Lexington Ins. Co. v. Nat'l Oilwell NOV, Inc.

• Decision Date: 12 May 2011
• Docket Number: No. 01–10–00711–CV.,01–10–00711–CV.
• Citation: 355 S.W.3d 205
• Parties: LEXINGTON INSURANCE COMPANY, Appellant, v. NATIONAL OILWELL NOV, INC. and Fiberglass Systems, L.P., Appellees.
• Court: Texas Court of Appeals

355 S.W.3d 205

LEXINGTON INSURANCE COMPANY, Appellant,

v.NATIONAL OILWELL NOV, INC. and Fiberglass Systems, L.P., Appellees.

No. 01–10–00711–CV.

Court of Appeals of Texas, Houston (1st Dist.).

May 12, 2011.

Jessica A. Zavadil, Thomas C. Wright, Wright Brown & Close, L.L.P., Houston, TX, for Appellant.

James M. Bettis Jr., Paul D. Sculey, Harrison, Bettis, Staff, McFarland & Weems, LLP, Houston, TX, for Appellees.

Panel consists of Chief Justice RADACK and Justices ALCALA and BLAND.

OPINION

JANE BLAND, Justice.

Albemarle Corporation (Albemarle) sued National Oilwell NOV, Inc. (National) in federal district court in Arkansas. It sought damages allegedly caused by defective fiberglass downhole tubing (DHT) that National had manufactured and sold it. National timely notified its insurer, Lexington, of the lawsuit, and Lexington acknowledged a responsibility to defend under a reservation of rights once National exhausted its self-insured retention.

After the case settled, Lexington brought this suit in Texas state district court, seeking a declaration of the rights and duties of the parties under the policy with respect to the Albemarle suit. After considering the parties' cross-motions for summary judgment, the trial court granted relief in National's favor, holding that Lexington had a duty to defend National in the Albemarle suit, accordingly awarding National its defense costs as damages and attorney's fees.

On appeal, Lexington contends that the trial court should have granted its motion for summary judgment because the allegations of damages sought in the Albemarle suit are excluded by the terms of the Lexington policy. Thus, it contends, the Albemarle allegations did not trigger a duty to defend under the policy. Lexington alternatively contends that it owed no duty to pay the defense costs National incurred after it exhausted the limits of the self-insured retention clause because National failed to timely notify Lexington it exhausted its SIR. National further challenges the propriety of the trial court's corresponding summary judgment on National's counterclaims for breach of contract and violation of the Texas Insurance Code's prompt payment statute. Tex. Ins.Code Ann. §§ 542.051–.061 (West 2009). Finding no error, we affirm.

Background

I. The insurance policy

Lexington issued a commercial general liability policy to the insureds for the policy period from May 11, 1999 to May 11, 2002. Pertinent to this case, the policy contains an endorsement for products liability claims that provides:

... Underwriters will indemnify the Assured in respect of damages arising out of the Products Liability hazard, whether imposed by law or assumed under contract in respect of any claim which is first made in writing against the Assured during [the policy period] and which arises solely by reason of

...

(b) Property Damage

resulting from any Accident....

“Products Liability” shall mean:

Liability for ... Property Damage arising out of the Assured's products or reliance upon a representation or warranty made at any time with respect thereto, but only if the ... Property Damage happens after physical possession of such products has been relinquished to others and happens away from the premises owned, leased or rented by the Assured.

“Property Damage” shall mean:

physical loss of or damage to or destruction of tangible property, including the loss of use arising directly therefrom.

The policy, however, excludes coverage for:

• Property Damage to the Assured's Products arising out of such products or any part of such products [or]

• The withdrawal, recall, repair, replacement or loss of use of the Assured's products or work completed by or for the Assured.

The policy contains a self-insured retention of $100,000 for each occurrence.

II. The underlying suitA. Albemarle's allegations

According to Albemarle's pleadings in the Arkansas suit, its business entails extraction of bromide ions from brine recovered from subsurface deposits. Albemarle uses pipes to transport the brine to its manufacturing facilities for the extraction. After processing the brine, Albemarle transports the heated “tail brine” through more pipes to underground storage wells and eventually back to subsurface reservoirs.

Beginning in 1994, National's predecessor, A.O. Smith, sold fiberglass downhole tubing, or pipe, to Albemarle. Albemarle replaced its existing metal pipe with the fiberglass DHT. It used the DHT to transport the brine to its manufacturing facilities in Columbia City, Arkansas. Finding that the fiberglass pipe was more durable than the metal pipe, Albemarle asked Smith to manufacture a DHT product for use in its disposal wells. Smith recommended a pipe made with aromatic amine epoxy, one that it already had manufactured for use in transporting natural and manufactured gas, petroleum fuels, and mixed gases.

