VIEWS FROM THE BENCH (PART 1): INSIGHTS FROM THREE TRIAL ... · VIEWS FROM THE BENCH (PART 1): INSIGHTS FROM THREE TRIAL JUDGES ON BEST PRACTICES FOR TRIAL LAWYERS IN INSURANCE CASES

VIEWS FROM THE BENCH (PART 1): INSIGHTS FROM THREE

TRIAL JUDGES ON BEST PRACTICES FOR TRIAL LAWYERS IN INSURANCE CASES

Moderator STEPHEN A. MELENDI, Dallas

Tollefson Bradley Mitchell & Melendi

HON. NANCY K. JOHNSON, Houston U.S. Magistrate Judge

Southern District of Texas

HON. GRAY H. MILLER, Houston U.S. District Judge

Southern District of Texas

HON. JEFFREY A. SHADWICK, Houston Judge, 55th Civil District Court

State Bar of Texas 11TH ANNUAL

ADVANCED INSURANCE LAW COURSE April 24-25, 2014

Houston

CHAPTER 9

S tephen A. Melendi is a partner in the Dallas, Texas based law firm of Tollefson Bradley Mitchell & Melendi, LLP. Mr. Melendi became licensed to practice law in 2003 after graduating cum laude from

Southern Methodist University School of Law in 2003. While in law school, Mr. Melendi was an articles editor for the International Law Review Association and was a member of Phi Delta Phi. Mr. Melendi also served as Judicial Extern for the late Chief Judge Jerry Buchmeyer of the United States District Court for the Northern District of Texas in 2001-2002. Prior to attending law school Mr. Melendi graduated from Texas A & M University with B.S. in political science.

Mr. Melendi is licensed to practice law before all state courts in Texas, all United States District Courts in Texas and Arkansas, as well as the United States Court of Appeals for the Fifth Circuit, Seventh Circuit, Eighth and Eleventh Circuit.

Mr. Melendi’s practice focuses on insurance coverage disputes and construction litigation.

Mr. Melendi was named a “Texas Rising Star” as published in Texas Monthly Magazine in 2007, 2008, 2009, 2010, and 2011.

Representative CasesNautilus Ins. Co. v. Steinberg, 316 S.W.3d 752 (Tex.App.–Dallas 2010, pet denied)Transport Intl. Pool, Inc. v. Continental Ins. Co., 166 S.W.3d 781 (Tex.App.–Fort Worth 2005, no pet.)Nautilus Ins. Co. v. All Counties Prof’l Secs. Inc., 168 Fed.Appx. 565 (5th Cir. 2006)Nautilus Ins. Co. v. Nevco Waterproofing, 202 Fed.Appx. 667 (5th Cir. 2006)Nautilus Ins. Co. v. Country Oaks Apartments Ltd., 566 F.3d 452 (5th Cir. 2009)Trinity Universal Ins. Co. v. Emplrs Mut. Cas. Co, 592 F.3d 687 (5th Cir. 2010)Nat'l Fire Ins. Co. v. Entertainment Specialty Ins. Services, Inc., 485 F.Supp.2d 737 (N.D.Tex. 2007)National Fire Ins. Co. v. NWM-Oklahoma, LLC, Inc., 546 F. Supp. 2d 1238 (W.D.Okla. 2008)Mainland Drilling Ltd. P'ship v. Colony Ins. Co., 546 F.Supp.2d 432 (W.D.Tex. 2008), aff’d 2010 WL 2546113 (5th Cir. June 23, 2010) (per curiam)Nautilus Ins. Co. v. ACM Contrs., Inc., 549 F.Supp.2d 857 (S.D.Tex. 2008)Nautilus Ins. Co. v. Country Oaks Apartments, Ltd., 556 F.Supp.2d 611 (W.D.Tex.2008)Trinity Universal Ins. Co. v. Emplrs Mut. Cas. Co., 586 F. Supp. 2d 718 (S.D. Tex. 2008)Trinity Universal Ins. Co. v. Emplrs Mut. Cas. Co, 592 F.3d 687 (5th Cir. 2010)Transcontinental Ins. Co. v. Rainwater Const. Co., LLC, 509 F.3d 454, (8th Cir.(Ark.) Dec 05, 2007)Nautilus Ins. Co. v. Nicky & Claire's Day Care, Inc., 630 F.Supp.2d 727 (W.D.Tex. 2009)Employers Mut. Cas. Co. v. Bonilla, 612 F.Supp.2d 734 (N.D.Tex. 2009)Colony National Insurance Company v. Specialty Trailer Leasing, Inc., 620 F.Supp.2d 786 (N.D.Tex. 2009)Nautilus Ins. Co. v. Reuter, 537 F.3d 733 (7th Cir. (Ind.) 2008)Nautilus Ins. Co. v. American Cmty. Servs., 2006 U.S.Dist. LEXIS 74201 (N.D.Ind. October 11, 2006)Nautilus Ins. Co. v. 5 Westside Group, Inc., et al., 2006 U.S.Dist. LEXIS 42886 (S.D.Tex. June 15, 2006)Nautilus Ins. Co. v. ABN-AMRO Mortg. Group, Inc., et al., 2006 U.S.Dist. LEXIS 88932 (S.D.Tex. December 8, 2006)Valley Forge Ins. Co. v. Shah, 2007 U.S.Dist. LEXIS 16045 (S.D.Tex. March 7, 2007)Valley Forge Ins. Co. v. Shah, 2009 WL 291080, (S.D.Tex. January 30, 2009) Richmond Condominiums v. Skipworth Commercial Plumbing, Inc., 245 S.W.3d 646, (Tex.App.-Fort Worth 2008, pet. denied)A.O. Smith Corp. v. Settlement Inv. Mgmt., 2006 Tex.App. LEXIS 715 (Tex.App – Fort Worth January 26, 2006, no pet.)(not designated for publication)

Stephen MelendiStephen Melendi Email: Email:

[email protected] bio

Stephen A. MelendiStephen A. MelendiAttorney BiographyAttorney Biography

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Gray H. Miller, United States District Judge

Case Manager

Rhonda Moore-Konieczny Case Manager (713) 250-5129 (voice) (713) 250-5894 {fax) [email protected]

515 Rusk Avenue, Room 9010C Houston, Texas 77002-2605

Appearances Contact with Court Personnel Continuances Courtesy Copies of Documents Courtroom Procedures Depositions Discovery and Scheduling Disputes Emergencies Eouipment Exhibits Forms Initial Pretrial Conferences and Docket Control Orders Memoranda of Law Motion Practice Required Trial Materials Settlements and Orders of Dismissal Trial Settings Voir Dire

Career Law Clerk

Anna Archer Anna [email protected]

Education: University of Houston, B.S., Psychology University of Houston Law Center, J.D.

Term Law Clerk

David Schwan Dayjd [email protected]

Education: University of Dallas, B.A., History University of Houston Law Center, J.D.

Term Law Clerk

Heather Winter Heather [email protected]

Education: University of Texas, B.S., Government University of Houston Law Center, J.D.

Selected Decisions

Carico Inys, Inc. v. Tex. Ale. Bev. Comm'n Ass'n of Ale. Bev. Permit Holders v. City of Houston Serv. Emp'ees Int'l Union v. City of Houston United States ex re/lonqhi v. Lithium Power Tech. United States v. Yanez Aldridge v. Thaler Fisher v. Halliburton

Judge Gray H. Miller

:Biography

Education

Judge Gray H. Miller was appointed as a

United States District Judge by President George W. Bush

on April 25, 2006.

Judge Miller attended the United States Merchant Marine Academy from 1967 to 1969. He received a B.A. in 1974 and a J.D. in 1978 from the University of Houston, where he was a member of the Order of the Barons. He was admitted in 1978 to practice law in Texas. He is a member of the

• bar of the United States Supreme Court.

Work Experience

2006-present

1998-2006

1986-1998

1978-1986

1969-1978

United States District Judge, Southern District of Texas

Senior Partner, Fulbright & Jaworski L.L.P.

Partner, Fulbright & Jaworski L.L.P.

Associate, Fulbright & Jaworski L.L.P.

Police Officer, Houston Police Department

Professional Activities and Memberships

Judge Miller is a member of the Houston Bar Association, the State Bar of Texas, the Maritime Law Association of the United States, the Houston Maritime Arbitrators Association, and the Mariners' Club of Houston (Skipper 1994-1995). He has also served as a vice chair of the Admiralty and Maritime Law Committee of the Tort and Insurance Practice Section of the ABA. He is a life fellow of the Houston Bar Foundation and a fellow of the Texas Bar Foundation. f-Ie is a member of the Houston Marine Insurance Seminar Executive Committee and has served on the planning committees for seminars on Admiralty and Maritime Law sponsored by the State Bar of Texas, the University of Texas and South Texas College of Law. He is a frequent speaker at these seminars. Judge Miller is listed in the 2001-2006 editions of "The Best Lawyers in America" as one of the top admiralty lawyers In the country. He is also listed in the 2003 edition of "Euro Money's Guide to the World's Leading Maritime Lawyers" and was chosen as a "Texas Super Lawyer."

Judge Mlller is Vice President and Counselor to the Executive Committee of the Garland R. Walker American Inn of Court. He is also a judicial liaison to the Federal Bar Association, Southern District of Texas Chapter and an honorary member of the Phi Delta Phi International Legal Honor Society.

Member of Advisory Board, Cavalla Historical Foundation

Life Member, 100 Club of Houston

Life Fellow, Houston Bar Foundation

Fellow, Texas Bar Foundation

Associate Member, U.S. Merchant Marine Academy Alumni and Foundation

Board of Texas Department of Mental Health & Mental Retardation (2002-04)

Board of Trustees, Harris County Mental Health/Mental Retardation Authority (1991-99), Chairperson (1997-99)

Judge Shadwick graduated from the University of Kansas in 1978 and from Baylor University School of Law

School in 1981. Judge Shadwick became licensed to practice law in both Texas and Kansas in 1981. After

practicing in Kansas for five years, in 1986 Judge Shadwick moved to Houston where he became a shareholder

at Winstead, McGuire, Sechrest & Minick. He served two terms on the Houston ISD school board, including

one year at its president. Judge Shadwick is AV rated by Martindale-Hubbell.

Judge Shadwick was appointed Judge of the 55th Judicial District Court by Governor Perry in December 2007,

where he serves today.

Views From The Bench (Part 1): Insights From Three Trial Judges On Best Practices For Trial Lawyers In Insurance Cases Chapter 9

i

TABLE OF CONTENTS

COURTROOM PROCEDURES .................................................................................................................................... 1

SELECTED INSURANCE OPINIONS ....................................................................................................................... 27

SELECTED INSURANCE OPINIONS ..................................................................................................................... 133

HON. JEFF SHADWICK55th CIVIL DISTRICT COURT

HARRIS COUNTY, TEXAS

1

COURTROOM

PROCEDURES

3

Harris County District Courts Page 1 of!

Texas SupremeCourt RuleChanges

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Pro hac viceCivilCourthouseDirections

ElectronicDocumentFiling Rules

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General Civil CourtInformationClick on any of the links below toget more information about thegiven toplc...

Local Rulesfor the CivilCourts

Rules CivilElectronicMedia

Judge JeffShadwickHarrisCounty CivilCourthouse201 Caroline.9th FloorHouston.Texas 77002

Harris CountyDistrict Courts

Horne I Courts 1 Civil I Judge Jeff Shadwick

~Home 55th Civil CourtDistrict Clerk

Court InformationCourts -Local RulesGrand Jury InfoJury InfoProcess ServersJudicial AssignmentsBail Bond ScheduleDowntown LocationsCriminal Justice CenterCivil CourthouseDowntownDining

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Court Staff

Law Clerk

Daniel Flores

Jonathan Patton

George Cardenas

Rudy Guillen

Gina Wilburn

Court Phone: (713) 368-6055Fax Number:Law Clerk:

Clerk:

Assistant Clerk:

Coordinator:Bailiff:

Court Reporter:

713-368-6065

713-368-6055

713-368-6055

713-368-6050

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55th Civil Court Information

Court Procedures

Court Staff

Standing Pre-Trial Order

A Few Words About Late Filings and Courtesy Copies

Harris County Administrative Offices of the District Courts 2006

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Horne I Courts I Civil I Judge Jeff Shadwick I Court Details......

All motions and responses must have proposed orders.

The Court does not need a courtesy copy of any filed motion.

Docket Call for trials is held on Monday one week before the trial setting at 11 :00 a.m. The onlythings we will discuss at Docket Call is the length of trial and when your trial will likely start. We willmake every effort to give you a good idea when your case will start.

Pre-Trial Conferences are usually held on the morning of the trial. We will request a jury panel themorning trial starts. They usually arrive at 9:30 a.m. giving us little time to discuss pre-trial matters. Ifthe parties believe it will take more than 30 minutes to do those things listed below, let us know atDocket Call and other arrangments will be made for the week between Docket Call and the trial.

Court ProceduresAll oral motions are heard on Mondays at 9:00 and 10:00 a.m. Call the Clerk of the 55th for anassignment. The Clerk will also let counsel know whether motions will be by submission or oralhearing. Motions set for submission are also set at 9:00 a.m. on Mondays. The Court will, in almostall circumstances, rule on motions set for submission by Friday of the week the motion is submitted.If you have not recived a ruling by the second Friday after submission, please call the Clerk of the55th. WHETHER ORAL OR SUBMISSION, FILE AND SERVE THE APPROPRIATE NOTICE OFHEARING.

Back to judge PageJudge Jeff ShadwickHomeDistrict ClerkCourt InformationCourtsLocal RulesGrand Jury InfoJury InfoProcess ServersJudicial AssignmentsBail Bond ScheduleDowntown LocationsCriminal Justice CenterCivil CourthouseDowntownDining

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At the Pre-trial Conference be prepared to discuss the following items (please see the Standing PreTrial Order):

1. Trial Exhibits. Each party shall prepare and bring two extra copies of their exhibit list (one for thejudge and one for the Court Reporter). Be prepared to discuss which of your opponents' exhibits youdo and do not object to. I will rule on the objections before trial begins.

2. Video Depositions. Be prepared to discuss offers and objections.

3. Proposed Jury Charge. While we will have formal and informal jury charge hearings as the trialprogresses, please bring your proposed jury charge to the Pre-Trial Conference on a CD or jumpdrive so I can begin reviewing it during the trial.

4. Motions in Limine. The Court does not require a Motion which states that everyone will follow therules of evidence. Present only those items special to your case. Be prepared to discuss what youdo and do not agree upon.

5. law Briefs and Cases. Please brief and/or bring cases on unusual legal and evidentary issues.


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Harris County District Courts


Horne I Courts I eM! I Judge Jeff Shadwick I Court Details......

Page 1 of 1

There are new issues arising as we make this transition to electronic filing and this is one thatneedlessly consumes a great deal of our clerk's time.

A Few Words About Late Filings and Courtesy CopiesThere are few excuses for late filings. If you feel the need to file something within 24 business hoursof your hearing please file it with the District Clerk's office. If you provide a courtesy copy to the courtplease clearly mark it "Courtesy Copy" so we will know that it has already been filed and imaged sowe do not have to spend time trying to make that determination.

HomeDistrict ClerkCourt InformationCourtsLocal RulesGrand Jury InfoJury InfoProcess ServersJudicial AssignmentsBail Bond ScheduleDowntown LocationsCriminal Justice CenterCivil CourthouseDowntownDiningOther InformationFAQCourts & LawDC Web EmailVisiting the Courthouse

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4/4120146

Harris County District Courts Page 1 of2

At least three days before trial, or the Pre-Trial Conference, theparties must serve upon each other the following items (if any) for review:

CAUSE NO. _


HomeDistrict ClerkCourt InformationCourtsLocal RulesGrand Jury InfoJury InfoProcess ServersJudicial AssignmentsBail Bond ScheduleDowntown Locations

. Criminal Justice CenterCivil CourthouseDowntownDiningOther InformationFAQCourts & LawDC Web EmailVisiting the CourthouseApplicationsFOAMS

Court Reporters

Judge Jeff Shadwick


v.COUNTY, T E XA S

JUDICIAL DISTRICT

§

Back to judge Page

IN THE DISTRICT COURT OF§

§ HARRIS

§

§ 55th

1. Motion in Limine2. Video Deposition Offers and Objections3. Exhibit Lists (2 extra copies - one for the Court Reporter and one

for the Judge)4. Stipulations5. Briefs/Cases6. Proposed Jury Questions

Please file your Motion in Limine with the Clerk so that the Courtmay review it in preparation for trial

Prior to the day of trial or Pre-Trial Conference} the parties shallreview each others' items as set forth above and make their best efforts toagree upon as many exhibits, deposition offers, limine items and juryquestions as possible.

At the appearance for jury selection/triaIjPre-Trial Conference, bringthe originals of the items listed above directly to the Presiding Judge forfiling, review} discussion and rulings.

http://www.justex.netiCourts/CiviIlCourtSection.aspx?crt=2&sid=300 4/4120147

HARRIS COUNTY

LOCAL RULES OF THE DISTRICT COURTS

concerning the

ELECTRONIC FaINGOF COURTDOCUMENTS

PART 1. GENERAL PROVISIONS

Rule 1.1 PuI1lose

These rules govern the electronic f.tling and service of court documents, by any methodother than fax filing, in Harris County. These rules are adopted pursuant to Rule 3 a oftheTexas Rules ofCivil Procedure and may be known as the "Harris County Local Rules ofthe District Courts Concerning the Electronic Filing of Court Documents."

Rule 1.2 Effect on Existing Local Rules

These rules are adopted in addition to any other local rules ofthe district courts in HarrisCounty. These rules do not supersede or replace any previously adopted local rules.These rules are in addition to current local rules, Part 4 electronic court documents (faxfiling).

PART 2. DEFINITIONS

Rule 2.1 Specific Tenus

The following definitions apply to these rules:

(a) "Convenience fee" is a fee charged in connection with electronic filing that is in'addition to regular filing fees. A Convenience Fee charged by the District Clerk shall notbe considered as a court cost. '

(b) "District clerk" means the Harris County District Clerk.

(c) "Document" means a pleading, plea, motion, application, request, exhibit, brief,memorandum oflaw, paper, or other instrument in paper form or electronic form.

(d) "Electronic filing" is a process by which a filer files a court document with the districtclerk's office by means of an online computer transmission ofthe document in electronicform. For purposes ofthese rules, the process does not include the filing of

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faxed documents which is described as the "electronic filing ofdocuments" in Section51.801, Government Code.

(e) "Electronic Filing Service Provider (EFSP)" is a business entity that provideselectronic filing services and support to its customers (filers). An attorney or law firmmay act as an EFSP. .

(f) "Electronic Service" is a method of serving a document upon a party in a case byelectronically transmitting the document to that party's e-mail address.

(g) ''Electronically File" means to file a document by means ofelectronic filing.

(h) "Electronically Serve" means to serve a document by means of electronic service.,

(i) "Filer" means a person who files a document, including an attorney.

(j) "Party" means a person appearing in any case or proceeding, whether represented orappearingyro se, or an attorney ofrecord for a party in any case or proceeding.

(k) "Regular Filing Fees" are those filing fees charged in connection with traditionalfiling.

(1) "Rules" are the Harris County Local Rules ofthe District Courts concerning theElectronic Filing of Documents.

(m) "Traditional Filing" is a process by which a filer files a paper document with a clerkor ajudge.

Rule 2.2 Application to Pro Se Litigants

The term "counsel" shall apply to an individual litigant in the event a party appears prosa,

PART 3. APPLICABILITY

Rule 3.1 Scope

(a) These rules apply to the filing ofdocuments in all non-juvenile civil cases, includingcases that are appeals from lower courts, before the various district courts withjurisdiction in Harris County.

(b) These rules apply to the filing ofdocuments in cases before the various district courtsreferred to in paragraph (a) above that are subsequently assigned to associate judges orany other similarjudicial authorities.

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Rule 3.2 Clerks

These rules apply only to the filing ofdocuments with the district clerk. These rules donot apply to the filing ofdocuments directly with ajudge as contemplated by TEX. R.CIV.P.74. '

Rule 3.3 Documents That May Be Electronically Filed

(a) A document that can be filed in a traditional manner with the district clerk may beelectronically filed with the exception ofthe following docUments: '

i) citations or writs bearing the seal ofthe court;

ii) returns ofcitation;

iii) bonds;

iv) subpoenas;

v) proof of service of subpoenas;

vi) documents to be presented to a court in camera, solely for the purpose of. obtaining a ruling on the discoverability ofsuch documents;

vii) documents sealed pursuant to TEX. R. CIV. P. 76a; and

viii) documents to which access is otherwise restricted by law or court order,including a document filed in a proceeding under Chapter 33, Family Code.

(b) A motion to have a document sealed, as well as any response to such a motion, maybe electronically filed.

Rule 34 Dgcuments Containing Signatures

(a) A document that is required to be verified, notarized, acknowledged, sworn to, ormade under oath may be electronically filed only as a scanned image.

(b) A document that requires the signatures ofopposing parties (such as a Rule 11agreement) may be electronically filed only as a scanned 'image.

(c) Any affidavit or other paper described in Rule 3.4(a) or (b) that is to be attached to anelectronically-filed document may be scanned and electronically filed along with theunderlying document.

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(d) Where a filer has electronically filed a scanned image under this rule, a court mayrequire the filer to properly fIle the document in a traditional manner with the districtclerk. A third party may request the court in which the matter is pending to allowinspection ofa document maintained by the filer.

PART 4. FILING MECHANICS

Rule 4.1 TexasOnllne

(a) Texas Online is a project ofthe TexasOnline Authority, a state entity charged withestablishing a common electronic infrastructure thr<;mgh which state agencies and localgovernments may electronically send and receive documents and required payments.

(b) To become registered to electronically file documents, fIlers must follow registrationprocedures outlined by TexasOnline. The procedure can be accessed from TexasOu!ine'swebsite at ..www.texasonline.com...

(c) Filers do not electronically fIle documents directly with the district clerk. Rather,fIlers indirectly fIle a document with the district clerk by electronically transmitting thedocument to an electronic filing service provider (EFSP) which'then electronicallytransmits the document to TexasOuline which then electronically transmits the documentto the district clerk. A fIler fIling or serving a document must have a valid account withan EFSP and with TexasOnline.

(d) Consistent with standards promulgated by the Judicial Committee on InformationTechnology (JeTI'), TexasOnline will specifythe permissible formats for documents thatwill be electronically fIled and electronically served. . .

(e) Filers who electronically file documents will pay regular fIling fees to the districtclerk indirectly through TexasOuline by a method set forth by TexasOnline.

(f) An EFSP may charge filers a convenience fee to electronically file documents. Thisfee will be in addition to regular filing fees. .

(g) TexasOnline will charge ftlers a convenience fee to electronically file documents.This fee will be in addition to regular filing fees and will be in an amount not to exceedthe amount approved by the TexasOnline Authority.

(h) The district clerk may charge filers a convenience fee to electronically file documents.This fee will be in addition to regular filing fees, credit card fees, or other fees.

Rule 4.2 Signatures

(a) Upon completion of the initial registration procedures, each fIler will be issued aconfidential and unique electronic identifier. Each fIler must use his or her identifier in

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order to electronically file documents. Use ofthe identifier to electronically filedocuments constitutes a "digital sigmiture" on the particular document

(b) The attachment of a digital signature on an electronically-filed document is deemed toconstitute a signature on the document for purposes ofsignature reqnirements imposed bythe Texas Rules ofCivil Procedure or any other law. The person whose name appearsfirst in the signature block ofan initial pleading is deemed to be the attorney in charge forthe purposes ofTexas Rules ofCivil Procedure 8, unless otherwise designated. Thedigital signature on any document filed is deemed to be the signature ofthe attorneywhose name appears first in the signature block ofthe document for the purpose ofTexasRules ofCivil Procedure 13 and 57.

(c) A digital signature on an electronically-filed document is deemed to constitute asignature by the filer for the purpose ofauthorizing the payment ofdocument filing fees.

Rule 4.3 Time Document is Filed

(a) A filer may electronically transmit a document through an EFSP to TexasOnline 24hours per day each and every day ofthe year, except during briefperiods ofstateapproved scheduled maintenance which will usually occur in the early hours ofSundaymoming.

(b) Upon sending an electronically-transmitted document to a filer's EFSP, the filer isdeemed to have delivered the document to the clerk and, subjectto Rule 4.3(h), thedocument is deemed to be filed. Ifa document is electronically transmitted to the filer'sEFSP and is electronically transmitted on or before the last day for filing the same, thedocument, ifreceived by the clerk not more than ten days tardily, shall be filed by theclerk and deemed filed in time. A transmission report by the filer to the filer's EFSP shallbe prima facia evidence ofdate and time oftransmission.

(c) On receipt ofa filer's document, the filer's EFSP must send the document to TexasOnline in the required electronic file format along with an indication ofthe time the filersent the document to the EFSP and the filer's payment information. TexasOnline willelectronically transmit to the fIler an "acknowledgment" that the document has beenreceived by TexasOnline. The acknowledgment will note the date and time that theelectronically-transmitted document was received by TexasOnline.

(d) Upon receiving a document from a filer's EFSP, TexasOnline shall electronicallytransmit the document to the district clerk. Ifthe document was not properly formatted,Texas Online will transmit a waming to the filer's EFSP.

(e) Not later than the first business day afterreceiving a document from TexasOnline, thedistrict clerk shall decide whether the document will be accepted for filing. The districtclerk shall accept the document for filing provided that the document is not misdirectedand complies with all filing requirements. The district clerk shall handle electronically-

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transmitted documents that are fJled in connection with an affidavit ofinability to affordcourt costs in the manner required by TEX. R. CN. P. 145. lfthe clerk fails to accept orreject a document within the time period, the document is deemed to have been acceptedand filed.

(f) lfthe document is accepted for filing, the district clerk shall note the date and time offiling which, with the exception of subsection (h) below, shall be the date and time thatthe filer transmitted the document to the filer's EFSP. The district clerk shall informTexasOnline ofits action the same day action is taken. TexasOnline shall, on that sameday, electronically transmit to the ftler's EFSP a "confirmation" that the document hasbeen accepted for filing by the district clerk. The EFSP will electronically transmit theconfirmation to the filer. This confirmation will include an electronically "fJle-marked"copy ofthe front page ofthe document showing the date and time the district clerkconsiders the document to have been filed.

(g) lfthe document is not accepted for ftling, the district clerk shall inform TexasOnlineofits action, and the reason for such action, the same day action is taken. TexasOnlineshall, on that same day, electronically transmit to the ftler's EFSP an "alert" that thedocument was not accepted along with the reason the document was not accepted. TheEFSP will electronically transmit the alert to the ftler.

(h) Except in cases of injunction, attachment, garnishment, sequestration, or distress .proceedings, documents that serve to commence a civil suit will not be deemed to havebeen filed on Sunday when the document is electronically transmitted to the filer's EFSP,TexasOnline, or the Clerk on Sunday. Such documents will be deemed to have been fJledon the succeeding Monday.

Rule 4.4 Filing Deadlines Not Altered

The electronic ftling of a document does not alter any ftling deadlines.

Rule 4.5 Multinle Documents

(a) Except as provided by subsection (b) below, a filer may include only one document inan electronic transmission to TexasOnline.

(b) A ftler may electronically transmit a document to TexasOnline that includes anotherdocument as an attachment (e.g., a motion to which is attached a briefin support ofthemotion).

Rule 4,6 Official DOGuwent

(a) The district clerk's ftle for a particular case may contain a combination ofelectronically-ftled documents and traditionally-ftled documents.


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(b) The district clerk may maintain and make available electronically-fIled documents inany manner allowed by law.

Rule 4.7 E-mail Address Required

In addition to the information required on a pleading by TEX. R. CN. P. 57, a fIler mustinclude an e-mail address on any electronically-filed document.

Rule 4.8 Document Format

(a) Electronically-filed documents must be computer-formatted as specified byTexasOnline. Electronically-fIled documents must also be formatted for printing on 8 Yz.inch by ll-inch paper.

(b) An electronically-filed pleading is deemed to comply with TEX. R. CN. P. 45.

fART 5. SERVICE OF DOO!MENTS OTHER THAN CITATION

Rule 5.1 Electronic Service ofDocuments Permissible

(a) In addition to the methods ofserving documents (other than the citation to be servedupon the filing ofa cause ofaction) set forth in lEX. R. CN. P. 21a, a fIler may servedocuments upon another party in the case by electronically transmitting the document tothat party at the party's email address. Service in such a manner is known as 'Electronicservice," and is permissible in the circumstances set out in paragraph (b) below.

(b) Documents may be electronically served upon a party only where that party has.agreed, in writing to receive electronic service in that case. The clerk shall adopt astandard form ofagreement which provides that the party has agreed to electronicallyaccept service, sets out the e-mail address where service should be sent, and informs theparty ofthe right to rescind the agreement by subsequent notice to the court. Theagreement must be fIled with the court and the form must be served on all other parties.

(c) By virtue ofelectronically fIling a document or serving a document or by agreeing toaccept service, a filer additionally agrees to provide information regarding any change inhis or her e-mail address to TexasOnline, the district clerk, and all parties in the case.

(d) A party who electronically fIles a document is not required to electronically servedocuments upon other parties. Electronic service ofdocuments is an optional method of

,service.

(e) A filer may electronically serve a document in instances where the document istraditionally fIled as well as in instances where the document is electronically fIled.


70f9

14

Rule 52 Completion ofService and Date of Service

(a) Electronic service shall be complete upon transmission ofthe document by the f.tler tothe party at the party's e-mail address.

(b) Except as provided by subsection (c) below, the date ofservice shall be the date theelectronic service is complete.

(c) When electronic service is complete after 5:00 p.m. (recipient's time), then the date ofservice shall be deemed to be the next day that is not a Saturday, Sunday or legal holiday.

Rule 5.3 Time for Action After Service

Whenever a party has the right or is required to do some act within a prescribed period oftime after service of a document upon the party and that document is electronicallyserved, then three days shall be added to the prescribed period oftime.

Rule 5.4 Certification of Service

(a) Documents to be electronically served upon another party shall be sent before the timeor at the same time that the document is f.tled. .

(b) A filer who electronically serves a document upon another party shall make a writtencertification of such service that shall accompany the document when that document isf.tled. The written certification shall include, in addition to any other requirementsimposed by the Texas Rules ofCivil Procedure, the following:

(i) the f.tler's e-mail address or telecopier (facsimile machine) number;

(li) the recipient's e-mail address;

(iii) the date and time ofelectronic service; and

(iv) a statement that the document was electronically served and that theelectronic transmission was reported as complete.

PART 6. ELECTRONIC ORDERS AND yrnwING OF ELECTRONICALLYFILED DOCUMENTS

Rule 6.1 Courts Not Authorized to make Electronic Orders

(a) Judges shall continue to sign paper copies ofcourt orders, judgments, rulings, noticesand other court-produced documents ("court orders").

Approved - Board ofDistrict ludges 11109/04

80f9

15

(b) The district clerk may electronically scan a court order. The scanned court order maythen serve as the official copy ofthe court order. The district clerk is not required toelectronically scan court orders in order to create official electronic court orders.Electronic scanning ofcourt orders is at the option ofthe district clerk.

Rule 6.2 viewing ofElectronically.med DOCllmenp;

(a) The district clerk shall ensure that all the records ofthe court, except those madeconfidential or privileged by law or statute, may be viewed in some format by all persons .for free.

(b) Independent ofthe TexasOnline system and the requirement ofviewing accessdescribed in subsection (a), the district clerk may choose to provide for both filers and thegeneral public to electronically view documents or court orders that have beenelectronically filed or scanned. Where such provision has been made, persons mayelectronically view documents or court orders that have been electronically fIled orscanned. .

(c) Nothing in this rule allows for the viewing ofdocuments or court orders, in any form,that are legally confidential (e.g., papers in mental health proceedings).

PART 7. MTSCELLANEmJS PROVISIONS

Rule 7.1 Assigned Court to Resolve Disputes

..In the event a dispute should arise involving the application ofthese rules or variouselectronic filing issues, a district court assigned in accordance with local assignmentprocedures shall decide any dispute.

These rules shall become effective upon their approval by the Supreme Court ofTexas.

Approved ~ Board ofDistrict Judges 11109/04

90f9

16

SELECTED

INSURANCE OPINIONS

17

CAUSE NO. 2010-47654

IN THE DISTRICT COURT OF

FIREMEN'S FUND INSURANCECOMPANY

o-PM HOUSTON PROPERTIES,LTD., et al.

VS

§§§§§ HARRIS COUNTY*EXAS§ (&<s;;,§ ~)

§ 0§ 0 ~§ 55THJUD~DISTRICT

00ORDER AND FINDINGS ON DEFENDANT'S PLE~~HE J1JRISDICTION

~The Court conducted an evidentiary hearing o~~ndant's Plea to the Jurisdiction.

Pursuant to such hearing, the Court finds and rules as~s:

Defendant's Plea to the Jurisdiction is D~~D. The Plaintiffs have standing to make.,~

the claims in their Petition, as amended. . 0~.

Fireman's Fund Insurance comp;9<"Fireman's" or "Defendant") has filed a Plea to the

Jurisdiction questioning the stand.~f each Plaintiff to pursue a claim under the subject,"-~--

insurance policy. Fireman's .~Q~ that the Plaintiffs either had no ins\l~a1:Jle interest in the

prClperties which were da~~in Hurricane Ike, or are not named insureds under the policy. A

.plea to the jurisdictio~s the appropriate vehicle to challenge a party's lack of standing.o~([)r

Standing is a thr~ inquiry. MD. Anderson Cancer Center v. Novak, 52 S.W.3d 704, 710=~

(Tex. 2001~~ding is a component of subject matter jurisdiction. Waco ISDv. Gibson, 22

S.W.3d 849, 850 (Tex. 1998).

As set out in the Court's July 23,2013 Notice of Hearing, the hearing was pursuant to the

guidance found in Texas Department of Parks and Wildlife v. Miranda, 133 S.W.3d 217, 226-

228 (Tex. 2004). The Court is pursuing the "decision tree" described in that Notice. Plaintiff

18

has made objections to this process claiming that determining whether they have rights under the

subject insurance policy is nothing different than proving the first element ofa breach of contract

action. In taking evidence and ruling upon Fireman's plea, Plaintiffs assert that the Court is

improperly splitting its cause of action. Fireman's has not objected.

