in "(1) Goods or Products"¹³ of the policy definition (see note 9, supra). These cases adopt the theory that "(2) Operations" relates only to persons who are engaged in the business of selling, manufacturing, etc. some product. In other words (2) is not independent of (1). In view of this we find it unnecessary to pass on the Assured's argument labored so mightily that to "work on" goods such as the drill collar here does not amount to goods "handled" within the phrase "(1) Goods or Products Manufactured, Sold, Handled, or Distributed by the Named Insured * * *" in the Products Hazards definition, note 9, supra.

Accepting this Texas construction as we must, the question then arises whether the damage claim asserted is within the coverage — perhaps more accurately, whether the claim is excluded from coverage. The big question has always been whether duty to defend is to be determined by what the damage claimant formally alleges or what the true facts are. On this, Texas has even more recently, but no less plainly, established the nature of the test to be applied. On January 27, 1965, in Heyden Newport Chemical Corp. v. Southern General Ins. Co., 1965, Tex., 387 S.W.2d 22, the Supreme Court of Texas gave its answer. Through Justice Hamilton it declared, "We think that in determining the duty of a liability insurance company to defend a lawsuit, the allegations of the complainant should be considered in the light of the policy provisions without reference to the truth or falsity of such allegations and without reference to what the parties know or believe the true facts to be, or without reference to a legal determination thereof." 387 S.W.2d at 24.

Since initial duty to defend depends on the damage claim alleged, the Court recognizes that a problem is inescapably presented concerning the standard to be applied to the pleadings in the damage suit when matching it against the coverage prescribed in the policy. The Court answers that one plainly too. "While we have said above that the court is limited to a consideration of the allegations and the insurance policy in determining an insurer's duty to defend, we wish to point out that in considering such allegations a liberal interpretation of their meaning should be indulged." 387 S.W.2d at 26. The Court went on to cite with approval 50 A.L.R.2d 458, at 504, that "* * * in case of doubt as to whether or not the allegations of a complaint against the insured state a cause of action within the coverage of a liability policy * * * such doubt will be resolved in insured's favor." 387 S.W. 2d at 26.

If the matter stopped there, our task would be an easy one of determining whether even under these loose, liberal standards¹⁴ any theory is set forth which does not essentially charge that the Assured took the drill collar from the rig, took it to its shop where it was supposed to, but did not, work on it and thereafter returned it to the drilling rig where it broke because of defective servicing by the Assured. More than that, we could hold that the trial Judge was correct in concluding that such allegations affirmatively revealed a temporary custody of the drill collar by the Assured and a surrender of that custody back to the Drilling Company after the repair work had been, or was thought to have been, performed by the Assured.

But the Supreme Court of Texas did not stop there. In articulating this standard for determining the duty to defend, Justice Hamilton distinguishes the liabilities under Part I Coverage and Part II Defense.¹⁵ With respect to payment of the claim, Part I Coverage A (see note 3, supra), the Court pointed out 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." 387 S.W.2d at 25. (Emphasis supplied). The Court highlights the contrast when it goes on to state: "The coverage in Paragraph II is entirely different from the coverage in Paragraph I. No legal determination of ultimate liability is...