Westchester Surplus Lines Ins. v. Maverick Tube

• Decision Date: 10 December 2009
• Docket Number: No. 09-20071.,09-20071.
• Citation: 590 F.3d 316
• Parties: WESTCHESTER SURPLUS LINES INSURANCE COMPANY, Plaintiff-Appellee, v. MAVERICK TUBE CORPORATION, Defendant-Appellant. Maverick Tube LP, a Delaware limited partnership; Tubos Del Caribe, LTDA, a Colombian sociedade por quotas de responsabiliadade limitada, Plaintiffs-Appellants, v. Westchester Surplus Lines Insurance Company, a Georgia Corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

590 F.3d 316

WESTCHESTER SURPLUS LINES INSURANCE COMPANY, Plaintiff-Appellee, v. MAVERICK TUBE CORPORATION, Defendant-Appellant.

Maverick Tube LP, a Delaware limited partnership; Tubos Del Caribe, LTDA, a Colombian sociedade por quotas de responsabiliadade limitada, Plaintiffs-Appellants, v. Westchester Surplus Lines Insurance Company, a Georgia Corporation, Defendant-Appellee.

No. 09-20071.

United States Court of Appeals, Fifth Circuit.

December 10, 2009.

Joseph Anthony Ziemianski (argued), Emily Joanna Nelson, April Michelle Zubizarreta, Cozen O'Connor, Houston, TX, for Appellee.

Charles Tynan Buthod (argued), Stephen G. Tipps, W. Zachary Hughes, Maryanne Lyons, Baker Botts, L.L.P., Houston, TX, for Appellants.

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

Before KING, DAVIS and BENAVIDES, Circuit Judges.

BENAVIDES, Circuit Judge:

Appellants Maverick Tube Corporation, Tubos del Caribe, Ltda, and Maverick Tube LP (collectively "Maverick") appeal the declaratory judgment ruling that Appellee Westchester Surplus Lines Insurance Company ("Westchester") had no duty to indemnify Maverick in an accident resulting from defective piping. This dispute involves the application of Missouri state law in determining if an insurance "occurrence" and the duty to indemnify exists. For the reasons set forth below, we reverse the district court's grant of summary judgment and remand.

FACTUAL AND PROCEDURAL BACKGROUND

Tubos manufactures drilling casing sold by Maverick to both distributors and end users. Maverick purchased a commercial general liability insurance policy ("CGL Policy") and an umbrella insurance policy ("Umbrella Policy") from Westchester. The CGL Policy provides indemnification for "property damage" resulting from an "occurrence."¹ An "`occurrence' is defined as an accident, including continuous or repeated exposure to substantially the same general harmful conditions."²

In 2006, Maverick sold a specific casing, P-110, to Dominion Exploration and Production Company ("Dominion") for use and operation in its gas wells. In September 2006, Dominion experienced catastrophic failure in four gas wells that were using the P-110 casing. Maverick opened an investigation on this matter, quarantined all P-110 casing, and notified other customers of the potential problems. Maverick informed Dominion that its warranty covered the cost of the casing, and it sent Westchester notice of this incident and requested indemnification.

On November 29, 2006, Dominion sent a written demand letter advising Maverick that Dominion considered the failed casing to be, among other things, a breach of warranty and sought $9,802,506 in damages for i) completion costs, ii) lost production, iii) plugging costs, and iv) re-drilling costs for new wells in exchange for releasing all claims against Maverick. Investigations by Maverick, Tubos, and the independent party hired by Maverick determined that Tubos' production process had a flaw in the heat treatment process and chain conveyance system, in which the casing would cool off outside the furnace and, upon re-entering the furnace, the conveyance chain would touch the casing causing it to cool more quickly than the rest of the surface. This defect resulted in brittle points on the pipe. These investigations and reports showed that Maverick and Tubos were responsible for Dominion's damages. Maverick forwarded these reports and documents to Westchester, who relied on the investigations performed by Maverick and Tubos without independent investigation or study per the CGL Policy terms.³

Maverick settled with Dominion in March 2007 for $6,601,035.39. The settlement was several million less than the amount originally sought by Dominion because the breach of warranty limit for replacing the casing ($808,390.61) and loss of production revenues were both excluded from the settlement total.

Westchester denied Maverick's claim on January 25, 2007. Westchester then filed this declaratory judgment action in February 2007 on the same day as Maverick's response to Westchester's denial of coverage. Maverick filed its lawsuit in the Eastern District of Missouri, which was consolidated in December 2007 with Westchester's action filed in the Southern District of Texas. Both parties agree that Missouri law controls this case.