In previously denying Fireman's motion for summary judgment, th~urt found that~!@

there are issues of fact as to Plaintiffs' standing. Taking the next step i@ Miranda decision

~tree, having heard the evidence, the Court believes that ruling upo~standing issue does not

implicate the merits of the Hurricane Ike insurance claim raise~er the subject policy. Since

the existence, terms, and conditions of the 2008 insurancev~y are not contested, ruling upon

the standing question will not interfere with the j~~termination of an insurance claim.

Accordingly, the standing issue will not besubtni~O the jury in the insurance claim trial, and

the Court will resolve that issue here. ~

All insurance companies, includi~ireman's, require that every property insurance

policy has a named insured, and th~~amed insured be someone with an insurable interest in

the subject property. The 2006~~y which was the first between the parties for the period

relevant to this litigation re~~"Triyar Group" as named insured. The 2007 policy reflects

"Triyar Companies, LLCQ ~amed insured, as does the 2008 policy which was the policy under.~ ..

which Plaintiffs ~~eir claims.

At no~~as either Triyar Group or Triyar Companies, LLC ever an Owner, tenant, or

otherwise a~riy with an insurable interest in the real property which'suffered a casualty loss. In

addition, Triyar Group is not a legal entity at all, something which the Court found at a glance to

be perfectly obvious. There are no indicia of corporate status in its name. Triyar Companies,

LLC, was at one time a legal entity but not at the time it was listed as named insured on the

2

19

20008 policy. Despite these facts, Fireman's issued policies of insurance in their name.

Apparently, then, Fireman's did the very thing its witnesses earnestly assured this Court it would

never do: sell a policy to any entity which did not have an insurable interest, and perhaps was

not a real entity at all. This happened three times, in 2006 through 2008. The Court is left to

decide whether the parties had an agreement which violated Fireman's poli~r that they did. /f'~~

not have an agreement at all. The Court finds the former. y~

The evidence strongly supports the conclusion that "Triyar ~,,, which appears on the

2006 policy as named insured, was a mere placeholder name. df:!s placed there, interestingly,

by Fireman's. Defendant's Exhibits 156 and 25 tell the.t~ Triyar's insurance application,

Defendant's Exhibit 156, shows "Triyar companies~~l see attached" as proposed named

insured. Fireman's makes much ofa later "see att=.~ schedule" on the application as somehow!f!'-directing Fireman's to look at the apPlicatio~erently, but the Court sees no importance in

~~"see attached" versus "see attached scj@iile." There are, in fact, two schedules. The

@application includes a schedule at.~~s numbered pages 001048 and 001049, which has a

F'\)~'"column designated "Entity NameJ7 Defendant's witness testified unconvincingly that this

schedule gave them no cI~e~'1oever of those entities' interest in the listed properties. It was

perfectly obvious, to th~Mrt at least, that Defendant's Exhibit 156 reflects a list of single asseto{@

entities which O~~listed properties. A number of other conclusions may be possible, but

none which le~Q easily to mind. The cluelessness of Fireman's witnesses as to the contents of

this sChedu~uld only be explained as non-credible, post-casualty, revisionism. The Court did

not believe a word of it. The application then schedules the properties themselves at Bates

numbered pages 001053 and 001054, just as the cover page indicates. There is no confusion.

3

20

Fireman's.

The application also indicates "NAMED INSURED: Triyar Group" which is not an

entity at all. Fireman's indecision as to who to list as named insured was justified as was its

interest in specificity, but Fireman's claim not to know of the single assets entities was not. The

indecision lead to several inquiries to the broker. The parties disagreed about whether the

inquiries went unanswered. Apparently Fireman's simply elected to show "T~W Group" as the(~

m2~)nan1ed insured in the 2006 policy without other input. Paul Walker of ~nan's, not knowing

~what to do with "a1l the other entities," decided after the policy ~~und to "Please just go

with Triyar Companies LLC for now." Exhibit 25 (emphasis~~. That either Triyar Group

or Triyar Companies LLC was just a placeholder name is t~~ade very clear.~

Brian Klepchick's affidavit testimony supports t~ourt's view of what happened. The<t::)}'1"!Court believes his affidavit testimony that "In 200~~iyarCompanies, LLC applied for property

insurance from FFIC asking that SJM Realtx&~ ("SJM") and GPM Houston Properties, Ltd. S~~·

("GI'M") be included in the proposed 20~07 policy as additional insureds." His following

sentence in his Affidavit, "Such 200~~est was not accepted by FFIC," weighed very heavily\~

on the Court in its prior rulings\~ was noticed by the Court. Mr. Kelpchick recanted this

testimony in the hearing wit~""1roviding any reason behind the change other than to call it antFP

error. The Court belie.xWihe change simply met the current legal narrative being urged byi~

.~(Qr

~There~UCh testimony which centered around which party had a duty to get the name

right. cert~ both parties had their own reasoning for getting it right, and both were sloppy

not to do so. This case is not about legal duty; it is about whether the evidence reflects an

agreement. As set out herein, the parties chose to have the policies say what they say. When

Plaintiffs saw over the years that the named insureds were not listed individually, they were

4

21

simply seeing a policy which said what they thought the parties agreed it would say. There was

no reason for Plaintiffs to advise Fireman's of a problem. See Defendant's Exhibit 22, for

example.

When the 2007 and 2008 policies listed Triyar Companies, LLC as named insured, that

name was no less a placeholder than was Triyar Group in 2006. Exhibit~ states. Triyar®1

Companies, LLC also had no insurable interest in the various prope~ and, according to

~Defendant, should not have been the name on the policy. That Tri~~Ceompanies, LLC was or

~'d~~~?)was not a legal entity, or later changed its name, or transferr~~ assets, or not, is hardly the

point. The point is that the parties used the name as a Placeh~r for someone else.

~~Defendant's belief that any entity named Tri~~ed any portion of Greenspoint Mall

or San Jacinto Mall was not reasonable and hadollf1te to no basis in the evidence. Defendantf0er

knew or should have known that the owne~re GPM Houston Properties, Ltd. and SJM

Realty, Ltd., respectively. The 2006 ap~tion was clear enough on that point. Fireman'sr@

underwriters made minimal effort~~termine the aGtual owners of the malls despite their

sW~

, I

insistence that their-insured-mu. ve-an--insur~ble-cillterest-.P'ir~man'-s--wi.tnesses-advised-.fue------

Court of their due diligen:~ ~, but seemed to operate with a Gonfirmation bias whiGh Gaused

them to view informati~~n~GritkallY. All Fireman's had to do is look up title or ask for proof":@j

of title. The faG~~he names on the poliGies do not matGh the names on the appliGations,

m~ .whiGh do not ~"" the names on the proposals, undermine Fireman's reGent protestations. If

Fireman's ~undear they would not have issued the polky. That the issued the polky leads

the Court to believe either that they were dear, or dear enough.

The Court is therefore left to Gondude that the policies refleGt exaGtly what the parties

intended sinGe the parties dearly intended to enter into the insuranGe GontraGts at issue. Under a

5

22

time crunch to bind insurance by June 30, 2006, and having a good and long relationship with

the broker (Penn) with whom Fireman's could sort out the details later, Fireman's issued a policy

with Triyar Group as named insured in 2006 intending to later replace that with the names of the

actual owners. Having no duty to make a proposal or bind coverage, it was Fireman's who made

the decision. Calling the named insured "Triyar Companies LLC" in the 200'fui'n>! 2008 policies@}"'Jw

changes nothing. Fireman's underwriters appear to have simply carried~d prior work and,~

as in 2006, paid little attention to the named insured. Their testim;-.a:'Aelating to the absolute~r

importance of getting the named insured right made comO'@;;Jj;ense to the Court. Why

Fireman's ignored their standards made no sense, but appe~r-~ have happened.J?The Court finds the parties had an actual .~-~to contract between the insuranceQW!1

company and the actual owners of the propertie~hoever they were. The Court therefore~'"

reforms the 2008 policy to so reflect. This r~~tion does not impact a single provision of the

policy itself, which is highly regulated. It~ges only the entity that is "named insured" so that

the policy uses of"You" and other~terms now refer to GPM and 8JM.

Having found facts in sQort of reformation as outlined above, the Court need not

address waiver or estoppel..~ Court finds no fraud on the part of Fireman's which would!F~

justifY the result set out@'WJs Order and Findings. .¢Wl

IT IS SO~~ERED.

SIGN~ the 9 day of , 2013.

~

FILEDChris DanielDistrict Clerk

AUG 09 2013

6

23

0~/23/2a13 14:22 7133686820

CAUSE NO. 2010-47654

PAGE 02

FIREMEN'S FUND INSURANCECOMPANY

GPM HOUSTON PROPERTIES,LTD., et al.

vs

§ IN THE DISTRICT COURT OF§§§§ HARRIS COUNTY, TEXAS§§§§§ 55TH JUDICIAL DISTRICT

NOTICE OF HEARING

An evidentiary hearing on Defendant's Plea to the Jurisdiction will be held commencing

at 9:00 a.m. on July 26, 2013. The parties may submit exhibits, deposition excerpts and briefing,

as they choose, at any time prior to the commencement oflive testimony on the 26th•

In this hearing the Court will be guided by Texas Department 0/ Parks and Wildlife v.

Miranda, 133 S.W.3d 217, 226-228 (Tex. 2004). The Miranda caSe related to subject mlltter

jurisdiction rather than standing, but the Miranda Court's reasoning applies here. The Miranda

Court recognized that "in some cases, disputed evidence ofjurisdictional facts that also implicate

the merits of the case may require resolution by the finder of fact." [d. at 226. Citing other cases

with approval, the court recognh;ed that "predicate facts" can be so inextricably linked to the

merits that the court may defer resolution of the issue until trial. That inquiry is based upon

whether ''the jurisdictional issue is inextricably bound to the merits of the case."

This begs the question ofwbat are the merits of the Plaintiffs'case. Plaintiffs have argued

often to this Court that their case is about a casualty loss caused by Hurricane Ike, and not issues

relating to the insurance contract. "In this case," stated the Miranda court, "we address a plea to

the jurisdiction in which undisputed evidence implicates both the subject matter jurisdiction of

the court and the merits of the case." [d. at 226. Similarly, this Court is being asked to address a

JUL-23-2013 15:27 7133686820 P.002

24

07/23/2013 14:22•7133686820 PAGE 03

standing issue which may implicate the SUbject matter of Plaintiff's case. It is not clear that

Defendant's standing issue is inextricably linked to Plaintiffs' Ike case. That the insurance

policy is involved in both does not necessarily make the plea and the Ike claim inextricable.

According to Miranda, this Court exercises its discretion in deciding whether the

jurisdictional determination (or standing, in this case) should be made at a preliminary hearing or

await a lUller development of the case. Exercising this discretion, the Court is ordtlling the July

26 hearing. The evidence is "by affidavits or otherwise." Live testimony is included within

'·otherwise."

Plaintiff has offered case law which stands for the proposition that standing is not

jurisdictional; that is, Defendant's standing issue does not affect the court's power to make a

legal decision or enter a judgment. This concept is not in dispute. Defendant's iSSlile is whether

Plaintiffs may go forward, not whether the Court may. That Defendant's pleading is correctly

called a plea to the jurisdiction is merely semantically contusing. Plaintiffs' cases do not change

Miranda. This Court sees no controlling decisions from Houston's First or Fourteenth Court of

Appeals.

What Miranda addresses as none of Plaintiffs' cases do, is what procedure to follow

when a plea and the merits might overlap. It is a question of law whether the plea and the merits

overlap. Thus, giving Miranda a reasonable extension to a case where standing is at issue and

the standing issue relates to but may not be inextricably tied to the underlying claim, the three

tiered "decision tree" articulated by Defendants emerges: First, if there is no material issue of

fact or otherwise the issue can be decided as a matter of law, the inquiry ends and the Court rules

on the plea. Second, if there is a genuine issue of material fact the court must decide whether the

standing challenge inextricably implicates the merits of the Hurricane Ike case. If the merits of

2

JUL-23-2013 15:27 7133686820 99~ P.003

25

07/23/2013 14:22• 7133686820 PAGE 04

the two are not inextricably implicated, then the Court will determine the plea as a fact finder.

Third, ifthe merits of the Ike case are inextricably implicated then the standing issue will be tried

to the jury in the Ike claim case and the Court will have made no ruling other than to let the case

proceed.

IT IS SO ORDERED.

SIGNED on the 23 day of-J~

3

,2013,

71336e6e20 1'.004

26

HON. NANCY K. JOHNSON

UNITED STATES MAGISTRATE JUDGE

SOUTHERN DISTRICT OF TEXAS

SELECTED

INSURANCE OPINIONS

27

Continental Cas. Co. v. Consolidated Graphics, Inc., 656 F.Supp.2d 650 (2009)

West Headnotes (9)

111 Contracts~ Language of Instrument

Under Texas law, terms in contracts are giventheir plain, ordinary, and generally aceepted

meaning unless contract itself shows thatpal1icular definitions are used to replace thatmeaning.

656 F.Supp.2d 650United States District Court,

S.D. Texas,Houston Division.

CONflNENTAL CASUAI,TY COMPANY, Plaintiff,

v.CONSOLIDATED GRAPHICS, INC.; Thousand

Oaks Printing & Specialties, Inc. d/b/a T/O Printing,

and Daniel Chambers, an Individual, Defendants,

Sentry Insmance, a Mutnal Company, Intervenor,

v.Consolidated Graphics, Inc., Thousand Oaks

Plinting & Specialties Inc. d/b/a T/O Printing,

and Daniel Chambers, an Individual, Defendants.

Civil Action No. 4:08-CV

02383. I Aug. 28, 2009.

Synopsis

Background: Excess commercial gencral liability (CGL)

insurer sought declaratory judgment of no duty to defend

or indemnify insured printing company, pursuant to excessCOL policy's advertising injury coverage provision, againstcompetitor's action alleging misappropriation oftrade secrets,unfair business practices lind other torts. Primary CGL insurerintervened. Insurers moved for summary judgment, andinsured cross-moved for partial summary judgment againstprimary CGL insurer.

Holdings: The District Court, Nancy K. Johnson, UnitedStates Magistrate Judge, held that:

[1] competitor's pricing information, including infonnationabout past product promotions. potentially constituted"advertising idea," but

[2] competitor's claim of misappropriation of its pncmg

strategy in order "to solicit" was not within advcliising injuryprovision, given lack of implication of wide dissemination.

Insurerst.mptions bTfanted.

[2]

13]

[41

Cases that cite this headnote

Contracts4f-w Application to Contracts in General

Contracts

*"" Existence of ambiguity

Under Texas law, when contract, as written, canbe given definite or certain legal meaning, thenit is unambiguous as a matter of law, and courtenforces it as written.


Insurance~ Exclusions, exceptions or limitations

Under Texas law, if insurance contractprovision, particularly an exclusionary clause,is susceptible to more than one reasonableinterpretation, court must resolve ambiguityin .favor of insured; insured's reasonableconstruction of exclusionary provision must beadopted even if insurerts construction is morereasonable.


Insurance'iF' Pleadings

Under Texas law, court applying eight-comersrule in order to determine liability insurer'sduty to defend considers factual allegations ofunderlying complaint in light of insurance policywithout regard to allegations! truth or falsity.

1 Cases that cite this headnote

28

(5]

16]

Insurance"'" Pleadings

Under Texas law, court applying cight,cornersrule in order to determine liability insurer's dutyto defend interprets allegations of underlyingcomplaint liberally and resolves all doubt.

regarding duty to defend in fawr of insured.

I Cases that cite this headnote

Insurance<fi.j.'W Pleadings

Under Texas law, liability insurer is requiredto defend its insured against suit as long asallegation$ of underlying complaint potentiallygive rise to at least one claim covered byinsurance policy.


191

2 Cases that cite this headnote

Insurtln£C~ Advertising Injury

InsuranceiP Misappropriation

Under Texas law, printing company's claimthat insured competitor had misappropriatedcompany's business history and pricing strategyin order "to solicit and misappropriate"company's customers was not within advertisinginjury coverage provisions of commercialgeneral liability (CGL) insurance policies, whichcovered use 01' misappropriation of another'sadvertising idea in insured's advertisement, andwhich defined advertisement as OInotice that isbroadcast or published to the general publicor specific m;lrket segments"; solicitation ofcustomers did not imply wide dissemination.

(7]

[S]

Jnsurancc~ Matters beyond ple'ldings

Under Texas law, court determining liabilityinsurer's duty to defend may not read facts intounderlying pleadings, look outside pleadings,or imagine factual scenarios that might triggercoverage.

I Cases that cite this headnote

Insurance""' Advertising Injwy

!Jnder Texas law as predicted by federal districtcourt, printing compl.lny's pricing information,including information about Hpromotionsgiven," potentially constituted "advertisingidea"under advertising injul'Y coverage provisionsof competitor's commercial general liability(CGL) insurance policies, which covered use ormisappropriation of another1s a.dvertising idea ininsured's advertising; promotions given, if notmere histoJical sales records, could constitutemethod of gaining customers or increasingsales, and in tunl confidential informationabout promotions given could be consideredadvertising idea.

2 Cases that ci tc this headnote

Attorneys and Law Firms

*652 John Charles Tollefson, Stephen A. Melendi,Tollefson Bmdley et aI., Dallas, TX, for Plaintiff.

Kathleen Hopkins Alsina, Phelps Dunbar LLP, Houston, TX,Usa Martin Lampkin. Selman Breitman, Los Angeles, CA,for Intervenor.

Richard Paul Colquitt, Fulhright & Jaworski, Houston, TX,

lor Defendants.

Opinion

MEMORANDUM OPINION

NANCY K. JOHNSON, United States Magistrate Judge.

Pending before the court I is the Motion for SummaryJudgment (Docket Entry No. 27) tiled by PlaintiffContinentalCasualty Company ("Continental"), the Motion for SummaryJudgment (Doeket Entry No. 43) tiled hy Intervenor Sentrylnsurance, a Mutual Company ("Sentry"), and the Cross~

Motion for Partial Summary Judgment against Sentry(Docket Entry No. 47) tiled by Defendants Consolidated

29

Continental Ca•. Co. v. Consolidated Graphics. Inc.• 656 F.Supp.2d 650 (2009)

Graphics, Inc. ("CGX"), Thousand Oaks Printing Specialties,Inc. dlbla TID Printing ("TID Printing"), and DanielChambers ("Chambers"). The court has considered themotions, all relevant filings, and the applicable law. For thereasons set forth below, the court GRANTS Continental'sMotion for Summary Judgment, GRANTS Sentry's Motionfor Summary Judgment and DENIES Defendants' CrossMotiou for Summary Judgment.

The parties consented to proceed before the undersignedn1llgistrate judge for all proceedings, including trial andfinal judgment, pursuant to 28 U.s.C. § 636(c) andFederal Rule of Civil Procedure 73, Docket EntlY Nos,2,20.

implicates Continental's CQverag~, because the courtfinds that there is no lOadvcrtising injury" under thelanguage of either policy.

*653 A~ The b ..urollce Policies

1. Continental's PolicyContinental is a liability insurer that issued two conseeutivepolicies of excess umbrella liability insurance to CGX witheffective dates October 1. 2005, to April 1,2007, and April

1,2007, to April I. 2008. (th~ "Continental policy"). R For

the purposes of this action, the language of the policies iseffectively the same.

I. Case Background

This is a dispute over insurance coverage. Continental

issued two excess liability insurance policies to CGX. 2

Sentry issued two primary cQmmercial gell~ral liability

("CGL") policies to CGX. 3 CGX is a Texas eOl'poration, and

Defendant TID Printing is its subsidiaty based in California, 4

Chambers is an individual claiming coverage under the

policies. 5 This case involves a request for declaratoryjudgment whether Continental and Sentry (hereinafter "theInsure,,") have duties to defend and indemnitY CGX against alawsuit brought by a competitor for misappropriation oftrade

secrets. 6 Because the Insurers' policies have similar languagewith respect to the duties to defend and indemnitY, this court

will discuss both motions conCUlTently. 7

8

10 [d. at p. S.

Under the telms of the policy, Continental is requiredto pay on behalf of the insured sums in excess of thescheduled underlying insurance that the insured becomesiegally obligated to pay as a result of any "personal and

advertising injury" covered by the policy. 11 The policy

applies to "Personal and Advertising Injury" caused by oneor both of the following enumerated offCl1ses, among others:

9

Pl.'s Mot. Summ. J., Docket Entry No. 27, p. I.

Continental's policy provides excess umbrella liability

coverage over primary liability insurance issued by Sentry. 9It provides two types of coverage: I) "bodily injury"and "property damage" and 2) "personal and advertising

injury," 10 Here, COX claims coverage for "personal andadvertising" injury.

Pt.'s Mot. Summ. J.. Docket Entry No. 27. p. 1.2

3

4

Intervenor's Mot. Summ, 1, Docket Entry No. 43, p. 2.

Pl.'s Mot. Summ. 1, Docket Entry No. 27, p. I.

11 PL's Mot.Summ. l, Docket Entry No. 10, Ex. 3.Continental's Insurance Policy, p. CICOI27.

~~Advertisement" ... a notice that is broadcast or publishedto the general public 01' specific market segments about

g. The use of another's advertising idea in your~'adveltisement;"

12

h. Infringing upon another's copyright, trade dress or

slogan in your "advertisement;" 12

ld. at CIC013 J.

Additionally, the policy defines "advertisement" as follows:

[d.

[d.

CGX has raised the issue that Continental lacks summaryjudgment proof to detennine its duty la defend andindemnify because Continental, whose policy coveragerelates to Sentry's scheduled underlying insurance, hasnot presented evidence regardi!1g whether the Sentrycoverage is implicated by the Rudamac suit. Because thecourl is detennining Continental's and Senuy's coveragesimultaneously, this point is moot. This court does notneed to reach the issue of whether Sentry's coverage

7

6

5

30


!d. atc;ICOJ29.

your goods, products or services for the purpose of

attracting customers or supporters .... 13

PL', Mot. Sunun. l, Docket No. 27, Ex. ), RudamacComplaint, p. CICOOOl.

Id,

The allegations that gave rise to the Rudamac suit are asfollows. Daniel Chambers ("Chambers"), the nephew of

Rudamac's owner and president, began his employment with

Rudamac nine years ago. 2\ \Vhen Chambers was refused anownership inte1'est in the company, he implemented a plan tomove a substantial. amount of Rudamac1s business to COX

and join the company as an employee. 22 Rudamac alleged in

its compiaint that Chambers "solicited customers" for CGX

during his employment and "in doing so, misappropriatedRudamac's trade secrets, customers and other valuable

proprietary information." 23 Specifically, Rudamac stated

that tbe misappropriated information included:

19

20

B. The Underlying Litigation (the "Rudamae suit")

On May 4, 2007, Rudamac, Inc. ("Rudamac"), a California

based printing company, med a complaint against CGX

in Califomia (hereinafter "the Rudamaccomplaint" or lithe

complaint"). 19 Tbe claims have been litigated in a lawsuit

styled Rudamac, Inc. v. Daniel Chambers, el ai" Cause No.

BC370594, Superior Court of the State of California, County

of Los Angeles ("the underlying case" or "the Rudamac

suit"). 20

Intervenor's Mot. Summ. 1., Docket Entry No, 43, Ex. 3,Sentry Policy p. 1 (unnumbered); Ex. 4, Sentry Policy,p. I (unnumbered).

16

Jd.. Ex:. 3, Sentry's Insurance Policy, pp. 001-007 of022;

Ex. 4. Sentry's Insurance Policy, pp. 001-007 of 022.

Coverage B of the Sentry policy provides that Sentry will

pay those sums that CGX becomes legally obligated to pay as

damages because of "advertising injuty" and has the duty to

defend any suit seeking those damages. 16

15

14

ld., Ex. 3, Sentry's Insurance Policy. pp. 006-007 of022;

Ex. 4. Sentry's Insurance Policy, pp. 00&.,007 of 022.

*654 Tbe Sentry policy's duty to defend/indemnify

speeifically applies to:

13

2, Sentry's Poliey

Sentry is a liability insurer that issued two primary CGL

policies to CGX effective frotn April 1, 2007, to April

1, 2008, (collectively, the "Sentry policy"). 14 11,e Sentry

poliey provides eoverage in two parts: 1) Coverage A for

"bodily injuty" or "property damage" and 2) Coverage B for

"adverti!:;ing injury." 15 Coverage A is not at issue here.

(2) "Advertising injury" caused by an

offense committed in the course ofadvertising your goods, .products, or

services; I?

21

22

23

Pl.'s Mol. Summ. J., Docket No. 27, p. 6.

Pl.'s Mot. Summ. J., Docket No, 27, Ex. 1. Rudamac

Complaint, p. CIC0002., to-17.

ld. at CIC0006,' to-l4.

17 ld.. Ex. 3, Sentry1s Insurance Policy, p. 007 of 022; Ex.4, Sentry's Insurance Policy, p. 007 of 022.

The Sentry policy sets out a list of enumerated offenses that

constitute advertising injuries. Relevant to this case is anadvertising injury arising out of ...

price information, including private data regardingthe competitive pricing of the products, protit margin,particularized pricing information such as mark \lPS,discounts, or other promotions given; terms of sale ...; and

cost information." 24

18

Rudamac alleged that this infonnation allowed CGX, among

other things, to HsoBcit customers and suppliers for neworders" and that its trade secrets were valuable to acompetitorbecause they could H use this information to ... leam how

to contact suppliers and customers:,25 All of Rudamac'strade secrets. the complaint alleged, were kept on a secured

c. Misappropriation of advertising

ideas or style of doing business; 18

Id., Ex. 3, Sentry's Insurance Policy, p. 016 of 022; Ex.4. Sentry's Insurance Policy. p. 016 of 022.

The Seiltry policy does not define the tern> "advertising."

24 ld. at CIC00007.' 15-21.

31

Continental Cas. Co. v. Consolidated Graphics, Inc., 656 F.Supp.2d 650 (2009)_._'~_~'__""_'~""~__,,_~,,~~~_<__",,,w~~._~__.__._~_"•.-__.w.,_·,_·."~. ,,_~~_~__,_,"."__.~,_ ", _, _"~"~"_·.W'~'"_'.W~'''_" '_''''' '_""" __'_""_',,,W ,",.'"_

and password-protected computer network, and, throughout

Chambers' employment, COX was aware of and understood

the confidential and proprietary nature of the infoonation. 26

III. Applicable Law

Brown v. City .of Houslon. Tex., 337 F.3d 539, 540-41

(5th Cir.2003). The movant must infoon the court of the

basis for the summary judgment motion and must point to

relevat'lt excerpts from pleadings. depositions. answers to

interrogatories, admissions, Of affidavits that demonstrate theabsence of genuine factual issues. Celolex Corp., 477 U.S.

at 323, 106 S.Ct. 2548; Topalian v. Ehrman. 954 F.2d 1125,

1131 (5tll Cil'.1992). If the moving plll1y meets its burdeu,

the nonmoving party must then go beyond the pleadings

and produce competent evidence that establishes each of the

challenged elements of the case, and which demonstratesthat genuine issues of material fact do exist which must beresolved at trial. Celotex, 477 U.S. at 324, 106 S.Ct. 2548.

A material fact is a fact that is identified by applicablesubstantive law ~s critical to the outcome ofthe suit. Anderson

v. Uberty Lobby, Inc.. 477 U.S. 242, 248, J06 S.C!. 2505,

91 L.Ed.2d 202 (1986). To he genuine, the dispute regarding

a material ract must be supported by evidence such that a

reasonable jury could resolve the issue in favor ofeither party.Id. at 250, 106 S.Ct. 2505. When considering the evidence,

"[d]oubts are to be resolved in favor of the nonmoving party,

and any reasonable inferences are to be drawn in favor ofthat party." Evans v. City (ifHouston, 246 F.3d 344, 348 (5th

Clf.2001).

Id. at C1C00009, ~ 3-4.

Id. at C1COOOI.

26

27

28

25

/d. atCJCOOOI2,~ 1-4.

Rudamac pled the following counts against COX: I)l'l'lisappropriation oftrade secrets; 2) unfair business practices;3) intentional interference with prospective economicadvantage; 4) breach of fiduciary duty; 5) constructive tmst;

6) unjust enrichment; 7) a demand for accounting; and 8)

intentional interference with at will employment relations. 28

Trial was held in this matter on December 9, 2008, and verdict

was entered on February 2, 2009. 29 The judgment found,

based on the jury's verdict, that CGX committed three torts:

interference with economic relations, breach of fiduciary

duty. and misappropriation of trade secrets. 30

Id. at C1C00007, ~ 28.

Based upon the facts of the case, Rudamac alleged that COX

"utilized [Rudamac's] *655 successful business history and

pricing strategy to solicit and misappropriate customers and

trade secrets." 27

As this declaratory action is in federal court under diversityjurisdiction. state law governs substantive matters. Erie R.R.v. Tompkins. 304 U.S. 64, 78, 58 S.Ct. 817, 82 L.Ed. 1188

(1938). Because Texas is the forum state in this matter, the

court applies Texas' choice of law rules. Gual'. NatlfIns. Co.v. Azrock Indus., 21 J F.3d 239, 243 (5th Cir.2000) (citing

Klaxon Co. v. Stelltof' Elee. Mfg. Co.. 313 U.S. 487, 496, 61

S.Ct. 1020,85 L.Ed. 1477 (1941) *656 and stating that a

federal district court sitting in diversity must apply the forum

state's conflict of laws rules).

PI,'sSecQnd SuppJ~m~nt to Mot. Summ. J., Docket EntryNo. 37, p. I.

30

29

ld., Ex. 1, Judgment, Rudamac suit.

As a result, Rudamac was awarded $5,698,000 in damages

and, due to ti,e findings of willful, malicious, oppressive,

and fraudulent conduct, the jury awarded punitive damages

against Thousand Oaks Printing for $1,500,000 and against

CGX for $6,647, 000. 31

Summmy judgment is warranted when the evidence revealsthat no genuine dispute exists regarding any material factand the moving party is entitled to judgment as a matter

of law. Fed.R.Civ.P. 56(e); CelOlex Corp. v. Calrell, 477U.S. 317, 322, 106 S.C!. 2548, 91 L.Ed.2d 265 (1986);

31 Id. at p. 8.

II. Snmmary Judgment Standard

Any insurance policy payable to a "citizen or inhabitant" ofTexas by an insurance company doing business in Texas isheld to be governed by Texas law regardless of where the

contract was executed or where the premiums arc paid. Tex.Ins.Code art. 21.42. Continental does business in Texas, andthe named Insured 011 the policy, CGX, is a Texas corporation.

Thus, Texas substantive law applies. The parties agree that

Texas law applies to the interpretation ofthe policies. 32

"_~'._.__"W""'''"''~~ .~_' ~'_'M.•._"~._,~_.~_"_~M_.~" ~." ~"...~._ ".".~_._~_~_.~_ ~_~_~"_~.~'_.'_'."._. __

\\I:estld\vNexr [L:!- 11";oi\,:;(;'(; F;8ut~~fS ;~G C:D!(i'

32

Continenlal Cas. Co. v. Consolidated Graphics, Inc., 656 F.Supp.2d 650 (200~)

A. Burden of Proof and Contract Interpretation

In gelleral. the insured bears the initial burden of e,tabli,hing

that there is coverage under an applicable insurance policy,while it is the insurer's burden to prove the applicability ofan

exclusion pennitting it to deny coverage. Lincoln Gen. Ins.Co. v. Reyna, 401 F.3d 347, 350 (5th Cir.2005) (applying

Texas law and pladng burden on insurer to demonstratethat the only reasonable interpretation supports exclusion);

Venture EllcodillgServ., Illc. v. At!. Mut. Ills. Co.. 107 S.W.3d

729, 733 (Tex.App.-Fort Worth 2003, pet, denied) (stating

that the Texas Insurance Codc places the burden on the insurer

to prove any exception to coverage); see also Tex. Ins.CodeAnn. § 554.002 (placing the burden on the insurer to prove

the applicability of a coverage exclusion). If the insurer issuccessful, the burden shifts back to the insured to prove thatan exception to the exclusion applies. Guar. Nat 'I Ins. Co.v. Vic Mfg. Co., 143 F.3d 192, 193 (5th eir. 1998) (applying

Texas law).

(11 Under Texas law, insurance policies are subject to the

rules of contract interpretation. AZl'oek Indus., 211 F.3d at

243; Progressive COUllty Mut. IllS. Co. l'. Sink, 107 S.W.3d

547, 551 (Tex.2003). In construing the terms of a contract,

the court's primary purpose is always to ascertain the trueintent of the parties as expressed in the written instrument.Mid-Century Tlls. Co. of Tex. v. Lindsey, 997 S.W.2d 153,

158 (Tex.1999); Nat'l Union Fire Ins. Co. of Pittsburgh,Pa. v. CHI Indus.. 907 S.W.2d 517, 520 (Tex.1995). To this

end, the court reads all provisions within the contract as awhole and gives effect to each tenn so that no part of the

agreement is left without meaning. MCI Telecomms. Cmp.

v. Te"" Utils. Elee. Co" 995 S.W.2d 647, 652 (Tex.1999);

see also Provident Life & Accident Ins. Co. v. Knott. 128S.W.3d 21 I, 216 (Tcx.2003) (warning the court to "exercise

caution not to isolate particular sections or provisions fromthe contract as a whole"). Tenns in contracts are given theirplain, Ol;dinary, and generally accepted meaning unless thecontract itself shows that particular definitions· are used toreplace that meaning. Bituminous Cas. Corp, v. Maxey, 110S.W.3d 203,208-09 (Tcx.App.-Houston [1st Dist,) 2003, pet.

denied) (citing W Reserve Life Ins. v. Meadows, 152 Tex.559,261 S,W.2d 554, 557 (1953)).

32 PI.', Mot. Summ. J., Docket Entl)' No. 27, p. 3;Intervenor's Mot. Summ. J.,·Oocket Entry No; 43. p. 8;See Def.'s Response, Docket Entry No. 28, (citing Texaslaw).

(21 131 When a contract, as written, can be given "a

definite or certain legal meaning," then it is unambi&,'Uousas a matter of law and the court enforces it as written.CBI IlIdu"., 907 S.W.2d at 520. If, however, a contract

provision. particularly an exclusionary clause, is susceptibleto morc than one reasonable interpretation, the court mustresolve the ambiguity in favor of the insurcd. Sillk, 107S.W.3d at 551; see also Mid-Continent Cas. Co. v. Swift

'657 Energy Co., 206 F.3d 487, 491 (5th Cir.2000)

(HIn Texas, when an insurance policy is ambiguous orinconsistent, the. const11lction that would afford coverageto the insured must govern."). In fact, if the insured'sconstruction of an exclusionctry provision is reasonable,it must be adopted, even if the insurer's constnlc\ion ismore reasonable, BolandrolJ v. Sq(eeo IllS. Co. ofAlii., 972S.W.2d 738, 741 (Tex. 1998). The court will not find a

contract ambiguous, however, merely because the partiesadvance conflicting interpretations. Kelley-Coppedge, lnc. v.Highlallds Tlls. Co., 980 S.W.2d 462, 465 (Tex, 1998).

