Zurich Am. Ins. Co. v. Arch Ins. Co.
| Decision Date | 14 December 2021 |
| Docket Number | No. 20-50966,20-50966 |
| Citation | 20 F.4th 250 |
| Parties | ZURICH AMERICAN INSURANCE COMPANY, Plaintiff—Appellant, v. ARCH INSURANCE COMPANY, Defendant—Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Ramiro Morales, Elizabeth B. Celniker, Morales Fierro & Reeves, Concord, CA, for Plaintiff—Appellant.
Christopher Dove, Esq., Jill Annette Schaar, Attorney, Locke Lord, L.L.P., Houston, TX, Kent Hofmann, Locke Lord, L.L.P., Austin, TX, for Defendant—Appellee.
Before Davis, Haynes, and Oldham, Circuit Judges.
This appeal arises from a highway construction project gone wrong. The question presented is whether the issuer of a commercial general liability policy, Arch Insurance Company, has a duty to defend the project's general contractor. The district court answered no. We disagree and reverse.
SH 130 Concession Company, LLC ("Developer") holds a concession to design and construct a 41-mile stretch of highway ("Project") running from Mustang Ridge to the I-10 connector near Seguin, Texas. The Developer hired Central Texas Highway Constructors, LLC ("CTHC") as the Project's general contractor. CTHC in turn hired Archer Western Contractors, Ltd. ("Archer Western"), among others, as a subcontractor. As most relevant here, Archer Western agreed to construct certain drainage systems for the Project.
Archer Western obtained annual commercial general liability ("CGL") policies from Arch Insurance Company ("Arch") that were effective from June 1, 2009, through June 1, 2018 (collectively, "Policy"). In the Policy, Arch assumed both a duty to indemnify and a duty to defend. As to the duty to indemnify, the Policy provides: "[Arch] will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies." As to the duty to defend, the Policy states: This case involves only Arch's duty to defend.
The subcontract required Archer Western to name CTHC as an "additional insured" on its Policy. Archer Western did so with two endorsements. First, the "Completed Operations Endorsement" extends coverage to the "additional insured [CTHC] ... with respect to liability for ‘bodily injury’ or ‘property damage’ caused, in whole or in part by, ‘your work’ [Archer Western's] at the location designated ... performed for that additional insured [CTHC]." Second, the "Ongoing Operations Endorsement" extends coverage under the Policy to the "additional insured [CTHC] ... with respect to liability for ‘bodily injury’, ‘property damage’ or ‘personal and advertising injury’ caused, in whole or in part, by ... [Archer Western's] acts or omissions ... in the performance of [its] ongoing operations for the additional insured [CTHC]." In sum, these two endorsements extend coverage under the Policy to CTHC for work Archer Western performed.
Work on the Project wrapped up in October 2012. On September 6, 2017, the Developer sent CTHC a notice of claim. About six weeks later, on October 20, 2017, the Developer requested arbitration against CTHC. The Developer alleged that CTHC and two other named contractors "fell far short of meeting their contractual obligations." Portions of the Project had "beg[un] to crack and heave before the road even opened to the public, and these pavement failures ... indicated that a significant underlying error in design and construction was causing the pavement to fail." The Developer also alleged that an investigation revealed that "CTHC improperly designed and constructed the pavement subgrade in such a way that it would inevitably expand" and caused the alleged deficiencies. It sought "to recover the full cost of remediating the project-wide defect in th[e] arbitration, along with other damages." Throughout this opinion, we'll refer to this arbitration proceeding (Developer v. CTHC ) as the "underlying litigation" or the "underlying arbitration."
The Developer's request for arbitration also incorporated its notice of claim against CTHC. The notice of claim, in turn, referenced several bridge inspection reports detailing alleged defects in portions of the Project. As most relevant here, the bridge inspection reports found that at least one bridge abutment "appear[ed] to have rotated ... due to moderate erosion caused by [a] deck drainage outlet pipe between girder 1 and 2[,] ... which ha[d] created a [three-foot-deep] void." The reports also noted that another bridge abutment had experienced "moderate erosion due to [a] deck drainage outlet."
