Harken Exploration Co. v. Sphere Drake Ins. PLC

• Decision Date: 16 August 2001
• Docket Number: No. 00-10517,00-10883,00-10517
• Parties: (5th Cir. 2001) Harken Exploration Company, Plaintiff-Counter Defendant-Appellee, v. Sphere Drake Insurance PLC, also known as Odyssey Re (London) Limited, Defendant-Counter Claimant-Appellant, Commercial Underwriters Insurance Company, Defendant-Appellant
• Court: U.S. Court of Appeals — Fifth Circuit

Page 466

261 F.3d 466 (5th Cir. 2001)

Harken Exploration Company, Plaintiff-Counter Defendant-Appellee, v. Sphere Drake Insurance PLC, also known as Odyssey Re (London) Limited, Defendant-Counter Claimant-Appellant, Commercial Underwriters Insurance Company, Defendant-Appellant.

No. 00-10517, 00-10883

United States Court of Appeals

For the Fifth Circuit

Aug. 16, 2001

[Copyrighted Material Omitted]

[Copyrighted Material Omitted] Patrick J. Wielinski (argued), Daniel T. Mabery, Haynes & Boone, Dallas, TX, for Harken Exploration Co.

Tolbert L. Greenwood (argued), Kevin C. Norton, Evelyn R. Leopold, Cantey & Hanger, Fort Worth, TX, for Commercial Underwriters Ins. Co.

Katherine A. Grossman, James William Walker (argued), Cozen & O'Connor, Dallas, TX, for Sphere Drake Ins. PLC.

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

Before Reynaldo G. Garza, Higginbotham, and Smith, Circuit Judges.

Reynaldo G. Garza, Circuit Judge:

Sphere Drake Insurance PLC (hereinafter "Sphere") and Commercial Underwriters Insurance Company (hereinafter "Commercial") (collectively hereinafter "Appellants") appeal the Dallas Federal District Court's ruling that they had a duty to defend Harken Exploration Company (hereinafter "Harken") in Harken's underlying federal and state lawsuits, the award of Harken's defense costs for the underlying lawsuits, and the use of a 10% interest rate to calculate prejudgment interest. For the reasons stated below, we Affirm.

1. Factual and Procedural Background.

Harken is an oil and gas exploration and production company. On December 15, 1995, Harken purchased an oil and gas lease (hereinafter "Lease") that covered Big Creek Ranch (hereinafter "Ranch") from Momentum Operating Company, Inc. Thereafter, Harken commenced oil and gas operations on the Ranch. The Rice Family Living Trust (hereinafter "Trust") owns the Ranch. D.E. Rice and Karen Rice (hereinafter "Rices") are the Trust's trustees.

On October 24, 1997, the Rices, on behalf of the Trust, sued Harken in Amarillo Federal District Court (hereinafter "Amarillo Court") alleging that Harken polluted the Ranch (hereinafter "Federal Lawsuit"). The Rices asserted causes of action for violation of the Oil Pollution Act,¹ breach of the Lease, breach of the pipeline easement, negligence, including negligent discharge of saltwater, negligence per se, nuisance, trespass, and equitable relief.

Harken notified the Appellants of the claims filed against it and asked the Appellants to defend it in the Federal Lawsuit. Harken carried two separate, successive commercial general liability policies; one issued by each of Appellants. The policy Sphere issued insured Harken from October 1, 1995 through October 1, 1996 (hereinafter "Sphere Policy"). The policy Commercial issued insured Harken from October 1, 1996 through October 1, 1997 (hereinafter "Commercial Policy") (collectively hereinafter "Policies"). The Appellants denied Harken's request and refused to defend it in the Federal Lawsuit.

Harken filed a declaratory judgment action in state court to determine whether the Appellants had a duty to defend it in the Federal Lawsuit. The Appellants removed this action to the Dallas Federal District Court (hereinafter "Dallas Court") based on diversity. The three parties, Harken, Sphere, and Commercial, each filed motions for partial summary judgment. Before the Dallas Court ruled on the motions for summary judgment, the Amarillo Court dismissed the Rices' Oil Pollution Act claims and the remaining supplemental state law claims for want of jurisdiction.² In response to the dismissal, the Rices sued Harken in state court asserting the same causes of action, minus the Oil Pollution Act claim (hereinafter "State Lawsuit"). Harken notified the Appellants of the State Lawsuit and asked them to defend it in that lawsuit. The Appellants refused. On February 10, 2000, the Dallas Court granted partial summary judgment in favor of Harken.

