RLI Ins. Co. v. Interstate Battery Sys. Int'l

• Decision Date: 05 November 2021
• Docket Number: Civil Action 3:20-CV-1888-D
• Parties: RLI INSURANCE COMPANY, Plaintiff, v. INTERSTATE BATTERY SYSTEM INTERNATIONAL, INC., INTERSTATE BATTERIES, INC., POWERCARE AND SERVICE SOLUTIONS, INC., and POWERFX, LLC, Defendants.
• Court: U.S. District Court — Northern District of Texas

RLI INSURANCE COMPANY, Plaintiff, v. INTERSTATE BATTERY SYSTEM INTERNATIONAL, INC., INTERSTATE BATTERIES, INC., POWERCARE AND SERVICE SOLUTIONS, INC., and POWERFX, LLC, Defendants.

Civil Action No. 3:20-CV-1888-D

United States District Court, N.D. Texas, Dallas Division

November 5, 2021

MEMORANDUM OPINION AND ORDER

SIDNEY A. FITZWATER SENIOR JUDGE

In this insurance coverage dispute, the court must decide whether plaintiff RLI Insurance Company (“RLI”) has a duty under an insurance policy to defend three defendants in this case in an underlying state-court lawsuit: PowerFX LLC v. PowerCare and Service Solutions., Inc. and Interstate Battery System International, Inc., No. C2018-1426B (207^th Jud. Dist. Ct., Comal Cnty. Tex.) (the “Underlying Lawsuit”). The answer to this question turns on whether a provision in the insurance policy excludes coverage. For the reasons explained, the court concludes that the insurer has a duty to defend. It therefore grants partial summary judgment in favor of defendants Interstate Battery System International, Inc. (“Interstate Battery System”), Interstate Batteries, Inc. (“Interstate Batteries”), and PowerCare and Service Solutions, Inc. (“PowerCare”) (collectively, “Defendants ” unless the context indicates otherwise), and denies RLI's motion for partial summary judgment.^[1]

I

RLI (the insurer) sues Defendants (the three defendants who are insureds) seeking a declaratory judgment that it does not owe a duty under the insurance policy at issue (the “Policy”) to defend them in the Underlying Lawsuit.^[2] RLI issued the Policy to Interstate Battery System.^[3] The Policy is a financial products policy and covers the period May 1, 2018 to May 1, 2019. The Policy provides, inter alia, that RLI will insure Interstate Battery System (and its subsidiaries PowerCare and Interstate Batteries) for certain litigation expenses: “The Insurer will pay on behalf of the Entity, Loss which the Entity is legally obligated to pay as a result of a Claim first being made during the Policy Period, or during the Discovery Period (if purchased), against the Entity for Wrongful Acts.”^[4] ECF No. 44-1, App. at 019 (emphasis omitted).^[5] It also provides that RLI “shall have the right and duty to defend any Claim covered by this coverage section.” Id. at 030 (emphasis omitted).

But this coverage obligation is subject to exclusions. The most pertinent one-on which the parties primarily focus-excludes coverage for claims arising from an obligation in or breach of contract:

The Insurer shall not be liable for Loss on account of any claim made against any Entity based upon, arising out of, directly or indirectly resulting from or in consequence of . . . for any actual or alleged obligation under or breach of any written, oral, express, or implied contract or agreement except to the extent that the Entity would have been liable in absence of such contract or agreement.

Id. at 022-23 (emphasis omitted). The scope of this exclusion and its application to the Underlying Lawsuit are the subjects of the present dispute.

In the Underlying Lawsuit, defendant PowerFX, LLC (“PowerFX”) is suing Interstate Battery System and PowerCare on claims for fraudulent inducement and negligent misrepresentation. PowerFX alleges that PowerCare and PowerFX entered a “Master Services Agreement” (the “Agreement”) on March 20, 2017. Under the Agreement, PowerCare “was obligated to deliver [to PowerFX] and provide maintenance” for its cloud-based battery rejuvenation and management solution product named “Battery Medic.” ECF No. 44-1, App. at 98 n.2, 101. In return, PowerFX would market the product and “perform[] demonstrations and obtain[] commitments from multiple entities who could benefit from the Battery Medic.” Id. at 101.

In the summer of 2017, however, the Agreement ran into “immediate problems.” Id. The Battery Medic machines PowerFX sent to customers failed to function and even caught fire. To respond to these problems, the parties signed a “temporary interim agreement” (the “Second Agreement”) in December 2017.^[6] But shortly thereafter, PowerCare and Interstate Battery System terminated their dealings with Power FX. PowerFX was left “without [its] past time and financial investments and without the ability to generate the massive profits promised” by PowerCare and Interstate Battery System. Id. at 103.

PowerFX alleges that much of its behavior-including entering into the Agreement-was the result of misrepresentations made by Power Care and Interstate Battery System regarding the performance of the Battery Medic.^[7] Most of the misrepresentations were made in September, October, and November 2016, before the Agreement was signed.