B. Duty to Defend

In Texas, an insurer1s duty to defend and duty to indemnifyare two distinct and separate duties. Trinity Universal/ns. Co.

v. Cowall. 945 S.W,2d 819, 821-22 (Tex. 1997). Under the

Ueight·comers" or ucomplaint allegation" rule, an insurer'sduty to defend its insured arises if the complaint in thesuit against the insured alleges facts that potentially support

claims for which there is coverage. Nat'[ Union Fire Ins. Co.q( Pittsburgh, Pa, v, Merchs. Fost Motor Lilies, Ille" 939S.W.2d 139, 141 (Tex. 1997). In detennining whether this

duty exists, the court1s only job is to compare the four cornersof the pleading with the four corners ofthe insurance policy.

Reyna, 401 F.3d at 350; see alsa Merehs. Fast Mator Lines,Tile., 939 S.W.2d at 141.

(41 [51 [61 (7] When applying Ihe eight-corners rule, the

court considcl'S the factual al1egatJons in light ofthe insurancepolicy without regard to their tl11th or falsity. See ArgonautSw. Tlls. Ca. v. Maupill, 500 S.W.2d 633.635 (Tex.1973).

The eourt interprets the allegations liberally and resolves all

doubts regarding the duty to defend in favor of the insured.Merchs. Fast Motor Lines, Ille.. 939 S,W.2d at 141, Aninsurer is required to defend its insured against suit as longas the allegations potentially give rise to at least one claimcovered by the insurance policy. Utica Nat'l IllS. Co. ofTe",.v. Am. Illdem. Co.. 141 S.W.3d 198,201 (Tex.2004) ("A

liability insurer is obligated to defend a suit ifthe facts alleged

in the pleadings would give rise to any claim within thecoverage of the policy."); see also Lafarge CO/po v. HaNford

33

Conllnenlal Ca•. Co. v. Consolldalad Graphics, Inc., 656 F.Supp,2d 650 (2009)

COX asserts that the Rudaraac suit alleges a cognizableadvertising injury beeause it contains allegations that fitone of the enumerated offenses in each policy: "g. the useof' ano'ther's advertising idea in your 'adv~rtisen'lcnt' .. (theContinental policy); and "c. Misappropriation of advertising

ideas or style of doing business" (the Sentry policy). 35

This ease involve, allegatioos that CGX sUITeptitiouslymisappropriated confidential' business information and theftutilized that information to solicit customers. Rudamacstated in, its complaint that its trade secrets include ilpriccinfol1l1ation. including private data regarding ." prolUotions

given." 36 Additionally, Rudamac stated that its trade secretsw01.dd be used to I'learn how to contact supplier:s and

customers," 37 From the totality of these statements, COXargues that "the Rudamac allegations reflect an allegedutilization of Rudamac's promotional information by [COX]

in their advertising to solicit customers generally," 38 Thus,according 10 COX, the allegations fall under "adveItisinginjury" as contemplated by thc policy.

Cas. Ins. Co., 61 F.3d 389, 393 (5th Cir.1995), disapproved

ill part on other groullds by Federated Mut. Ills .. Co. v.

Orapeville Excavatioll. Inc.• 241 F.3d 396, 398 n. 3 (5thCir.200n. ("Even if the plaintiff's complaint alleges multipleclaims or claims in the alternative, some ofwhich are coveredunder the policy and some ofwhich are not, the duty to dcfendarises if at least one of the claims in the complaint is faciallywithin the policy's coverage."). However, the court may notread facts into the pleadings, look outsidc the pleading"or imagine factual scenarios that might trigger coverage.Merchs. Fast Motor Lilies, Inc., 939 $.W.2d at 141.

C, Duty to Indemnify

The duty to indemnify arises only if the dury to defend firstexists. Am. States Ills. Co. v. Bailey, 133 F.3d 363, 368 (5th

Cir.1998) (applying Texas law and noting that "[I]ogic andcommon sense dictate that if there is no duty to defend, thenthere must he no dUty to indemnify"). Under Texas law,an insurer's duty to indemnitY is narrower than its duty todefend. St. poui Ins. Co. v. Tex. Dep't ofTransp.. 999 S.W.2d881, 884 (Tex.App.-Austin 1999, pct. dcnicd). The dury to

indemnify is triggercd only by the actual facts cstablishingthc insured's liability in the undcrlying litigation. Cowan. 945S.W.2d at 821. Accordingly, "an insurer mayhave a duty todefend but, event\lally, no duty to indemnify." Formers Tex.

"658 County Mut. Ins. Co. v. Oriffin, 955 S.W.2d 81, 82(Tex. I997).

35

36

37

Dcf.'s Response to PI.'s Mot. Summ. J., Docket Entry No,28, p. 6; Def.'s Response to Intervenor's Mot, Summ, J.,Docket Entry No. 47, p. 4.

Pl.', Mot. SUinm. J, Docke' Entry No. 27, Ex. 3,ContincntaPs Insurance Policy. p. CIC00007,'1 15-21.

Id. at CIC00009. ~ 3-4.

IV, AnalysIs

A."Advertising injury"

In its motion tor partial summary judgment, Continentaland Sentry argue that they have no dury to defend COXbecanse the claims of misappropriation of trade secrets donot fall under the provisions ofthe insurance policies relating

to "advertising injury,n33 Continental also advances theargument tbat, despite whether or not Rudamac has allegedall "advertising injury," the exclusions under "KnowingViolation of Rights of Others" and "Criminal Acts" bar

coverage. 34

38 Def.'s Response to Pl.'s Mot. Summ. J" Docket Entry No.2S. p. i.

For the court to find a cognizable advertising injury under theInsurers' policies, the underlying complaint must allege thatCGX used Rudamac's advertising idea 111 its advertisement orin the course of advertising. This requires a two~part inquiry.In order to find an advertising injury, the court must determinethat 1) the Rudamac complaint alleges an "advertising idea"and 2) the Rudamae complaint alleges that COX used thatidea in its advertisement.

1. "Advertising Idea"[8J First, the pricing information, including information

about past "promotions given," could be interpreted as anadvertising idea under both policies. The Insurers' policiesdo not define advertising idea, thus the· term will be givenits plain, ordinary, and generally accepted meaning. SeeBitu",inous Cas, Corp. v, Muxey. 110 S.W.3d 203, 208-09(Tex.App,-Houston [1st Dist.] 2003, pet. denied) (citing W.

PI.'s Mot. Summ. J., Docket Entry No. 27, p. 21-22.

Pl.'s Mot. Scmm. J., Docket Entry No. 27, p. t4-19;Intervenor's Mot. Summ, 1., Docket Entry No. 43, p. lO15.

33

34

34

Conllnental Cas. Co. v. Consolidated Graphics. Inc.• 656 F.Supp.2d 650 (2009)_,._.~._",_."",,~_.~,v_, __."~__,~~,_~~_~,~,,_._~~,•. _,,_.'_._~._,_."'_ .•_"".~"~ __••.•_._ .,_.__,__·__.•",_~,w__,._·,""~,",.w~_,·~'~.·».'.'_M·'",_"~,.',_," . . .~,_. .._,,,._.

COX claims that Rudamac alleged an adveltising injury in thefollowing paragraphs:

"42. [Rudamac] alleges ... that [Defendants] (a) utilized(Rudamae's] successful business history and pricingstrategy to solicit and misappropriate customers ... of

[Rudamacj." 40

the usc of promotiolJaI items such as logo pens or basebaUcaps. To a.ssume that these were merely lists rather thanpromotional strategies or ideas, would undermine this court'srequiroment to read the pleadings libcrally. Merch... FastMotor Lines, Inc., 939 S.W.ld at 142. Thercfore, the Insurers'arguments ~re unavailing.

2. Usc in Defendant's "ndvertisement" or "in the eourseof advertising"191 This court f1nds the Rudamac complaint alleges the

misappropriation of an advertising idea; however, that doesnot end thc inquiry. To cstablish an advertising injaryunder the terms of the Contincntal policy, the complaintmust allege that COX u$Od Rudamac's advertising ideasin its advertisement. Similarly, to establish an advertisinginjury under the Scntry policy, thc complaint must allegethat Defcndant used the advertising idea "in the course ofadvertising [its] goods. products, or setvices."

Pl.'s Mol. Summ. J.. Docket Entry No. 27. Ex. 1.Rudamac Complaint, p, CIC00012, ~ 1-4.

40

39 PI.'s Reply to Ocf.'s Response to Pl.'s Mot. Surnm. J.•

Docket Enny No. 29, p. 5.

The court must interpret policy provisions in favor of theinsured, provided that interpretation is not 'Unreasonable. NatllUnion Pire Ins. Co. v. Hud,mn Energy Co., 811 S.W.2d 552,555 (Tex.1991). Texas case law does not define "advel,isingidea," however cases from other jurisdictions can informthe court how Texas highest court would rulc. See StateFarm Fire & Ca". Co. v. Fullerton, 118 F,3d 374, 378 (5thCir.1997). From a review of the case law, an Uadvertisingidea" is an idea, ooncept. or method related to marketing andsales. Because ;;promotions given" is not further explainedin thc Rudamae complaint aud bccaus. promotion is def1nedas th. "furtherance of the '" sale of merl'handisc throughadvertising", it is reasonable '660 to interpret Rudamac'scomplaint as alleging a misappropriatiol1 of an advertisingidca.

The Fifth Cireuit and Texas' eourts have not spoken directlyto the definition ofan '659 advertising idea in COL policies,however, the Eleventh Circuit has defined an h£ldvertisingidea" as an i;idea or concept that is related to the promotion ofa produl't to the public." Hyman v. Nationwide Mut. Fire In•.Co.. 304 FJd 1179, 1188 (11th Cir.2002). Additionally, inthe Ninth Circuit case of Sentex Sy... Inc. v. Hariford Ace. &lndem. Co.. 93 F.3d 578, 580 (9th Cir.1996i,the court foundflO advertising idc.a where the misappropriated trade secretswere related to marketing and sales. Conversely, in Frog,Switch. Mfg. Co. v. Traveler. Ins. Co.. 193 F.3d 742, 748 (3rdCir. I999), thore was no advertising idea where the complaintdid not aliege any "medlOd[ ] ofgaining customers."

COX points to the language in Rudamac's complaintthat information regarding "promotions given" wasmisappropriated by Chambers, as all~ging a misappropriationof an advertising idea. According to Merriam-Webster'sCollegiate Dictionary, the word "promotion" means 1'".; 2.the act offurthering the growth or devclopment ofsomething;especially: thc furthcrance of the acceptance and sale ofmerchlll1dise through advertising, publicity, or discounting."Merriam-Webster'. Collegiate Dictionary, p. 994, (11thed.2007). Promotion, thcn, by its very def1nition, is a methodof gaining customers or increasing sales. Thus, confidentialinformation about promotions, in the general sense, can beconsidered advert.ising ideas.

Reserve Life Ins. v. Meadows, 152 Tex. 559, 261 S.W.2d 554,557 (1953)).

To rcfute COX's contention that Rudamac's infomlation~bout "promotions givenJO are advertising ideas, the Insurersrely on Gemini I/ls. Co, v. Andy Boyd Co.. 2006 WL 1195639(S.DTex. May 3, 2006) where the court held that customerlists were not advertising ideas but WCI'C mer~ly sales records.Similarly, the Insurers arb'11C that the "promotions given"in this context merely relate to historical records "of what'freebies' were given to Rudamac customers in the p~st" and

therefore, are not methods of gaining customers, 39 It is truethat historical salcs records are most likcly not advcrtisingideas, However, in the instant case,· it is impossible to discernfrom the face of the complaint whethcr tbc "promotionsgiven" refcrred to sales records or ifit referred to promotionali4eas about the 'immmer a product is promoted to the public."which constituted all advertising idea according to the Gemi"icourt. ld. at 7. It is as likely that the infonnution about"promotions given" contained ideas about how to enhancesales by giving discounts or draw public attention through

8

35


The question before the court remains whether the above

statement alleges that COX used Rudamac's advertising

ideas (Le., information about the "promotions given")

in an advertisement. The Continental policy defines

"advertisement" as a Hnotice that is broadcast or published

to the general public 01' specific market segments about

[the insured's] goods, products 01' services for the purpose

of attracting customers or SUPPol'ters,Il41 Thus, this issueturns on how COX used the information and, ultimately

this hinges 011 whether soliciting or targeting customers is

"advertisement" under the policies. The court finds that it is

not.

The linchpin of what constitutc' "advertis~ment" 01'

\Iadvertlsil1gl0 under a commercial liability policy is that the

alleg~d conduct must be widcly disseminated to the g~n~ral

public, See Smarifoods, Inc, y, Northbrook Prop. & Cas.Co., 35 Mass,App,Ct, 239, 618 N,E,2d 1365 (1993) (finding

no duty to defend insured for soliciting distribulors by mail

because the obj~ctive ofadvertising is the wide diss~millation

Qfinfonnation); Am. States fns.Co. v. Vortherms,5 S.W.3d

538, 542 (Mo,Ct.App.1999) (affirming no dnty to defend

based on numerous cases that held that ladvCl1ising' involvesthe widespread distribution of promotional material to the

public at large).

It fbllows from the relevant case law as well as th~ generally

accepted meaning of "advertisement" as a hnotice that

is broadcast to the general public," that the solicitation

and misappropriation of a competitor1s customers is not

advertising under the Insurerst policies. There is no evidencefrom the Rudamae complaint that COX broadcast anytbing

to the public at large, Rath~r, th~ complaint supports the

notion that COX's solicitation consisted of direct contactwith Rudamacts customers in order to lure them away from

Def,'s Rt?sponse to Pl.'s Mot. Sumrn. J., Docket Entry No.Z8, p, 7,

"661 Altbough the T~xas Supr~m~ Court and its app~lIate

courts have not spoken directly 011 this iSS1.IC, a myriad of

other state courts and federal circuits have discussed the issueof whether soliciting customers constitutes advertising. In

Hameid y, Nat'/ Fire IllS" 31 CalAth 16, 29, 1 CaI.Rpu·,3d

401, 71 PJd 761 (CaI.2003), ti,e court did not eon,id~r

it advertising where a former employee stole a salon's

eustom~r list and solicited its customers. The conduct in that

particular Case involved making telephone calls and sending

direct mailers to plaintiffs customers advising them of the

dcfendant's lower price,. Id, Similarly, thc Vermonl Supr~U1e

Court held tbat defining advertising to include customer

solicitations would stretch the meaning of advertising too

far. Selec:t Design, Ltd. v. Union Mut. Fire Ins., 165 Vt. 69,

674 A,2d 798, 801~803 (1996). From a policy persp~ctive,

if contacting potential customers were to be consideredadvertising nnder the policy, almost any dispute rclated to

economic competition would be covered by the "advertising

injury" provision, See tel. at 803, The Maryland Court of

Special Appeals has ev~n gone .s far as to say that advertising

and solidtation arc mutually exclusive, 'lthe·difference beingthat advertising must be of a public nature." Monumental LifeIns, Co. v, U.S. Fidelity & Guarallty Co,. 94 Md,App. 50S,

617 A.2d 1163,1173 (Md,Ct.Spec.App.1993),

43

PI.'s Mot. Summ, 1., Doekat Entry No, 27, p. 14.

41

42

PI.', Mot. Summ. J., Ex, 3, CICOOI29, In the interestof simplicity. this court treats 'Iadvcrtiscment" and "in

the course of advertising" the same. This court adoptsthe definition of "advertisement" in the Continental

policy as the definition of "advcltising" in the Setltt)'

policy. This court interprets advertising as contemplatingthe public or widespread dissemination of material.

Although not specifically addressed in Texas case law,the trend iu other states is the acceptance of a similardefinition in CGL policies. See Selec:t Design, Ltd. v.Union Mut. Fire IllS., 165 Vt. 69, 674 A.2d 798, 801

803 (1996) (discussing cases in various states suggestingthat the "majority view" interprets advertising as thewidespread distribution of promotional material to thepublic at large); ~}ee also Fox Chem. Co. v. Great Am,

IllS, Co" 264 N.W.2d 385, 386 (Minn.1978) ('tatingterm I'advcrtiliing" contemplates t,ublic or widcapreaddistribution of material), Additionally, the InsuranceService, Om.e (ISO), which dralls the standard CqLinsurance policies, defines "advertising" using the samelanguage in the Continental Policy. See Hamf!id. v. Nat'lFire lllS" 31 CaL4th 16, 24n, 3, 1 CaLRptrJd 401. 71P,3d 76 I (CaL2003).

The Insurers contend that cOl1tacting and soliciting acompetitor1s customers, and Uengagil1B in oncRon-one contact

such as is all~g~d by Rudamac is ,imply not 'advertising,'

,,42 COX inlerprets Rudamac's allegation tbat it "utilized

[Rudamac's] successful business history and pricing strategy

to solicit and misappropriate customers'" as meaning thatCGX utilized "Rudatnac1s promotional infonnatiol'1 ... in their

advertising to solicit customers generally." 43 Unfortunately,

the logical leap expounded by COX is not supported by Case

lawaI' the t~rms ofth~ policies,

36

Continental Cas. Co. v. Consolidated Graphics, Inc" 656 F.Supp.2d 650 (2009)_~"_' · '_' •__~__ ~_~W.V. "M·_.' .__'" .~~.'.'_~_,.,_._.>. "~_.__~.,',m_'_'__ ",·_._~_,_.'w_·_·, ·"··~·, •· .~__·,·~·,_.'·

44

45

Rudamac, which would not be advertisement under the

policy. See Monumental Life, 617 A.2d at 1163 (finding itwas

not advertisement where ex-employee cO\.llted a competitor'scustomers with a personal solicitation that caused many ofthem to defect).

The complaint alleges that COX would utilize Rudamac's

trade secrets to U ~cherry pick' the best and most profitableorders," "direct their efforts more selectively." towards

customers with which [Rudamac] has already demonstrated

a successful pricing ... history," and "solicit [Rudamac's]

customers, ... with pricing strategies which wrongfully

undercut [Rudamac's] pricing.',44 Here Rudamac is alleging

direct contact with specific, prior customers, 110t a broadcastor notice to the general public or a particular market

segment. In fact, Rudamacts complaint seems to suggest thatit eliminates COX's *662 need to advertise because, with the

customer and price lists, COX would be able to "cherry pick"

and be more "selective." This is the opposite of advertising

which is the widespread dissemination of material to thepublic at large.

PI.', Mot. Summ. J.. Docket Eotry No. 27, Ex. I.Rudamae Complaint, CIC00008. 1124--27.

COX relies on the nnpublished Southen! District ofNew York

opinion in Tec!Jnaoro, Inc. v. u.s. Fidelity & Cas. Co., 2006WL 3230299 (S.O.N.Y. Nov. 7, 2006) to assert that a single

reference to the word "promotion" can trigger coverage.However, this court does not read Technaoro to mean thatit should accept the existence of the word "promotion"as automatically alleging an advertising injury without

examining its context, The complaint in Tee/maoro -hadnumerous references to advertising and specifically allegedthat the defendant used the Cartier brand to attract customers

to its product.ld. at 13-14. ("Cartier demanded that plaintiff

'immediately discontinue Ule advertising, promotion and sale

End of Document

of any merchandise incorporating the Cartier Trade Dress,and that all advertisin~ ... be withdrawn.' "). Convcr.ely,

although the word "promotion" is present in the Rudamae

complaint, it does not make a single reference to advertisingdone by COX. Thus, the single reference to the word

'Ipromotion" in the Rudamac complaint, when taken incontext, does not rise to the level of an advertising injury,

In sum, this court holds that Rudamacls complaintalleged an advertising idea where it stated that COX

misappropriated confidential il1fonnatiol1 about "promotionsgiven." However, this cOutt also holds that Rudamac'scomplaint did not allege that COX advertised that information

or used the information in connection with an advertisement.

Thus, there was no advertisinginjury under either policy. 45

Because it has been determined that there was noadvcl1ising injury, this court does not reach the

issue of whether Continental's policy exclusions under"Knowing Violation of Rights of Others" and "CriminalActs" bar coverage.

The court finds neither Continental nor Sentry has the duty

to defend COX. Based on the court's finding of no duty to

defend, it also follows from this judgment tbnt neither party

has a duty to indemnify. Farmers Tex. Co. Mut. Ins, Co. v.

Griffin, 955 S.W.2d 81, 84 (Tex,1997).

v. Conclusion

Based on the foregoing, the court GRANTS Continental'.

Motion for Summary Judgment, GRANTS Sentry's motion

for summary judgment and DENIES Defendants' CI'OSS

Motion for Summary Judgment.

@ 2014 Thomson Reuters. No c!3irn to original U.S. Government Works.

37

210 646 FEDERAL REPORTER, 3d SERIES

trial claim lacked merit, then he cannotshow that there is a reasonable probabilitythat a motion for a speedy trial would havebeen granted if his attorney had filed it.We have already concluded that it wasobjectively reasonable for the state courtto determine that Amos’s speedy-trialclaim lacked merit. A fortiori, it was alsoobjectively reasonable for that court todetermine that Amos could not demon-strate that he was prejudiced by his attor-ney’s failure to move for a speedy trial.

IV.

For the reasons discussed above, thedistrict court’s judgment dismissingAmos’s habeas petition with prejudice isAFFIRMED.

,

CONTINENTAL CASUALTYCOMPANY, Plaintiff–

Appellee,

v.

CONSOLIDATED GRAPHICS INC.;Thousand Oaks Printing & Special-ties, Inc., doing business as T/O Print-ing; Daniel Chambers, an Individual,Defendants–Appellants,

v.

Sentry Insurance, A Mutual Company,Intervenor Plaintiff–Appellee.

No. 09–20666.

United States Court of Appeals,Fifth Circuit.

July 7, 2011.

Background: After a jury found againstprinting company, its subsidiary, and an

individual in an action, under Californialaw, alleging, inter alia, misappropriationof trade secrets, intentional interferencewith prospective economic advantage, andbreach of fiduciary duty, excess commer-cial general liability (CGL) insurer soughtdeclaratory judgment that it had no duty,under the policy’s advertising injury cover-age provision, to defend or indemnify theprinting company. Printing company’s pri-mary CGL insurer intervened. Insurersmoved for summary judgment, and in-sured cross-moved for partial summaryjudgment against primary CGL insurer.The United States District Court for theSouthern District of Texas, Nancy K.Johnson, United States Magistrate Judge,656 F.Supp.2d 650, awarded summaryjudgment for the insurers, and appeal wastaken.

Holdings: The Court of Appeals, Owen,Circuit Judge, held that:

(1) under Texas law, advertising injurycoverage provision of CGL policy didnot obligate insurer to defend insured,and

(2) under Texas law, insurer was not obli-gated to indemnify its insured.

Affirmed.

1. Insurance O2914

Under Texas law, insurer’s duty todefend is determined by the eight-cornersdoctrine, pursuant to which an insurer’sduty to defend is determined solely fromthe factual allegations in the pleadings andthe terms of the insurance policy.

2. Insurance O2914

Under Texas law, if the underlyingpetition does not allege facts that may fall

is no evidence that the court would havegranted the motion.’’); United States v. Gib-son, 55 F.3d 173, 179 5th Cir. 1995 (‘‘Counsel

is not required by the Sixth Amendment tofile meritless motions.’’).

38

211CONTINENTAL CAS. CO. v. CONSOLIDATED GRAPHICSCite as 646 F.3d 210 (5th Cir. 2011)

within the scope of coverage, an insurer isnot legally required to defend a suitagainst its insured.

3. Insurance O2914Under Texas law, court applying

eight-corners rule in order to determineliability insurer’s duty to defend construesthe pleadings liberally; insurer has a dutyto defend if the facts alleged in the plead-ings would give rise to any claim withinthe coverage of the policy.

4. Insurance O2301Under Texas law, advertising injury

coverage provision of commercial generalliability (CGL) insurance policy did notobligate insurer to defend insured printingcompany in action alleging misappropria-tion of a competitor’s business history andpricing strategy in order to solicit andmisappropriate competitor’s customers,where there was no allegation in the un-derlying litigation that the insured causedan injury in the course of advertising itsgoods, products, or services within themeaning of the policy; the contacts withthe competitor’s customers were directdealings rather than through public dis-semination of any kind.

5. Insurance O2298Absent any evidence suggesting that

insured printing company disseminated acompetitor’s trade secrets in a public man-ner, primary commercial general liability(CGL) insurer was not obligated, underTexas law, to indemnify its insured pursu-ant to policy’s advertising injury coverageprovision.

6. Federal Courts O894Any error in district court’s decision

to grant insurer’s motion to amend itspleadings on same day the court entered afinal judgment in the case was harmless,where judgment was not granted on thepleadings but based on both insurers’ sum-

mary judgment motions; amended plead-ings did not alter the summary judgmentevidence in the record or the arguments inthe motions.

John Charles Tollefson (argued), BethDunn Bradley, Stephen Andrew Melendi,Tollefson, Bradley, Ball & Mitchell, L.L.P.,Dallas, TX, for Plaintiff–Appellee.

Richard P. Colquitt (argued), Fulbright& Jaworski, L.L.P., Houston, TX, for De-fendant–Appellant.

Kathleen Hopkins Alsina (argued),Phelps Dunbar, L.L.P., Houston, TX, LisaMartin Lampkin, Selman Breitman,L.L.P., Los Angeles, CA, for IntervenorPlaintiff–Appellee.

Appeals from the United States DistrictCourt for the Southern District of Texas.

Before DENNIS, OWEN andSOUTHWICK, Circuit Judges.

OWEN, Circuit Judge:

Consolidated Graphics Inc., ThousandOaks Printing & Specialties, Inc., and Dan-iel Chambers (collectively, the Consolidat-ed Graphics defendants) seek to recoverthe cost of defending a suit against themand indemnity for an adverse judgmententered against them in that suit from twoinsurers, Continental Casualty Company(Continental) and Sentry Insurance (Sen-try). The Consolidated Graphics defen-dants appeal the district court’s grant ofsummary judgment in favor of the insur-ers. We affirm.

I

This case concerns whether either Sen-try, the primary insurer, or Continental,an excess insurer, has a duty to defend

39


and indemnify the Consolidated Graphicsdefendants in an underlying tort suit. Webegin with the facts of that underlyinglitigation.

Thousand Oaks Printing & Specialties,Inc. (Thousand Oaks), a California corpo-ration, is a subsidiary of ConsolidatedGraphics, a large printing and graphicscorporation. Rudamac, Inc. (Rudamac) isa family-owned printing company in Cali-fornia. Daniel Chambers, the nephew ofRudamac’s owner and president, was em-ployed by Rudamac for approximately nineyears. When Chambers’s aunt refused togive him an ownership interest in the com-pany, he devised a scheme to direct asubstantial portion of Rudamac’s businessto Thousand Oaks and to become an em-ployee of one of the Consolidated Graphicsdefendants. He allegedly misappropriatedtrade secrets, including price information,private data regarding product prices,profit margins, and information about pro-motions given, to three of Rudamac’s cus-tomers: Dacor, AIG and Tiger WoodsFoundation. Thousand Oaks and Consoli-dated Graphics were allegedly activelycomplicit in this scheme.

Rudamac sued Consolidated Graphics,Thousand Oaks, and Chambers in Califor-nia state court for misappropriation oftrade secrets, unfair business practices, in-tentional interference with prospectiveeconomic advantage, breach of fiduciaryduty, constructive trust, unjust enrich-ment, a demand for an accounting, andintentional interference with at-will em-ployment relations. Rudamac alleged thatChambers acted for himself and as theundisclosed agent of Consolidated Graph-ics and Thousand Oaks. The case wastried to a jury on theories of misappropria-tion, interference, and breach of fiduciary

duty, and the jury found against the Con-solidated Graphics defendants on allcounts. The jury awarded Rudamac$5,698,000 in compensatory damages. Thejury also awarded $1,500,000 in punitivedamages against Thousand Oaks and$6,647,000 in punitive damages againstConsolidated Graphics. The judgmentrendered in the California trial court wasaffirmed on appeal.

Consolidated Graphics and its subsidiar-ies were insured under two primary liabili-ty insurance policies issued by Sentry andan excess liability insurance policy issuedby Continental. Each of the policies pro-vided liability coverage for ‘‘advertising in-jury.’’ While the Rudamac litigation waspending, Continental brought a declarato-ry judgment action against the Consolidat-ed Graphics defendants in federal court,which had diversity jurisdiction. Sentryintervened. Both Continental and Sentrysought a declaratory judgment that theyhad no duty to defend or indemnify theConsolidated Graphics defendants in theRudamac litigation, contending that no‘‘advertising injury’’ had been alleged inthat underlying suit or had occurred withinthe meaning of the policies. The partiesfiled cross motions for summary judgment,and the district court granted summaryjudgment in favor of Continental and Sen-try. The Consolidated Graphics defen-dants now appeal.

II

[1, 2] We first consider Sentry’s poli-cies and its duty to defend. The partiesagree that Texas law governs, and Texaslaw instructs that an insurer’s duty todefend is determined under the eight-cor-ners doctrine.1 The court considers onlythe factual allegations in the pleadings and

1. Gilbert Tex. Constr., L.P. v. Underwriters atLloyd’s London, 327 S.W.3d 118, 132 (Tex.

2010).

40


the terms of the insurance policy.2 ‘‘If apetition does not allege facts within thescope of coverage, an insurer is not legallyrequired to defend a suit against its in-sured.’’3

[3] In applying the eight-corners rule,the court construes the pleadings liberal-ly.4 The liability insurer has a duty todefend ‘‘if the facts alleged in the plead-ings would give rise to any claim withinthe coverage of the policy.’’5

The Sentry policies included liabilitycoverage for ‘‘advertising injury’’ and pro-vided:

a. We will pay those sums that theinsured becomes legally obligated topay as damages because of ‘‘personalinjury’’ or ‘‘advertising injury’’ towhich this insurance applies. We willhave the right and duty to defend any‘‘suit’’ seeking those damages.

TTTT

[ ]b[.] This insurance applies to:

TTTT

(2) ‘‘Advertising injury’’ caused by anoffense committed in the course ofadvertising your goods, products orservicesTTTT

‘‘Advertising injury’’ is defined as:

injury arising out of one or more of thefollowing offenses:

a. Oral or written publication of ma-terial that slanders or libels a per-son or organization or disparagesa person’s or organization’s goods,products or services;

b. Oral or written publication of ma-terial that violates a person’s rightof privacy;

c. Misappropriation of advertisingideas or style of doing business;or

d. Infringement of copyright, title orslogan.

The policy does not define the term ‘‘ad-vertising’’ or ‘‘advertisement.’’

The Consolidated Graphics defendantsrely on only one of the foregoing offenses,‘‘[m]isappropriation of advertising ideas orstyle of doing business,’’ in support of theirclaim in this court that Sentry had a dutyto defend them. They point to four para-graphs in the complaint filed by Rudamacin the underlying tort litigation, which al-leged:

19. Plaintiff’s customer and supplierlists are compilations of detailed infor-mation about each of its customersand suppliersTTTT [T]his informationtypically included specialized informa-tion, including a list of key personneland decision-makers with the custom-er or supplier’s company as well asspecific contract informationTTTT

TTTT

21. Plaintiff’s trade secret/financial in-formation includes price information,including private data regarding thecompetitive pricing of the products,profit margin, particularized pricinginformation such as mark ups, dis-counts, or other promotions givenTTTT

22. Plaintiff’s marketing strategies in-clude Plaintiff’s long and short-termplans for developing new and existing

2. D.R. Horton–Tex., Ltd. v. Markel Int’l Ins.Co., 300 S.W.3d 740, 744 (Tex.2009).

3. Pine Oak Builders, Inc. v. Great Am. LloydsIns. Co., 279 S.W.3d 650, 654 (Tex.2009) (in-ternal quotation marks and citation omitted).

4. Nat’l Union Fire Ins. Co. of Pittsburgh v.Merchs. Fast Motor Lines, Inc., 939 S.W.2d139, 141 (Tex.1997).

5. Utica Nat’l Ins. Co. of Tex. v. Am. Indem.Co., 141 S.W.3d 198, 201 (Tex.2004).

41


suppliers for various orders and prod-ucts.TTTT

42. Plaintiff alleges TTT that [Defen-dants] utilized [Rudamac’s] successfulbusiness history and pricing strategyto solicit and misappropriate custom-ers TTT of [Rudamac]TTTT

The district court concluded that theallegations regarding ‘‘pricing TTT pro-motions’’ alleged ‘‘[m]isappropriation of[an] advertising idea[ ]’’ within the mean-ing of Sentry’s policy. We will assume,without deciding, that this is a correctconstruction of the policy under Texas law.We need not reach that issue because thedistrict court further held, and we agree,that there were no facts alleged in theRudamac litigation that would support afinding that an ‘‘advertising injury’’ was‘‘committed in the course of advertising[the Consolidated Graphics defendants’]goods, products or services’’ as requiredunder the Sentry policy.

The Consolidated Graphics defendantsassert that the term ‘‘advertising’’ must beconstrued broadly under Texas law. How-ever, decisions of the Texas courts and ofthis court applying Texas law lead us toconclude that the concept of ‘‘advertising’’cannot be stretched to encompass the alle-gations in the Rudamac suit.

The Supreme Court of Texas was calledupon to construe the meaning of ‘‘advertis-ing’’ in Smith v. Baldwin.6 The plaintiff inthat case had asserted a claim under provi-sions of the Texas Deceptive Trade Prac-tices Act that declared ‘‘ ‘advertising goodsor services with intent not to sell them as

advertised’ ’’ to be a deceptive or mislead-ing practice.7 The Texas court turned toBlack’s Law Dictionary for a definition of‘‘advertise,’’ citing with approval the fol-lowing definition:

Advertise. To advise, announce, ap-prise, command, give notice of, inform,make known, publish. On call to thepublic attention by any means whatsoev-er. Any oral, written, or graphic state-ment made by the seller in any mannerin connection with the solicitation ofbusiness and includes, without limitationbecause of enumeration, statements andrepresentations made in a newspaper orother publication or on radio or televi-sion or contained in any notice, handbill,sign, catalog, or letter, or printed on orcontained in any tag or label attached toor accompanying any merchandise.8

The misrepresentations at issue in Smithv. Baldwin included a builder’s statementin a contract to build a home that, whencompleted, would meet the requirementsfor a final Veterans Administration inspec-tion compliance report.9 The SupremeCourt of Texas indicated that ‘‘advertising’’connotes public notice of some sort, andthat the representations at issue were not‘‘advertising.’’10 The court reasoned that‘‘[t]he representations concerning compli-ance with V.A. standards and regulationsand the ability to complete the house asscheduled were not marketing devices de-signed to induce the public to patronizeAlan Baldwin, Builder. Smith was notenticed to enter into a contractual relation-ship because of a public notice drawing

6. 611 S.W.2d 611 (Tex.1980).

