St. Paul Fire and Marine v. Compaq Computer Corp.

• Decision Date: 15 August 2008
• Docket Number: No. 07-2949.,No. 07-2865.,07-2865.,07-2949.
• Parties: ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Plaintiff-Appellant, v. COMPAQ COMPUTER CORPORATION, Defendant-Appellee. St. Paul Fire and Marine Insurance Company, Plaintiff-Appellee, v. Compaq Computer Corporation, Defendant-Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

539 F.3d 809

ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Plaintiff-Appellant, v. COMPAQ COMPUTER CORPORATION, Defendant-Appellee.

St. Paul Fire and Marine Insurance Company, Plaintiff-Appellee, v. Compaq Computer Corporation, Defendant-Appellant.

No. 07-2865.

No. 07-2949.

United States Court of Appeals, Eighth Circuit.

Submitted: May 14, 2008.

Filed: August 15, 2008.

Charles E. Spevacck, argued, Minneapolis, MN (William M. Hart, Michael P. McNamee, and Damon L. Highly, on the brief), for appellant.

Martin K. Katz, argued, Los Angeles, CA (Paul A. Banker, and Christopher A. Grgurich, on the brief, Minneapolis, MN, on the brief), for appellee.

Before WOLLMAN, MURPHY, and SMITH, Circuit Judges.

MURPHY, Circuit Judge.

St. Paul Fire & Marine Insurance Company brought this declaratory judgment action for a ruling that it had no duty to defend its insured, Compaq Computer Corporation (Compaq), in a case brought against it in Texas by Hal LaPray (LaPray litigation). Compaq counterclaimed for a declaratory judgment that St. Paul had such a duty and for breach of contract damages and then moved for statutory damages under Texas law. The district court¹ ruled in deciding the motions before it that St. Paul had a duty to defend and that Compaq was neither entitled to reimbursement for certain defense costs nor to statutory damages under Texas law. Judgment was entered accordingly, and St. Paul appeals the district court's ruling that it has a duty to defend Compaq in the LaPray litigation. In its cross appeal Compaq attacks the district court's rulings on reimbursement of defense costs and statutory damages. We affirm in part and reverse in part.

I.

Compaq builds and sells computers, and St. Paul is Compaq's liability insurer. On January 28, 2000 Hal LaPray brought a putative class action suit against Compaq in Texas state court alleging breach of contract and breach of express warranty (LaPray litigation). The plaintiffs alleged that they purchased Compaq computers containing defective "floppy diskette controllers" (FDCs) and that the software Compaq issued to "fix" the FDC problem — the SoftPaq — did not work and caused additional damage. Another putative class action was filed on October 31, 1999 in the Eastern District of Texas by Charles Thurmond (Thurmond litigation). In addition to state law claims, the complaint in that case alleged a federal claim under the Computer Fraud and Abuse Act, 18 U.S.C. § 1030. Yet another similar lawsuit was filed in the District of Colorado (Sprung litigation).

Compaq was covered at all relevant times by a "Multicover Package Policy" issued by St. Paul which included three separate insurance policies: a "Technology Errors and Omissions Liability Protection" policy (Technology E & O policy), a "Technology Commercial General Liability Protection" policy, and a "Technology Umbrella Excess Liability Protection" policy. This lawsuit involves provisions of the Technology E & O policy.

The Technology E & O policy states "[w]e'll pay amounts any protected person is legally required to pay as damages for covered loss that ... is caused by an error." The agreement defines "error" as an "error, omission or negligent act." The policy defines "damages" as "compensatory damages imposed by law [or] consequential damages," but it expressly excludes "the contract price of [the] computer." The policy also excludes damages that "result[ ] from any criminal, dishonest, fraudulent or other intentionally wrongful act or omission." The insurer's duty to defend under this policy is therefore triggered when a party sues Compaq alleging an error and demanding damages, as both terms are defined by the Technology E & O policy, so long as the damages are not the result of an intentionally wrongful act.

Compaq submitted the Thurmond litigation to St. Paul in late 1999. St. Paul agreed to defend Compaq pursuant to the Technology E & O policy, but reserved its right to deny coverage upon a subsequent determination that the Thurmond claim was not covered by that policy. After the plaintiffs in Thurmond filed their second amended complaint dropping the state law claims and alleging only the fraud claim, a claim excluded under the policy as a form of intentionally wrongful conduct, St. Paul concluded that it had no duty to defend the lawsuit. It reached the same conclusion after reviewing an amended complaint in the Sprung litigation. Compaq ultimately prevailed in the Thurmond litigation, which was dismissed on jurisdictional grounds. See Thurmond v. Compaq Computer Corp., 171 F.Supp.2d 667 (E.D.Tex. 2001). The court is not aware of the status of the Sprung litigation.