Albemarle installed the aromatic amine epoxy pipe in April 1995. Eventually, however, the pipe split, separated, and leaked. These failures left Albemarle unable to continue operations in several of its disposal wells. By November 1995, Smith informed Albemarle that its testing revealed that the pipe had an inadequate tensile strength for transporting the hot tail brine.

With respect to damages, Albemarle first alleged that it was entitled to recover repair and replacement costs of the pipe and lost income because it was forced to forego business opportunities while operating without several of its disposal wells. Second, Albemarle alleged that its injection wells were forced to stop operations “while being repaired.” The entire damages section reads:

Albemarle has suffered damages including, but not limited to, the following:

(a) Albemarle has spent or reasonably anticipates spending more than $2,900,600 to repair or replace the defective DHT;

(b) Albemarle lost income and profits due to the fact that the injection wells containing the defective DHT were forced to stop operations while being repaired;

(c) Albemarle lost business opportunities due to the fact that the injection wells containing the defective DHT were forced to stop operations while being repaired;

(d) Albemarle suffered other incidental and consequential damages due to the defective condition of the DHT; and

(2) Albemarle has incurred attorneys' fees and expenses in having to bring this cause of action.

To represent it in the Albemarle suit, National retained Texas defense counsel expressly identified in the Lexington policy as “approved counsel that may be used by the Assured without seeking prior approval from Underwriters in the event of a Loss under this policy.” National also retained local counsel in Arkansas to assist in its defense. B. Notice and claims handling

Through its insurance broker, National notified Lexington of the Albemarle suit in April 2005. Defense counsel provided Lexington with a December 2005 status report. Lexington responded by sending National a reservation of rights letter four months later, in April 2006. In the letter, Lexington concluded that Albemarle's claims fell within the policy's products liability endorsement, creating “a potential indemnity obligation for Lexington with regard to the allegations....” Then, Lexington proceeded to examine whether any of the policy exclusions barred coverage. Lexington noted that “the cost of repair and/or replacement of the DHT which failed in the wells is a significant element of Albemarle's claimed damages,” but conceded that:

it is unclear from Albemarle's Complaint the exact nature and extent of all the damages claimed by Albemarle as a result of the failure of the DHT. Certain of the damages claimed by Albemarle, such as lost profits, lost business opportunities, consequential losses associated with the replacement of the DHT could conceivably not be precluded from coverage by virtue of the exclusions cited above....”

While reserving its rights, Lexington acknowledged that it “may have a contractual duty to indemnify [National] in this matter but only after the SIR of $100,000 has been paid by [National] in defense and/or settlement or judgment of Albemarle's claims.” Lexington reiterated its agreement to National's selection of defense counsel for the suit and continued, “[a]t such time as it appears likely that the SIR will be fully eroded, Lexington requests that [National] so notify Lexington so that Lexington may then begin to provide a defense to [National] for the claims in the complaint, and to take reasonable steps in this matter necessary to protect [National's] interests, as well as Lexington's own.”

National incurred $703,179.27 in attorney's fees and expenses—well in excess of the SIR—before settling the Albemarle case. Lexington declined to reimburse National for the balance exceeding the SIR and brought a declaratory judgment action against National in May 2006. Lexington asked the trial court to declare that it had no duty to defend National under the policy, and alternatively, that National's failure to provide timely notice that it exhausted the SIR relieved Lexington from any obligation to pay the attorney's fees and expenses. National counterclaimed for breach of contract and violation of the Texas Insurance Code's prompt payment provision. Tex. Ins.Code Ann. § 542.051. The trial court considered the parties' cross-motions for summary judgment and granted summary judgment in favor of National.

Discussion

I. Standard of review

We review a trial court's summary judgment de novo. Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 661 (Tex.2005); Provident Life Accid. Ins. Co. v. Knott, 128 S.W.3d 211, 215 (Tex.2003). Under the traditional standard for summary judgment, the movant has the burden to show that no genuine issue of material fact exists and that the trial court should grant a judgment as a matter of law. Tex.R. Civ. P. 166a(c); KPMG Peat Marwick v. Harrison Cnty. Hous. Fin. Corp., 988 S.W.2d 746, 748 (Tex.1999). When reviewing a summary judgment, we take...