Technical Automation Servs. Corp. v. Liberty Surplus Ins. Corp.

• Decision Date: 05 March 2012
• Docket Number: No. 10–20640.,10–20640.
• Citation: 673 F.3d 399
• Parties: TECHNICAL AUTOMATION SERVICES CORP., Plaintiff–Appellee, v. LIBERTY SURPLUS INSURANCE CORPORATION, Defendant–Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

673 F.3d 399

TECHNICAL AUTOMATION SERVICES CORP., Plaintiff–Appellee,

v.LIBERTY SURPLUS INSURANCE CORPORATION, Defendant–Appellant.

No. 10–20640.

United States Court of Appeals, Fifth Circuit.

March 5, 2012.

Darren R. Rice, Thomas Edwin Walker (argued), Michael Dennis Wisdom, Walker, Rice & Wisdom, P.C., Houston, TX, for Plaintiff–Appellee.

Kevin Lamar Sewell (argued), Walker Sewell, L.L.P., Dallas, TX, for Defendant–Appellant.

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

Before KING, JOLLY, and WIENER, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

Liberty Surplus Insurance Corporation appeals the summary judgment awarded to its insured, Technical Automation Services Corporation, holding that Liberty had a duty to defend Technical Automation in an underlying lawsuit. The parties consented to trial and entry of judgment by a federal magistrate judge. In granting summary judgment, the magistrate judge applied the “eight corners” rule of contract interpretation to determine the duty to defend, looking only to the complaint in the underlying lawsuit and the insurance policy. The magistrate judge therefore did not consider Liberty's defense of mutual mistake because Liberty's evidence created a factual dispute that was inappropriate to determine the duty to defend. Accordingly, the court granted summary judgment for the insured, Technical Automation.

Furthermore, we have raised, sua sponte, a jurisdictional question relating to whether, in the light of Stern v. Marshall, the magistrate judge had authority under Article III of the Constitution to try and enter judgment in the state law counterclaim in this case. We hold that, notwithstanding Stern, the magistrate judge had jurisdictional authority.

With respect to the merits, we hold that the magistrate judge erred in not resolving whether a mutual mistake existed as to coverage and whether the policy should be reformed to expunge the disputed provision. We therefore reverse and vacate the summary judgment in favor of Technical Automation and remand for further proceedings not inconsistent with this opinion.

I.

A.

From 2003 to 2004, Liberty was Technical Automation's general commercial liability insurer. The 2003 insurance policy provided a basic coverage form that set forth the essential terms of the policy. It also included various endorsements that amended or supplemented the basic coverage form. Endorsement nineteen was identified as form number “ES 344 EG/RH” and entitled “Exclusion–Professional Liability.” It provided that: “with respect to any professional services shown in the schedule, this insurance does not apply to ‘bodily injury,’ ‘property damage,’ ‘personal injury,’ or ‘advertising injury’ due to the rendering of or failure to render any professional service.”

In late 2003, Technical Automation sought to renew its coverage with Liberty for another year. After providing Technical Automation with a policy renewal quote and an insurance binder, Liberty issued commercial general liability policy number “DGL–BO–199658–023” to Technical Automation, for the period of February 21, 2004 to February 21, 2005. The basic policy stated that Liberty was obligated to defend Technical Automation against any suit seeking damages covered by the terms of the insurance policy because of “bodily injury” or “property damage” that occurred during the policy period. The policy's schedule of forms and endorsements identified endorsement nineteen as form number “ES 344” entitled “Exclusion–Professional Liability,” an exclusion that would make the terms of the new policy identical to the 2003–2004 policy. In the actual policy document, however, endorsement nineteen was not an exclusion, but appeared as a “Miscellaneous Errors and Omissions Endorsement” (“E & O endorsement”), which was identified as form number “CGL 1204 0103.” This endorsement provides:

Subject to the conditions and exclusion in the Coverage Part, the coverage afforded by this endorsement shall apply to those sums which you shall become legally obligated to pay as damages as a result of any negligent act, error or omission committed by you, that results in “bodily injury” or “property damage” committed during the policy period in the conduct or operations shown in the Schedule above.

B.