7. Id. at 614 (quoting TEX. BUS. & COM.CODE

§ 17.46(b)(9)).

8. Id. at 614–15 (quoting BLACK’S LAW DICTIO-

NARY 50 (5th ed. 1979)).

9. Id. at 614.

10. Id. at 615.

42


attention to Baldwin’s capabilities as a con-tractor.’’11

A Texas intermediate court of appealshas held that ‘‘advertising injury,’’ whenused in an insurance policy, contemplatesdissemination to the public. In ANR Pro-duction Co. v. American Guarantee & Li-ability Insurance Co., a Texas court ofappeals considered whether an insurer hada duty to defend, pursuant to an insurancepolicy covering ‘‘advertising injury,’’against claims alleging breach of contract,fraud, negligent misrepresentation, and vi-olations of the Texas Deceptive TradePractices Act.12 In holding that the insur-er had no duty to defend, the court ex-plained that ‘‘ ‘[a]dvertising’ is defined asadvising, announcing, or publishing a mat-ter to the public. It is distinguished fromother forms of communication in that itcalls a matter to the public’s attention.’’13

The court further noted that if it acceptedthe insured’s broad definition of advertis-ing, ‘‘any time parties negotiated any kindof contract, there would be a potential forcoverage under advertising injury for rep-resentations or omissions made during thenegotiations.’’14

In Sport Supply Group, Inc. v. Colum-bia Casualty Co.,15 we considered and ap-plied Texas law in construing the meaningof ‘‘misappropriation of advertising ideas’’in an insurance policy. We concluded that

‘‘[u]nder Texas law, it appears that theterm ‘advertising’ in an insurance policy isused in a conventional sense: to refer to apublic announcement (such as on a bill-board, in a newspaper, on a signpost, or ina television or radio commercial) that ‘in-duce[s] the public to patronize’ a particularestablishment or to buy a particular prod-uct.’’16

The Consolidated Graphics defendantscite cases from other jurisdictions, includ-ing the Minnesota Supreme Court’s deci-sion in General Casualty Co. of Wisconsinv. Wozniak Travel, Inc., in which thatcourt defined ‘‘advertising’’ broadly as‘‘any oral, written, or graphic statementmade by the seller in any manner in con-nection with the solicitation of business.’’17

The Consolidated Graphics defendants alsocite the Wisconsin Supreme Court’s deci-sion in Acuity v. Bagadia, in which thatcourt observed that ‘‘advertising’’ is ‘‘sus-ceptible to multiple reasonable interpreta-tions,’’ including a broad definition encom-passing customer solicitation.18 There areadditional decisions in jurisdictions otherthan Texas that ascribe a broad meaningto the term ‘‘advertising.’’19

But Texas is not alone in its view that‘‘advertising,’’ in the context of an insur-ance policy, requires a measure of publicdissemination. For example, the Califor-

11. Id.

12. 981 S.W.2d 889, 891–92 (Tex.App.—Hous-ton [1st Dist.] 1998, no pet.).

13. Id. (internal citation omitted).

14. Id. at 892.

15. 335 F.3d 453 (5th Cir.2003).

16. Id. at 464 (second alteration in original).

17. 762 N.W.2d 572, 579 (Minn.2009) (inter-nal quotation marks omitted).

18. 310 Wis.2d 197, 750 N.W.2d 817, 828(2008).

19. See, e.g., Amway Distribs. Benefits Ass’n v.Fed. Ins. Co., 990 F.Supp. 936, 945(W.D.Mich.1997) (concluding that ‘‘advertis-ing activities’’ is ambiguous and ‘‘can be rea-sonably interpreted to encompass widespreaddistribution of materials to the public as wellas direct solicitation of small groups or indi-viduals’’); John Deere Ins. Co. v. ShamrockIndus., Inc., 696 F.Supp. 434, 440 (D.Minn.1988) (holding that a company’s solicitationsto three customers constituted ‘‘advertisingactivity’’).

43


nia Supreme Court, in Hameid v. NationalFire Insurance of Hartford, consideredwhether an insurer had a duty to defendunder the ‘‘advertising injury’’ coverage ofits policy when the underlying complaintalleged that the insured took a competi-tor’s customer list and solicited customersfrom the competitor.20 In concluding thatthe insurer owed no duty to defend, thecourt interpreted the term ‘‘advertising’’ asused in the policies to mean ‘‘widespreadpromotional activities usually directed tothe public at large.’’21 The court notedthat adopting a broader definition of ad-vertising that would include one-on-one so-licitation of customers ‘‘would encouragelitigation’’ and ‘‘eliminate the clarity andcertainty that is essential to the insuranceindustry.’’22 The court further explainedthat ‘‘defin[ing] ‘advertising’ to mean thewidespread distribution of promotional ma-terials to the public at large TTT interpretsthe contractual term under its ordinaryand popular meaning. It allows uniformityin interpretation under different factualcircumstances that may or may not lead to

coverage.’’23 Other courts have expressedsimilar views.24

[4] Our responsibility, however, is todiscern and apply Texas law. Texas lawand our precedent make clear that in theRudamac litigation against the Consolidat-ed Graphics defendants, it was never al-leged that the defendants caused an injury‘‘in the course of advertising your goods,products or services’’ within the meaningof Sentry’s policy. The contacts Cham-bers had with the three customers werenot through public dissemination of anykind. They were direct dealings. Thedistrict court did not err in holding thatSentry had no duty to defend the Consoli-dated Graphics defendants.

III

With good reason, the ConsolidatedGraphics defendants do not contend thatthey have inflicted an ‘‘advertising injury’’within the meaning of Continental’s excessliability policy. That policy defines adver-tising injury in pertinent part to include‘‘[t]he use of another’s advertising idea in

20. 31 Cal.4th 16, 1 Cal.Rptr.3d 401, 71 P.3d761, 762 (2003).

21. Id. at 766.

22. Id. at 769.

23. Id.

24. See Am. States Ins. Co. v. Vortherms, 5S.W.3d 538, 543 (Mo.Ct.App.1999) (explain-ing that ‘‘[a]n ‘advertising idea’ implicatesone calling public attention to a product orbusiness, particularly by reference to its desir-able qualities so as to increase sales or pa-tronage’’); Select Design, Ltd. v. Union Mut.Fire Ins. Co., 165 Vt. 69, 674 A.2d 798, 800–01 (1996) (holding that ‘‘advertising’’ requireswidespread distribution to the public at largeand thus does not encompass direct customersolicitation); Smartfoods, Inc. v. NorthbrookProp. & Cas. Co., 35 Mass.App.Ct. 239, 618N.E.2d 1365, 1368 (1993) (noting that, ‘‘[i]n

ordinary usage, TTT advertising means a pub-lic announcement to proclaim the qualities ofa product or point of view’’); MonumentalLife Ins. Co. v. U.S. Fid. & Guar. Co., 94Md.App. 505, 617 A.2d 1163, 1173 (1993)(concluding that the plain meaning of theterm ‘‘advertising’’ ‘‘is not susceptible of morethan one meaning, and encompasses only the‘public’ sense of the word’’); MGM, Inc. v.Liberty Mut. Ins. Co., 17 Kan.App.2d 492, 839P.2d 537, 540 (1992) (holding that the term‘‘advertising’’ as used in an insurance policymeans ‘‘public or at least widely disseminatedsolicitation or promotion’’); Playboy Enters.,Inc. v. St. Paul Fire & Marine Ins. Co., 769F.2d 425, 429 (7th Cir.1985) (concluding thatthe term ‘‘advertising’’ refers to ‘‘widespreaddistribution of promotional material to thepublic at large’’); Solers, Inc. v. Hartford Cas.Ins. Co., 146 F.Supp.2d 785, 795 (E.D.Va.2001) (explaining that ‘‘[a]dvertising and so-licitation differ because advertising must be ofa public nature’’).

44


your ‘advertisement,’ ’’ and the policy ex-pressly defines ‘‘advertisement’’ as ‘‘noticethat is broadcast or published to the gen-eral public or specific market segmentsabout your goods, products or services forthe purpose of attracting customers orsupporters.’’ The Consolidated Graphicsdefendants do not assert that any conductof this nature was alleged in the underly-ing tort litigation.

The Consolidated Graphics defendantsargue only that if Sentry had a duty todefend, then Continental had a duty todefend if Sentry’s policy limits were ex-hausted. We do not consider that argu-ment because, as we have held, Sentry wasnot obligated to defend the ConsolidatedGraphics defendants.

IV

A remaining issue is whether either ofthe insurers is obligated to indemnify theConsolidated Graphics defendants. Thedistrict court disposed of this issue in asingle sentence, concluding, ‘‘Based on thecourt’s finding of no duty to defend, it alsofollows from this judgment that neitherparty has a duty to indemnify,’’ citing theSupreme Court of Texas’s decision inFarmers Texas County Mutual InsuranceCo. v. Griffin.25 The Consolidated Graph-ics defendants contend that the duty toindemnify cannot be resolved on the basisof the summary judgment record.

The Supreme Court of Texas did nothold in Griffin that there can be no duty toindemnify if there is no duty to defend,and we do not read the district court’sopinion to so construe Griffin. The deci-

sion in Griffin observed that the Texascourts have long recognized that ‘‘[a]n in-surer’s duty to defend and duty to indem-nify are distinct and separate duties.’’26

‘‘It may sometimes be necessary to deferresolution of indemnity issues until theliability litigation is resolved. In somecases, coverage may turn on facts actuallyproven in the underlying lawsuit.’’27 ‘‘Inmany cases, however, the court may ap-propriately decide the rights of the partiesbefore judgment is rendered in the under-lying tort suit.’’28 In Griffin the insurerhad no duty to defend, ‘‘and the samereasons that negate the duty to defendlikewise negate any possibility the insurerwill ever have a duty to indemnify.’’29 TheSupreme Court of Texas therefore wasable to determine that there was no dutyto indemnify even though the underlyinglitigation had not concluded.30 The Su-preme Court of Texas further explainedthe interplay between and independence ofthe duty to defend and the duty to indem-nify in D.R. Horton–Texas, Ltd. v. MarkelInternational Insurance Co.31

At the time that the district court deter-mined the insurers had no duty to indem-nify the Consolidated Graphics defendants,the trial in the underlying tort litigationhad concluded. Sentry moved for sum-mary judgment based on the charge to thejury and its verdict in that case. TheConsolidated Graphics defendants assertthat the charge and verdict do not provethat the claims in that litigation were notcovered. They cite a Fifth Circuit deci-sion, National Union Fire Insurance Co.of Pittsburgh, Pennsylvania v. Puget Plas-

25. 955 S.W.2d 81, 84 (Tex.1997).

26. Id. at 82.

27. Id. at 84.

28. Id.

29. Id. (emphasis omitted).

30. Id.

31. 300 S.W.3d 740, 743–44 (Tex.2009).

45


tics Corp.,32 for the proposition that evi-dence may be admitted in coverage litiga-tion if the underlying case does not resolvethe factual issues necessary to determinecoverage. The Consolidated Graphics de-fendants misapprehend the respective bur-dens of proof.

[5] Sentry is not relying on an exclu-sion in its policy in asserting that there isno coverage. It is relying on the insuringclauses. Under these circumstances, theConsolidated Graphics defendants have theburden of establishing that the claims forwhich they seek defense costs and indem-nification come within their policy’s cover-age.33 Since the insurers did not have theburden on this issue, they could satisfytheir summary judgment burden by point-ing to the absence of evidence to supportthe Consolidated Graphics defendants’case.34 Sentry did this by pointing to thejury charge and verdict form. The Con-solidated Graphics defendants then hadthe burden of ‘‘identify[ing] specific evi-dence in the record and articulat[ing] themanner in which that evidence’’ showedthat they were entitled to coverage.35 TheConsolidated Graphics defendants did notrespond with any evidence that would es-tablish a basis for coverage. Without anyevidence suggesting that the ConsolidatedGraphics defendants disseminated Ruda-mac’s trade secrets in a public manner, theConsolidated Graphics defendants cannotsurvive summary judgment. Accordingly,Continental and Sentry were entitled tosummary judgment on this issue.

V

[6] Lastly, the Consolidated Graphicsdefendants argue that the district court

committed error by granting a motion bySentry to amend its pleadings on the sameday the court entered a final judgment inthe case. They contend that they shouldhave been allowed ten days to respond tothe amended pleading. Sentry and Conti-nental argue that any error in this regardwas harmless. We agree. The districtcourt did not grant judgment on the plead-ings but rather based on Sentry’s andContinental’s summary judgment motions.The amended pleadings did not alter thesummary judgment evidence in the recordor the arguments in the motions. Accord-ingly, any error in this regard was harm-less.

* * *

For the foregoing reasons, we AFFIRMthe district court’s judgment.

,

UNITED STATES of America,Plaintiff–Appellee,

v.

Welles D. BACON, Defendant–Appellant.

No. 10–40088.


July 7, 2011.

Background: Defendant pled guilty in theUnited States District Court for the South-

32. 532 F.3d 398, 404 (5th Cir.2008).

33. See Trinity Universal Ins. Co. v. Emp’rsMut. Cas. Co., 592 F.3d 687, 692 (5th Cir.2010).

34. See Duffie v. United States, 600 F.3d 362,371 (5th Cir.2010).

35. Id. (internal quotation marks and citationomitted).

46

IN THE UNITED STATES DISTRICT COURTFOR THE SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

CONTINENTAL CASUALTY §COMPANY, §

§Plaintiff, §

§v. § CIVIL NO. H-05-3252

§NORTH AMERICAN CAPACITY §INSURANCE COMPANY, §

§Defendant, §

§and §

§NATIONAL UNION FIRE INSURANCE §COMPANY OF PITTSBURGH, PA., §

§Intervenor/ §Third-Party Plaintiff, §

§v. §

§CONTINENTAL CASUALTY COMPANY, §et al., §

§Third-Party Defendants, §

§and §

§COLUMBIA CASUALTY COMPANY, §

§Fourth-Party Plaintiff, §

§v. §

§NORTH AMERICAN CAPACITY §INSURANCE COMPANY, §

§Fourth-Party Defendants. §

AMENDED MEMORANDUM, RECOMMENDATION, AND ORDER

Case 4:05-cv-03252 Document 234 Filed in TXSD on 01/13/10 Page 1 of 40

47

1 This case was referred to the undersigned magistrate judge pursuantto 28 U.S.C. § 636(b)(1)(A) and (B), the Cost and Delay Reduction Plan under theCivil Justice Reform Act, and Federal Rule of Civil Procedure 72. Docket EntryNo. 9.

2 See M&R dated Nov. 4, 2009, Docket Entry No. 222.

3 See Objections, Docket Entry Nos. 226, 227, 228; Responses toObjections, Docket Entry Nos. 229, 230, 231, 232, 233.

2

Pending before the court1 are this case’s final set of three

summary judgment motions and responses thereto. Defendant North

American Capacity Insurance Company (“North American”) filed a

motion for summary judgment (Docket Entry No. 211), as did

Intervenor National Union Fire Insurance Company of Pittsburgh,

Pa., (“National Union”)(Docket Entry No. 212) and, jointly,

Plaintiff/Third-Party Defendant Continental Casualty Company

(“Continental”) and Third-Party Defendant/Fourth-Party Plaintiff

Columbia Casualty Company (“Columbia”)(collectively “CNA”)(Docket

Entry No. 213). Also pending is a motion to strike filed by

National Union (Docket Entry No. 220).

On November 4, 2009, the court issued a memorandum and

recommendation (“M&R”) recommending that all of the summary

judgment motions be granted in part and denied in part and denying

National Union’s motion to strike.2 All of the parties filed

objections and responses to the other parties’ objections.3

In its objections, Continental pointed out that the court had

relied on the unamended version of the “Other Insurance” provision

in the Continental policy. In its review, the court discovered it


48

4 See Memorandum and Recommendation dated Dec. 5, 2006, Docket EntryNo. 131, pp. 2-7, vacated by Order dated Jan. 2, 2007, Docket Entry No. 138;Memorandum and Recommendation dated Nov. 9, 2007, Docket Entry No. 167, pp. 2-8;Memorandum and Recommendation dated August 29, 2008, Docket Entry No. 190, pp.2-18.

3

also had relied on the unamended version of the “Other Insurance”

provision in the North American policy. Be that as it may, the

issuance of new controlling law by the Fifth Circuit Court of

Appeals diminishes the significance of those factual errors but

confirms a legal error in the opinion, the correction of which

changes the complexion of the opinion entirely.

The court amends the pending M&R to correct the above-

mentioned errors. As a result of the corrections, the court must

address other issues previously avoided, ultimately changing the

outcome in one major respect. The parties will be allowed a full

objection period during which time they should repeat their

previously stated objections that remain relevant, as well as raise

all new objections generated by this M&R.

I. Case Background

The factual background of this case has been recounted many

times in the record. A portion of the account recited here is

taken from prior memoranda4 without record citations. The focus is

on the content of the relevant insurance policies and the

litigation history.

A. Underlying Events and Insurance Policies

This insurance coverage dispute emanates from events that


49

5 Valero and Encompass Power were dropped from the amended complaintin intervention, but have not been dismissed from the case. Compare Intervenor’sAmended Complaint, Docket Entry No. 61, with Intervenor’s Second AmendedComplaint, Docket Entry No. 148. At a hearing in May 2007, the parties intimatedthat Valero and Encompass Power no longer have a stake in this lawsuit. SeeTranscript, Docket Entry No. 144, p. 4; see also Valero and Encompass Power’sJoint Status Report filed May 2, 2007 (“May 2007 Joint Status Report”), DocketEntry No. 143, pp. 2-3. However, North American’s cross complaint against Valeroand Encompass Power remains pending. See North American’s Original Cross Claimsagainst Valero and Encompass Power, Docket Entry No. 85.

6 See CNA’s Motion for Summary Judgment, Docket Entry No. 213, Ex. B,subcontract.

7 Id. at § 9.1.1.

8 Id. at § 9.2.1; Ex. E, Insurance Provisions, p. 2 (unnumbered).

4

occurred in May and June 2002 at a refinery in California. Third-

Party Defendant Valero Refining Company (“Valero”) engaged Third-

Party Defendant Encompass Power Services, Inc., (“Encompass

Power”)5 to design, engineer, and construct a co-generation

facility at Valero’s refinery.

Encompass Power contracted with ECCO Engineering &

Construction Company (“ECCO”), a California corporation, to perform

electrical work on the project.6 The subcontract included an

indemnity provision regarding ECCO’s responsibility for damage

resulting from its work.7 The subcontract also required ECCO to

purchase insurance to protect itself from claims arising out of its

operations under the agreement and to carry commercial general

liability (“CGL”) insurance on which Encompass Power was to be

named as an additional insured with regard to ECCO’s work.8

During the time period at issue, Encompass Services

Corporation (“ESC”), a company of which Encompass Power was a


50

9 All three policies provided coverage to subsidiaries of the namedinsured. See CNA’s Motion for Summary Judgment, Docket Entry No. 213, Ex. D, theContinental policy, Broad Named Insured Endorsement; Ex. E, the National Unionpolicy, p. 3; Ex. J, the Columbia policy, Declarations.

10 See CNA’s Motion for Summary Judgment, Docket Entry No. 213, Ex. D,the Continental policy.

11 See id. at Ex. E, the National Union policy.

12 See id. at Ex. J, the Columbia policy.

13 See id. at Ex. C, the North American policy.

14 Id. at Ex. D, the Continental policy, Declarations.

15 Id. at p. 1.

16 Id.

5

subsidiary,9 maintained a CGL insurance policy with Continental,10

an umbrella CGL policy with National Union,11 and a professional and

pollution liability (“PL”) policy with Columbia.12 ECCO maintained,

inter alia, a CGL policy through North American on which Encompass

Power was named an additional insured.13

Continental’s CGL policy covered up to $1,000,000 of damages

per occurrence.14 Continental also assumed the “right and duty to

defend the insured against any ‘suit’ seeking those damages.”15 The

policy stated that the duty to defend would end when Continental

had “used up the applicable limit of insurance in the payment of

judgments or settlements.”16 The policy did not further define or

qualify the terms “judgments” or “settlements.”

With regard to other insurance, the policy was amended to

state:

If other valid and collectible insurance isavailable to the Insured for a loss we cover under


51

17 Id. at Amendment of Other Insurance Condition.

18 Id. at Ex. E., the National Union policy, p. 1.

6

coverages A. or B. of this Coverage Part, thisinsurance is excess over any of the OtherInsurance, whether primary, excess, contingent, oron any other basis.When this insurance is excess, we will have no dutyunder coverage A. or B. to defend any claim or“Suit” that any other Insurer has a duty to defend.If no other Insurer defends, we will undertake todo so, but we will be entitled to the Insured’srights against all those other Insurers.

When this insurance is excess over Other Insurance,we will pay only our share of the amount of loss,if any, that exceeds the sum of:

(1) The total amount that all such Other Insurancewould pay for the loss in the absence of thisinsurance; and

(2) The total of all deductible and self-insuredamounts under all that Other Insurance.

We will share the remaining loss, if any, with any OtherInsurance that is not described in this excess insuranceprovision and was not bought specifically to apply inexcess of the limits of insurance shown in thedeclarations of this Coverage Part.17

According to its policy, National Union assumed the duty to

defend when the limits of all applicable underlying policies were

“exhausted by payment of claims to which this policy applies” or

when damages sought were not covered by any underlying insurance

policy.18 An “Other Insurance” provision stated that the National

Union policy would be excess to any other valid and collectible

insurance that applied to a loss under the policy unless the other

insurance was specifically written to be in excess of the National


52

19 Id. at p. 14.

20 Id.

21 Id. at Ex. J, the Columbia policy, Declarations, p. 1A, and policy,p. 11.

22 Id. at policy, p. 2.

23 Id. at Ex. C, the North American policy, Additional InsuredEndorsement.

7

Union policy.19 The National Union policy also contained the

following subrogation clause: “If any Insured has rights to

recover all or part of any payment we have made under this policy,

those rights are transferred to us. The Insured must do nothing

after loss to impair these rights and must help us enforce them.”20

The Columbia PL policy contained a $250,000 self-insured

retention (“SIR”) over which Columbia’s liability was limited to

$20 million.21 Columbia agreed to defend the insured as follows:

We have the right and duty to defend any claim madeagainst you seeking amounts that are payable under theterms of this Policy, even if any of the allegations ofthe claim are groundless, false or fraudulent. . . . Weare not obligated to defend any claim or pay any amountsafter the applicable limit of our liability has beenexhausted.22

ECCO’s CGL policy with North American contained the following

“other insurance” provision applicable to additional insureds:

Coverage provided by this policy to the AdditionalInsured(s) shown in the Schedule shall be primaryinsurance[,] and any other insurance maintained by theAdditional Insured(s) shall be excess and non-contributory, but only as respects any claim or liabilitydetermined to be the result of the sole negligence orresponsibility of the Named Insured and only if requiredof the Named Insured by written contract.23


53

24 See North American’s Final Motion for Summary Judgment, Docket EntryNo. 211, Ex. 1, Settlement Agreement and Release.

25 See id. at p. 4.

26 See id.

27 Id.

8

During construction of the plant, the refinery experienced

power outages and a fire, which caused significant property damage

and a firestorm of litigation.

B. Resulting Litigation between Valero and Encompass Power

Near the end of 2002, ESC and its subsidiaries (including

Encompass Power) filed for Chapter 11 bankruptcy protection. On

May 15, 2003, Valero and the ESC debtor entered a Settlement

Agreement and Release (hereinafter “the bankruptcy settlement

agreement”).24 Valero agreed to pay Encompass Power $1.5 million

as full payment for all of its work on the construction at Valero’s

refinery.25 The parties agreed that the bankruptcy stay should be

lifted to allow Valero to pursue all claims against the ESC

entities in connection with Encompass Power’s work.26

Valero agreed that, if successful on its claims, “it [would]

proceed with collection efforts on any judgment obtained, or

settlement reached, only as to and against one or more of such

insurance policies that provide coverage to [the ESC entities].”27

Valero further agreed to waive the right to collect any amount of

a judgment or settlement that exceeded the limits of the available


54

28 See id.

29 Id. at p. 5. “Work Agreement” referred to the contract betweenValero and Encompass Power related to work on Valero’s co-generation facility;“Project” referred to the construction of the facility; and “Notice” referred toValero’s notice of its claim to Continental, Columbia, and other insurers not inthis suit. See id. at pp. 1, 2. ESC also assigned Valero its claims anddefenses against third parties arising out of the work Encompass Power performedfor Valero. See id. at p. 4.

30 See North American’s Final Motion for Summary Judgment, Docket EntryNo. 211, Ex. 2, Order Pursuant to Federal Rule of Bankruptcy Procedure 9019Authorizing and Approving Settlement and Compromise with Valero Refining Company--California.

31 Docket Entry No. 177, Ex. N, Order Confirming Debtors’ Joint Plan ofReorganization under Chapter 11 of the Bankruptcy Code.

9

insurance.28 In exchange, ESC assigned, inter alia:

any and all rights and/or claims [ESC] and/or [EncompassPower] and/or affiliates may have against its insurersunder any policy providing coverage for the claims Valeromay assert against [Encompass Power], [ESC] and/oraffiliates which assignment shall become effective onlyin the event that such insurers breach their duty(ies) todefend and/or duty(ies) to indemnify [ESC], [EncompassPower] and/or affiliates against the claims asserted byValero arising out of or relating to the Work Agreement,the Project and/or the Notice.29

Less than a week later, the bankruptcy court approved the

settlement and lifted the stay as contemplated in the settlement

agreement.30 On May 28, 2003, the bankruptcy court approved the

joint plan of reorganization for ESC.31

After receiving the bankruptcy court’s approval, Valero filed

an arbitration action against Encompass Power. Valero accused

Encompass Power of negligence in the design, engineering,

construction of Valero’s California co-generation facility, in the

misrepresentation of its qualifications, and in selecting,

retaining, training, and supervising its subcontractors. The poor


55

32 See North American’s Motion for Summary Judgment Regarding Duty toDefend, Docket Entry No. 177, Ex. A-2, letter from David C. Kent to Daniel F.Sullivan dated Nov. 4, 2004.

33 North American’s Final Motion for Summary Judgment, Docket Entry No.211, Ex. 4, Limited Assignment Agreement.

34 Id. at pp. 3-4 (unnumbered).

10

design, engineering, installation and testing of electrical

hardware by Encompass Power and its subcontractors caused the

damage to the refinery, according to Valero’s arbitration claim.

On November 4, 2004, well over a year after Valero filed the

arbitration claim, Encompass Power tendered a claim for

“indemnification, defense and insurance coverage” to North American

via counsel representing ECCO in the arbitration.32 A month later,

Columbia denied it owed a duty to defend Encompass Power. On

December 17, 2004, Continental also sent a letter of tender to

North American. North American responded eight months later, after

conducting an investigation, and denied coverage.

On December 28, 2005, while Continental was defending

Encompass Power under a reservation of rights, ESC, claiming

successorship to Encompass Power, and Valero entered into a Limited

Assignment Agreement by which ESC agreed to assign to Valero all of

Encompass Power’s claims against CNA.33 In two paragraphs, the

agreement spelled out, in great detail, the extent of Encompass

Power’s assignment of claims to Valero.34 Essentially, the

agreement covered “any and all Claims of whatsoever kind and nature

that Encompass [Power] may have had, now has, or may have against


56

35 Id. at p. 3 (unnumbered).

36 Id. at p. 4 (unnumbered).

37 See id. at pp. 1-5.

38 North American’s Final Motion for Summary Judgment, Docket Entry No.211, Ex. 3, Confidential Settlement Agreement, pp. 6-7, 9.

39 Id. at p. 7.

11

CNA arising out of or relating to insurance coverage for Encompass

[Power] in connection with the Project or Arbitration.”35

The third paragraph of the agreement portion read: “Encompass

[Power] has carefully reviewed this Agreement[] and understands its

provisions. Encompass [Power] has sought legal advice with counsel

and has relied wholly upon its own judgment and knowledge in

executing this Agreement. Encompass [Power] fully understands and

voluntarily accepts each and every provision contained in this

Agreement.”36 The agreement did not release any portion of Valero’s

claims against Encompass Power or, for that matter, include any

promise whatsoever on Valero’s part.37

Valero then entered a settlement agreement with CNA

(hereinafter “the CNA/Valero agreement”), releasing all of

Encompass Power’s claims against CNA in exchange for a guaranteed

total payment of $8.5 million, $3 million of which was to be paid

within five days.38 The parties agreed that “a portion of the

Initial Payment” was to be paid from the Continental policy and

“that such payment fully exhaust[ed]” that policy.39 CNA was to pay

the remaining $5.5 million from amounts they recovered “from any


57

40 Id.

41 See id. at p. 8.

42 Id.

43 Id. at p. 9.

12

insurance and/or any subcontractor assets available to Encompass

[Power and its successors and assigns, etc.],” with CNA making up

any difference between the amount recovered and the guaranteed

amount.40 They also agreed on the division of amounts received in

excess of the guaranteed amount.41 The agreement stated:

The Parties agree that payments by CNA in excess of theInitial Payment shall be of last resort and that it isthe intent of the Parties that Third Party RecoverySources shall be the primary source of recovery. TheParties further agree that in no event shall CNA ever payfrom its own monies any amount in excess of an amountequal to the Guaranteed Amount to Valero or any otherparty, including in satisfaction of any claim forcontribution or set-off from any third-party or otherinsurer.42

In exchange for the promise of payment, Valero released CNA

from any and all claims, including those to which Valero claimed a

legal right by virtue of the Limited Assignment Agreement.43 Valero

also committed to a partial release of Encompass Power:

Valero further releases Encompass [Power] of itscontinuing obligations to Valero pursuant to the May 15,2003 Settlement Agreement, but solely and exclusively asthose ongoing obligations set forth in that SettlementAgreement arise from or relate to any policy of insuranceissued to Encompass [Power] by CNA. The Parties agreethat[,] unless otherwise subject to the terms of thisAgreement, Encompass [Power] retains any and allobligations to any other insurer, including anyobligation to cooperate in the defense of the


58

44 Id. at p. 10.

45 Id. at pp. 10, 11.

46 Id. at p. 11.

47 See id. at pp. 19-20.

48 See National Union’s Motion for Partial Summary Judgment, DocketEntry No. 84, Ex. E, letter from Christopher Carroll to David Metzler dated Dec.30, 2005.

49 National Union’s Final Motion for Summary Judgment, Docket Entry No.212, Ex. A, Affidavit of Carlos Cruz, ¶ 6.

13

Arbitration.44

Valero indicated that it intended to “continue to prosecute to

completion” the arbitration, but that it would “not seek to collect

any judgment, award or settlement from any other asset of Encompass

[Power].”45 Valero and Encompass Power agreed to cooperate in

attempts by CNA to recover from other sources, and all agreed to

confer with each other regarding settlement offers by third

parties.46 Representatives of Valero, Continental, and Columbia,

but not Encompass Power, signed the agreement.47

Upon the initial payment to Valero, Continental claimed its

policy limits were exhausted and, on December 30, 2005, tendered

Encompass Power’s continuing defense to National Union.48 Although

National Union did not agree that it owed Encompass Power the duty

of defense, it nevertheless defended Encompass Power under a

reservation of rights to the conclusion of the arbitration. From

January 2006 through March 2007, National Union was the only

carrier providing a defense for Encompass Power.49 However, counsel


59

50 North American’s Final Motion for Summary Judgment, Docket Entry No.211, Ex. 5, Affidavit of Byron C. Keeling, Ex. B, Summary of Fees, p. 2(unnumbered).

51 Valero and Encompass Power’s Joint Status Report, Docket Entry No.143, p. 2.

52 See id.

53 Royal was the excess carrier for ECCO’s CGL coverage.

54 Valero and Encompass Power’s Joint Status Report, Docket Entry No.143, p. 2.

55 CNA’s Motion for Summary Judgment, Docket Entry No. 213, p. 32.

56 National Union’s Final Motion for Summary Judgment, Docket Entry No.212, Ex. A, Affidavit of Carlos Cruz, ¶ 7. According to the affidavit testimony,National Union incurred over $250,000 in defense costs prior to June 2005. Id.at ¶ 8.

14

hired by Continental continued to bill fees related to Encompass

Power’s defense: $24,847 in January 2006, $1,896 in February 2006,

and $412 in March 2006.50

In March 2007, the arbitration parties reached a settlement

agreement that resolved all of Valero’s claims against Encompass

Power and all of Encompass Power’s claims against ECCO.51 Payments

under the settlement were due June 5, 2007.52 Additionally,

Columbia, Continental, National Union, North American, and Royal

Indemnity Company (“Royal”)53 settled all issues related to their

respective duties to indemnify Encompass Power for the arbitration

settlement.54 By the time the arbitration was settled,

Continental’s defense expense total was $2,712,857,55 and National

Union’s total was $3,046,223.79.56

In September of 2008, the court adopted, with modifications,

the undersigned’s Memorandum and Recommendation concerning the


60

57 See Order Adopting Magistrate Judge’s Memorandum and Recommendationdated Sept. 19, 2008, Docket Entry No. 193.

15

parties’ summary judgment motions on duty to defend.57 The court

resolved the following duty-to-defend issues during that round of

summary judgment motions: 1) Columbia, Continental, and North

American, as primary insurers, each owed Encompass a complete

defense in the arbitration; 2) National Union, as an excess CGL

insurer, had a duty to defend only upon exhaustion of the

Continental and North American policies; 3) Texas law applied to

the priority of coverage issue. The current round of summary

judgment motions targets all of the remaining issues concerning how

the defense obligation should be apportioned among the four

insurers in suit.

II. Summary Judgment Standard

Summary judgment is warranted when the evidence reveals that

no genuine dispute exists regarding any material fact and the

moving party is entitled to judgment as a matter of law. Fed. R.

Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986);

Brown v. City of Houston, Tex., 337 F.3d 539, 540-41 (5th Cir.