The misrepresentations related primarily to the quality of the Battery Medic product. They included, inter alia, that Interstate Battery System had a full-time staff for training (which it did not) and that the Battery Medic worked on all batteries (which it did not); Interstate Battery System owned the intellectual property to the computers to operate Battery Medic (which it did not); the Battery Medic could stream data to the cloud or could be exported to any file type (neither of which it could do); Interstate Battery System had set aside capital for the project (which it had not); and the Battery Medic was being used by companies (like Amazon) who did not actually use the product.^[8]

PowerFX alleges that “[e]very dollar and minute that PowerFx spent on Battery Medic was due solely to the Defendants' false statements.” Id. at 105. Due to these misrepresentations regarding the functionality and features of Battery Medic, “PowerFX created their business model, obtained investments, and made agreements with ‘Service Partners' in the field.” Id. at 101. PowerFX also suffered “injury through the loss of past time and expenses and expected profits in the future, ” and “enter[ed] into further commitments of time and money, and continued redirection of resources away from other business ventures.” Id. at 106, 108.

II

A

It is undisputed that Texas law applies in this case. In Texas “[t]he duty to defend arises when a third party sues the insured on allegations that, if taken as true, potentially state a cause of action within the terms of the policy.” St. Paul Guardian Ins. Co. v. Centrum GS Ltd., 283 F.3d 709, 713 (5th Cir. 2002) (citation omitted). “Texas follows the ‘eight-corners' rule, under which the court looks only to the third-party plaintiff's pleadings and the provisions of the insurance policy in determining whether an insurer has a duty to defend.” Trammell Crow Residential Co. v. Va. Sur. Co., 643 F.Supp.2d 844, 849 (N.D. Tex. 2008) (Fitzwater, C.J.) (citing GuideOne Elite Ins. Co. v. Fielder Rd. Baptist Church, 197 S.W.3d 305, 308 (Tex. 2006)). “Neither facts outside the pleadings nor the truth or falsity of the allegations should be considered, and the allegations against the insured should be ‘liberally construed in favor of coverage.'” Id. (quoting GuideOne Elite Ins. Co., 197 S.W.3d at 308); see also Gilbane Bldg. Co. v. Admiral Ins. Co., 664 F.3d 589, 597 (5th Cir. 2011) (“[W]e may not infer additional facts that are not in the pleadings.”). The court must “resolve all doubts regarding the duty to defend in favor of the duty.” Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487, 491 (Tex. 2008) (citing King v. Dall. Fire Ins. Co., 85 S.W.3d 185, 187 (Tex. 2002)). Under the “eight-corners” rule,

[i]f the four corners of a petition allege facts stating a cause of action which potentially falls within the four corners of the policy's scope of coverage, the insurer has a duty to defend. If all the facts alleged in the underlying petition fall outside the scope of coverage, then there is no duty to defend, but we resolve all doubts regarding duty to defend in favor of the duty.

Liberty Mut. Ins. Co. v. Graham, 473 F.3d 596, 600 (5th Cir. 2006) (footnotes omitted). “If an insurer has a duty to defend any portion of a suit, the insurer must defend the entire suit.” St. Paul Fire & Marine Ins. Co. v. Green Tree Fin. Corp.-Tex., 249 F.3d 389, 395 (5th Cir. 2001).

The insured has the initial burden of showing that a claim is potentially within the scope of policy coverage, and, once the insured's burden is met, “the insurer bears the burden of showing that the plain language of a policy exclusion or limitation allows the insurer to avoid coverage of all claims, also within the confines of the eight corners rule.” Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523, 528 (5th Cir. 2004) (emphasis in original) (citing Tex. Ins. Code Ann. art. 21.58(b) (Vernon Supp. 1997)) (collecting Texas cases). “If the insurer proves that an exclusion applies, the burden shifts back to the insured to show that an exception to the exclusion brings the claim back within coverage.” Gilbert Tex. Constr., L.P. v. Underwriters at Lloyd's London, 327 S.W.3d 118, 124 (Tex. 2010) (citations omitted). “Exclusions are narrowly construed, and all reasonable inferences must be drawn in the insured's favor.” Gore Design Completions, Ltd. v. Hartford Fire Ins. Co., 538 F.3d 365, 370 (5th Cir. 2008).

B

The parties' summary judgment burdens depend on whether they are addressing a claim or defense for which they will have the burden of proof at trial. To be entitled to summary judgment on a matter for which it will have the burden of proof, a party “must establish ‘beyond peradventure all of the essential elements of the claim or defense.'” Bank One, Tex., N.A. v. Prudential Ins. Co. of Am., 878 F.Supp. 943, 962 (N.D. Tex. 1995) (Fitzwater, J.) (quoting Fontenot v. Upjohn Co., 780 F.2d 1190, 1194 (5th Cir. 1986)). The court has noted that the “beyond peradventure” standard is “heavy.” See, e.g., Cont'l...