Mid-Continent Cas. Co. v. Swift Energy Co., MID-CONTINENT

Citation206 F.3d 487
Decision Date09 March 2000
Docket NumberNo. 98-21154,MID-CONTINENT,98-21154
Parties(5th Cir. 2000) CASUALTY COMPANY, Plaintiff-Appellee, v. SWIFT ENERGY COMPANY; ET AL, Defendants, SWIFT ENERGY COMPANY, Defendant-Appellant
CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)

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

Before KING, Chief Judge, and REYNALDO G. GARZA and EMILIO M. GARZA, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

In this insurance coverage declaratory judgment diversity action, Swift Energy Company ("Swift" or "Company") appeals from a summary judgment entered by the district court in favor of Mid-Continent Casualty Company ("Mid-Continent"). The district court found that Mid-Continent was not required to indemnify or defend Swift with regard to a lawsuit filed by Air Equipment Rental, Inc. ("Air Equipment" or "Contractor") employee Oscar Lozano ("Lozano") under any of the following: 1) the Master Service Contract between Flournoy Drilling Company ("Flournoy") and Air Equipment (the "Master Service Contract"); 2) the Master Service Agreement between Air Equipment, as Contractor, and Swift, as Company (the "MSA"); or 3) Commercial General Liability Policy CGL 212768, issued by Mid-Continent to Air Equipment (the "Policy"). Finding Swift to be covered as an additional insured under the Policy, we reverse.

I.

Swift leased and operated an oil drilling site which included Well No. 62. Swift hired Flournoy to drill the well. Flournoy requested that Air Equipment provide a casing crew to install casing at the site. Accordingly, Flournoy and Air Equipment entered into the Master Service Contract, dated June 1, 1991. Swift and Air Equipment entered into the MSA, dated February 1, 1992. Mid-Continent issued the Policy to Air Equipment with an effective policy period of January 1, 1996 to January 1, 1997.

On June 23, 1996, Lozano, who was serving in a supervisory role for Air Equipment, was injured on the drilling site when gas released from Well No. 62 ignited and exploded. Lozano sued Swift and Flournoy alleging that their negligence caused his injuries.1

In August 1996, Flournoy notified Mid-Continent of Lozano's lawsuit and requested that Mid-Continent assume Flournoy's defense and provide indemnity pursuant to the Master Service Contract. Mid-Continent complied. Shortly thereafter, Swift requested that Flournoy provide it with a defense and indemnity for the Lozano litigation. Flournoy forwarded Swift's demand to Mid-Continent. Mid-Continent agreed to provide Swift with a defense.

However, in August 1997, Mid-Continent advised Flournoy and Swift that it would no longer provide a defense and indemnity in light of the Fifth Circuit's decision in Greene's Pressure Testing and Rentals, Inc. v. Flournoy Drilling Co., 113 F.3d 47 (5th Cir. 1997), which held that indemnity language identical to that contained in the Master Service Contract was unenforceable under the Texas Oilfield Anti-Indemnity Act, Tex. Civ. Prac. and Rem. Code Ann. '' 127.001-.007 (the "TOAIA" or "Act"). Swift argued that it was entitled to indemnity under the MSA, which contained different indemnity language, and as an additional insured under the Policy. Mid-Continent maintained it owed Swift neither a defense nor an indemnity, and provided neither.

In September 1997, Mid-Continent filed this declaratory judgment action seeking a clarification of its obligations to Swift and Flournoy under the Master Service Contract, the MSA, and the Policy. Meanwhile, Flournoy and Swift's liability carriers settled the Lozano lawsuit.

In November, 1998, the district court entered summary judgment for Mid-Continent with regard to both Swift and Flournoy.2 The court held that the Master Service Contract was unenforceable under the TOAIA. 3 The district court also found that the MSA was unenforceable under the TOAIA. It added that, even if the MSA was enforceable, it was inapplicable because Lozano was not working for Swift at the time of the accident. The district court also found that Swift did not qualify as an "additional insured" under the Policy, as Swift's liability did not "arise out of [Air Equipment's] ongoing operations for [Swift]," as the Policy's language required. Finally, the district court refused to consider Swift's claim that Mid-Continent should be waived or estopped from asserting its policy coverage defense. It noted that waiver and estoppel are affirmative defenses which must be asserted in a party's answer, see Fed. R. Civ. P. 8(c); id. R. 12(b), that Swift had failed to assert these defenses in its answer, and that Swift's motion to amend its answer to include waiver and estoppel had been properly denied as untimely.