2003). The movant must inform the court of the basis for the

summary judgment motion and must point to relevant excerpts from

pleadings, depositions, answers to interrogatories, admissions, or

affidavits that demonstrate the absence of genuine factual issues.

Celotex Corp., 477 U.S. at 323; Topalian v. Ehrman, 954 F.2d 1125,


61

16

1131 (5th Cir. 1992).

A material fact is a fact that is identified by applicable

substantive law as critical to the outcome of the suit. Anderson

v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Ameristar Jet

Charter, Inc. v. Signal Composites, Inc., 271 F.3d 624, 626 (5th

Cir. 2001). To be genuine, the dispute regarding a material fact

must be supported by evidence such that a reasonable jury could

resolve the issue in favor of either party. Anderson, 477 U.S. at

250; TIG Ins. Co. v. Sedgwick James of Wash., 276 F.3d 754, 759 (5th

Cir. 2002).

III. Analysis

What remains to be decided is the allocation of defense costs

based on the prior decisions regarding priority of coverage and the

current issues of contribution, subrogation, and assignment, among

others. The court navigates through the set of very complex and

intricate issues beginning with the effect of recent caselaw on

Continental and National Union’s rights to reimbursement for their

defense costs.

A. Whether Recent Caselaw Precludes Continental from SeekingReimbursement of Defense Costs from North American

Before January 4, 2010, this issue generated much debate

because of the uncertainty caused by the Supreme Court of Texas’

2007 answer to a certified question posed by the Fifth Circuit

Court of Appeals (“Fifth Circuit”). See Mid-Continent Ins. Co. v.

Liberty Mut. Ins. Co. (hereinafter “Mid-Continent”), 236 S.W.3d 765


62

58 A “pro-rata” clause provides “for equal or pro rata sharing up to theco-insurers’ respective policy limits if the loss is covered by other primaryinsurance.” Mid-Continent, 236 S.W.3d at 769.

17

(Tex. 2007). Mid-Continent clarified how Texas law treats one

primary insurer’s claim for reimbursement of indemnity costs from

another primary insurer when both policies contain so-called “pro-

rata” clauses.58

On January 4, 2010, the Fifth Circuit issued Trinity Universal

Insurance Co. v. Employers Mutual Casualty Co., No. 08-20532, 2010

WL 6903, ___ F.3d ___, (5th Cir. Jan. 4, 2010). The court resolved

many questions regarding the reach of the Mid-Continent decision by

definitively holding that Mid-Continent does not apply to the

recovery of defense costs. See Trinity Universal Ins. Co., 2010 WL

6903, at *1. Finding that Mid-Continent dealt only with “the

question of whether one co-insurer has a right of contribution or

subrogation against a non-paying co-insurer to recover money paid

to indemnify a common insured for a loss,” the court analyzed the

separate issue of “whether a co-insurer that pays more than its

share of defense costs may recover such costs from a co-insurer who

violates its duty to defend a common insured.” See Trinity

Universal Ins. Co., 2010 WL 6903, at *6.

The Fifth Circuit determined that a primary insurer who pays

its insured’s defense costs is entitled to reimbursement from a

non-paying co-primary insurer pursuant to a claim of contribution.

See id. at *7 The elements of a contribution claim are: 1) a


63

59 One of the arguments not addressed in the November opinion wasColumbia’s position that its policy was never triggered because Encompass Powerfailed to contribute the self-insured retention required by the policy. Thecourt has considered that argument and finds it meritless. The bankruptcyreorganization plan, which was approved by the bankruptcy court, specificallyoutlined how an insurance SIR would be handled:

If the proceeds of an Insurance Policy become payable as aconsequence of the allowance of a Litigation Claim, and theInsurance Policy (or Insurance Policies) providing coverage for theAllowed Litigation Claim contains a retention (deductible) that hasnot been paid by the Debtors on or before the Effective Date, then,and in such event, (i) the amount of Insurance Policy proceedspayable by an insurer to the holder of the Allowed Litigation Claimshall be reduced by the amount of the unpaid retention, and (ii) theholder of the Allowed Litigation Claim shall hold an Allowed GeneralUnsecured Claim in the amount of such unpaid retention.

18

common obligation and 2) “a compulsory payment or other discharge

of more than its fair share of the common obligation or burden.”

Id. (quoting Mid-Continent, 236 S.W.3d at 772). Based on Texas law

holding that “[t]he duty to defend creates ‘a debt which is equally

and concurrently due by’ all of its insurers,” the court determined

that the paying insurers met the common obligation element of a

contribution claim. Trinity Universal Ins. Co., 2010 WL 6903, at

*7 (quoting Mid-Continent, 236 S.W.3d at 772). The refusal by one

of the primary insurance companies to participate in the defense

forced the remaining insurers to cover that debt, which satisfied

the second requirement for contribution. Trinity Universal Ins.

Co., 2010 WL 6903, at *7. Without explicitly stating its reasons

for the allocation, the court held that each insurer owed an equal

share of the defense. Id.

Trinity Universal Insurance Co. incontrovertibly resolves a

critical issue in the present case. Here, the court has determined

that Columbia,59 Continental, and North American each owed Encompass


64

North American’s Motion for Summary Judgment Regarding Duty to Defend, DocketEntry No. 177, Ex. N, Order Confirming Debtors’ Joint Plan of ReorganizationUnder Chapter 11 of the Bankruptcy Code, Ex. A, Second Amended Joint Plan ofReorganization, p. 20. Therefore, denial of coverage was not a remedy availableto Columbia for Encompass Power’s failure to meet its SIR.

19

Power a complete defense. Like the paying insurers in Trinity

Universal Insurance Co., Continental paid more than its fair share

of the common defense obligation by initially shouldering the

entire expense and, thus, is entitled to contribution from the

other two primary insurers. Following the Fifth Circuit’s example

of allocation, the court finds that each primary insurer is

responsible for one-third of the cost of defending Encompass Power

against Valero’s claims.

Even so, North American cannot be held liable for defense

costs incurred prior to the date on which Encompass Power requested

a defense from North American. See Royal Ins. Co. of Am. v.

Hartford Underwriters Ins. Co., 391 F.3d 639, 644 (5th Cir.

2004)(applying Texas law)(stating that the duty to defend arises

when an insured tenders to its insurer a third-party petition that

includes a potentially covered claim); Coastal Ref. & Mktg., Inc.

v. U.S. Fid. & Guar. Co., 218 S.W.3d 279, 293-94 (Tex. App.--

Houston [14th Dist.] 2007, pet. denied)(stating that an insured

typically cannot recover costs of defense incurred prior to tender

of claim to the insurer). Encompass Power tendered the claim to


65

60 North American argues in its motion that it did not receive noticeof Encompass Power’s claim until it requested coverage by way of a letter datedNovember 4, 2004. See North American’s Final Motion for Summary Judgment, DocketEntry No. 211, p. 31. However, in its response to Continental’s motion, itargues that it is not responsible for defense costs prior to December 17, 2004,the date on which Continental tendered Encompass Power’s defense to NorthAmerican. See North American’s Response to CNA’s Final Motion for SummaryJudgment, Docket Entry No. 217, p. 27. The court agrees with North American’soriginal assessment that its duty was triggered by the letter between counseldated November 4, 2004.

61 As evidenced by its briefing, Continental concedes that NorthAmerican, despite its breach of the duty to defend, has the right to challengethe reasonableness of the cost of defending Encompass Power.

20

North American by way of a letter dated November 4, 2004.60 From

that date forward, North American owed a duty to defend.

Continental is entitled to reimbursement for the reasonable defense

costs it expended between November 4, 2004, and when it ceased

providing Encompass Power a defense after entering the CNA/Valero

agreement.

B. Whether Continental’s Defense Expenses Were Reasonable61

The Fifth Circuit has stated: “A breach of the duty to defend

entitles the insured to the expenses it incurred in defending the

suit, including reasonable attorney’s fees and court costs.”

Primrose Operating Co. v. Nat’l Am. Ins. Co., 382 F.3d 546, 559 (5th

Cir. 2004)(emphasis added)(applying Texas law and addressing the

slightly dissimilar question of whether an insured who was provided

a defense by two of its three insurers could recover from the

third, breaching insurer the expense of a law firm the insured

hired in addition to the representation provided by its insurers);

see also United Servs. Auto. Ass’n v. Pennington, 810 S.W.2d 777,


66

62 North American’s Final Motion for Summary Judgment, Docket Entry No.211, p. 42.

21

784 (Tex. App.--San Antonio 1991, writ denied)(addressing a

situation in which an insured provided its own defense when its

insurer denied coverage); Tex. United Ins. Co. v. Burt Ford

Enters., 703 S.W.2d 828, 835 (Tex. App.--Tyler 1986, no

writ)(same).

North American challenges the reasonableness of the attorneys’

fees incurred by Continental because they include “unproductive,

excessive and redundant time.”62 Citing a few examples, North

American argues that the number of entries is too great to identify

each instance of excessive billing and, thus, the billing

statements should simply be reduced by forty percent. North

American submits the opinion of an expert witness on attorneys’

fees to support its position. North American also challenges the

more than $27,000 in fees assessed after Continental signed the

CNA/Valero agreement and tendered Encompass Power’s defense to

National Union.

Continental, too, offers expert testimony in support of its

contention that the defense costs were reasonable and necessary.

Additionally, it attacks the weight of North American’s expert

testimony on the basis that the expert “lacked the background

knowledge necessary to understand the nature of the litigation, the

work that was being performed and the personnel involved so as to


67

63 Continental’s Response to North American’s Final Motion for SummaryJudgment, Docket Entry No. 216, p. 19.

22

put the invoices in context.”63 Continental argues that it

necessarily incurred expenses after tendering the defense to

National Union in order to assure a smooth transition.

Whether attorneys’ fees are reasonable is typically a question

of fact. Satterwhite v. Safeco Land Title of Tarrant, 853 S.W.2d

202, 206 (Tex. App.--Fort Worth 1993, writ denied). This case is

no different. The accusations presented by North American that

Continental’s attorneys engaged in excessive billing and that post-

tender expenses were unnecessary are weighted issues that require

factual determinations. The fact finder is best suited to handle

the battle of the experts.

C. Whether Recent Caselaw Precludes National Union from SeekingReimbursement of Defense Costs from the Primary Insurers

National Union’s claim to reimbursement from the primary

insurers does not fit within the Mid-Continent paradigm because

National Union was an excess carrier. Under Texas law, an excess

insurer becomes obligated to defend the insured only upon

exhaustion of the primary policy limits. Keck, Mahin & Cate v.

Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 20 S.W.3d 692, 700

(Tex. 2000); see also Tex. Employers Ins. Ass’n v. Underwriting

Members of Lloyds, 836 F. Supp. 398, 409 (S.D. Tex. 1993). A

primary insurer’s duty to defend “extends to covered claims without

regard to their amount;” thus, a claim in excess of the primary


68

64 The majority opinion did not clearly state on which cause of actionit allowed the excess insurer to proceed. It noted initially that the excessinsurers brought suit for negligence, gross negligence, breach of the duty ofgood faith and fair dealing, and violations of the Texas Deceptive TradePractices-Consumer Protection Act (“DTPA”) and article 21.21 (now Chapter 541)of the Texas Insurance Code. Canal, 843 S.W.2d at 481. In a subsequent portionof the opinion where it agreed with the court of appeals that the equitablesubrogation claim, which was subject to a limitations period parallel to aStowers action, was not time barred, the court wrote:

We also agree that any claims against [the primary insurer] fornegligence, gross negligence and violations of the DTPA andInsurance Code were barred by the applicable statutes oflimitations. Thus we need not, and do not, decide whether the

23

policy’s limits does not trigger the excess insurer’s duty to

defend. Keck, Mahin & Cate, 20 S.W.3d at 701.

Mid-Continent specifically addressed the difference between a

subrogation claim for reimbursement by one primary liability co-

insurer against another and one by an excess liability insurer

against a primary liability insurer. See Mid-Continent, 236 S.W.3d

at 776. In fact, the court acknowledged that prior precedent

recognized “equitable subrogation as a basis for an excess

insurer’s recovery against a primary insurer to prevent a primary

insurer from taking advantage of an excess insurer, acting solely

as such, when a potential judgment approaches the primary insurer’s

policy limits.” Id. (citing Am. Centennial Ins. Co. v. Canal Ins.

Co. (hereinafter “Canal”), 843 S.W.2d 480, 483 (Tex. 1992)).

Mid-Continent, thus, appears to have left undisturbed prior

precedent regarding the subrogation rights of excess insurers. See

id. The Canal opinion allowed excess insurers to assert, via

subrogation to the insured’s rights, a claim for negligence against

the insured’s primary carrier64 and a claim for legal malpractice


69

doctrine of equitable subrogation would extend to permit suchactions by an excess carrier against the primary insurer.

Id. at 483. The only remaining cause of action not barred, then, was breach of the duty

of good faith and fair dealing. See id. However, the concurring opinion, inwhich a majority of the court joined, stated that, “[a]lthough the Court does notexpressly consider which of [the asserted] theories is available to the excesscarriers by subrogation, [the writer assumed] . . ., and would so hold, that theexcess carriers’ only cause of action [was] for negligence” and “agree[d] withthe Court that the primary carrier failed to establish as a matter of law thatsuch an action is barred by limitations.” Id. at 486 (Hecht, J., concurring).The Fifth Circuit agreed with the concurring opinion that the cause of action inCanal was negligence. See Royal Ins. Co. of Am. v. Caliber One Indem. Co., 465F.3d 614 (5th Cir. 2006). Therefore, this court does as well.

65 The court went so far as to state, in response to a contraryargument, that an insurer’s payment of a settlement amount was not voluntary forsubrogation purposes even if its policy actually did not provide coverage. Keck,

24

against the insured’s defense team. See Canal, 843 S.W.2d at 483-

84. The court refused to consider allowing a direct action between

excess and primary insurers because equitable subrogation provided

an adequate remedy. See id. at 483.

Under circumstances similar to those in Canal, the Supreme

Court of Texas allowed another excess liability insurer’s

subrogation claim for negligence in the defense of the underlying

lawsuit against the primary insurer. Keck, Mahin & Cate, 20 S.W.3d

702. The court explained that the “reasonable belief” rule allowed

the excess insurer’s equitable subrogation claim despite the

payment of more than its share of the settlement costs:

An insurer who pays a third-party claim against itsinsured is not a volunteer if the payment is made in goodfaith and under a reasonable belief that the payment isnecessary to its protection. In the context of equitablesubrogation, Texas courts have been liberal in theirdeterminations that payments were made involuntarily. Anexcess insurer’s payment to settle a suit against theinsured has been said to be presumptively involuntary forsubrogation purposes.65


70

Mahin & Cate, 20 S.W.3d at 703. The court noted that good public policysupported this conclusion because, absent a right of subrogation in such aninstance, the insurance company, acting in its best interest, would litigate allquestionable claims. Id. The reasonable belief rule, then, encourages insurancecompanies to settle disputed claims instead of forcing insureds into litigationwith their insurers. Id.

25

Id. (internal quotation marks and citations omitted).

Other pre-Mid-Continent Texas decisions have held that excess

insurers may bring equitable subrogation claims for reimbursement

from nonpaying primary insurers. See Argonaut Ins. Co., 869 S.W.2d

at 542; Liberty Mut. Ins. Co. v. Gen. Ins. Corp., 517 S.W.2d 791,

797 (Tex. Civ. App.--Tyler 1974, writ ref’d n.r.e.). In such

cases, the insurer is seeking to enforce the insured’s contractual

right to payment of the primary policy’s limits.

In Argonaut Insurance Co., the court of appeals used language

later quoted in Mid-Continent to explain the doctrine of

subrogation: “[T]he doctrine of subrogation is given a liberal

application and is broad enough to include every instance in which

one person, not acting voluntarily, has paid a debt for which

another was primarily liable and which in equity and good

conscience should have been discharged by the latter.” Argonaut

Ins. Co., 869 S.W.2d at 541-42. That court identified two “key”

elements of an equitable subrogation claim: 1) the party on whose

behalf the debt was discharged was primarily liable; and 2) the

paying party did so involuntarily. Id. at 542. Because excess

insurers are secondarily liable, the court reiterated, their

payments to insureds on behalf of primary carriers are


71

66 The case also allowed a primary co-insurer to bring an equitablesubrogation claim against another primary co-insurer under circumstances notsignificantly different from those in Mid-Continent. See Liberty Mut. Ins., 517S.W.2d at 796. This portion of the opinion appears to have lost any precedentialvalue as a result of the Mid-Continent decision.

26

presumptively involuntary. Id. The Liberty Mutual Insurance Co.

court reached the same decision.66 Liberty Mut. Ins. Co., 517

S.W.2d at 797 (relying on prior Texas cases and stating that the

excess insurer “was secondarily liable and was therefore entitled

to legal or equitable subrogation” against the primary insurer).

Federal caselaw, before and after Mid-Continent, are in

accordance with the above state precedents on the subrogation

rights of excess insurers. Most notable is Royal Insurance Co. of

America v. Caliber One Indemnity Co. (hereinafter “Caliber One”),

465 F.3d 614 (5th Cir. 2006). In that case, the Fifth Circuit

reversed in part a lower court decision based on the appellate

court’s finding that an excess carrier could bring an equitable

subrogation claim against a co-temporal primary insurer when the

claim was predicated on the insured’s contract rights. Caliber

One, 465 F.3d at 617-18 (noting that Employers Cas. Co., 444 S.W.2d

at 610, recognized that an excess carrier had an equitable

subrogation right “to recover amounts that a primary insurer should

have paid under its policy terms and limits”). The court clarified

that excess carriers are entitled, based on policy indemnity

provisions, to reimbursement from primary insurers up to the

underlying policy limits. Caliber One, 465 F.3d at 619.


72

27

Echoing guiding principles articulated in the Canal case, the

opinion stated that Texas recognizes “equitable subrogation as a

remedy for excess carriers precisely because an insured who has

excess insurance coverage may not have any incentive to press its

primary carrier for the full limits of its policy.” Caliber One,

465 F.3d at 620 (also quoting Canal, 843 S.W.2d at 483, regarding

the position of the Supreme Court of Texas that primary carriers

should not be relieved of their duties to protect the interests of

the insured “simply because the insured has separately contracted

for excess coverage.”); see also N. Am. Specialty Ins. Co. v. Royal

Surplus Lines Ins. Co., 541 F.3d 552, 555 (5th Cir. 2008)(citing

Canal, 843 S.W.2d at 481, and stating, “Texas cases providing a

right of equitable subrogation to an excess carrier involve an

excess carrier suing a primary carrier, where their respective

policies overlap temporally”).

These decisions indicate that excess insurers are entitled to

reimbursement from primary insurers based on the insured’s

contractual right to a defense. Mid-Continent did not alter the

prior law concerning excess insurers’ subrogation rights because it

dealt with the effect of pro rata clauses on primary co-insurers’

common obligations, not with the relationship between excess and

primary insurers, which by definition is not one of common

obligations.

National Union’s policy contained a subrogation provision


73

67 In its response brief, National Union also asserts that it has aright of contribution against the primary insurers. A right of contribution isbased on the payment of a whole debt owed equally and concurrently by the payorand one or more co-insurers. Mid-Continent, 236 S.W.3d at 772. The concept of

28

allowing it to be subrogated to Encompass Power’s rights against

the primary insurers. So, National Union is entitled to

contractual subrogation. Moreover, equity also favors National

Union. National Union’s assumption of Encompass Power’s defense

was presumptively involuntary. See Argonaut Ins. Co., 869 S.W.2d

at 543. Insureds (particularly ones that are bankrupt and excused

from all liability beyond their available insurance) lack incentive

to force their primary insurers to defend until payment of the

policy limits when excess insurers are willing to fill in for

delinquent primary insurers. Cf. Caliber One, 465 F.3d at 620-21

(favoring enforcement of primary policies by excess insurers when

insureds lack incentive to do so). Continental, Columbia, and

North American based the premiums charged on the risk appurtenant

to primary coverage and should not be able to prematurely escape

their responsibilities simply because Encompass Power also carried

excess coverage. See id.; Tex. Employers Ins. Ass’n, 836 F. Supp.

at 407; Keck, Mahin & Cate, 20 S.W.3d at 701; Canal, 843 S.W.2d at

483.

Accordingly, the court finds that National Union, as an excess

insurer, is not precluded by Mid-Continent from seeking

reimbursement from the primary insurers under a theory of either

contractual or equitable subrogation.67


74

contribution is inapposite to the relationship between an excess insurer and aprimary insurer. As explained above, an excess insurer does not share the dutyto defend with the underlying primary insurer, but owes the insured a defenseonly upon the extinguishment of the primary insurer’s duty. See Keck, Mahin, &Cate, 20 S.W.3d at 700. National Union may not pursue reimbursement viacontribution because it did not equally and concurrently owe that duty. SeeCaliber One, 465 F.3d at 619 (remarking that Texas law does not allow a directcause of action by an excess carrier against a primary carrier).

29

D. Whether Encompass Power’s Assignment of Rights ProhibitsNational Union from Collecting from the Primary Insurers

One poignant observation in Mid-Continent speaks to this

issue: the right to subrogation does not guarantee recovery under

that right. Mid-Continent, 236 S.W.3d at 774. “Under the doctrine

of equitable subrogation, an excess insurer, paying a loss under a

policy, stands in the shoes of its insured with regard to any cause

of action its insured may have against a primary insurer

responsible for the loss.” Caliber One, 465 F.3d at 619.

Conversely, if the insured no longer possesses any right of action

against its primary insurers, the excess insurer gains nothing

through subrogation. See id.; Mid-Continent, 236 S.W.3d at 774.

What rights National Union gained via subrogation against

Continental, Columbia, and North America were potentially limited

by two agreements involving the assignment to Valero of Encompass

Power’s rights against its insurers. The first of these was the

bankruptcy settlement agreement signed by Valero and ESC

representatives on May 15, 2003, and approved by the bankruptcy

court on May 21, 2003. The second was the Limited Assignment

Agreement signed by an ESC principal on December 28, 2005. The


75

68 The parties submitted Valero’s Third Amended Statement of Claim inconnection with their motions for summary judgment on the duty to defend. SeeMemorandum and Recommendation dated August 29, 2008, Docket Entry No. 190, pp.12-14, 29-43 (citing National Union’s Motion for Summary Judgment on Duty toDefend and Priority Among the Carriers, Docket Entry No. 175, Ex. C, Valero’sThird Amended Statement of Claim).

30

court examines each.

Pursuant to the 2003 bankruptcy settlement agreement,

Encompass Power assigned (to Valero) all of its rights against its

insurers under the policies providing coverage for the Valero

claims effective upon the insurers’ breaches of their duties under

the policies. In other words, the assignment was not immediate,

but took effect as to each defaulting insurer at the time of

default.

As the court previously has determined, Columbia and North

American owed Encompass Power a duty of defense based on Valero’s

Third Amended Statement of Claim in the arbitration, which was

dated July 16, 2004.68 Five months after the filing of the third

claim amendment, Columbia denied it owed Encompass Power a duty to

defend; more than a year after the amendment and eight months after

tender of the claim, North American also denied its duty to defend.

The failure of Columbia and North American to provide Encompass

Power a defense breached their respective policies. All of

Encompass Power’s rights, including the right to a defense, as

against both Columbia and North American automatically became

Valero’s rights by assignment upon breach.

Therefore, by the time National Union took over Encompass


76

69 National Union’s position differs in this regard from that ofContinental, which began defending Encompass Power before any of its insurers hadbreached.

31

Power’s defense in January 2006, Encompass Power no longer

possessed the right to a defense under the Columbia and North

American policies.69 Valero possessed those rights via assignment.

Standing in Encompass Power’s shoes, as it was entitled to do,

National Union gained nothing against those two insurers. See Mid-

Continent, 236 S.W.3d at 774.

National Union’s subrogation clause afforded protection

against this transfer even though the right of subrogation was not

in existence at the time of assignment. The subrogation clause

specified that Encompass Power must not take any action after loss

to impair rights available to National Union via subrogation.

Certainly, by transferring all of its rights against Columbia and

North American to Valero, Encompass Power impaired National Union’s

potential subrogation rights to enforce the other insurers’

obligation to defend Encompass Power.

This legal truth offers National Union no practical

assistance, however. The remedy for impairment of subrogation

rights is not the invalidation of the assignment but the discharge

of National Union’s obligation to the extent Encompass Power

defeated the right of subrogation. See Vesta Ins. Co. v. Amoco

Prod. Co., 986 F.2d 981, 987 (5th Cir. 1993)(“[S]uch conduct . . .

has the effect of forfeiting any claim the insured might have had


77

70 The court acknowledges that the facts of these cases differ in themanner in which the right of subrogation was impaired, but finds the general ruleof remedy equally applicable here.

71 This clause stated, “Your rights and duties under this policy may notbe transferred without our written consent.” CNA’s Motion for Summary Judgment,Docket Entry No. 213, Ex. E, the National Union policy, p. 15.

72 The policy required the insured to “cooperate with us in theinvestigation, settlement or defense of the claim or suit.” Id. at p. 13.

32

under the insurance policy.”); Oss v. United Servs. Auto. Ass’n,

807 F.2d 457, 459 (5th Cir. 1987)(“Texas courts have held that

insurers are discharged from their obligation to pay the insured to

the full extent to which the insured has defeated the right of

subrogation.”).70 Unfortunately for National Union, its only

recourse under its subrogation clause would be against Encompass

Power, were such action possible. See Vesta Ins. Co., 986 F.2d at

987.

National Union argues that the anti-assignment71 and

cooperation72 provisions of its policy operated to invalidate

Encompass Power’s assignment of its rights against Columbia and

North America. These contract provisions fail National Union. The

anti-assignment clause prevents Encompass Power from assigning its

rights or duties under the National Union contract. Encompass

Power did not assign its rights under the National Union policy,

but assigned its rights under other insurance policies.

National Union argues that the cooperation clause prevents the

insured from entering any agreement that imposes liability on

National Union or deprives National Union of a defense. Be that as


78

33

it may, assignment of Encompass Power’s rights against other

insurers cannot legitimately be said to have done either. National

Union gained no duties by assignment and retained all the same

defenses. The difference was that, although the other insurers

remained obligated, a separate entity owned the right to force them

to perform under the other contracts.

With regard to the 2005 agreement signed by Encompass Power

purporting to assign all of its rights against CNA, the court finds

that it was not effective as to either Columbia or Continental. As

discussed above, Encompass Power’s rights against Columbia

transferred automatically to Valero when Columbia breached its duty

to defend by wrongfully denying the claim in late 2004. The

assignment occurred at least a year prior to the date of the

Limited Assignment Agreement. Therefore, Encompass Power no longer

possessed any right against Columbia that could be assigned to

Valero.

Continental, on the other hand, had not breached its duty to

defend at the time it entered the settlement agreement, which meant

that its rights had not been automatically assigned to Valero

pursuant to the 2003 bankruptcy settlement agreement. Encompass

Power sill retained all of its rights against Continental.

Although the 2005 Limited Assignment Agreement purported to

transfer those rights, Valero offered absolutely nothing to


79

73 To the extent any party contends that Valero’s promises in theConfidential Settlement Agreement with CNA to release Encompass Power ofcontinuing obligations arising from the CNA policies and to refrain from seekingcollection of any amount from Encompass Power, the court finds the argumentwithout merit. Neither promise served as consideration for the separate, prioragreement by which Encompass Power purported to assign rights to Valero.Furthermore, the second promise was illusory in that Valero already made thecommitment, in the 2003 bankruptcy settlement agreement, to pursue any judgmentfrom the insurers and waived any right to collect against Encompass.

74 Because the court concludes that Encompass Power retains no rightsagainst Columbia that could pass to National Union via subrogation, the courtdoes not discuss whether National Union could collect against Columbia, a primaryinsurer to which National Union is not excess. The question is intriguing. Therelationship between National Union and Columbia fits neither the Mid-Continentscenario of primary co-insurers subject to pro rata clauses nor the Canal factsof primary and excess insurers in the same insurance line. At least one districtcourt case held that an excess insurer was not liable until all primary policieswere exhausted. See St. Paul Mercury Ins. Co. v. Lexington Ins. Co., 888 F.Supp. 1372, 1381 (S.D. Tex. 1995). The facts there, as here, involved lines ofdifferent types of insurance. See id. 1375, 1381.

34

Encompass Power in exchange.73 In other words, the assignment was

not supported by any consideration from Valero. See Copeland v.

Alsobrook, 3 S.W.3d 598, 604 (Tex. App.--San Antonio 1999, pet.

denied)(stating that consideration is a necessary element of the

formation of a contract); Russell v. Panhandle Producing Co., 975

S.W.2d 702, 712 (Tex. App.--Amarillo 1998, no pet.)(stating that an

assignment is a contract). Despite being labeled an agreement, the

document signed by Encompass Power was not a binding contract

effective to assign its rights against Continental to Valero.

Encompass Power’s automatic assignment of its rights against

Columbia and North American prevents National Union from seeking

reimbursement from those insurers.74 The 2005 Limited Assignment

Agreement was not a valid contract and did not transfer Encompass

Power’s rights against Continental to Valero.


80

75 Continental argues that the CNA/Valero agreement exhausted theContinental policy and released the Columbia policy. No one contends that theagreement operated to exhaust Columbia’s $20 million policy limit. According tothe Columbia policy, its duty to defend terminated only when the limit ofliability was exhausted. Yet, CNA argues, not that Columbia paid $20 million asrequired by the policy to terminate its defense obligation, but that Valeroreleased Columbia from any further obligations in exchange for payment of no morethan $7.5 million (assuming Columbia paid the guaranteed settlement amount minusContinental’s $1 million policy limits). CNA does not explain how thesettlement, even if valid, managed Columbia’s full release. CNA fails to offerany legal authority that allows an insurer to settle its obligations at what wasessentially a more than sixty percent discount in exchange for full release ofits insuring obligations while leaving its insured to fend for itself incontinuing litigation. The court doubts CNA seriously believes that to be thelaw for two reasons. First of all, the entirety of CNA’s argument on the pointis that the settlement was valid and released Columbia. That certainly is notenough to establish entitlement to summary judgment as a matter of law. Secondof all, although CNA asserts that the settlement agreement released Continentalas well, CNA does not rely on release but policy exhaustion in its argument thatthe agreement terminated Continental’s duty to defend. Regardless of thesettlement agreement’s validity, it did not relieve Columbia of its duty todefend.

35

E. Whether the CNA/Valero Settlement Agreement is Enforceable andResults in the Exhaustion of the Continental Policy75

It is axiomatic that the insuring agreement dictates the

relationship between insurer and insured. Excess Underwriters at

Lloyd’s, London v. Frank’s Casing Crew & Rental Tools, Inc., 246

S.W.3d 42, 70 (Tex. 2008)(stating that, despite common law and

legislative changes, “the relationship between insurer and insured

is still fundamentally based on the agreement of the parties”).

Insurance policies are subject to the rules of contract

interpretation. Progressive County Mut. Ins. Co. v. Sink, 107

S.W.3d 547, 551 (Tex. 2003). “Terms in contracts are given their

plain, ordinary, and generally accepted meaning unless the contract

itself shows that particular definitions are used to replace that

meaning.” Bituminous Cas. Corp. v. Maxey, 110 S.W.3d 203, 208-09

(Tex. App.—Houston [1st Dist.] 2003, pet. denied)(citing W. Reserve


81

76 CNA’s Motion for Summary Judgment, Docket Entry No. 213, Ex. D,Continental policy, CGL Coverage Form, p. 1.

36

Life Ins. v. Meadows, 261 S.W.2d 554, 557 (Tex. 1953)). When a

contract as worded “can be given a definite or certain legal

meaning,” then it is unambiguous as a matter of law and the court

enforces it as written. Nat’l Union Fire Ins. Co. of Pittsburgh,

Pa. v. CBI Indus., 907 S.W.2d 517, 520 (Tex. 1995).

The CNA/Valero agreement did not relieve Continental of its

duty to defend Encompass Power for the simple reason that it did

not meet the requirements of Continental’s policy. The Continental

policy stated that its duty to defend the insured terminated when

the policy limit was “used up . . . in the payment of judgments or

settlements.”76 The unambiguous language of the policy required not

only that the policy limits be paid but that they be paid toward a

judgment or settlement. Because the policy does not give the terms

“judgments” and “settlements” any special meaning, the court

applies the “plain, ordinary, and generally accepted meaning” to

the terms. See Bituminous Cas. Corp., 110 S.W.3d 208-09. No

judgment had been entered in the underlying lawsuit at the time of

the execution of the CNA/Valero agreement. Therefore, the only

question is whether that agreement amounted to a settlement of

Valero’s claims in arbitration.

A “settlement” is “[a]n agreement ending a dispute or

lawsuit.” Black’s Law Dictionary 1405 (8th ed. 2004). Although a


82

37

settlement may partially resolve a lawsuit, it is a full and final

resolution of one or more of a party’s claims against another. See

Judwin Props., Inc. v. United States Fire Ins. Co., 973 F.2d 432,

436 (5th Cir. 1992)(holding that insurer exhausted policy limits

when it settled all of the claims asserted by two of multiple

groups of third-party plaintiffs); Am. States Ins. Co. v. Arnold,

930 S.W.2d 196, 200-02 (Tex. App.--Dallas 1996, writ

denied)(holding that insurer’s duty to defend terminated upon

payment of policy limits to settle all claims by a plaintiff

against named insured, even though claims against additional

insured remained pending). In those cases, the insurer faced

multiple claims by multiple plaintiffs and/or against multiple

insureds. See Judwin Props., Inc., at 973 F.2d at 433-34; Arnold,

930 S.W.2d at 198-99, 202. The negotiated settlements resolved all

of the claims by one third-party plaintiff against one insured.

See Judwin Props., Inc., at 973 F.2d at 436; Arnold, 930 S.W.2d at

202.

An agreement to pay a certain amount toward an ultimate

judgment does not resolve any portion of the lawsuit and does not

release an insurer from its duty to defend. See Anchor Cas. Co. v.

McCaleb, 178 F.2d 322, 325 (stating that insurer cannot avoid

defense obligation by paying money into the court’s registry).

Similarly, making the policy limits available or settling a case

without funding it does not terminate the insurer’s duty to defend.


83

77 North American and National Union also make several other argumentsin support of their position that the CNA/Valero agreement did not terminateContinental’s defense obligations, including the contentions that the CNA/Valeroagreement was void because it violated public policy and that it was notsupported by valid consideration. These arguments are very interesting andrather perplexing. However, because the result is the same for purposes of thislawsuit whether the agreement is found to be void and/or unenforceable or foundnot to exhaust or release the CNA policies, the court opts not to make anyadditional, unnecessary ruling on its validity, and, so, does not reach the otherarguments.