The Developer later filed a more detailed statement of claim in the underlying arbitration. In it, the Developer alleged three categories of defects in the Project: "(1) pavement defects, (2) slope defects, and (3) bridge defects." As to category (1), the Developer alleged that "the cracking and heaving in the roadway was the result of differential movement related to subgrade heave and sulfate reactions," which itself was "the direct result of CTHC's failure to design and construct the [Project] subgrade and pavement structure in accordance with its contractual obligations." As to category (2), the Developer alleged that CTHC's design choices had caused slopes adjacent to the highway to fail. And as to category (3), the Developer alleged that CTHC "failed to properly account for the soils at the bridges, and in doing so, created problems such that multiple bridges—the most long-lived assets of a road's infrastructure—are exhibiting early signs of aging and premature failure." In sum, the Developer's claims in the underlying arbitration alleged that poor drainage caused physical damage to parts of the Project.
Given the Developer's claims in the underlying arbitration against CTHC, CTHC's insurer—Zurich American Insurance Company ("Zurich")—invoked Arch's duty to defend CTHC. Arch refused. So Zurich sued. It sought a declaration that Arch owes CTHC a duty to defend, as well as reimbursement for defense costs already incurred. The parties eventually cross-moved for summary judgment, which the district court referred to a magistrate judge.
The magistrate judge issued a report and recommendation that Arch's motion for summary judgment be granted because none of the Developer's claims potentially fell within the Policy's coverage. In reaching that recommendation, the magistrate judge determined that some of the Developer's allegations concerned damage to Archer Western's own work, which was expressly excluded from the Policy's coverage; that the Developer never alleged Archer Western caused the complained-of defects; and that some of the Developer's allegations could only hypothetically implicate Archer Western's work.
The district court adopted that recommendation and entered partial final judgment in favor of Arch under Federal Rule of Civil Procedure 54(b). Zurich timely appealed. We have jurisdiction under 28 U.S.C. § 1291. It's undisputed that we must apply Illinois law. And our review is de novo. See Landry's, Inc. v. Ins. Co. of the State of Pa. , 4 F.4th 366, 368 (5th Cir. 2021) () ; Central Ill. Light Co. v. Home Ins. Co. , 213 Ill.2d 141, 290 Ill.Dec. 155, 821 N.E.2d 206, 213 (2004) ().
It's undisputed that if either of the Policy's two endorsements potentially applies, then Arch (the issuer of the Policy) owes a duty to defend CTHC (the additional insured in the endorsements) in the underlying arbitration (Developer v. CTHC ). It's also undisputed that the applicability vel non of the endorsements turns on whether Archer Western (the primary insured) performed work that could trigger its Policy with Arch. Complicated as this might seem, the web of the insurance contracts creates a relatively straightforward question: Do the Developer's claims against CTHC in the underlying arbitration potentially implicate Archer Western's drainage-system work, such that Archer Western's insurer (Arch) owes a duty to defend the additional insured (CTHC)? The answer is yes.
"To determine whether an insurer has a duty to defend its insured from a lawsuit, a court must compare the facts alleged in the underlying complaint to the relevant provisions of the insurance policy." Valley Forge Ins. Co. v. Swiderski Elecs., Inc. , 223 Ill.2d 352, 307 Ill.Dec. 653, 860 N.E.2d 307, 314 (2006). "If the [relevant documents] allege facts within or potentially within policy coverage, the insurer is obliged to defend its insured even if the allegations are groundless, false, or fraudulent." Northbrook Prop. & Cas. Co. v. Transp. Joint Agreement , 194 Ill.2d 96, 251 Ill.Dec. 659, 741 N.E.2d 253, 254 (2000) ; see also Valley Forge , 307 Ill.Dec. 653, 860 N.E.2d at 314–15. The alleged facts need only be "potentially within" the policy's coverage. Am. States Ins. Co. v. Koloms , 177 Ill.2d 473, 227 Ill.Dec. 149, 687 N.E.2d 72, 75 (1997) (emphasis added); see also, e.g., Valley Forge , 307 Ill.Dec. 653, 860 N.E.2d at 314–15. For this reason, the "threshold that [the relevant documents] must satisfy to present a claim of potential coverage is low." LaGrange Mem'l Hosp. v. St. Paul Ins. Co. , 317 Ill.App.3d 863, 251 Ill.Dec. 191, 740 N.E.2d 21, 27 (2000) ; see also, e.g., Bituminous Cas. Corp. v. Gust K. Newberg Constr. Co. , 218 Ill.App.3d 956, 161 Ill.Dec. 357, 578 N.E.2d 1003, 1006 (1991) (Threshold is "minimal."); Del Monte Fresh Produce N.A., Inc. v. Transp. Ins. Co. , 500 F.3d 640, 643 (7th Cir. 2007) (Illinois law) ("In a duty-to-defend action, we begin with the deck stacked in favor of the insured.").
In comparing the Policy's language to the allegations in...
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