On appeal, Swift claims that the district court erred in 1) finding that Swift was not entitled to indemnity under the MSA; 2) denying Swift coverage as an "additional insured" under the Policy; and 3) denying Swift leave to add its waiver and estoppel claims to its answer. Because we find that Swift was entitled to coverage as an "additional insured" under the Policy, we find it unnecessary to consider the district court's other holdings.4

II.

We review the district court's determination that Swift was not covered as an "additional insured" under the Policy de novo. See National Union Fire Ins. Co. of Pittsburgh, Penn. v. Kasler, 906 F.2d 196, 197 (5th Cir. 1990) ("The interpretation of an insurance contract, including the question of whether the contract is ambiguous, is a legal determination meriting de novo review.").

In this diversity action, we must apply Texas law as interpreted by Texas state courts. See Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938). In Texas, insurance policies are contracts and are controlled by rules of contract construction. See Barnett v. Aetna Life Ins. Co., 723 S.W. 2d 663, 665 (Tex. 1987). In interpreting a policy, the court's primary focus is to ascertain the true intent of the parties as expressed in the written document. See National Union Fire Ins. Co. of Pittsburgh, Penn. v. CBI Industries, Inc., 907 S.W. 2d 517, 520 (Tex. 1995). If the language in a policy is Asusceptible to more than one reasonable construction, it is patently ambiguous." Barnett, 723 S.W. 2d at 666; see also CBI, 907 S.W. 2d at 520. A policy may be ambiguous even if its language is definite, if "the meaning and scope of the language is ambiguous." Barnett, 723 S.W. 2d at 666 (holding that an insurance policy was ambiguous with regard to whether it included VA benefits); see also CBI, 907 S.W. 2d at 520 (noting that latent, as opposed to patent, ambiguity arises when contract is ambiguous as applied to its subject matter). The question of whether a policy is ambiguous, as with other questions of policy construction, is a question of law for the court. See CBI, 907 S.W. 2d at 520; Admiral Ins. Co. v. Trident NGL, Inc., 988 S.W. 2d 451, 453-54 (Tex.App.--Houston [1st Dist.] 1999, pet. denied, Feb. 10, 2000).

In Texas, when an insurance policy is ambiguous or inconsistent, the construction that would afford coverage to the insured must govern. See Gonzalez v. Mission Am. Ins. Co., 795 S.W. 2d 734, 737 (Tex. 1990); Glover v. National Ins. Underwriters, 545 S.W. 2d 755, 761 (Tex. 1977); Admiral, 988 S.W. 2d at 454. Exceptions or limitations on an insurer's liability are construed "even more stringent[ly]." Barnett, 723 S.W. 2d at 666 (holding that construction of exclusionary clause urged by insured must be accepted so long as it is "not unreasonable," even if insurer's construction seems "more reasonable or a more accurate reflection of the parties' intent").

Form B of the Policy, the Aadditional insured" provision, provides in part:

SCHEDULE

Name of person or organization:

Any person or organization for whom the named insured has agreed by written "insured contract" to designate as an additional insured subject to all provisions and limitations of this policy. . .

WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of your ongoing operations performed for that insured.

The named insured under the Policy is Air Equipment. Mid-Continent presents several arguments to support its position that Swift is not an "additional insured" under the Policy. First, Mid-Continent argues that the MSA is not an "insured contract" under the Policy, because it is neither enforceable nor applicable. Second, Mid-Continent argues that the liability to Lozano 1) was not "arising out of" Air Equipment's ongoing operations and 2) even if "arising out of" Air Equipment's ongoing operations, did not arise out of ongoing operations "performed for" Swift. We consider each of these arguments in turn.

A. MSA not an "Insured Contract"

The Policy defines an "insured contract" to include, "That part of any contract or agreement pertaining to your business . . . under which you [Air Equipment] assume the tort liability of another party to pay for -bodily injury' or -property damage' to a third person or organization." In the MSA, Swift and Air Equipment each agree to defend and indemnify the other from any liabilities "arising directly or indirectly during or out of the performance of this Agreement," regardless of fault. Section 8 of the MSA, titled "Mutual Indemnity," adds that each party will provide equal amounts of insurance coverage, as set forth in Exhibit C thereto,5 to support the indemnities assumed in the Agreement. Section 9(A) of the MSA, titled "Insurance," again requires Air Equipment to carry the insurance coverage set forth in Exhibit C to support its Section 8 indemnity and liability obligations. Section 9(A) adds that the indemnity obligations of Air Equipment under the MSA are limited to the amount of supportinginsurance obtained through the Policy. Section 9(B) further requires Air Equipment to add Swift as an additional insured on all insurance policies "for liabilities...

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