38

See, e.g., Tex. Employers Ins. Ass’n, 836 F. Supp. at 409; In re

Consol. Freightways, Inc., 75 S.W.3d 147, 152 (Tex. App.--San

Antonio 2002, no pet.).

As North American and National Union point out, the CNA/Valero

agreement did not settle any claim against Encompass Power. Before

the settlement, Encompass Power was the defendant in the underlying

arbitration and, after the settlement, Encompass Power remained a

defendant on all of the claims originally asserted by Valero. The

“settlement” actually operated as an agreement on the apportionment

of indemnity costs between insurers. Regardless of Valero’s

professed release of CNA and covenant not to execute against

Encompass Power personally, Valero continued to prosecute all of

the claims in the underlying arbitration against Encompass Power.

The focus should be on settling the underlying arbitration suit,

not settling the insurers’ disputes. The CNA/Valero agreement did

not end any dispute or lawsuit between Valero and Encompass Power

and, thus, was not a full or partial settlement of the

arbitration.77

Regardless of what Continental may have thought at the time,


84

39

payment pursuant to the CNA/Valero agreement did not exhaust

Continental’s policy limits. Additionally, Valero did not have the

authority to release Continental because Encompass Power, not

Valero, possessed rights against Continental at the time of the

CNA/Valero agreement. Ironically, though, Continental’s wrongful

tender of Encompass Power’s defense to National Union in the

aftermath of the CNA/Valero agreement was a breach of its policy,

which triggered the 2003 bankruptcy settlement agreement provision

automatically assigning Encompass Power’s rights against

Continental to Valero.

As a result, National Union stepped into very empty shoes. By

that time, Encompass Power had transferred to Valero its rights to

enforce all three breaching insurers’ duties to defend.

IV. Conclusion

Based on the foregoing, the court RECOMMENDS that all three

motions for summary judgment be GRANTED IN PART AND DENIED IN PART.

As previously mentioned, North American’s cross complaint against

Valero and Encompass Power remains pending, although it no longer

appears to have relevance. Assuming that is the case, the only

issue that requires a trial is the reasonableness of Continental’s

defense costs.

The Clerk shall send copies of this Memorandum and

Recommendation to the respective parties who have fourteen days

from the receipt thereof to file written objections thereto


85

40

pursuant to Federal Rule of Civil Procedure 72(b) and General Order

2002-13. No requests for extensions of time will be granted.

Failure to file written objections within the time period mentioned

shall bar an aggrieved party from attacking the factual findings

and legal conclusions on appeal.

The original of any written objections shall be filed with the

United States District Clerk, either electronically or by mail to

P.O. Box 61010, Houston, Texas, 77208. Copies of such objections

shall be mailed to opposing parties and to the chambers of the

undersigned, 515 Rusk, Suite 7019, Houston, Texas 77002.

SIGNED in Houston, Texas, this 13th day of January 2010.


86

79CONTINENTAL CAS. v. NORTH AMERICAN CAPACITY INS.Cite as 683 F.3d 79 (5th Cir. 2012)

faction of her claim against the Town. Sheis therefore required, under Lorenzetti’sbroad language, which stresses ‘‘third par-ties’’ as opposed to ‘‘persons,’’ to reimbursethe Department of Labor under FECA.This makes sense, given that ‘‘the purposeof § 8132 is TTT to minimize the cost of theFECA program to the Federal Govern-mentTTTT It is self-evident that [that] goalis directly advanced by allowing the Unit-ed States to obtain reimbursement out ofany third-party recoveryTTTT’’ Lorenzetti,467 U.S. at 177, 104 S.Ct. 2284 (emphasisadded).

B.

Hutchins also contends that ‘‘[i]f ‘person’is construed broadly it would allow theDepartment of Labor to sue States. Suchaction by a federal agency, if actually per-mitted by the FECA subrogation statute,would threaten state sovereignty and vio-late the important Constitution principlesof federalism.’’ Appellant’s Br. at 7. Spe-cifically, Hutchins argues that interpreting‘‘person’’ to include the Town would permitthe Department of Labor, under 5 U.S.C.§ 8131, to sue states and their subdivi-sions, in violation of South Carolina’s TortClaims Act and the Constitution of theUnited States.

We, like the district court, decline toaddress this argument. The Departmentof Labor never required Hutchins to as-sign her claim to the government, nor didthe government seek to prosecute an ac-tion against the Town. Rather, Hutchinspersonally pursued the claim, and the De-partment of Labor merely sought reim-bursement afterwards. The legality of acase in which the federal governmentbrings a claim against a state is thereforesimply not at hand, and we refrain fromaddressing it.

III.

In sum, the statutory language and Su-preme Court precedent indicate that a mu-nicipality such as the Town constitutes a‘‘person’’ for purposes of reimbursementunder 5 U.S.C. § 8132. The district courttherefore correctly determined that Hutch-ins’s recovery from the Town for her inju-ries sustained when falling into a Townmanhole was properly subject to refundunder FECA.

AFFIRMED

,

CONTINENTAL CASUALTY CO.,Plaintiff–Third Party Defendant–In-tervenor Defendant–Counter Claim-ant–Appellee–Cross Appellee–CrossAppellant,

v.

NORTH AMERICAN CAPACITY IN-SURANCE CO., Defendant–Interve-nor–Defendant–Counter Claimant–Appellee–Cross Appellant–Cross Ap-pellee,

v.

Columbia Casualty Co., Third Party De-fendant Intervenor Defendant–Coun-ter Claimant–Appellee Cross Appel-lee–Cross Appellant,

v.

National Union Fire Insurance Compa-ny of Pittsburgh, Pennsylvania, Inter-venor Plaintiff–Third Party–PlaintiffCounter Defendant–Appellant–CrossAppellee.

No. 10–20262.


May 30, 2012.Background: Contractor’s commercialgeneral liability (CGL) insurer brought

87


suit in state court, seeking declaratoryjudgment that subcontractor’s CGL insur-er was obligated to defend contractoragainst owner’s claims as an additionalinsured. Following removal, contractor’sumbrella insurer intervened, and implead-ed contractor’s professional liability insur-er. The United States District Court forthe Southern District of Texas, Sim Lake,J., determined on summary judgment thatthe three primary insurers had to splitcosts initially spent by umbrella insurerdefending insured, but that umbrella in-surer could not recover any of its defensecosts from the primary insurers. Partiesappealed.

Holdings: The Court of Appeals, Reavley,Circuit Judge, held that:

(1) umbrella insurer was entitled recoverits defense costs from primary insur-ers;

(2) contractor’s CGL insurer was primari-ly liable for defense costs;

(3) professional liability insurer was pri-marily liable for defense costs;

(4) subcontractor’s CGL insurer was pri-marily liable for defense costs; and

(5) defense costs were properly proratedequally among the primary insurers.

Affirmed in part and reversed in part.

1. Federal Courts O776

Court of Appeals reviews districtcourt’s decisions on summary judgment denovo, applying same legal standard as dis-trict court.

2. Subrogation O1

Under Texas law, ‘‘equitable subroga-tion’’ arises in every instance in which oneperson, not acting voluntarily, has paiddebt for which another was primarily liable

and which in equity should have been paidby the latter.

See publication Words and Phras-es for other judicial constructionsand definitions.

3. Subrogation O27

Under Texas law, ‘‘contractual subro-gation’’ is created by agreement or con-tract that grants right to pursue reim-bursement from third party in exchangefor payment of a loss.

See publication Words and Phras-es for other judicial constructionsand definitions.

4. Insurance O3523(1, 3)

In case of either equitable or contrac-tual subrogation, under Texas law, insurerstands in shoes of insured, obtaining onlythose rights held by insured against thirdparty, subject to any defenses held bythird party against insured.

5. Insurance O3517

Under Texas law, subrogation clauseof commercial umbrella policy, providingthat ‘‘[i]f any Insured has rights to recoverall or part of any payment we have madeunder this policy, those rights are trans-ferred to us,’’ entitled umbrella insurerwhich took over defense of insured to re-cover its defense costs from primary insur-ers who refused to defend their insured;insured’s assignment of its defense rightsunder the policies in bankruptcy agree-ment did not preclude insurer from assert-ing its subrogation rights on ‘‘emptyshoes’’ theory.

6. Insurance O1806

Under Texas law, insurance policiesare interpreted using same rules govern-ing other contracts.

7. Contracts O143(3), 152

Under Texas contract law, words aregiven their plain meaning, and courts must

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not insert additional provisions into thecontract.

8. Contracts O143(1)Under Texas law, if written instru-

ment is worded so that it can be given onlyone reasonable construction, it will be en-forced as written.

9. Insurance O2930Under Texas law, commercial general

liability (CGL) insurer’s settlement ofclaim against its insured did not end itsduty to defend under the policy, whichprovided that insurer’s ‘‘right and duty todefend end when we have used up theapplicable limit of insurance in the pay-ment of judgments or settlements’’; therewas no judgment ending even part of thearbitration against insured, and there wasno settlement because no lawsuit or dis-pute was ended.

10. Insurance O2283, 2917Under Texas law, sums paid by other

insurers in insured’s defense satisfied re-quirement for triggering professional lia-bility coverage that insured pay self-in-sured retention amount.

11. Insurance O2913Under California law, insurer’s duty

to defend is broader than duty to indemni-fy, and it may be owed even in actionswhere damages are not ultimately award-ed.

12. Insurance O2913Under California law, insurance carri-

er must defend suit which potentiallyseeks damages within coverage of policy.

13. Insurance O2914, 2915Under California law, to determine if

insurer owes duty to defend, court firstcompares allegations of complaint withterms of policy; extrinsic evidence, if avail-able, may also assist in determining insur-er’s duty to defend.

14. Insurance O2915

Under California law, if extrinsic evi-dence establishes that ultimate question ofcoverage can be determined as matter oflaw on undisputed facts, then that evidencemay defeat alleged duty to defend; that is,where extrinsic facts eliminate the poten-tial for coverage, insurer may decline todefend even when bare allegations in com-plaint suggest potential liability.

15. Insurance O2361

Under California law, even thoughproject owner’s complaint against insuredcontractor never mentioned electrical sub-contractor by name, subcontractor’s com-mercial general liability (CGL) insurer’sduty to defend contractor as additionalinsured was triggered by allegations thatnegligent electrical work by subcontractorscaused fire damage to project.

16. Insurance O2285(4), 2923

Where each policy providing primarycoverage effectively passed liability for in-cident onto different primary insurer, Tex-as law allowed court to ignore the conflict-ing language and look to remainder of thepolicies to determine which should providecoverage, and since each policy providedfor primary defense, liability was proratedbetween insurers.

17. Insurance O2285(1, 4)

Under Texas law, when, from point ofview of insured, she has coverage fromeither one of two policies but for the oth-er, and each contains provision which isreasonably subject to construction that itconflicts with provision in the other con-current insurance, there is conflict in theprovisions, and court may ignore the ‘‘of-fending provisions’’ and look to remainderof the policies to determine which policyshould provide coverage, and if both poli-cies provide coverage, and priority is un-

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certain, liability is prorated between insur-ers.

Christopher R. Carroll (argued), Carroll,McNulty & Kull, L.L.C., Basking Ridge,NJ, George T. Jackson, Burck, Lapidus &Jackson, Houston, TX, for Plaintiff–ThirdParty Defendant–Appellee Cross–Appel-lant.

Marcie Lynn Schout, William LanceLewis (argued), Gregory Marshall Sud-bury, Quilling, Selander, Lownds, Winslett& Moser, P.C., Dallas, TX, for Defendant–Intervenor Defendant–Appellee Cross–Ap-pellant.

Michael Alan Choyke (argued), ThomasClark Wright, Wright & Close, L.L.P.,Houston, TX, David John Kennedy Met-zler, Cowles & Thompson, P.C., Dallas,TX, for Intervenor Plaintiff–AppellantCross–Appellee.

Appeals from the United States DistrictCourt for the Southern District of Texas.

Before REAVLEY, GARZA andSOUTHWICK, Circuit Judges.

REAVLEY, Circuit Judge:

Three primary insurers and one excesscarrier appeal the district court’s determi-nation on summary judgment of theirduties to defend a contractor who allegedlywas responsible for a fire that occurredduring construction. The district courtheld that the three primary insurers mustsplit the costs initially spent by one ofthem defending the insured, while the ex-cess insurer could not recover any of itsdefense costs from the primary insurers.We AFFIRM as to the allocation amongthe primary insurers of the initial defensecosts, and REVERSE to award defensecosts to the excess carrier.

I. BACKGROUND ANDPROCEDURAL

HISTORY

Valero Refining Company contractedwith Encompass Power Services to design,engineer, and construct a co-generation fa-cility at Valero’s oil refinery in Benicia,California. Encompass entered into a sub-contract with ECCO Engineering & Con-struction Company to perform electricalwork for the project.

For purposes of the Valero project, En-compass was a named insured on fourinsurance policies. First, Encompassmaintained a primary commercial generalliability (‘‘CGL’’) policy issued by Conti-nental Casualty Company that had a $1million per occurrence limit with a $2 mil-lion general aggregate limit. Second, En-compass also carried a professional liabili-ty policy issued by Columbia CasualtyCompany. The Columbia policy had a$250,000 self-insured retention amount anda $20 million aggregate and per-claim lim-it. Third, Encompass had a commercialumbrella policy issued by National UnionFire Insurance Company that was excessto Encompass’s primary CGL policies andprovided a $25 million aggregate policylimit. Finally, Encompass was also an ad-ditional named insured in a CGL policycarried by ECCO as part of its subcontractwith Encompass. That policy was issuedby North American Capacity Insuranceand provided $1 million per occurrencewith a $2 million general aggregate limit toEncompass for liability resulting fromECCO’s work on the Valero project.

In May and June 2002, the Valero pro-ject experienced three separate power out-ages and a fire in the refinery that causedsignificant damage. Valero later allegedthat Encompass and its subcontractors’negligence gave rise to the power outages,

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the third of which caused the fire. Valerosought over $40 million in damages fromEncompass.

In November 2002, Encompass filed forChapter 11 bankruptcy protection. InMay 2003, the bankruptcy court approveda settlement agreement between Encom-pass and Valero (‘‘the 2003 bankruptcyagreement’’) that allowed Encompass toreceive payment from Valero for its workon the refinery project but also permitteda lifting of the automatic stay so thatValero could pursue its claims against En-compass. Valero paid $1.5 million to En-compass’s bankruptcy estate and agreednot to seek any damages beyond whatinsurance policies would pay. In ex-change, Encompass assigned Valero anyrights and claims that it had against itsinsurers, to become effective only uponbreach by the insurers. No liability wasconceded to Valero, nor was the contractu-al obligation of Encompass’s insurers im-paired.

In June 2003, Valero invoked contractualarbitration against Encompass, allegingthat Encompass’s negligence in designing,engineering, and constructing the co-gen-eration facility caused the power outagesand ensuing fire. Continental providedthe initial defense of Encompass duringthe early stages of arbitration. In 2004and 2005, Columbia and North Americandenied they had any obligation of defense.Columbia maintained that its policy did notprovide coverage because Encompass’sconduct did not fall within its professionalservices clause and Encompass failed tosatisfy its $250,000 self-insured retentionlimit prior to requesting coverage. NorthAmerican contended that its policy was notimplicated because ECCO’s work did notprompt the power outages or fire. NorthAmerican also argued that even if there

was coverage its policy was excess to En-compass’s primary insurers.

In 2005, Continental filed a declaratoryjudgment action against North Americanin Texas state court, arguing that NorthAmerican was obligated to defend Encom-pass as an additional insured under itspolicy with ECCO. North American re-moved the suit to federal court based ondiversity. National Union intervened inDecember 2005 on the ground that it hadan interest in the court’s coverage deter-minations, and it later filed an amendedcomplaint impleading Columbia.

On December 28, 2005, Encompass pur-ported to assign to Valero all claims, in-cluding the right to demand a defense, thatit had against Continental and Columbiathat stemmed from the Valero project(‘‘the 2005 assignment’’). Its express pur-pose was to facilitate a settlement amongContinental, Columbia, and Valero. Vale-ro made no reciprocal promises to Encom-pass in the 2005 assignment. One daylater, Continental and Columbia, togetherdenominated as ‘‘CNA,’’1 agreed to a sepa-rate settlement with Valero (‘‘the 2005CNA–Valero agreement’’). That settle-ment provided that Continental and Co-lumbia would immediately pay Valero $3million and guaranteed that Valero wouldbe paid an additional $5.5 million. Thepayment would include Continental’s $1million CGL policy, with the remainder tocome from amounts that Continental orColumbia recovered from other insurers orfrom subcontractors. In return, Valeropurported to release Continental and Co-lumbia from all claims against them.Again, no liability of Encompass was con-ceded nor was any contractual obligationof Encompass’s insurers effectively im-paired.

1. Continental and Columbia share a corporate parent.

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Continental claimed that the settlementhad satisfied its duty to defend Encom-pass, while Columbia disclaimed any dutyto defend or indemnify. On December 30,2005, Continental tendered Encompass’sdefense to the excess insurer, NationalUnion, which took over the defense inJanuary 2006 subject to a reservation ofrights. National Union defended Encom-pass until 2007, when the arbitration wasfully settled and Valero released all re-maining claims stemming from the refin-ery fire. Continental, Columbia, NorthAmerican, and National Union enteredinto a joint release agreement in whichthey resolved their duties to indemnifyEncompass. Each reserved its claimsagainst the others regarding the properallocation of defense costs in the arbitra-tion. By the time of the arbitration settle-ment, Continental had incurred approxi-mately $2.7 million in defense costs andNational Union had expended approxi-mately $3 million.

After the arbitration concluded, the in-surers filed opposing summary judgmentmotions in the instant litigation. The dis-trict court held that Columbia and NorthAmerican were both primary insurers andwere liable for paying one-third shares ofthe total amount that Continental had ex-pended in Encompass’s defense beforeturning the defense over to National Un-ion. North American’s share would bereduced, however, because Encompass didnot request that North American defend ituntil November 4, 2004, after Continentalbegan its defense.

The district court concluded that Na-tional Union was entitled to both contrac-tual and equitable subrogation against theother three insurers as a result of takingover Encompass’s defense. It also held,however, that National Union could notrecover its defense costs as a subrogee,reasoning that the right of an insurer to

recover through subrogation depends on‘‘standing in the shoes’’ of the insured.The court held that Encompass assignedits defense rights under the insurance poli-cies to Valero in the 2003 bankruptcyagreement, and then no longer could as-sert those rights and neither could Nation-al Union by way of subrogation. Thecourt also held that National Union did nothave a right to contribution from the pri-mary insurers because that remedy isavailable only among primary insurers—not excess insurers—who share a commonduty to a shared insured.

The district court held that Encompass’sattempted 2005 assignment of its rightswas invalid because there was no consider-ation for it. Further, the court held thatthe 2005 CNA–Valero agreement did notrelieve Continental of its duty to defendbecause it did not resolve the underlyingdispute between Encompass and Valerobut merely settled one insurer’s financialobligation. Finally, the court also heldthat the agreement did not exhaust Conti-nental’s policy limits.

National Union now appeals, while Con-tinental, Columbia, and North Americancross-appeal. National Union seeks recov-ery of the money it expended on defensecosts. The other three insurers defendagainst National Union’s claim and appealthe district court’s rulings regarding thedistribution of the amount Continentalspent defending Encompass.

II. DISCUSSION

[1] We review the district court’s deci-sions on summary judgment de novo, ap-plying the same legal standard as the dis-trict court. See ACS Recovery Servs., Inc.v. Griffin, 676 F.3d 512, 515 (5th Cir.2012).Summary judgment is appropriate if themoving party demonstrates there ‘‘is nogenuine dispute as to any material fact and

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the movant is entitled to judgment as amatter of law.’’ FED.R.CIV.P. 56(a).

The district court applied Texas law toanalyze the insurance policies of Continen-tal, Columbia, and National Union and ap-plied California law to North American’spolicy. No party disputes these choices,and we accept them.

A. National Union’s Appeal

National Union argues that the districtcourt erroneously denied recovery of itsdefense costs from the primary insurers.It argues that it should have prevailedunder theories of either contractual subro-gation, equitable subrogation, or contribu-tion. It further argues that Encompass’spurported assignment of its rights to Vale-ro was invalid. The primary insurers con-tend that National Union was not entitledto subrogation because Encompass’s as-signment of its rights to Valero meant thatNational Union stepped into empty shoes.We agree that National Union should havebeen able to recover based on contractualsubrogation.

[2–4] Subrogation is the substitution ofone party for another such that the newparty may assert the rights of the substi-tuted party. See Argonaut Ins. Co. v.Allstate Ins. Co., 869 S.W.2d 537, 541 (Tex.App.1993). The two most common typesof subrogation are equitable and contractu-al. See Colony Ins. Co. v. PeachtreeConstr., Ltd., 647 F.3d 248, 256 (5th Cir.2011). Equitable subrogation ‘‘arises inevery instance in which one person, notacting voluntarily, has paid a debt forwhich another was primarily liable andwhich in equity should have been paid bythe latter.’’ Mid–Continent Ins. Co. v.Liberty Mut. Ins. Co., 236 S.W.3d 765, 774(Tex.2007). Contractual subrogation, onthe other hand, ‘‘is created by an agree-ment or contract that grants the right topursue reimbursement from a third party

in exchange for payment of a loss.’’ Id.In the case of either equitable or contrac-tual subrogation, ‘‘the insurer stands in theshoes of the insured, obtaining only thoserights held by the insured against a thirdparty, subject to any defenses held by thethird party against the insured.’’ Id.

In Mid–Continent, two primary insurerswhose policies contained pro rata clausesjointly defended and settled a negligencecase against their insured for $1.5 million.Id. at 769–70. The two insurers contribut-ed disproportionate amounts to the settle-ment because they differed on the settle-ment value of the case. One insurer paid$1.35 million while the other paid $150,000.Id. at 770. The higher-paying insurersued the other company for reimburse-ment based on inter alia contractual sub-rogation. The Texas Supreme Court heldthat because the insured had been fullyindemnified, and therefore had no right offurther recovery from anyone, the higher-paying insurer had no basis upon which torest its subrogation claim. Id. at 775–76.The court explained that ‘‘[h]aving fullyrecovered its loss, an insured has no con-tractual rights that a co-insurer may as-sert against another co-insurer in subroga-tion.’’ Id. at 776. In other words, theinsurer could not assert a right that theinsured no longer possessed and that hadbeen extinguished.

The district court here relied in part onMid–Continent to hold that, even thoughNational Union paid for Encompass’s de-fense when the primary insurers shouldhave done so, and National Union’s policycontained a subrogation clause, NationalUnion was barred from recovering itscosts under an ‘‘empty shoes’’ theory. Thedistrict court reasoned that Encompass’srights against the primary insurers passedto Valero by operation of the 2003 bank-ruptcy agreement, and therefore National

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Union could not assert Encompass’s rightto recover defense costs.2

Since the district court’s decision in thiscase, we have recognized that the Mid–Continent bar to recovery is narrow andlimited to the facts of that case. SeePeachtree, 647 F.3d at 257; AmerisureIns. Co. v. Navigators Ins. Co., 611 F.3d299, 306–07 (5th Cir.2010). We have heldthat Mid–Continent applies in cases where‘‘the insurers (1) were co-primary insurers;(2) did not dispute that both covered theloss; and (3) were subject to pro rataclauses.’’ Peachtree, 647 F.3d at 258. Inboth Peachtree and Amerisure, we reject-ed a broad view of Mid–Continent andheld that contractual subrogation is notbarred simply because an insured has beenfully indemnified. See Peachtree, 647 F.3dat 257–58; Amerisure, 611 F.3d at 307.In other words, that the shoes of the in-sured are purportedly ‘‘empty’’ of rightsagainst the primary carrier does not nec-essarily bar an excess insurer from recov-ering under a theory of subrogation fromthe primary carrier who should have paidits share of indemnity or defense costs.The facts of each case must be considered.See Mid–Continent, 236 S.W.3d at 774 (ap-plying ‘‘the particular facts’’ to the ele-ments of subrogation).

In Amerisure, we distinguished the ap-plication of the Mid–Continent bar incases where both insurers acknowledgedtheir duties to defend and indemnify, thusfully protecting the insured. Amerisure,611 F.3d at 307. Limiting Mid–Continentto those circumstances, we held, was faith-ful to Texas law ‘‘that dueling coinsurersmust place the interests of their insureds

before their own.’’ Id. at 307–08 (citingHardware Dealers Mut. Fire Ins. Co. v.Farmers Ins. Exch., 444 S.W.2d 583, 588–89 (Tex.1969)). In Amerisure, unlikeMid–Continent, the insurers did not agreeon the duties to defend and indemnify.Instead, the primary carrier in that caseinsisted that its policy was inapplicable,and the excess carrier refused to indemni-fy until the primary carrier paid its policylimit. Id. at 308. The primary carrier didso but sought contractual subrogation afterthe underlying case was settled. We con-cluded that the insured would not havebeen fully protected and that applyingMid–Continent to bar subrogation in thosecircumstances ‘‘would have further deviat-ed from settled principles of Texas insur-ance law by discouraging insurers fromfirst defending and indemnifying and thenseeking reimbursement for the costs that acoinsurer should have paid.’’ Id. (citingKeck, Mahin & Cate v. Nat’l Union FireIns. Co. of Pittsburgh, Pa., 20 S.W.3d 692,703 (Tex.2000)). We held that the primarycarrier thus could seek contractual subro-gation from the excess carrier even thoughthe insured ultimately had been fully in-demnified. Id.

[5] Similar concerns animate the pres-ent case. The three primary carriers hererefused to defend their insured, Encom-pass, in the midst of the arbitration, withtwo of the carriers denying any obligationto indemnify. With the insured left unpro-tected, National Union stepped in to takeover the defense and incurred significantdefense costs. National Union thus borethe costs of a defense to which Encompass

2. The district court treated Encompass’sshoes to be ‘‘empty’’ of the right to demand adefense by the time National Union incurreddefense costs because the 2003 agreementtransferred the rights of defense effectivelywhen Columbia and North American refused

to defend. The 2003 agreement is better readonly to serve the means of Valero to collectwhatever it recovered against Encompass,and no breach of the ‘‘insurers’’ occurredbecause National Union did defend.

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was entitled from third parties.3 NationalUnion’s policy with Encompass contains asubrogation clause that states: ‘‘If anyInsured has rights to recover all or part ofany payment we have made under thispolicy, those rights are transferred to us.The Insured must do nothing after loss toimpair these rights and must help us en-force them.’’ Under the terms of the sub-rogation clause, National Union is entitledto reimbursement from the insurers whoshould have borne the costs that it paid.

The 2003 bankruptcy agreement andpurported assignment relied upon by thedistrict court to deny National Union’s re-covery do not change the result. Thatagreement provided that ‘‘Execution ofthis Agreement will also constitute an as-signment of any and all rights and/orclaims [Encompass] may have against itsinsurers under any policy providing cover-age for the claims Valero may assertagainst [Encompass] which assignmentshall become effective only in the eventthat such insurers breach their duty(ies) todefend and/or duty(ies) to indemnify En-compass[.]’’ We do not read this provi-sion, as did the district court, to give awaythe right to demand a defense and pre-clude National Union from asserting itssubrogation rights for covering the defensecosts. Disallowing National Union to re-cover from the primary carriers whenthose carriers had an obligation to protectthe insured would encourage the primarycarriers to breach their duties to defendrather than place their insured’s interestsabove their own by defending and seekingreimbursement later. See Amerisure, 611F.3d at 308; see also Hardware Dealers,444 S.W.2d at 589 (providing that ‘‘settledprinciples’’ of Texas law ‘‘give dominant

consideration to the rights of the in-sured’’).

Moreover, despite the purported ‘‘settle-ment’’ in the 2003 bankruptcy agreement,that agreement did not resolve in any wayEncompass’s liability to Valero, which wasnot established until 2007 when the arbi-tration was finally settled. In the interim,Encompass proceeded with the arbitration,vigorously defended first by Continentaland then by National Union. The 2003bankruptcy agreement even contemplatedthat liability was still contested, specifical-ly providing that ‘‘[t]he automatic staywhich exists pursuant to 11 U.S.C. § 262shall be lifted solely for the purpose and tothe extent necessary to permit Valero topursue any and all claims, actions andcauses of action it may have against En-compass[.]’’ The purpose and effect of theassignment in the 2003 bankruptcy agree-ment was not to empty Encompass’s shoesbut rather to assist Valero in the collectionof any judgment against Encompassshould Valero ultimately prevail on liabili-ty. To this end, the agreement providedthat ‘‘to the extent that Valero is successfulon any or all such claims, Valero agreesthat it will proceed with collection effortson any judgment obtained, or settlementreached, only as to and against one ormore of such insurance policies that pro-vide coverage to Encompass[.]’’ (Empha-sis added).

At all times, the primary insurers re-tained their contractual obligation to pro-vide Encompass with a defense and En-compass retained the right to demand adefense. The district court believed thatwhen the primary insurers breached theirduties to defend Encompass, the insured’srights flowed to Valero by operation of the2003 agreement. But, as noted above, that

3. We address, and reject, below various argu-ments by the primary carriers that they

lacked a duty to defend.

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agreement also required Valero to obtain afavorable judgment, and Encompass wasstill defending the arbitration action inwhich Valero was pursuing such a judg-ment.4 In other words, Encompass’s rightto demand a defense from the insurerswho owed that defense could not flow to itsadversary in the very action that it wasactively contesting.5 Because NationalUnion paid for the defense of that actionwhen the primary insurers were obligatedto the insured, National Union may en-force the contractual subrogation provisionin its policy. The 2003 assignment merelycontemplated rights flowing to Valero afterthe primary insurers breached their dutiesand there was a liability judgment ob-tained in Valero’s favor; it did nothing toalter the insured and insurers’ subrogationrelationship.6

The empty shoes analogy urged by theprimary insurers is especially unsatisfyinghere. To say that National Union may notrecover for payment of costs that anothershould have paid because the insured had‘‘empty shoes’’ makes too broad a concep-tual leap under the circumstances. In-deed, there will almost always be ‘‘emptyshoes’’ when a court is dealing with thelegal fiction of subrogation. We could justas well turn to equitable subrogation,which employs ‘‘a legal fiction whereby anobligation, extinguished by a paymentmade by a third person, is treated as stillsubsisting for the benefit of this thirdperson, so that by means of it one creditor

is substituted to the rights, remedies, andsecurities of another.’’ Day Cruises Mari-time, L.L.C v. Christus Spohn Health Sys.,267 S.W.3d 42, 61 (Tex.App.2008) (empha-sis added) (internal quotation marks andcitation omitted); 68 TEX. JUR. 3d Subroga-tion § 12 (2012); see also Restatement(Third) of the Law of Restitution and Un-just Enrichment § 24 (2011). The subro-gation claim is based on this fiction thatthe obligation to the creditor remains sothat the third person may assert the credi-tor’s rights. But in reality the creditor’sexpectations have been satisfied. In otherwords, the original creditor’s shoes will be‘‘empty’’ any time a third party makes apayment on his behalf and then seeks torecover under the fiction that the debt stillexists to that creditor, yet this is not deter-minative of the payor’s ability to recoverunder subrogation.

We hold that the district court erredwhen it determined that National Unionwas precluded from recovering its defensecosts under a theory of contractual subro-gation.

B. Primary Duty to Defend

Our holding that National Union mayrecover from the primary insurers pre-supposes that each of those insurers wasprimarily liable for the cost of defendingEncompass. In the course of defendingNational Union’s appeal and prosecutingtheir respective cross-appeals, the pri-mary insurers make several arguments as

4. To read the assignment as did the districtcourt results in the following impossible sce-nario: the insured demands a defense; theinsurers refuse, thereby breaching theirduties; the right to demand a defense passesto the insured’s adversary and may no longerbe asserted by the insured. Thus, the insuredloses its right to a defense merely because theinsurers refuse to defend.

5. Moreover, at the time of the 2003 bankrupt-cy agreement, the arbitration action had not

yet been filed, which further suggests thatthere was no intent by the parties that En-compass surrender its right to demand a de-fense.

6. The same is true of the 2005 assignment,whereby Encompass purported to assign toValero its claims against Continental and Co-lumbia. We agree with the district court’sholding that this agreement was unsupportedby consideration.

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to why they did not have a primary dutyto defend. We consider each primary in-surer’s policy with Encompass to deter-mine its respective duties.

1. Continental and Columbia

As noted above Continental and Colum-bia entered into a single settlement withValero in 2005, which they argue on appealfully satisfied their obligations to Encom-pass. Continental argues that it exhaust-ed its policy limit by spending $2.7 millionon Encompass’s defense and by contribut-ing the full $1 million of coverage under itspolicy to the 2005 CNA–Valero settlement.Columbia argues that it had no duty todefend and that this settlement simply rec-ognized that. We are unpersuaded.

[6–8] Insurance policies are interpret-ed using the same rules governing othercontracts. Nat’l Union Fire Ins. Co. ofPittsburgh, Pa. v. Crocker, 246 S.W.3d 603,606 (Tex.2008). Words are given their‘‘plain meaning,’’ and courts must not in-sert ‘‘additional provisions into the con-tract.’’ Id. ‘‘If the written instrument isworded so that it can be given only onereasonable construction, it will be enforcedas written.’’ Nat’l Union Fire Ins. Co. ofPittsburgh, Pa. v. Hudson Energy Co., 811S.W.2d 552, 555 (Tex.1991).

[9] Encompass’s policy with Continen-tal provides that Continental’s ‘‘right andduty to defend end when we have used upthe applicable limit of insurance in thepayment of judgments or settlements.’’The district court concluded that Continen-tal’s settlement with Valero did not satisfythe plain meaning of this provision becausethere was no judgment ending even part ofthe arbitration against Encompass. Fur-thermore, there was no settlement as in-tended by the policy because no lawsuit ordispute was ended. We agree.

In Judwin Properties, Inc. v. UnitedStates Fire Insurance Company, 973 F.2d432, 433–34, 436 (5th Cir.1992), we consid-ered what was needed under Texas law toend an insurer’s duty to defend under apolicy provision that the insurer ‘‘shall notbe obligated to pay any claim or judgmentor to defend any suit after the applicablelimit of the company’s liability has beenexhausted by payment of judgments orsettlements.’’ We concluded that the in-surer fulfilled its contract by settling all ofthe claims brought by a group of plaintiffs,even though the settlement was not withall of the plaintiffs in the suit. Id. at 436.The Texas Supreme Court made a similarruling soon after our decision. See Tex.Farmers Ins. Co. v. Soriano, 881 S.W.2d312, 315 (Tex.1994). It held ‘‘that whenfaced with a settlement demand arising outof multiple claims and inadequate pro-ceeds, an insurer may enter into a reason-able settlement with one of the severalclaimants even though such settlement ex-hausts or diminishes the proceeds availableto satisfy other claims.’’ Id. (footnoteomitted).