We now turn to the incident that provoked this coverage dispute. In 2005, Technical contracted with Oxy Vinyls (Oxy) to inspect and to remove a chlorine flow transmitter and to install a new transmitter at Oxy's Deer Park Caustic Plant. Technical completed its work on February 17, 2005, during the policy's liability coverage. On February 24, 2005, three days after Technical Automation's policy with Liberty expired, an Oxy employee, Juan Valdovinos, ¹ was injured by a chlorine leak at the Oxy plant. In 2007, Valdovinos brought a personal injury suit against Technical Automation and Oxy alleging negligence by both companies. Valdovinos specifically alleged that Technical failed to calibrate the new transmitter properly and that Oxy did not provide adequate safety measures in the event of a chlorine leak.

Technical Automation first tendered a request for defense and indemnity for the Valdovinos suit to Twin City Fire Insurance Company (Twin City), which was Technical Automation's liability insurer on the date that Valdovinos was injured. Twin City denied coverage based on a limited pollution exclusion in Technical Automation's insurance policy. As a result of the denial of its claim by Twin City, Technical Automation submitted defense and indemnity claims to Liberty. In consequence, Oxy also tendered defense and indemnity claims to Liberty. On October 15, 2008, a representative from Liberty International Underwriters denied coverage for the Valdovinos lawsuit on behalf of Liberty, claiming that Valdovinos's injury did not occur until after the policy period had expired.

On March 2, 2009, Technical Automation filed suit in the Harris County District Court seeking a declaratory judgment stating that Liberty had the duty to defend and indemnify Technical Automation in the Valdovinos suit; it also sought damages for breach of contract. Oxy intervened in the state court action, also asserting claims for a declaratory judgment and breach of contract as an additionally insured party. On April 14, 2009, Liberty removed the case to the United States District Court for the Southern District of Texas, on the grounds that the complaint alleged complete diversity of citizenship and the amount in controversy was more than $75,000.

On November 18, 2009, Technical Automation moved for partial summary judgment. It argued that Liberty was obligated to defend Technical in the Valdovinos suit, because Valdovinos raised a claim for negligence that was covered by the E & O endorsement in the liability policy. On February 19, 2010, Liberty opposed Technical Automation's motion and, in the same document, Liberty moved for summary judgment on the basis that the inclusion of the E & O endorsement was a mutual mistake and sought reformation of the contract. It also argued that it had no duty to defend Technical Automation because Valdovinos's alleged injuries took place after the policy had expired.

C.

We now review the trial court proceedings. As we have said, the parties consented, under 28 U.S.C. § 636(c) of the Federal Magistrates Act, to a United States magistrate judge handling all further proceedings. The magistrate judge was thus responsible for determining Technical Automation's breach of contract, duty to defend, and duty to indemnify claims; Oxy's third party claims; and Liberty's reformation counterclaim. On May 17, 2010, the magistrate judge issued a memorandum opinion and an order on the cross-motions for summary judgment. The court addressed the “eight corners” rule of contract interpretation, and it seems that, on the basis of the eight corners rule, the court reasoned that, when determining the duty for an insurer to defend, it could not consider any matter not reflected in the complaint in the underlying lawsuit or the liability policy. Thus, because the magistrate judge concluded that “there is a genuine issue of material fact on whether an original agreement existed” with respect to Liberty's defense of mutual mistake and its reformation counterclaim and that it could not look to extrinsic evidence to establish the contents of the original agreement, the court denied Liberty's motion for summary judgment. The court then turned to interpret the E & O endorsement in the light of the complaint in the Valdovinos lawsuit; and it determined that the endorsement was ambiguous and construed the endorsement in favor of Technical Automation, the insured. Accordingly, the court held that the E & O endorsement extended the coverage of the liability policy to include “bodily injury” occurring after the policy period, if the alleged negligent acts or omission occurred during the policy period. The magistrate judge subsequently granted summary judgment to Technical Automation, holding that Liberty had a duty to defend. However, the court found that it was premature to rule on whether Liberty owed Technical Automation indemnification. Lastly, the court granted Liberty's motion for summary judgment regarding Oxy's claims, holding that Oxy was not a named insured under the contract.

On June 8, 2010, the magistrate judge, acting under the authority of Rule 20 of the Federal Rules of Civil Procedure, entered an order severing certain specific claims and a final judgment with respect to all other claims. The order severed Technical Automation's remaining indemnification claim from the claims regarding Liberty's duty to defend Technical Automation and Liberty's duty to defend and indemnify Oxy. With respect to all of the claims except for Liberty's indemnification claim, the court entered a final judgment in favor of Technical Automation finding that Liberty had a duty to defend Technical against the...