Mid-Continent Cas. Co. v. Petroleum Solutions, Inc.
| Decision Date | 29 July 2016 |
| Docket Number | CIVIL ACTION NO. 4:09-0422 |
| Parties | MID-CONTINENT CASUALTY CO., Plaintiff, v. PETROLEUM SOLUTIONS, INC., BILL HEAD d/b/a BILL HEAD ENTERPRISES, and TITEFLEX CORP., Defendants. |
| Court | U.S. District Court — Southern District of Texas |
I. Introduction ...................................................................................................... 2
II. Background ...................................................................................................... 3
A. The Fuel Tank and the Flex Connector ................................................. 4
B. The State Court Litigation ..................................................................... 5
C. Communications Between PSI and Mid-Continent ............................ 11
D. Procedural Posture ............................................................................... 12
III. Legal Standard ............................................................................................... 13
IV. Analysis ......................................................................................................... 14
A. Legal Principles for Interpretation of Insurance Contracts ................. 14
B. Legal Bases of the Titeflex Judgment: Texas Civil Practice & Remedies Code § 82.002 ..................................................................... 17
C. The Duty to Cooperate ........................................................................ 26
D. Coverage for the Titeflex Judgment Under the Policy ....................... 35
E. Texas Insurance Code ......................................................................... 75
F. Section 38.001 Attorney's Fees Request ............................................ 76
V. Conclusion and Order .................................................................................... 76
Appendix .................................................................................................................. 79
This insurance coverage case raises various legal issues suitable for a law school examination. Pending are the parties' cross-motions for summary judgment. Defendant Petroleum Solutions, Inc. ("PSI") has filed a Motion for Summary Judgment ("PSI Motion") [Docs. # 62, # 63]. Plaintiff Mid-Continent Casualty Company ("Mid-Continent") responded and filed a Cross-Motion for Summary Judgment ("Mid-Continent Motion," and, with the PSI Motion, the"Motions") [Docs. # 68, # 68-1].1 At the Court's request, PSI and Mid-Continent each filed a supplemental briefs.2 The Court heard argument on the Motions on June 6, 2016. See Hearing Minutes and Order [Doc. # 87].
The Motions are now ripe for determination. After carefully considering the parties' briefing, all matters of record, and the applicable legal authorities, the Court grants in part and denies in part the PSI Motion and grants in part and denies in part the Mid-Continent Motion. The Court decides as a matter of law all issues presented by the parties except the question of whether PSI satisfied its duty to cooperate under the Mid-Continent insurance policy, an issue on which there is need for a trial.
II. BACKGROUND
The parties dispute whether a commercial general liability ("CGL") policy issued by Mid-Continent (the "Policy")3 provides coverage for a judgmentrendered against PSI in litigation in Texas state court. The provisions of the Policy that are relevant to this dispute are excerpted in the Appendix to this Memorandum and Order ("Appendix"). The following facts are not in dispute for the purposes of the Motions for Summary Judgment.
A. The Fuel Tank and the Flex Connector
In 1997, Bill Head ("Head") contracted with PSI to construct and install an underground fuel storage system at his Silver Spur Truck Stop ("Silver Spur") in Pharr, Texas.4 PSI purchased a component part for the fuel tank from Titeflex Commercial Products ("Titeflex").5 In October 2001, Head discovered that 20,000 gallons of fuel had seeped into the soil under the truck stop.6 Head attributed the damage to a leak in the fuel storage system and contacted PSI. PSI notified Mid-Continent of the fuel spill because PSI believed any resulting liability would be covered by the Policy.7 PSI and Mid-Continent theorized that a flex connector manufactured by Titeflex in the fuel tank was faulty.8
Counsel was retained by Mid-Continent in 2002 to represent PSI in any potential litigation arising out of the fuel leak. Counsel submitted the flex connector to an expert for testing.9 The expert inspected the flex connector but found no conclusive evidence that the part was defective.10 The expert caused the flex connector to be stored in W.H. Laboratories' storage facility, which was torn down in 2006, causing the part to be lost.11
B. The State Court Litigation
On February 13, 2006, Head filed suit against PSI in the 398th District Court of Hidalgo County (the "State Court Litigation").12 Head alleged claims for Breach of Warranty of Fitness, Breach of Implied Warranty of Good and Workmanlike Services, and Negligence. Head alleged that PSI had contended that the fuel leak was caused by a faulty flex connector, but the Original Petition alleged more broadly that PSI was at fault because it sold and installed the fuel storage tank, including the flex connectors and the leak detection system.13 Mid-Continent assumed PSI's defense under a reservation of rights.14
On October 5, 2006, PSI filed a third-party action against Titeflex, which alleged that Titeflex was responsible for the failure of the fuel storage system and therefore PSI was "entitled to contribution and/or indemnity" from Titeflex (the "Affirmative Claim") under the Texas Products Liability Act, specifically, § 82.002 of the Texas Civil Practice and Remedies Code ("Section 82.002").15 Several months later, on January 30, 2007, Head filed a First Amended Original Petition, which added a strict products liability claim against Titeflex.16
During discovery in the State Court Litigation, on January 4, 2008, Titeflex moved for a spoliation instruction against PSI for PSI's failure to produce the flex connector.17 On March 7, 2008, Head nonsuited his claims against Titeflex without prejudice18 and shortly thereafter filed an amended petition that alleged claims only against PSI.19
In the first half of 2008, PSI and Mid-Continent debated whether to dismiss PSI's Affirmative Claim against Titeflex. Mid-Continent had retained Victor Vicinaiz ("Vicinaiz") to represent PSI in trial court and Jennifer Hogan ("Hogan") as appellate counsel. Hogan also offered legal advice during the trial court proceedings.20 After Head nonsuited his claims against Titeflex without prejudice, Vicinaiz advised that PSI similarly should dismiss its Affirmative Claim without prejudice to simplify the State Court Litigation because Titeflex was "vigorously defending itself," and the defense was undercutting PSI's position vis-à-vis Head.21
On May 19, 2008, Titeflex filed a counterclaim against PSI (the "Titeflex Counterclaim") requesting indemnification of "costs of court, reasonable expenses, and attorney's fees arising subsequent to the entry of [Head's] Notice of Non-Suit [on March 7, 2008] which were expended in defense of this action and in prosecution of this demand for indemnity."22 Vicinaiz relayed to Mid-Continent and PSI that Titeflex offered to dismiss its Counterclaim if PSI dismissed its Affirmative Claim.23 As a result, on August 12, 2008, PSI dismissed itsAffirmative Claim without prejudice.24 On August 13, 2008, Titeflex explained that it would only dismiss its Counterclaim if PSI would agree to mutual dismissal of their claims with prejudice (the "Settlement Offer").25 Titeflex gave PSI two days, until August 15, 2008, to accept the Settlement Offer.26
Vicinaiz advised Mid-Continent and PSI that PSI's dismissal of its claims against Titeflex likely disposed of the Titeflex Counterclaim because it was merely a reformulation of Titeflex's Answer to PSI's Affirmative Claim. Titeflex maintained nevertheless that its Counterclaim remained valid despite PSI's dismissal. Vicinaiz as well as Mid-Continent personnel urged PSI to accept the Settlement Offer.27 PSI decided to reject the Settlement Offer because PSI wanted to retain the option to pursue an indemnity action against Titeflex, if necessary, in light of Mid-Continent's reservation of rights regarding the...
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