In the present case, Valero’s claimsagainst Encompass did not end with the2005 CNA–Valero settlement but merelygot an initial installment payment fromone insurer. Indeed, the CNA–Valeroagreement specifically provided that ‘‘Va-lero shall, at its sole cost and expensecontinue to prosecute to completion its ex-isting claims against Encompass.’’ (Em-phasis added). The agreement furtherprovided that ‘‘[n]othing in this Agree-ment shall be construed as limiting orimpairing Encompass’s or its insurers’ability to defend that action.’’ Continen-tal’s million-dollar payment under the2005 CNA–Valero settlement was not tobe applied to an existing judgment butinstead to some future judgment or globalsettlement, which did not finally occur un-til 15 months after the 2005 CNA–Valero

97


settlement. Continental’s payment wasthus not pursuant to a settlement or judg-ment as required by its policy. We con-clude that the district court’s thoroughanalysis of this issue was correct.

[10] With respect to Columbia’s obli-gation to provide a defense, it argues thatcoverage under its policy never arose be-cause Encompass failed to pay the re-quired $250,000 self-insured retentionamount. Encompass’s policy with Colum-bia provided that this amount ‘‘must bepaid prior to any payment being made byus under the terms and conditions of thisPolicy of insurance.’’ Columbia relies on adistrict court decision in which an insurerwas not required to satisfy the insured’sself-insured retention limit when the in-sured was in bankruptcy. See Pak–MorMfg. Co. v. Royal Surplus Lines Ins. Co.,No. SA–05–CA–135–RF, 2005 WL 3487723(W.D.Tex. Nov. 3, 2005). The court thereruled that the insured was obligated to paythe self-insured retention limit under itspolicy. Id. at *2. Because the insured’sbankruptcy prevented the payment, theinsurance policy was not triggered. Id. at*5–6.

Although it is undisputed that Encom-pass never paid its self-insured retentionlimit, the policy does not explicitly requirethe insured to pay the amount itself. BothContinental and National Union spent mil-lions of dollars on Encompass’s defense,thereby satisfying the self-insured reten-tion limit. Such a limit ‘‘represents theamount of the loss that the insured isresponsible for before the coverage is trig-gered.’’ See 3 ALLAN D. WINDT, INS. CLAIMS

& DISPUTES § 11:31, at 11–498 (5th ed.2010). Conversely, it is the part the insur-er is not responsible for. Here, this re-sponsibility was met on the insured’s be-half. Therefore, Columbia’s policy wastriggered.

2. North American

North American argues that it owed nodefense to Encompass because the allega-tions in Valero’s complaint did not mentionany involvement by ECCO, its insured.North American also argues that extrinsicfacts demonstrate that ECCO’s work didnot lead to the damage at the refinery.Thus, it contends that the district courtmistakenly held it was bound to defendEncompass against Valero’s claims. Wedisagree.

[11–13] Pursuant to California law,which controls North American’s policy, aninsurer’s duty to defend is broader thanthe duty to indemnify, and it may be owedeven in actions where damages are notultimately awarded. See Horace MannIns. Co. v. Barbara B., 4 Cal.4th 1076, 17Cal.Rptr.2d 210, 846 P.2d 792, 795 (1993).An insurance carrier ‘‘must defend a suitwhich potentially seeks damages withinthe coverage of the policy.’’ Id. (emphasis,internal quotation marks and citation omit-ted). To determine if an insurer owes thisduty, the court first ‘‘compar[es] the alle-gations of the complaint with the terms ofthe policy.’’ Id. Extrinsic evidence, ifavailable, may also assist in determiningan insurer’s duty to defend. Ameron Int’lCorp. v. Ins. Co. of the State of Pa., 50Cal.4th 1370, 118 Cal.Rptr.3d 95, 242 P.3d1020, 1028 (2010).

[14] If ‘‘extrinsic evidence establishesthat the ultimate question of coverage canbe determined as a matter of law on undis-puted facts,’’ then that evidence may de-feat the alleged duty to defend. MontroseChem. Corp. v. Superior Ct., 6 Cal.4th 287,24 Cal.Rptr.2d 467, 861 P.2d 1153, 1159(1993). That is, ‘‘where the extrinsic factseliminate the potential for coverage, theinsurer may decline to defend even whenthe bare allegations in the complaint sug-gest potential liability.’’ Waller v. Truck

98


Ins. Exch., Inc., 11 Cal.4th 1, 44 Cal.Rptr.2d 370, 900 P.2d 619, 628 (1995) (em-phasis added). Thus, summary judgmentis not proper if extrinsic evidence merelyplaces coverage ‘‘in dispute;’’ it must ‘‘elim-inate the possibility’’ of coverage. Vann v.Travelers Cos., 39 Cal.App.4th 1610, 1615,46 Cal.Rptr.2d 617 (Cal.Ct.App. 1st Dist.1995) (internal quotation marks and cita-tion omitted).

[15] The North American policy coversEncompass for any losses that take placeas a result of ECCO’s work. The policysets out a duty to defend the insured basedon these events. ECCO provided electri-cal subcontracting work for Encompass atValero’s Benicia refinery where the fireand work stoppage occurred. The workincluded installing wiring and other electri-cal components for the project. Valeroalleged that the ‘‘incorrect design, engi-neering, and testing of electrical hardwareby [Encompass] TTT and [its] subcontrac-tors caused the faulty operation of Valero’selectrical system and equipment,’’ result-ing in catastrophic power losses and signif-icant damage from the fire. (Emphasisadded).

Valero also claimed that ‘‘negligence of[Encompass] and its subcontractors’’ dur-

ing installation of a protective electricalrelay ‘‘interrupt[ed] power to two of thethree main incoming electrical feeders tothe plant,’’ causing several million dollarsin damages. Because North American’spolicy covered losses on the Valero projectfor which ECCO was responsible, theseallegations gave rise to the possibility thatits policy would be implicated. This issufficient to trigger North American’s dutyto defend, absent extrinsic evidence defini-tively proving otherwise. See HoraceMann, 17 Cal.Rptr.2d 210, 846 P.2d at 797.

North American argues that the com-plaint never mentioned ECCO, therebyraising no potential for coverage. Howev-er, the complaint alleged negligent electri-cal work by Encompass’s subcontractors.The broadly construed duty to defend re-quires only that the policy potentially cov-er the loss, which the allegation here ac-complished. See id. The specific pieces ofextrinsic evidence to which North Ameri-can points may blur the picture of ultimateliability, but they do not eliminate the pos-sibility that ECCO’s work caused the dam-age. See Waller, 44 Cal.Rptr.2d 370, 900P.2d at 628. Therefore, the district courtdid not err by finding that North Ameri-can owed Encompass a defense under itspolicy with ECCO.7

7. In both the district court and this court,North American raised a number of defensesthat pertained only to it and not to Continen-tal and Columbia. We agree with the districtcourt’s resolution of those issues. NorthAmerican argues that Encompass’s assign-ment of its rights violated the anti-assignmentclause in its insurance policy, thereby impair-ing its rights and ending any duty to defend.California courts have held that anti-assign-ment clauses in insurance contracts exist to‘‘prevent an increase of risk and hazard ofloss by a change of ownership without theknowledge of the insurer.’’ Westoil TerminalsCo. v. Harbor Ins. Co., 73 Cal.App.4th 634,641–42, 86 Cal.Rptr.2d 636 (Cal.Ct.App.2dDist.1999) (internal quotation marks and cita-tion omitted). If an insured assigns a rightunder the policy after a loss occurs, it does

not ‘‘in any fashion increase the risk to’’ aninsurer. Id. at 642, 86 Cal.Rptr.2d 636. Theloss here occurred in 2002. Encompass exe-cuted the assignment in 2003, but by theterms of the assignment it did not take effectuntil North American breached the contractin 2005. To the extent that Encompass as-signed any viable rights in the agreement, thatassignment did not increase the risk to NorthAmerican because it took place after the loss.

Similarly, an anti-impairment clause inNorth American’s policy is not at issue in thiscase. North American maintains that En-compass’s 2003 assignment violated thisclause because it impaired North American’sability to recover from the other insurers.This appeal concerns only defense costs borneby National Union and Continental, towards

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In sum, we hold that the district courtcorrectly determined that each of the poli-cies issued by Continental, Columbia, andNorth American was triggered by Valero’sclaims against Encompass and that allthree insurers owed a primary duty toprovide a complete defense.

C. Continental, Columbia, and NorthAmerican’s Cross–Appeal

Whereas National Union’s direct appealconcerns reimbursement for the defensecosts it incurred after agreeing to defendin early 2006, the primary insurers’ cross-appeals dispute the allocation of costs thatContinental paid before it settled in De-cember 2005. Continental and Columbiaargue that the district court erroneouslyordered North American to reimburse onlyone-third of Continental’s defense costs be-cause, according to them, their policieswere excess to North American’s policy.North American, in turn, contends that itspolicy was excess to the Continental andColumbia policies, and that the districtcourt erred by finding it was a primaryinsurer for Encompass. We must considerthe scope of coverage provided by theinsurance policies, and decide whether thedistrict court correctly divided Continen-tal’s cost between all three primary insur-ers.

[16] The Continental policy states:If any other valid and collectible in-

surance is available to the Insured for aloss we cover under coverages A. or B.of this Coverage Part, this insurance isexcess over any of the Other Insurance,whether primary, excess, contingent, oron any other basis.

When this insurance is excess, we willhave no duty under coverage A. or B. todefend any claim or ‘‘Suit’’ that any oth-er Insurer has a duty to defend. If noother Insurer defends, we will undertaketo do so, but we will be entitled to theInsured’s rights against all those otherInsurers.

The Columbia policy provides:

If there is other collectible insurance,including but not limited to project spe-cific insurance, that applies to a claimcovered by this Policy, the other insur-ance must pay first and this Policy isexcess over the other insurance. ThisPolicy applies to the amount of the claimthat exceeds the available limit of liabili-ty and any deductibles or retentionamounts of the other insurance.

In relevant part, the North American poli-cy indicates:

Coverage provided by this policy tothe Additional Insured(s) shown in theSchedule shall be primary insurance andany other insurance maintained by theAdditional Insured(s) shall be excessand non-contributory, but only as re-spects any claim or liability determinedto be the result of the sole negligence orresponsibility of the Named Insured andonly if required of the Named Insuredby written contract.

Each policy effectively passes liabilityfor the same coverage-triggering incidentonto a different primary insurer. The dis-trict court noted that the three policiesconflicted, which the parties fail to addressin their briefs.

which North American has not contributed.North American has failed to identify how theassignment impaired its rights to recovercosts that it did not expend. Therefore, thisclause is not implicated. North Americanwaived its argument that National Union

failed to plead subrogation properly becauseit failed to raise any challenge to the sufficien-cy of the pleadings in the district court. Cela-nese Corp. v. Martin K. Eby Constr. Co., 620F.3d 529, 531 (5th Cir.2010).

100

93U.S. v. OWENSCite as 683 F.3d 93 (5th Cir. 2012)

[17] ‘‘When, from the point of view ofthe insured, she has coverage from eitherone of two policies but for the other, andeach contains a provision which is reason-ably subject to a construction that it con-flicts with a provision in the other concur-rent insurance, there is a conflict in theprovisions.’’ Hardware Dealers, 444S.W.2d at 589. If the policies conflict, thecourt may ignore the ‘‘offending provi-sions’’ and look to the remainder of thepolicies to determine which policy shouldprovide coverage. Id. If both policiesprovide coverage, and priority is uncertain,liability is prorated between the insurers.Id. at 590.

Because the three policies conflict, weexcise the conflicting language and lookto the remainder of their language to de-termine if any policy should provide soleprimary insurance to Encompass. Eachpolicy provides for primary defense ofEncompass based on the allegations inValero’s complaint. The Continental poli-cy states that it has the ‘‘duty to defendthe insured against any ‘suit’ seeking’’damages as a result of property damage.North American’s policy contains nearlyidentical language. The Columbia policyindicates that it would ‘‘defend any claimmade against [Encompass] seekingamounts that are payable under theterms of this Policy.’’ Each policy pro-vided complete, primary coverage to En-compass. Therefore, the district court’sdecision to prorate the defense costsequally among the three primary insurerswas correct. See id.

III. CONCLUSION

National Union may seek reimburse-ment for its defense costs from Continen-tal, Columbia, and North Americanthrough contractual subrogation. The dis-trict court did not err in its allocation ofContinental’s defense costs among Conti-

nental, Columbia, and North American.We therefore affirm the district court’sjudgment in part and reverse in part, andwe remand for further proceedings consis-tent with this opinion.

AFFIRMED IN PART and RE-VERSED IN PART; REMANDED.

,

UNITED STATES of America,Plaintiff–Appellee,

v.

Mark Anthony OWENS; KimberlyMichelle Kirkwood, Defendants–

Appellants.

No. 10–40707.


May 30, 2012.

Background: Following jury trial, defen-dants were convicted in the United StatesDistrict Court for the Eastern District ofTexas, Thad Heartfield, J., of bank rob-bery by force or violence and aiding andabetting commission of bank robbery byforce or violence. Defendants appealed.

Holdings: The Court of Appeals, Higgin-son, Circuit Judge, held that:

(1) severance of trials was inappropriate;

(2) attorney affidavit did not support sev-erance;

(3) denial of motion to sever did not resultin specific and compelling prejudice;

(4) sufficient evidence supported first de-fendant’s conviction;

(5) sufficient evidence supported seconddefendant’s conviction; and

101

1 The parties consented to proceed before the undersigned magistratejudge for all proceedings, including trial and final judgment, pursuant to 28U.S.C. § 636(c) and Federal Rule of Civil Procedure 73. Docket Entry Nos. 12,18, and 23.

IN THE UNITED STATES DISTRICT COURTFOR THE SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

PILLSBURY WINTHROP SHAW §PITTMAN LLP, §

§ Plaintiff, §

§v. § CIVIL NO. 4:09-mc-365

§BROWN SIMS, P.C. and INSURANCE §COMPANY OF NORTH AMERICA, §

§Defendants. §

§

ORDER

Pending before the court1 are the following motions: Plaintiff

Pillsbury Winthrop Shaw Pittman LLP’s (“Plaintiff”) Motion to Quash

Defendant Insurance Company of North America’s (“INA”) Subpoena

(Docket Entry No. 1); INA’s Motion to Compel Production (Docket

Entry No. 3); and Plaintiff’s Motion to Compel Pursuant to Rule

26(b)(5)(B) (Docket Entry No. 32).

The court has considered the motions, all relevant filings,

and the applicable law. For the reasons set forth below, the court

DENIES IN PART, GRANTS IN PART Plaintiff’s Motion to Quash INA’s

Subpoena (Docket Entry No. 1); DENIES IN PART, GRANTS IN PART INA’s

Motion to Compel Production (Docket Entry No. 3); and DENIES IN

PART, GRANTS IN PART Plaintiff’s Motion to Compel Pursuant to Rule

26(b)(5) (Docket Entry No. 32).

Case 4:09-mc-00365 Document 43 Filed in TXSD on 01/06/10 Page 1 of 30

102

2 Plaintiff’s Original Complaint for Protective Order and Motion toQuash INA’s Subpoena (“Complaint and Motion to Quash”), Docket Entry No. 1.

3 Id.

4 INA’s Answer to Complaint and Motion to Quash, and OriginalCounterclaim, Docket Entry No. 2, ¶ 14.

5 Plaintiff’s Reply in Support of Its Motion for Protective Order andMotion to Quash (“Plaintiff’s Reply in Support of Its Motion to Quash”), DocketEntry No. 7, p. 2.

6 Id. at 3.

2

I. Case Background

Plaintiff initiated this miscellaneous action against

defendants Brown Sims, P.C., (“Brown Sims”) and INA on July 16,

2009, in United States District Court for the Southern District of

Texas, Houston Division.2 Plaintiff seeks to quash a subpoena for

numerous documents issued against it by Brown Sims on behalf of its

client INA.3 INA counterclaimed for enforcement of and compliance

with the subpoena.4

The subpoena at issue was served in connection with a lawsuit

pending in United States District Court for the Southern District

of Florida (“Underlying Action”).5 The Underlying Action

originated when, in October 2005, Hurricane Wilma grounded a 158-

foot sailing vessel (the S/Y Legacy) in a National Marine Sanctuary

(“Sanctuary”), causing environmental harm to the Sanctuary.6 The

grounding of the vessel led to a multi-year effort to settle

liability claims asserted against INA’s insureds and to extract the

vessel in a manner that minimized damage to the vessel and the


103

7 Id.; see generally INA’s Response to Plaintiff’s Motion to Quash andINA’s Motion to Compel Production (“INA’s Motion to Compel”), Docket Entry No.3, Ex. A, Peter Halmos, International Yachting Charters, Inc., and High PlainsCapital’s First Amended Complaint in the United District Court for the SouthernDistrict of Florida, ¶¶ 47-105. The Florida complaint goes into great detailwith regard to the Underlying Action, little of which is relevant for purposesof this opinion.

8 Complaint and Motion to Quash, Docket Entry No. 1, Declaration ofJohn Easton (“Easton”), ¶ 2. Easton is an attorney who is a partner withPillsbury. Id. ¶ 1.

9 Id. ¶ 2.

10 Complaint and Motion to Quash, Docket Entry No. 1, ¶ 6 andDeclaration of Easton, ¶ 3. The case is styled International Yachting Charters,Inc., et al. v. Insurance Company of North America, et al., Civil Action No. 08-10084-CIV-Martinez-Brown, Southern District of Florida, Key West Division.Complaint and Motion to Quash, Docket Entry No. 1, ¶ 1.

11 INA’s Response to Plaintiff’s Motion to Quash and INA’s Motion toCompel Production, Docket Entry No. 3, p. 3. No vessels other than the Legacyand the Mongoose are named or discussed with particularity in the filingspresently before the court.

3

Sanctuary.7

In 2006, International Yachting Charters, Inc., (“IYC”), which

owned the Legacy, retained Plaintiff to assist in negotiating a

settlement with the National Oceanic and Atmospheric Administration

(“NOAA”) to resolve the question of IYC’s potential liability for

the environmental damage and to obtain the necessary permits to

recover the Legacy from her grounded position inside the

Sanctuary.8 IYC and High Plains Capital (“HPC”) later retained

Plaintiff to assist with losses to various other vessels, as well.9

On October 22, 2008, IYC and Peter Halmos (“Halmos”),

president of both IYC and HPC, filed the Underlying Action against

INA.10 HPC, which owned a damaged vessel named the Mongoose, was

later also added to the suit as a plaintiff.11 The action stemmed

from losses in several different incidents made to and by vessels


104

12 Complaint and Motion to Quash, Docket Entry No. 1, ¶ 6 andDeclaration of Easton, ¶ 3. Plaintiff is not clear whether all of the mentionedinsurance policies were with INA, although that seems to be the inference. Id.The court notes that the parties variably refer to the existence of a singlepolicy and of multiple policies throughout their briefs. However, it is unclearwho precisely, between IYC, HPC, and Halmos, jointly or separately, were theinsured under the policies. The parties variably refer to IYC as seekingreimbursement here at times and, at other times, refer to various combinationsof Halmos, IYC, and HPC. Throughout this opinion, the court uses the term“Policy” to refer to any and all policies that may be held with INA and throughwhich reimbursement is sought with respect to the Legacy and the Mongoose. SeeINA’s Motion to Compel, Docket Entry No. 3, Ex. B, Subpoena Issued to Plaintiff,p. 4 (requesting discovery only “with respect to the S/Y LEGACY and/or the M/VMONGOOSE”).

In addition, INA is liable to certain requests for reimbursement withrespect to Plaintiff’s invoices that are covered under not only its Policy, butalso that were agreed to regarding the negotiation of the NOAA settlement. See,e.g., INA’s Supplement to INA’s Response to Complaint and Motion to Quash, DocketEntry No. 31, Ex. D, E-mail Communication Between the Parties, dated Oct. 29,2009. Throughout this opinion, the court’s discussion of INA’s coverage underthe Policy encompasses any additional coverage agreement it made with regard toPlaintiff’s negotiation of the NOAA agreement, as this appears to be the parties’intent as well.

13 Complaint and Motion to Quash, Docket Entry No. 1, Declaration ofEaston, ¶ 3.

14 Complaint and Motion to Quash, Docket Entry No. 1, ¶ 6.

4

owned and operated by IYC and HPC that were covered by at least

five insurance policies (“Policy”).12 Halmos is proceeding pro se

in the Underlying Action, while Plaintiff represents the interests

of IYC and HPC (“Clients”).13 Halmos, IYC, and HPC are therein

alleging, in part, that INA failed to properly investigate, adjust,

and pay on the claims stemming from those losses made to and by the

vessels and, as a result, have alleged causes of action including

breach of contract, bad faith, negligence, and breach of fiduciary

duty.14

As part of the claims for damages for which reimbursement is

sought from INA through the Policy, a seventy-five-page list of

charges from various vendors totaling over fourteen million dollars


105

15 INA’s Motion to Compel, Docket Entry No. 3, p. 3 and Ex. E,Preliminary Partial Listing of Legacy Salvage Charges, Expenses to Protect,Liability, Among Others, for Reimbursement.

16 Plaintiff states that the list was only a preliminary list ofexpenses prepared as an interim measure to provide INA with some information sothat INA could know how much money was at issue and set its reserves accordingly.Plaintiff’s Reply in Support of Its Motion to Quash, Docket Entry No. 7, pp. 3-4.


18 Id.

19 INA’s Motion to Compel, Docket Entry No. 3 and Ex. B, Subpoena Issuedto Plaintiff.

5

was submitted to INA.15 The sparsely-detailed list16 prompted INA

to request supporting documentation, including invoices for many of

the vendors, including Plaintiff, so INA could determine whether

the charges were reasonable, necessary, and covered under its

Policy.17 The request for reimbursement for Plaintiff’s legal

services totaled more than $1,500,000.18

INA issued a subpoena to Plaintiff on June 23, 2009, to obtain

documentation and information for determining whether the amounts

charged by Plaintiff were reasonable, necessary, and covered under

the Policy.19 Specifically, INA’s subpoena requested:

Any and all papers, notes, books, accounts, invoices,writings, drawings, graphs, charts, photographs,contracts, agreements, expert reports, articles, email,electronic or digital records, phone records, recordings(audio, video and digital), and all other information,data and data compilations prepared on behalf of,directed to or received from [Halmos], [IYC] and/or[HPC], their agents, employees and entities acting in arepresentative capacity with respect to the S/Y LEGACYand/or the M/V MONGOOSE including, but not limited to,


106

20 INA’s Motion to Compel, Docket Entry No. 3, Ex. B, Subpoena Issuedto Plaintiff, p. 4.

21 Id. at 5.

22 INA’s Motion to Compel, Docket Entry No. 3 and Ex. D, Redacted FeeStatements Provided by Plaintiff.

23 Compare INA’s Supplement to INA’s Motion to Compel, Docket Entry No.31, Ex. M, Unredacted Billing Entries, with INA’s Motion to Compel, Docket EntryNo. 3, p. 4 and Ex. E, Preliminary Partial Listing of Legacy Salvage Charges,Expenses to Protect, Liability, Among Others, for Reimbursement.

24 Transcript, Motion Hearing, Aug. 20, 2009, Docket Entry No. 20, p.16.

25 INA’s Supplement to INA’s Motion to Compel, Docket Entry No. 31, p.3.

6

those items set forth on attached Exhibit A-1.20

Exhibit A-1 listed, for the most part, various claims made by

Plaintiff for reimbursement by INA for “Legal and Legal Support

Services.”21

In response to the subpoena, Plaintiff filed this action and

provided heavily redacted billing statements but no supporting

documentation to establish the amounts for which INA should

reimburse Plaintiff on behalf of its Clients.22 The billing

statements claimed reimbursement for only $984,911.52 for Plaintiff

from 2006 through mid-2009, approximately half a million less than

had been requested in the preliminary billing statements.23

At an August motion hearing, the court ordered Plaintiff to

produce “unredacted bills for every dollar that [Plaintiff is]

seeking from [INA],” but the court refused to order Plaintiff to

turn over any billing statements for which it was not seeking

reimbursement.24 Plaintiff timely complied,25 and, in accordance


107

26 INA’s Notification Regarding Requested Backup Documents, Docket EntryNo. 22; Plaintiff’s Response to INA’s Notification Regarding Requested Back-upDocumentation (“Plaintiff’s Response to INA’s Notification”), Docket Entry No.25, p. 4. Plaintiff characterizes INA’s September 10th response as including “20broad categories of Reimbursables that [INA] sought to contest . . . , butwithout much detail or explanation as to the good faith basis for questioningthese entries.” Plaintiff’s Response to INA’s Notification, Docket Entry No. 25,p. 2.

27 INA’s Supplement to INA’s Motion to Compel, Docket Entry No. 31, p.9. INA characterizes Plaintiff’s October 20th production as “a miserly sheaf ofdocuments.” Id. at 13.

28 Plaintiff’s Emergency Motion to Compel Pursuant to Rule 26(b)(5)(B)(“Plaintiff’s Motion to Compel”), Docket Entry No. 32, Ex. A, Communication fromPlaintiff’s Counsel to INA’s Counsel, Oct. 30, 2009.

29 Transcript, Status Conference, Docket Entry No. 37, p. 9.

7

with the court’s August 20, 2009, Order, INA, first on September

10, 2009, and again on October 8, 2009, responded with lists of

requested supporting documentation correlated with various entries

on the billing statements.26

Plaintiff produced some of the requested information on

October 20, 2009, and INA made a follow-up request on October 29,

2009.27 On October 30, 2009, Plaintiff invoked the “clawback”

provision of Federal Rule of Civil Procedure 26(b)(5)(B), which

allows a party to assert a claim of privilege on information after

that information has already been produced in discovery. Plaintiff

requested: “With respect to materials produced in response to the

subpoena . . . [Plaintiff] request[s] the return of all materials,

including invoices, as inadvertently produced.”28

On November 6, 2009, the court held a status conference and

allowed for additional briefing on the issue of privilege.29 Also

at that time, the court ordered INA to sequester the produced


108

30 Id. at 18.

31 INA’s Motion to Compel, Docket Entry No. 3., p. 2.

32 Because the court is creating a new deadline by which Plaintiff mustcomply with the adjusted subpoena, Plaintiff’s argument that the originalsubpoena failed to allow a reasonable time to comply is moot.

8

documents until such a time as the court made its final ruling on

the issue of privilege.30

II. Motions to Quash and to Compel

INA’s motion to compel seeks unredacted billing statements and

supporting documentation, because, according to INA, any privilege

pertaining thereto has been waived by the Underlying Action against

INA.31

In support of its motion to quash INA’s subpoena, Plaintiff

argues that: (1) the requested documents are protected from

disclosure by the attorney-client privilege and work product

doctrine; (2) the subpoena is vague and overly broad; (3) the

subpoena is unduly burdensome; and (4) the subpoena failed to allow

a reasonable amount of time to comply.32

The court must first decide whether Florida or Texas law

applies to this subpoena which was issued in Texas but pertains to

an underlying action filed in Florida. Second, the court must

determine whether there are attorney-client or work product

privileges and whether those privileges have been waived. Third,

the court addresses whether the subpoena is overly broad and/or

unduly burdensome and precisely what must be produced in response


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33 See, e.g., INA’s Motion to Compel, Docket Entry No. 3, p. 8 n.11;INA’s Reply in Support of Its Motion to Compel, Docket Entry No. 10, p. 3.

34 INA’s Reply in Support of Its Motion to Compel, Docket Entry No. 10,p. 4; Transcript, Status Conference, Docket Entry No. 37, p. 5; INA’s Responseto Plaintiff’s Brief on Privilege, Docket Entry No. 40, p. 4. Plaintiff has nottaken a firm stand on which state’s law should control the court’s decision andhas, accordingly, cited to a wide jurisdictional range of case law. See, e.g.,Plaintiff’s Reply in Support of Its Motion to Quash, Docket Entry No. 7, p. 7 n.5(“As this particular point relates to discussions between parties in theUnderlying Action as opposed to the legal work done by Plaintiff in this action,

9

to the subpoena. Fourth, the court addresses Plaintiff’s motion

under Federal Rule of Civil Procedure Rule 26(b)(5)(B). Finally,

the court addresses Plaintiff’s confidentiality concerns.

A. Choice of Law

As Plaintiff has stated, “[t]he issue of choice of law is

unusually complicated in this case.” The parties do not dispute

that federal law governs the procedural aspects of this

miscellaneous action concerning a subpoena issued under Federal

Rule of Civil Procedure 45, because federal courts sitting in

diversity apply the substantive law of the state providing the law

of decision while following federal procedural law. Bartley v.

Euclid, Inc., 158 F.3d 261, 280 (5th Cir. 1998 (citing Gasperini v.

Center for Humanities, Inc., 518 U.S. 415 (1996)).

As for the substantive law of the case regarding privilege,

INA, in its briefs, emphasizes that this case should be decided

under Florida law.33 However, INA also concedes that Texas and

Florida formulations of the offensive use doctrine do not conflict,

although Florida calls it the “at issue doctrine,” and thus use of

either state’s law would result in the same outcome.34


110

Plaintiff cites Florida and South Carolina law. Nevertheless, this is not anassertion or admission that either of those state’s law controls the outcome withrespect to legal work done by Texas lawyers in Texas.”)

10

When the laws of two or more states may apply, the court must

first determine whether those states’ laws conflict with regard to

the relevant issues. See Schneider Nat’l Transp. v. Ford Motor

Co., 280 F.3d 532, 536 (5th Cir. 2002). If the laws conflict, the

court turns to the choice-of-law principles of the forum state.

See Cantu v. Jackson Nat. Life Ins. Co., 579 F.3d 434, 437 (5th Cir.

2009). However, if the relevant doctrines do not conflict, the

court need not undertake a choice-of-law analysis. See Kimberly-

Clark Corp. v. Factory Mut. Ins. Co., 566 F.3d 541, 546 n.6 (5th

Cir. 2009) (citing Railroad Mgmt. Co., L.L.C. v. CFS La. Midstream

Co., 428 F.3d 214, 222 (5th Cir. 2005) (“Where there are no

differences between the relevant substantive laws of the respective

states, there is no conflict, and a court need not undertake a

choice of law analysis.”)). The law of the forum state then

governs the action. See Schneider Nat’l Transp., 280 F.3d at 536.

Here, the parties do not dispute that the pertinent doctrines

under Texas and Florida law applicable to this case are not in

conflict. Further, as discussed below, the court has not found any

material conflict in the applicable laws of these states.

Accordingly, the court need not engage in a choice-of-law analysis

for purposes of this Order. Because the laws of Texas and Florida

do not conflict on the claims in this lawsuit, the court applies


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35 Complaint and Motion to Quash, Docket Entry No. 1, p. 4.

11

the substantive law of the forum state, Texas, to the pending

motions.

B. Privileges

1. Attorney-Client and Work Product

Plaintiff claims that INA’s requests violate the attorney-

client privilege and the work product doctrine.35 The attorney-

client privilege protects communications between an attorney and

his or her client that are intended to be confidential. Upjohn Co.

v. United States, 449 U.S. 383, 389 (1981). “[T]he privilege

exists to protect not only the giving of professional advice to

those who can act on it but also the giving of information to the

lawyer to enable him to give sound and informed advice.” Upjohn

Co., 449 U.S. at 390.

The attorney work product privilege, first announced by the

Court in Hickman v. Taylor, 329 U.S. 495, 510 (1947), protects the

written statements, private memoranda, and personal recollections

prepared or formed by an attorney in the course of his or her legal

duties. Upjohn Co., 449 U.S. at 399. This has been incorporated

into Federal Rule of Civil Procedure 26(b)(3)(B), which states

that the court “must protect against disclosure of the mental

impressions, conclusions, opinions, or legal theories of a party’s

attorney or other representative concerning the litigation.”

The work product rule protects materials prepared by a


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12

consultant in anticipation of litigation but not documents prepared

in the ordinary course of business. United States v. El Paso Co.,

682 F.2d 530, 542 (5th Cir. 1982). Determining whether a document

is prepared in anticipation of litigation has been described as “a

slippery task” by the Fifth Circuit. El Paso Co., 682 F.2d at 542.

The privilege protects more than documents generated in the course

of a lawsuit and has been extended to those documents generated for

the “primary motivating purpose” of aiding in possible future

litigation. In re Kaiser Aluminum & Chemical Co., 214 F.3d 586,

593 (5th Cir. 2000). Factors to be considered in determining the

primary motivation for the creation of the document is whether

counsel has been retained, whether counsel directed the preparation

of the document, whether it was a routine practice of the party to

generate such document, and whether the document was prepared in

response to a particular circumstance. Navigant Consulting, Inc.

v. Wilkinson, 220 F.R.D. 467, 477 (N.D. Tex. 2004).

As the party asserting privilege, Plaintiff bears the burden

of demonstrating privilege. United States v. Rodriguez, 948 F.2d

914, 916 (5th Cir. 1991) (abrogated on other grounds by United

States v. Dixon, 509 U.S. 688 (1993)). Here, however, INA does not

contend that the requested documents are not privileged, only that

the privilege has been waived as to INA. Accordingly, the court

need not engage in a privilege analysis with regard to Plaintiff’s

Clients.


113


37 Complaint and Motion to Quash, Docket Entry No. 1, ¶ 7.

38 See id.

39 Complaint and Motion to Quash, Docket Entry No. 1, ¶ 6 andDeclaration of Easton, ¶ 2.


41 See id. From the filings made with this court, it is difficult toascertain whether, in fact, there would be any documents with respect to Halmosthat are not in his official capacity as president of IYC and HPC and that alsopertain to the Legacy and the Mongoose, per the terms of the subpoena. See id.The subpoena, as written, however, insinuates that there may be, and to the

13

INA’s subpoena requests documents from all three of the

plaintiffs in the Underlying Action.36 Plaintiff represents only

IYC and HPC in the Underlying Action.37 Halmos, a pro se plaintiff

in the Underlying Action, has submitted nothing to this court.38

Further, there has been no allegation that Plaintiff represented

Halmos in the NOAA settlement litigation.39 In fact, there are no

allegations that Plaintiff has ever represented Halmos. Therefore,

no privilege attaches to any documents “prepared on behalf of,

directed to or received from” Halmos, unless those documents were

“prepared on behalf of, directed to or received from” Halmos in his

official capacity as the president of IYC and HPC.40

Accordingly, it is ORDERED that Plaintiff turn over all

documents requested in the subpoena with respect to Halmos that

were not “prepared on behalf of, directed to or received from” him

in his official capacity as president of IYC and/or HPC and that

pertain to the Legacy and/or the Mongoose.41


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extent that there are, these must be turned over for lack of privilege. See id.