In response to St. Paul's declination of coverage for the Thurmond defense costs, Compaq filed suit in Minnesota state court seeking a declaration that St. Paul had a duty to defend the Thurmond and Sprung litigations under the Technology E & O policy. The trial court granted summary judgment for St. Paul because the complaints in those actions alleged "only causes of action and damages resulting from Compaq's intentional conduct," thus not alleging an "error" under the Technology E & O policy. The Minnesota Court of Appeals affirmed. Compaq Computer Corp. v. St. Paul Fire and Marine Ins. Co., 2003 WL 22039551 (Minn.Ct.App. Sept.2, 2003) (unpublished).

St. Paul then brought this action in Minnesota state court seeking a declaration that it had no duty to defend Compaq in the LaPray litigation under the Technology E & O policy.² Compaq removed the case to federal court and then filed two counterclaims: one seeking a declaration that St. Paul had a duty to defend and that Compaq had no obligation to return defense costs related to the LaPray action and the other seeking damages for breach of contract pursuant to the insurance policy package. St. Paul moved for summary judgment on its complaint and Compaq's counterclaim; Compaq filed a cross motion for summary judgment in its favor on St. Paul's complaint and for partial summary judgment on its counterclaim.

The principal decision under review was issued on October 13, 2004. The key issues in determining if St. Paul had a duty to defend Compaq in the LaPray litigation was 1) whether the LaPray complaint alleged an "error" and demanded "damages" as the Technology E&O policy defined those terms and 2) whether a policy exclusion applied. Applying Texas law the district court concluded that the complaint alleged conduct falling within the policy's definition of "error," that the relief sought fell within the definition of "damages," and that no exclusions applied. The district court therefore held that St. Paul had a duty to defend Compaq in the LaPray litigation. St. Paul Fire and Marine Ins. Co. v. Compaq Computer Corp., CIV 03-5471, Doc. 64 (D.Minn. Oct. 13, 2004).

On appeal, St. Paul argues that the district court erred in three ways. It contends that the LaPray complaint does not allege an "error" within the meaning of the Technology E & O agreement, that the LaPray complaint does not seek damages covered by the policy, and that the LaPray complaint triggers the exclusion for losses resulting from intentional wrongful conduct. Compaq supports the district court's determination that St. Paul has a duty to defend the LaPray litigation but claims that the district court erred in ruling on its counterclaims. We address the background and procedural history of those rulings below.

II.

We review a district court's grant of summary judgment de novo, viewing the evidence in the light most favorable to the nonmoving party. Skare v. Extendicare Health Servs., Inc., 515 F.3d 836, 840 (8th Cir.2008). We review the district court's findings of fact for clear error and its conclusions of law de novo. Crossett Paper Mills Employees Fed. Credit Union v. Cumis Ins. Soc'y, Inc., 476 F.3d 578, 580 (8th Cir.2007).

A.

The principal issue on appeal is whether St. Paul has a duty to defend Compaq in the underlying LaPray litigation pursuant to the Technology E & O policy. The question of whether an insurer has a duty to defend is a legal question that we review de novo. Travelers Property Cas. Co. of America v. Gen. Cas. Ins. Cos., 465 F.3d 900, 903 (8th Cir.2006).

We agree with the parties that Texas law governs the duty to defend analysis. Under Texas law an insurer has a duty to defend if "any claim alleged in the pleadings is within the coverage of the policy." Dresser Indus., Inc. v. Underwriters At Lloyd's, London, 106 S.W.3d 767, 774 (Tex.App.2003). Texas applies the "eight corners" or "complaint allegation" rule when determining an insurer's duty to defend. GuideOne Elite Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d 305, 308 (Tex.2006). This rule provides that a court must consider only the factual allegations within the four corners of the third party plaintiffs' complaint, together with the terms within the four corners of the insurance policy. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. Merchs. Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex.1997) (per curiam). The court "may indulge the most liberal interpretation of the allegations of which they are susceptible and doubts as to the import of the allegations are to be resolved in favor of the insured and coverage." Continental Sav. Ass'n. v. U.S. Fidelity and Guar. Co., 762 F.2d 1239, 1243-44, amended on rehearing in part by 768 F.2d 89 (5th Cir. 1985) (applying Texas law).

When applying the eight corners rule we must determine whether the complaint, properly construed, alleges conduct covered by the policy. GuideOne Elite, 197 S.W.3d at 308. We begin with the terms of the policy itself. The Technology E & O policy "provides errors and omissions liability protection for your computer or electronic products or services." It is a "claims made" policy which covers defense expenses. To be covered, a "claim or suit must be first made or brought while this agreement is in effect, or during a reporting period, if one applies." Under...