At this point, Harken had not expressly amended its pleading or its motion for summary judgment to include the State Lawsuit. In its motion for entry of judgment, Harken presented the Dallas Court with the State Lawsuit's original petition and asked the court to enter a judgment that the Appellants had a duty to defend it in both the Federal Lawsuit and the State Lawsuit (collectively hereinafter "Lawsuits"). The Appellants responded and presented evidence in opposition. On April 14, 2000, the Dallas Court entered its final judgment. The Dallas Court decided that the Appellants had a duty to defend Harken in the Lawsuits and that by failing to do so breached the Policies. The Dallas Court awarded Harken its defense costs in the Lawsuits (attorneys' fees and court costs), prejudgment interest at 10%, and later, attorneys' fees and expenses in this case.

2. Discussion.

The Appellants appeal the Dallas Court's grant of partial summary judgment in favor of Harken. They contend that they do not owe Harken a duty to defend because: 1) there was not an "occurrence" as defined by the Policies; 2) the Saline Clause only obligates the Appellants to indemnify Harken, not defend it; and 3) the property damage alleged did not occur during the Policies' periods. The Appellants, further, contend that the Dallas Court erred when it awarded Harken the Lawsuits' defense costs and used a 10% interest rate to calculate prejudgment interest.

2.1 The Appellants have a duty to defend Harken.

We review a federal district court's grant of summary judgment de novo, applying the same standard of review as would the district court. Merritt-Campbell, Inc. v. RxP Products, Inc., 164 F.3d 957 961 (5th Cir. 1999). Summary judgment is only proper when there is not a genuine issue as to any material fact and the movant is entitled to judgment as a matter of law. Id. We view the evidence in the light most favorable to the non-movant and make all reasonable inferences in her favor. Merritt-Campbell, Inc, 164 F.3d at 961; Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587-588 (1986). A fact is material if it might affect the outcome of the suit under the governing law. Merritt-Campbell, Inc, 164 F.3d at 961; Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). There is a genuine issue as to a material fact if the evidence is such that a reasonable jury could return a verdict for the non-movant. Merritt-Campbell, 164 F.3d at 961.

The Appellants contend that the Dallas Court erred when it held that the Appellants have a duty to defend Harken. Under Texas Law, an insurer's duty to defend is usually determined solely from the allegations in the most recent petition and the language of the insurance policy.³ Nat'l Union fire Ins. Co. of Pittsburgh, Pa. v. Merch. Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997). The insured bears the initial burden of showing that the claim against her is potentially within the insurance policy's scope of coverage. Employers Casualty Co. v. Block, 744 S.W.2d 940, 945 (Tex. 1988). If the insurer relies on the policy's exclusions to deny coverage, the burden shifts to the insurer to prove the exclusion applies. Federated Mut. Ins. Co., 197 F.3d at 723, citing Guaranty Nat'l Ins. Co. v. Vic. Mfg. Co., 143 F.3d 192, 193 (5th Cir. 1998), citing Telepak v. United Services Auto Ass'n., 887 S.W.2d 506, 507 (Tex.App.-San Antonio 1994, writ denied). If the insurer is successful, the burden shifts back to the insured to show that an exception to the exclusion brings the claim against her potentially within the scope of coverage under the insurance policy. Federated Mut. Ins. Co., 197 F.3d at 723, citing Guaranty Nat'l Ins. Co., 143 F.3d at 193, citing Telepak, 887 S.W.2d at 507.

"The general rule is that the insurer is obligated to defend [its insured] if there is, potentially, a case under the complaint within the coverage of the policy." Merch. Fast Motor Lines, Inc., 939 S.W.2d at 141. If there is a "doubt as to whether or not the [factual] allegations of a complaint against the insured state a cause of action within the coverage of a liability policy sufficient to compel the insurer to defend the action, such doubt will be resolved in [the] insured's favor." Id.

2.11 The Rices alleged an "occurrence."

The Parties agree that initially under the Policies the Appellants have a duty to defend Harken against a suit alleging damages caused by an occurrence. The first step in determining whether the Appellants have a duty to defend Harken against the Lawsuit is to determine whether the Rices alleged an occurrence.

The Policies define occurrence as "an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured." The Policies, however, do not define accident. Thus, we must give accident its plain, ordinary, and generally accepted meaning. See Western Reserve Life Ins. V. Meadows, 261 S.W.2d 554, 557 (Tex. 1953) ("[i]t is well-settled law in this state that contracts of insurance in their construction are governed by the same rules as other contracts, and that terms used in them are to be given their plain, ordinary, and generally accepted meaning unless the instrument itself shows the them to have been used in a technical or different sense.") (giving "war" its plain, ordinary, and generally accepted meaning); Gonzalez, 795 S.W.2d at 736 (giving "bodily injury," "sickness," "disease," "death," and "including" their plain, ordinary, and generally accepted meaning).

The Texas Supreme Court has not articulated a hard and fast rule for when an accident occurs. See Mid-Century Ins. Co. of Texas v. Lindsey, 997 S.W.2d 153, 155 (Tex. 1999)("[a]n injury caused by voluntary and intentional conduct is not an accident just because the result or injury may have been unexpected, unforeseen, and unintended . . . [although,]...