Snug Harbor, Ltd. v. Zurich Ins.

• Decision Date: 18 August 1992
• Docket Number: No. 91-2085,91-2085
• Parties: SNUG HARBOR, LTD., et al., Plaintiffs-Appellees, v. ZURICH INSURANCE, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 538

968 F.2d 538

SNUG HARBOR, LTD., et al., Plaintiffs-Appellees, v. ZURICH INSURANCE, Defendant-Appellant.

No. 91-2085.

United States Court of Appeals Fifth Circuit.

Aug. 18, 1992.

Byron Lee, David S. Lynch, Coats, Rose, Yale, Holm, Ryman & Lee, Robert Collins, Andrews Kurth, Houston, Tex., Ignatius J. Melita, Siff, Rosen & Parker, New York City, for defendant-appellant.

Michael H. Norman, Doherty, Norman, & Williamson, Houston, Tex., for plaintiffs-appellees.

Kelly D. Williams, Williams, Blizzard & McCarthey, Houston, Tex., for Steve Campbell, Assignee of 1st Savings Assoc.

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

Before SMITH and EMILIO M. GARZA, Circuit Judges, and KENT, District Judge. ^*

EMILIO M. GARZA, Circuit Judge:

This appeal involves a claim for coverage brought by Snug Harbor, Ltd. (Snug Harbor) under a comprehensive general liability (CGL) insurance policy issued by Zurich Insurance Company (Zurich). Snug Harbor alleges that (1) Zurich's insured--First South Savings Corporation (First South)--mishandled a petition and citation which was to be served on Snug Harbor, thereby causing a default judgment to be entered against Snug Harbor in Texas state court, and (2) the mishandling of this citation and petition constitutes "property damage" for purposes of the CGL policy. Following trial, the district court entered judgment in favor of Snug Harbor in the amount of $2,230,000. We reverse and render judgment in favor of Zurich.

I

On October 15, 1985, while at his home in a condominium project owned by Snug Harbor, Stephen Campbell was stabbed by a Snug Harbor employee. Seeking remedy for his injuries, Campbell brought suit in Texas state court in January 1986 against Snug Harbor, its general partner Claude Williams, and others connected with the property.

On the same day notice of Campbell's suit was allegedly ¹ served on Snug Harbor, First South--holder of a mortgage on the Snug Harbor property--held a foreclosure sale and took possession of the Snug Harbor premises. Snug Harbor asserts that, as a result of First South taking possession of its premises, it never received a copy of the Campbell petition and citation which, pursuant to Rule 106 of the Texas Rules of Civil Procedure, should have been left at "the defendant's usual place of business." Snug Harbor never responded to Campbell's suit, and a default judgment was entered against it on June 12, 1986 in the amount of $500,000 plus post-judgment interest.

In August 1987, Snug Harbor brought suit in Texas state court against (1) Zurich, ² (2) Essary, Hart & MacWilliams, Inc. (Essary), ³ and (3) First South. Snug Harbor later amended its petition, limiting its action to claims for negligence and breach of fiduciary duty based on First South's failure to forward the Campbell petition and citation to Snug Harbor. In February 1990, First South made several demands on Zurich to assume its defense and pay the Campbell default judgment. ⁴ Zurich formally refused to defend First South on April 13, 1990, asserting that (1) Snug Harbor did not suffer "property damage" within the meaning of the CGL policy; (2) even if Snug Harbor did suffer property damage under the policy, such damage was not caused by an occurrence within the policy period; and (3) any coverage otherwise applicable was excluded by the policy's "care, custody, and control" exclusion clause.

During these proceedings, First South was placed in conservatorship; the Federal Savings and Loan Insurance Corporation (FSLIC) was appointed conservator and the Federal Deposit Insurance Corporation (FDIC) was appointed manager. The FSLIC and the FDIC intervened as defendants, removed the case to federal court, and the Resolution Trust Corporation (RTC) replaced the FSLIC as conservator. Thereafter, the case was whittled down to the dispute now before us: The district court dismissed claims against the FDIC and RTC with prejudice, and Snug Harbor and Campbell settled with Essary for $807,000 and with First South for $700,000. ⁵ Snug Harbor also took an assignment of First South's cross-claim against Zurich in which First South alleged that Zurich had breached a duty to defend in accordance with the CGL policy.