Maverick's claim against Westchester excluded the $350,000 self-insured retention limit and the cost of the casing sold, $808,390.61, as Maverick's warranty covered the replacement product cost and the CGL Policy excluded the cost to replace a defective product. Westchester moved for summary judgment and argued that Maverick's entire claim was a breach of warranty claim, which does not constitute an "occurrence" under Missouri law, based on Dominion's November 29 letter sent to Maverick. Maverick filed a cross motion for summary judgment and argued that Dominion's letter was not dispositive of the coverage issue and that Westchester was vexatious in its refusal to pay Maverick's claim.

The district court granted Westchester's request for summary judgment, holding that Dominion advanced only a breach of warranty claim against Maverick and that a warranty claim is not within the meaning of the word "occurrence" in a CGL Policy or Umbrella Policy under Missouri law.

STANDARD OF REVIEW

This Court reviews a district court's grant of summary judgment de novo, applying the same standards as the district court. E.g., Hirras v. Nat'l R.R. Passenger Corp., 95 F.3d 396, 399 (5th Cir.1996). Summary judgment is proper if the record reflects "that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c).

DISCUSSION

The insured bears the burden of showing that the damages alleged are covered by the insurance policy. Am. States Ins. Co. v. Mathis, 974 S.W.2d 647, 649 (Mo.Ct.App.1998). But an insurer may not merely rest upon the allegations found in the petition; instead, the insurer must consider the facts it knew or could have reasonably ascertained and show there is no possibility of coverage. Stark Liquidation Co. v. Florists' Mut. Ins. Co., 243 S.W.3d 385, 392 (Mo.Ct.App.2007) (quoting Truck Ins. Exch. v. Prairie Framing, LLC, 162 S.W.3d 64, 83 (Mo.Ct.App.2005)). The unsettled state of Missouri breach of warranty law stems from cases that fail to specify whether the underlying facts or the cause brought by the disputing party has been the basis for determining whether an occurrence exists that triggers the duty to indemnify under insurance policies.

The Letter, Settlement, and Cause of Action

Maverick contends that the district court erred in finding that Westchester did not need to provide coverage for the settlement with Dominion. Maverick argues that the text and context of the November 29 letter refers not only to Maverick's published warranty but also discusses the release of "all claims." Further, Maverick argues that because the letter identified the four components of recovery and because investigations were still ongoing when the letter was written, the claim was not limited solely to the breach of warranty claim. Maverick stresses that had Dominion wanted to recover on the sole ground of Maverick's warranty, the letter would have only had one component of recovery—the cost of the casing—because the warranty only covered the purchase price of a product and not additional damages. Moreover, no formal list of causes of actions by Dominion in the form of a complaint or petition was advanced. Westchester asserts that the letter only discusses recovery under a breach of warranty theory and that because Dominion never asserted a claim for negligence or another tort, Westchester correctly denied coverage. In essence, Westchester argues that Maverick's only evidence of a claim is Dominion's letter, and the letter's only mention of legal recovery theories used the word "warranty"; however, Westchester cites to no authority suggesting that a demand letter can or should be used as the sole indicator of whether a claim is covered.

Concerning the settlement, Maverick argues that the settlement agreement's language is the evidence that provides additional facts that initiates Westchester's duty to indemnify. The agreement itself excludes the purchase price of the P-110 casing and mentions that "all matters relating to the Incident" are resolved.⁴ The settlement language mirrors the warranty agreement language that "strictly limit[s the damages] to the purchase price of the [g]oods paid." Westchester disagrees that the settlement agreement should be considered.

Westchester's reasoning suggests that had Dominion filed a lawsuit that used the word "negligence" or "products liability" it would pay for the damages because the facts support this claim. But one important difference should be noted—no formal complaint by Dominion was ever filed. Thus, the resolution by the Eighth Circuit in Spirco Environmental, Inc. v. American International Specialty Lines Insurance Co., 555 F.3d 637 (8th Cir.2009) is helpful in interpreting the facts of the instant case.

In Spirco, American refused to reimburse the arbitration fee paid by Spirco because the recovering party had characterized the settlement as a breach of contract claim. Id. at 639. But Spirco's attorney advanced the property-damage nature of the claim from the beginning of the arbitration due to the findings made by the arbitrator and the positions of the parties. Id. at 640. Because the damage occurred after Spirco had finished its contract, the claim was not limited to the completion of the contract; instead, the claim focused on the property damages that occurred later. Id. The court determined that a property damage claim existed based on the factual assertions, substance of the claims, and arbitrator's findings, and not on the label chosen by the property owner. Id.

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