Following trial, the district court instructed the jury that Zurich had a duty to defend First South and asked the jury to determine whether Zurich's failure to defend was a bad faith breach of that duty. Finding that Zurich had acted in bad faith and with reckless disregard in failing to defend First South, the jury returned a verdict against Zurich and awarded First South $30,000 in attorney's fees and $1,500,000 in punitive damages. ⁶ The district court entered judgment in accordance with the jury verdict, and Zurich filed a Motion for Judgment Notwithstanding the Verdict and Alternative Motion for New Trial--a motion the district court denied. Modifying its earlier judgment, the district court then entered judgment in favor of Snug Harbor and against Zurich for (1) $30,000 in attorney's fees, (2) $1,500,000 in exemplary damages, and (3) $700,000 in actual damages--the full amount of the First South settlement. Zurich appeals.

II

Zurich raises the following contentions:

(a) the district court erred in submitting the issue of coverage to the jury;

(b) the district court erred in holding that Zurich had a duty to defend First South;

(c) the district court erred in failing to conclude that, as a matter of law, Zurich did not breach its duty of good faith and fair dealing; and

(d) the district court erred in awarding damages.

A

Zurich contends that, as a matter of law, Snug Harbor's claim against First South was not covered by the Zurich-issued policy because (1) the only loss Snug Harbor could have suffered was loss of notice of the Campbell suit--a loss that does not constitute "property damage" for purposes of the Zurich policy, and, (2) even if this alleged misplacement of the Campbell citation and petition is construed as "property damage," it did not occur during the policy period. Therefore, Zurich asserts, the district court erred by submitting this question to the jury.

The question before us is one of contract interpretation. We review such questions de novo unless they arise from ambiguity in the language of the contract. See Carpenters Amended & Restated Health Benefit Fund v. Holleman, 751 F.2d 763, 766 (5th Cir.1985). ⁷ Therefore, to the extent that the language within an insurance policy is coherent and the parties' intent is clear from that language, our standard of review is de novo. See Holleman, 751 F.2d at 766 ("As long as the contract as a whole is coherent, ambiguities can be resolved as a matter of law, without looking beyond the four corners of the document."). We find that the language within the Zurich-issued policy is unambiguous ⁸ and, therefore, our standard of review is de novo. Id.

The Zurich-issued policy provides CGL insurance coverage for property damage, ⁹ which the policy defines as:

(1) physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or (2) loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period. ¹⁰

Snug Harbor asserts that its loss of the use of the Campbell citation and petition constitutes such property damage. We disagree.

Whether the mishandling of a legal document leading to the entry of a default judgment constitutes "property damage" for CGL insurance purposes is a question of first impression. ¹¹ Nevertheless, the volumes of case law interpreting "property damage" provide us with guidance. See generally, 1A ROWLAND H. LONG, THE LAW OF LIABILITY INSURANCE (1992) § 10.05 (titled Bodily Injury or Property Damage ). Courts generally have interpreted property damage to require (1) actual damage to tangible property or (2) the loss of use of property with tangible monetary value. ¹² Courts have also held that purely economic losses--for example, loss of the use of money a claimant would have received but for the insured's negligence--do not constitute "the loss of use of tangible property." ¹³ Snug Harbor--bearer of the burden of establishing that the claim against it falls within the coverage provided by the Zurich-issued policy ¹⁴--relies upon Lay v. Aetna Ins., 599 S.W.2d 684 (Tex.Civ.App.--Austin 1980, writ ref'd n.r.e) (action brought against insurer for negligent location of oil well), as authority for its proposition that the Campbell petition constitutes lost tangible personal property under the CGL policy. Specifically, Snug Harbor relies upon the Lay court's statement that " '[t]angible property' is commonly understood to be property that is capable of being handled or touched." Id. at 686 (citations omitted). Our reading of Lay is much broader than this statement--that is, Snug Harbor overlooks the fact that the Lay court, after making this statement, went on to hold that purchase of an assignment of drilling rights and payment of attorney and surveyor fees do not constitute injury to, destruction of, or loss of use of tangible property. Id. The court held that, rather, "[t]he purchase of the assignment was an economic transaction involving the exchange of money for the privilege of drilling and producing oil." Id.

The Campbell petition and citation had no intrinsic value or use beyond notifying Snug Harbor that legal action had commenced against it. The substantive loss resulting from the alleged mishandling of this documentation is loss of that notice, which resulted in a default judgment. ¹⁵ We find that, as a matter of law, such a loss does not constitute a property loss for CGL policy purposes. ¹⁶ Zurich also asserts that there was no occurrence ¹⁷ during the policy period because the alleged misplacement of the Campbell petition and citation...