42 See, e.g., INA’s Motion to Compel, Docket Entry No. 3, p. 8.

43 The court has already ruled on INA’s third argument at an earliermotion hearing. Transcript, Status Conference, Oct. 20, 2009, Docket Entry No.29, p. 13 (stating, “If it’s redacted it’s not waived.”).

14

2. Waiver of Privilege

INA argues that any right to claim that the requested

documents are privileged has been waived.42 It bases this argument

on three grounds: (1) Plaintiff’s Clients waived the privilege

since they filed suit for the full amount of Plaintiff’s invoices

and the supporting work at issue in the Underlying Action; (2) INA

and Plaintiff’s Clients shared a common interest in the underlying

proceedings which prevented the privilege from applying; and (3)

Plaintiff’s Clients waived the privilege by producing redacted fee

statements. The court finds INA’s first argument dispositive and

rules on that ground.43

Generally, the offensive use doctrine states that a party

seeking affirmative relief against another cannot maintain the

action and at the same time utilize privileges to protect critical

material from discovery. Tex. Dep’t of Pub. Safety Officers Ass’n

v. Denton, 897 S.W.2d 757, 761 (Tex. 1995). “A plaintiff cannot

use one hand to seek affirmative relief in court and with the other

lower an iron curtain of silence against otherwise pertinent and

proper questions which may have a bearing upon his right to

maintain his action.” Ginsberg v. Fifth Circuit Court of Appeals,


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15

686 S.W.2d 105, 108 (Tex. 1985). Accordingly, privilege can be

waived by the offensive use of it. Republic Ins. Co. v. Davis, 856

S.W.2d 158, 163 (Tex. 1993).

The circumstances of In re Beirne, Maynard & Parsons, L.L.P.

are notably similar to the facts of the present proceeding. 260

S.W.3d 229 (Tex. App.—Texarkana 2008, orig. proceeding [mand.

denied]). There, the law firm filed suit against its client’s

insurance company to recover fees for which it had invoiced its

client. Id. at 230-31. The insurance company questioned the

veracity of the law firm’s billing and, accordingly, sought

discovery of the underlying documentation to determine whether the

billing was accurate. Id. Because the critical defensive issue in

the lawsuit was whether the billing records were accurate, and

because the law firm was putting its privilege to offensive use,

the court held that, under the offensive use doctrine, the firm

could not deny the insurance company the right to review the

documents supporting the firm’s claim. Id. at 231.

In Fugro-McClelland Marine Geosciences, Inc. v. Steadfast

Insurance Company, the defendant/insurer contended that the

plaintiff/insured waived its privileges to the communications

between the insured and its defense counsel and among the insured’s

representatives about the underlying action. No. H-07-1731, 2008

WL 5273304, at *1 (S.D. Tex. Dec. 19, 2008) (unpublished). The

insurer’s reason for requesting the privileged documents was that


116

44 INA’s Response to Plaintiff’s Reply Brief on Privilege, Docket EntryNo. 42, p. 1.

16

some “documents produced in discovery so far indicate that [the

insured] was working against [the insurer] to make [the insurer]

pay 100% of the defense costs for the [underlying action], even

though both [the insurer] and [a second insurer] told [the insured]

that the policies and Texas law required [the second insurer] to

share in the defense.” Id. at *4. The insurance company relied in

part upon the offensive use doctrine. Id. at *4. After discussing

Davis and Ginsberg, the court determined that the insurer had

failed to show that any documents withheld by the insured were

outcome determinative. Id. Even if the insurer’s reason was true,

the court held, it did not necessarily follow that the insured’s

withheld documents were outcome determinative on the same point.

Id.

Unlike here, in Fugro there appears to have been no dispute as

to coverage or reasonableness of the defense costs. The insurer

was not disputing that the underlying action was covered under its

policies, only that another insurance company was legally bound to

share the costs. The dispute in the present case is more

fundamental: whether all of Plaintiff’s submitted defense costs are

covered under the Policy.44

Three factors guide the court in determining whether an

offensive use waiver has occurred: (1) whether the party asserting


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17

the privilege is seeking affirmative relief; (2) whether the

privileged information sought in all probability would be outcome

determinative of the cause of action asserted; and (3) whether the

party seeking disclosure has no other means of obtaining the

evidence. Davis, 856 S.W.2d at 163; Transamerican Nat. Gas. Corp.

v. Flores, 870 S.W.2d 10, 11-12 (Tex. 1994).

INA’s request satisfies all of these factors. In support of

the first factor, Plaintiff has asserted the privilege to this

court and is seeking affirmative relief in the form of a motion to

quash INA’s subpoena. Furthermore, in the Underlying Action,

Plaintiff is seeking affirmative relief by attempting to recover

reimbursable attorneys’ fees from INA on behalf of its Clients. In

support of the second factor, this case was instigated so that

Plaintiff’s Clients could recover, among other costs, attorneys’

fees that were expended to settle the Underlying Action.

Production of documents by Plaintiff that would prove that the

various statements on its billing statements were, in fact covered

by the Policy is at the heart of the underlying dispute and,

consequently, production of these documents would be outcome

determinative. In support of the third factor, Plaintiff has not

suggested another way by which INA might obtain the evidence

proving coverage under the Policy. As the court has already

stated, “[INA] can’t get that information from [Plaintiff’s

Clients]. [Plaintiff’s Clients have] no more idea what email


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45 Transcript, Status Conference, Nov. 6, 2009, Docket Entry No. 37, p.8.

46 The parties have not provided and the court has not found any FloridaSupreme Court decision that is on point.

47 Essex was attempting to submit to the court its unredacted billingstatements and its fee agreement, both under seal, so that the court coulddetermine the reasonableness of the charges by in camera review; the courtrejected this approach to resolution. Essex, 2007 WL 700851, at *1-2.

18

[Plaintiff] reviewed for a half an hour than [INA does]. So

[Plaintiff] is the only source for this information.”45

Florida case law is in accord with this determination.46

“[F]or waiver to occur under the at issue doctrine, the proponent

of a privilege must make a claim or raise a defense based upon the

privileged matter and the proponent must necessarily use the

privileged information in order to establish its claim or defense.”

Coates v. Akerman, Senterfitt & Eidson, P.A., 940 So.2d 504, 510

(Fla. 4th DCA 2006). In Essex Builders Group, Inc. v. Amerisure

Insurance Company, plaintiff Essex Builders Group, Inc. (“Essex”)

sought to recover attorneys’ fees and costs against defendant

Amerisure Insurance Company (“Amerisure”). No. 6:04-cv-1838-Orl-

22JGG, 2007 WL 700851, at *1 (M.D. Fla. Mar. 1, 2007)

(unpublished). Essex had produced redacted billing statements,

asserting that the redacted information was protected by attorney-

client and/or work product privileges.47 Id. Amerisure did not

dispute that the records contained privileged information but

argued that it should be permitted to review the unredacted billing

records to determine whether it had a basis for contesting specific


119

48 Although the privileged nature of the information was not contested,the Essex court, in dicta, expressed “some doubt” as to whether the recordsqualified for a privilege. Essex, 2007 WL 700851, at *1, n.1.

49 Plaintiff’s Brief on Privilege, Docket Entry No. 39, p. 14.

19

entries.48 Id. The Essex court concluded that Essex had waived any

privilege it might have with regard to the billing statements and

fee agreement because Essex had placed the protected information

“in issue through some affirmative act for [its] own benefit, and

to allow the privilege to protect against disclosure of such

information would be manifestly unfair to the opposing party.” Id.

(citing Cox v. Admin. U.S. Steel & Carnegie, 17 F.3d 1386, 1417

(11th Cir. 1994)).

Plaintiff states that Essex was wrongly decided but then only

argues that the case is inapplicable to the issue of underlying

documentation because the case only addressed unredacted billing

statements.49 The court disagrees. First, at least one underlying

document (the fee agreement) was at issue in Essex. Essex, 2007 WL

700851, at *1. Second, Plaintiff cites to no Florida law contra

the Essex opinion. Third, the spirit of the Essex decision, that

when a Plaintiff has placed protected information “in issue through

some affirmative act for [its] own benefit, . . . to allow the

privilege to protect against disclosure of such information would

be manifestly unfair to the opposing party,” is equally as

applicable to underlying documentation as it is to billing

statements. Finally, there is nothing in the doctrine’s


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50 See Complaint and Motion to Quash, Docket Entry No. 1, p. 5.

51 See INA’s Motion to Compel, Docket Entry No. 3, Ex. B, SubpoenaIssued to Plaintiff, p. 4 (requesting “[a]ny and all papers, notes, books,accounts, invoices, writings, drawings, graphs, charts, photographs, contracts,agreements, expert reports, articles, email, electronic or digital records, phonerecords, recordings (audio, video and digital), and all other information, dateand date compilations prepared on behalf of, directed to or received from[Halmos], [IYC] and/or [HPC], their agents, employees and entities acting in arepresentative capacity with respect to the S/Y LEGACY and/or the M/V MONGOOSE”);see also INA’s Response to Plaintiff’s Reply Brief on Privilege, Docket Entry No.42 (stating that the issue to be determined, and consequently the reason forseeking the documents, is to determine what to pay under the Policy).

20

formulation in Coates by the Florida state court of appeals that

undermines the Essex decision. See Coates, 940 So.2d at 510

(discussing offensive use of “privileged information”).

Accordingly, the court finds that the privileges surrounding

the billing statements and underlying documentation have been

waived as to those items for which Plaintiff’s Clients seek

reimbursement.

C. Production

Plaintiff argues that the subpoena is vague and overly broad.50

The court agrees, because the subpoena as written covers a broad

swath of material that is not relevant to the issue of coverage

under INA’s Policy.51 Having found that privilege as to both

billing statements and supporting documentation has generally been

waived for some of INA’s requests, the court now turns to the

specifics of which billing statements and what supporting

documentation must be produced.

1. Billing Statements

Many of the cases discussing this issue have concluded that


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21

unredacted billing records must be produced for an insurance

company when the policyholder is seeking reimbursement. See, e.g.,

Ideal Electronic Sec. Co., Inc. v. Int’l Fidelity Ins. Co., 129

F.3d 143, 152 (D.C. Cir. 1997); Essex, 2007 WL 700851, at *1-2.

For example, in Ideal, the court rejected partially redacted

billing statements:

As a practical matter, the reasonableness of any portionof the billing statement can only be determined byexamining all billing statements pertaining to the legalservices provided as a whole. The reasonableness of anyone entry on an attorney’s billing statement is likely tobe informed by other charges incurred for the samegeneral service.

Ideal, 129 F.3d at 151. A district court in the Fifth Circuit also

recently decided that, “[a]lthough the propriety of redaction of

its billing records is at least doubtful,” the court would allow a

redacted version of the attorneys’ billing records because only

certain entries were relevant to the limited inquiry the court was

asked to make. Vantage Trailers, Inc. v. Beall Corp., No. H-06-

3008, 2008 WL 4093691, at *3, n.2 (S.D. Tex. Aug. 28, 2008)

(unpublished).

This case and the accompanying discovery requests have been

complicated because Plaintiff works on multiple matters for the

insureds. Plaintiff’s representation includes at least eleven

matters in various lawsuits, some of which are related to the


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52 Plaintiff states that it is demanding fees for two principlecategories of work done: (1) “fees incurred defending [its Clients] on third-party claims, for example, in defending Halmos and IYC from claims from NOAA andthe State of Florida (for which INA had a duty to defend); and (2) “fees relatedto other matters, including pursuit of the claims in the underlying IYCLitigation.” Complaint and Motion to Quash, Docket Entry No. 1, p. 5. AlthoughPlaintiff does not specifically state that INA had a duty to pay for the workperformed in the second category, the fact that Plaintiff is demanding fees forthat work belies INA’s assertion that Plaintiff’s complaint “admits that[Plaintiff’s] work encompasses matters allegedly covered under INA’s policy aswell as matters not covered, such as ‘pursuit of claims’ in the FloridaLitigation.” INA’s Motion to Compel, Docket Entry No. 3, p. 5.

Plaintiff has submitted to INA various redacted statements pertaining toeleven different matters upon which Pillsbury worked for its Clients. INA’sMotion to Compel, Docket Entry No. 3, p. 4 and Ex. D, Redacted Fee StatementsProvided by Plaintiff. Full payment has been requested for these matters,although it is unclear whether they all fall under INA’s coverage because of theredaction. INA’s Motion to Compel, Docket Entry No. 3, pp. 4-5.

53 Plaintiff has stated that although there were many different mattersupon which it is working for the insured, there is more than one matter for whichits Clients are seeking reimbursement from INA. Transcript, Status Conference,Nov. 6, 2009, p. 6.

54 See INA’s Motion to Compel, Docket Entry No. 3, Ex. B, SubpoenaIssued to Plaintiff, p. 4 (stating that the documents requested are only “withrespect to the S/Y LEGACY and/or the M/V MONGOOSE”).

55 The court notes that this order is identical to the one regardingbilling statements that had previously been issued from the bench. SeeTranscript, Motion Hearing, Aug. 20, 2009, Docket Entry No. 20, p. 16 (statingto INA: “[Y]ou are going to turn over unredacted bills for every dollar that you

22

Underlying Action.52 The current dispute does not pertain to all

of these lawsuits, and many of them do not involve INA in any way.53

INA has a very strong interest in determining that the billing

statements submitted to it actually pertain to Plaintiff’s work on

matters covered by the Policy.

Accordingly, it is ORDERED that Plaintiff must produce the

billing statements upon which its Clients are requesting

reimbursement in relation to the Legacy and the Mongoose.54

Plaintiff may fully redact any entry for which reimbursement is not

being sought. Plaintiff may not redact, even partially, any entry

for which reimbursement is being sought.55 Plaintiff must submit


123

are seeking from the insurance company, but I’m not going to go as far to saythat you have to turn over every bill which you are not seeking reimbursementfor. I don’t think that [the privilege has] been waived on unrelated matters,only the matters that are at issue in this case which are: fees that you’reseeking to be reimbursed.”).

56 See Complaint and Motion to Quash, Docket Entry No. 1, pp. 6-7.

23

to INA the billing statements as outlined above within thirty (30)

days from the date this Order is issued.

2. Supporting Documentation

Plaintiff resists the subpoena by arguing that the request is

unduly burdensome because of the great volume of documentation that

has been generated by the original action that led to the NOAA

settlement.56 Under Federal Rule of Civil Procedure 26(b)(1), a

district court may limit discovery if, among other things:

it determines that: (I) the discovery sought isunreasonably cumulative or duplicative, or is obtainablefrom some other source that is more convenient, lessburdensome, or less expensive; (ii) the party seekingdiscovery has had ample opportunity by discovery in theaction to obtain the information sought; or (iii) theburden or expense of the proposed discovery outweighs itslikely benefit . . . .

Here, the discovery sought by INA is neither cumulative,

duplicative, or obtainable from another source; nor has INA had the

opportunity to otherwise discovery the sought-after material.

Furthermore, considering that a central point of contention in the

Underlying Litigation revolves around proving how much Plaintiff’s

Clients are entitled to be reimbursed under the Policy, the burden

and expense of the proposed discovery does not outweigh its likely

benefit of substantially furthering the resolution of this case.


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58 At the court’s order, Plaintiff produced unredacted copies of thebilling statements. Shortly thereafter, Plaintiff attempted to use the clawbackprovision of Federal Rule of Civil Procedure 26(b)(5)(B) to retrieve theunredacted statements and all supporting documentation that had been produced upto that time. Plaintiff’s Motion to Compel, Docket Entry No. 32.

59 See INA’s Motion to Compel, Docket Entry No. 3, p. 4 and Ex. E,Preliminary Partial Listing of Legacy Salvage Charges, Expenses to Protect,Liability, Among Others, for Reimbursement; INA’s Supplement to INA’s Motion toCompel, Docket Entry No. 31, Ex. M, Unredacted Billing Entries.

24

In addition, Plaintiff admitted that Plaintiff has been

representing its Clients “on a variety of matters . . . probably .

. . 15 matters” and that, were the NOAA matter and the insurance

litigation the only matters the firm had with the Clients, the file

request “would have been easy.”57 The court will not find that

document requests that “would have been easy” had it been the

firm’s only matter for a client become “unduly burdensome” when the

firm’s organization falters when providing client support on

multiple matters. Accordingly, the court does not find it unduly

burdensome for Plaintiff to provide documents proving that its

actions were covered under INA’s Policy with the Clients.

Finally, one of Plaintiff’s main arguments is that INA needs

to trust Plaintiff’s heavily redacted billing statements and need

not obtain additional documentation at all.58 This position is

undermined by the facts of this case, because Plaintiff has already

given INA reason to mistrust the calculation of its defense fees.59

Plaintiff initially requested around $1.5 million from INA as its


125


61 INA’s Supplement to INA’s Motion to Compel, Docket Entry No. 31, Ex.M, Unredacted Billing Entries.

62 Id. Ex. D, E-mail Communication Between the Parties, dated Oct. 29,2009.

63 See INA’s Reply in Support of Its Motion to Compel, Docket Entry No.10, p. 7; Plaintiff’s Reply in Support of Its Motion to Quash, Docket Entry No.7, Ex. E, Nov. 19, 2007, E-mail from Pamela Harting-Forkey to Peter Halmos. Thispayment was made “without benefit of the actual billings or detail”, but thecheck was “without prejudice” such that no one waived any “reservations, claims,[or] defenses” against one another. Plaintiff’s Reply in Support of Its Motionto Quash, Docket Entry No. 7, Ex. E, Nov. 19, 2007, E-mail from Pamela Harting-Forkey to Peter Halmos. See also Transcript, Motion Hearing, Aug. 20, 2009,Docket Entry No. 20, p. 7 (confirming that the promised $500,000 was indeed paidout for the Clients). Later in the same hearing, INA said the amount was$557,000. Id. at 15.

25

defense fees for the Underlying Action.60 When INA asked for

billing statements, the amount requested by Plaintiff dropped

significantly to $984,911.52.61 INA has agreed to pay $64,698.98

for reimbursable legal work in attorneys’ fees based on information

Plaintiff has already provided.62 INA has also in good faith

already paid out around $500,000 for reimbursement for attorneys’

fees, having expected to later receive the supporting information.63

Plaintiff’s Clients expect to be reimbursed under the Policy it has

with INA, and because Plaintiff has put insurance payments under

the Policy at issue in this case, Plaintiff cannot now decline to

provide documentation showing that the work was consistent with the

Policy and thus covered and reimbursable by INA.

Although the court has already determined that privilege as to

the billing statements and supporting documentation has been

waived, waiver of privilege must be narrowly construed. See Davis,


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64 Prior to the start of this litigation, when Halmos believed that,“Unless something unexpected comes over the transom . . . we’re over the hump reNOAA/Florida legal fees,” INA agreed that, “Certainly there may be items that maybe considered attorney-client priveleged [sic] and that need to be redacted;which [INA] fully understands; as Halmos and [INA] may be at odds.” Plaintiff’sReply in Support of Its Motion to Quash, Docket Entry No. 7, Ex. E, Nov. 19,2007, E-mail from Pamela Harting-Forkey to Peter Halmos.

65 See INA’s Motion to Compel, Docket Entry No. 3, Ex. B, SubpoenaIssued to Plaintiff, p. 4 (stating that the documents requested are only “withrespect to the S/Y LEGACY and/or the M/V MONGOOSE”).

66 Alternatively, Plaintiff may decide to allow INA access to theoriginal documents either on its premises or at another location within thirty(30) days from the date this Order is received. The court suggests this only asone possible avenue of reducing Plaintiff’s costs of production. See Complaint

26

856 S.W.2d at 163. Therefore, the court finds that privilege has

been waived only insofar as is required to prove that the work done

by Plaintiff falls under the Policy its Clients have with INA.

Accordingly, partial redaction of these documents is permissible.64

It is ORDERED that Plaintiff must produce supporting

documentation for the billing entries for which reimbursement is

being sought with respect to the Legacy and the Mongoose.65

Plaintiff need not produce any documentation on any items that are

not included in the unredacted billing entries. As the parties

have stated, the issue of coverage is for the Florida court to

decide, but if Plaintiff expects reimbursement, then it must here

produce the material upon which it relies to fall within the

Policy, showing that the work accomplished was done for purposes of

the portions of the Underlying Action that fall under INA’s

coverage. It is further ORDERED that Plaintiff submit to INA the

supporting documentation as outlined above within thirty (30) days

from the date this Order is issued.66


127

and Motion to Quash, Docket Entry No. 1, pp. 6-7 (arguing undue burden based oncost of production).

27

The court emphasizes that these supporting documents may be

redacted, but the more the documents are redacted, the greater the

risk Plaintiff runs of creating doubt as to whether those documents

support the billing statements for which Plaintiff’s Clients seek

reimbursement. Plaintiff and its Clients must decide how much, if

any, to redact, and any redaction of material proving coverage may

risk INA’s refusal to cover the matching billing entries. It is

the insured’s responsibility to provide information showing that

the requested reimbursement falls under the policy. See Federated

Mut. Ins. Co. v. Grapevine Excavation Inc., 197 F.3d 720, 723 (5th

Cir. 1999); Banco Nacional De Nicaragua v. Argonaut Ins. Co., 681

F.2d 1337, 1340 (11th Cir. 1982). Because this is the insured’s

responsibility, and because the insured has made this request part

of its action against INA, the privilege has been waived only

insofar as is necessary to show that Plaintiff’s work falls under

INA’s Policy. INA’s motion to compel is therefore DENIED IN PART,

GRANTED IN PART, and Plaintiff’s motion to quash is DENIED IN PART,

GRANTED IN PART.

D. Motion to Compel Pursuant to Rule 26(b)(5)(B)

On November 6, 2009, in response to Plaintiff’s invocation of

the “clawback” provision of Federal Rule of Civil Procedure

26(b)(5)(B), the court ordered INA to sequester the documents that


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67 Transcript, Status Conference, Nov. 6, 2009, Docket Entry No. 37, p.18.

68 The court notes that some of those documents may only partially besubject to the “clawback” provision in accord with this Order. For example,Plaintiff may have produced a billing statement with some entries for whichPlaintiff is not seeking reimbursement and some entries for which Plaintiff is.If such is the case, then INA must return the entire document and Plaintiff mustreturn the properly redacted document within thirty (30) days of the issuance ofthis Order.

28

Plaintiff had already produced until such a time as the court made

its ruling on the issue of privilege.67 Rule 26(b)(5)(B) provides,

in part:

If information is produced in discovery that is subjectto a claim of privilege . . . the party making the claimmay notify any party that received the information of theclaim and the basis for it. After being notified, aparty must promptly return . . . the specifiedinformation and any copies it has and may not use ordisclose the information until the claim is resolved.

The court has made its rulings on the documents that must be

produced by Plaintiff. If Plaintiff has produced documents that do

not fall into these categories, then Plaintiff may “clawback” those

specific documents.68

Accordingly, it is ORDERED that, within seven (7) days of this

Order, Plaintiff must give INA a list consisting of any specific

documents that it requests the return of because they do not fall

into the categories of production which the court has ordered are

subject to discovery. It is further ORDERED that INA comply with

Plaintiff’s request within seven (7) days of receiving Plaintiff’s

list.

E. Confidentiality


129

69 Transcript, Motion Hearing, Aug. 20, 2009, Docket Entry No. 20, p.12; Transcript, Status Conference, Oct. 20, 2009, Docket Entry No. 29, p. 24.


71 Id.

72 Id.

29

Finally, the court notes the concern of Plaintiff and its

Clients regarding the confidentially of the documents from the

original Florida litigation. INA has agreed on the record that the

documents received from Plaintiff can be made confidential between

the parties.69 In fact, at the August motion hearing, Plaintiff’s

counsel requested a protective order as to the confidential status

of the documents.70 INA’s counsel agreed with this request stating

that his Clients “absolutely do not have a problem with the

confidentiality order.”71 Plaintiff’s counsel agreed to write and

submit to the court a draft protective order on confidentiality.72

However, the court has not yet received a draft protective order

from any party. Accordingly, the court directs the parties to

confer regarding an appropriate confidentiality agreement for the

documents produced pursuant to this Order. In the alternative,

Plaintiff may yet submit to the court a draft protective order for

the court to sign, but it must do so within fourteen (14) days of

the issuance of this opinion.

III. Conclusion

Based on the foregoing, the court DENIES IN PART, GRANTS IN


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PART Plaintiff’s Motion to Quash INA’s Subpoena (Docket Entry No.

1); DENIES IN PART, GRANTS IN PART INA’s Motion to Compel

Production (Docket Entry No. 3); and DENIES IN PART, GRANTS IN PART

Plaintiff’s Motion to Compel Pursuant to Rule 26(b)(5)(B) (Docket

Entry No. 32).

SIGNED in Houston, Texas, this 6th day of January, 2010.


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132

HON. GRAY H. MILLER

UNITED STATES DISTRICT JUDGE

SOUTHERN DISTRICT OF TEXAS

133

134

SELECTED

INSURANCE OPINIONS

135

UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

MID-CONTINENT CASUALTY COMPANY, §§

Plaintiff, §§

v. § CIVIL ACTION H-08-21§

ACADEMY DEVELOPMENT, INC. et al., §§

Defendants. §

MEMORANDUM OPINION & ORDER

The court hereby VACATES its prior memorandum and order dated March 24, 2010 (Dkt.

49) and REISSUES this order in its place.

Pending before the court is defendants Academy Development, Inc., Chelsea Harbour, Ltd.,

Legend Classic Homes, Ltd., and Legend Home Corporation’s motion for partial summary judgment

(Dkt. 35) and plaintiff Mid-Continent Casualty Company’s cross motion for partial summary

judgment (Dkt. 36). After review of the motions, the responses, the replies, and the applicable law,

defendants’ motion is GRANTED and plaintiff’s motion is DENIED for the reasons stated below.

BACKGROUND

The Underlying Lawsuit

Defendants Academy Development, Inc., Chelsea Harbour, Ltd., Legend Classic Homes,

Ltd., and Legend Home Corporation (collectively “Academy”) were sued on or about May 23, 2005

by a group of plaintiffs (the “Budiman plaintiffs”) that purchased homes from the defendants in the

Chelsea Harbour subdivision of Fort Bend County, Texas. Dkt. 34, Ex. 12. The Chelsea Harbour

subdivision was developed as a lake-front community and nearly all of the homes were constructed

on lots connected to one of the lakes in the community. Id. The Budiman plaintiffs allege that


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Academy knew at the time it sold the homes to the plaintiffs that the lake walls were failing and that

water was leaking from the lakes onto the adjacent home sites. Id. The plaintiffs further allege that

Academy did not disclose this information to them. Id. As a result, the Budiman plaintiffs brought

claims of statutory fraud, negligence and negligent misrepresentation, and violations of the

Deceptive Trade Practices Act against Academy. Id. The case went to trial and the jury returned a

verdict for the defendants. Dkt. 37 at 6.

The Policies

Defendant Legend Classic Homes, Ltd. is a named insured under five consecutive

Commercial General Liability (“CGL”) policies issued by plaintiff Mid-Continent Casualty

Company. Dkt. 35 at 2. The policies covered the period from August 1, 2000 to August 1, 2005.

Id. The other defendants—Academy Development Inc., Chelsea Harbour, Ltd., and Legend Home

Corporation—are listed as named insureds on each of the Mid-Continent policies via an

endorsement. Id. The policies are as follows:

Policy Effective Dates Policy Number Deductible

August 1, 2000—August 1, 2001 04-GL-000037547 $1,000 per claim



August 1, 2003—August 1, 2004 04-GL-000123869 $50,000 per occurrence

August 1, 2004—August 1, 2005 04-GL-000557144 $100,000 per occurrence

In addition to variations in the deductible amount per policy, some of the policies provide that the

deductible also applies to defense costs. See Dkt. 34, Exs. 13–17. In all other respects, the policies

are identical.


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Mid-Continent does not dispute that it had a duty to defend up through the eight amended petition. Also, as1

stated above, subsequent to the filing of the cross motions for partial summary judgment, the Underlying Lawsuit went

to trial and the jury returned a verdict for the defendants. The duty to indemnify, therefore, is no longer an issue in the

case.

3

The Declaratory Judgment Action

Mid-Continent initially agreed to provide a defense to Academy in the Underlying Lawsuit

under a reservation of rights. Dkt. 37 at 7. However, after the Budiman plaintiffs filed their ninth

amended petition, Mid-Continent informed Academy that it would no longer pay for defense costs

incurred after that filing. Dkt. 37 at 3. Mid-Continent based its decision on a determination that the

Budiman plaintiffs no longer alleged “property damage” as that term is defined in the policies. Dkt.

35 at 7. On January 3, 2008, Mid-Continent filed this suit seeking a declaration that it owed no duty

to defend or indemnify Academy upon the filing of the Budiman plaintiffs’ ninth amended petition.1

Academy filed a counterclaim seeking a ruling that Mid-Continent had a duty to defend, and in failing

to provide that defense, breached its contract with Academy and violated the Prompt Payment of

Claims Act of the Texas Insurance Code. Dkts. 1, 21. The parties agreed to file cross motions for

summary judgment on two of the issues in this case: (1) whether Mid-Continent had a duty to defend

after the filing of the Budiman plaintiffs’ ninth amended petition and (2) with respect to those

policies triggered, how the defense costs incurred by Academy should be allocated across the policies.

Dkts. 35, 36.

ANALYSIS

I. Summary Judgment

A timely motion for summary judgment shall be granted “if the pleadings, depositions,

answers to interrogatories, and admissions on file, together with the affidavits, if any, show 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); see also Carrizales v. State Farm Lloyds, 518 F.3d 343, 345


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(5th Cir. 2008). Upon a defendant's motion for summary judgment, the plaintiff “must set forth

specific facts showing that there is a genuine issue for trial. If he does not so respond, summary

judgment, if appropriate, shall be entered against him.” FED. R. CIV. P. 56(e). Ultimately, “[w]here

the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there

is no ‘genuine issue for trial.’” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587,

106 S. Ct. 1348 (1986). An issue is “material” if its resolution could affect the outcome of the action.

Burrell v. Dr. Pepper/Seven Up Bottling Group, Inc., 482 F.3d 408, 411 (5th Cir. 2007). “[A]nd a

fact is genuinely in dispute only if a reasonable jury could return a verdict for the non-moving party.”

Fordoche, Inc. v. Texaco, Inc., 463 F.3d 388, 392 (5th Cir. 2006).

The moving party bears the initial burden of informing the court of all evidence demonstrating

the absence of a genuine issue of material fact. Celotex Corp. v. Catrett , 477 U.S. 317, 323, 106 S.

Ct. 2548 (1986). Only when the moving party has discharged this initial burden does the burden shift

to the non-moving party to demonstrate that there is a genuine issue of material fact. Id. at 322. If

the moving party fails to meet this burden, then it is not entitled to a summary judgment, and no

defense to the motion is required. Id.

“For any matter on which the non-movant would bear the burden of proof at trial . . . , the

movant may merely point to the absence of evidence and thereby shift to the non-movant the burden

of demonstrating by competent summary judgment proof that there is an issue of material fact

warranting trial.” Transamerica Ins. Co. v. Avenell , 66 F.3d 715, 718–19 (5th Cir. 1995); see also

Celotex, 477 U.S. at 323–25. To prevent summary judgment, “the non-moving party must come

forward with ‘specific facts showing that there is a genuine issue for trial.’” Matsushita Elec. Indus.

Co., 475 U.S. at 587 (quoting FED. R. CIV. P. 56(e)).


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When considering a motion for summary judgment, the court must view the evidence in the

light most favorable to the non-movant and draw all justifiable inferences in favor of the non-movant.

Envtl. Conservation Org. v. City of Dallas, Tex., 529 F.3d 519, 524 (5th Cir. 2008). The court must

review all of the evidence in the record, but make no credibility determinations or weigh any

evidence; disregard all evidence favorable to the moving party that the jury is not required to believe;

and give credence to the evidence favoring the non-moving party as well as to the evidence supporting

the moving party that is uncontradicted and unimpeached. Moore v. Willis Ind. Sch. Dist., 233 F.3d

871, 874 (5th Cir. 2000). However, the non-movant cannot avoid summary judgment simply by

presenting “conclusory allegations and denials, speculation, improbable inferences, unsubstantiated

assertions, and legalistic argumentation.” See TIG Ins. Co. v. Sedgwick James of Wash., 276 F.3d

754, 759 (5th Cir. 2002); see also Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) (en

banc). By the same token, the moving party will not meet its burden of proof based on conclusory

“bald assertions of ultimate facts.” Gossett v. Du-Ra-Kel Corp., 569 F.2d 869, 872 (5th Cir. 1978);

see also Galindo v. Precision Amer. Corp., 754 F.2d 1212, 1221 (5th Cir. 1985).

II. Contract Interpretation

“Texas courts interpret insurance policies according to the rules of contract construction.” de

Laurentis v. U.S. Auto. Ass’n, 162 S.W.3d 714, 721 (Tex. App.—Houston [14th Dist.] 2005, pet.

denied). The primary objective of the court is to ascertain the parties’ intent, as expressed in the

written instrument. See Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 133 (Tex. 1994). “[T]he

parties’ intent is governed by what they said, not by what they intended to say but did not.” Nautilus

Ins. Co. v. Country Oaks Apartments, Ltd., 566 F.3d 452, 455 (5th Cir. Apr. 22, 2009) (quoting Fiess

v. State Farm Lloyds, 202 S.W.3d 744, 746 (Tex. 2006)) (internal quotation omitted).


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“If the insurance policy is worded so that it can be given a definite meaning or certain legal

meaning, then the policy is not ambiguous. If the policy is not ambiguous, then the court construes

the policy as a matter of law.” Brown & Brown of Tex., Inc. v. Omni Metals, Inc., — S.W.3d —,

2009 WL 4856782, at *35 (Tex. App.—Houston [1st Dist.] Dec. 17, 2009, no pet. h.) (citing Am.

Mfrs. Mut. Ins. Co. v. Schaefer, 124 S.W.3d 154, 157 (Tex. 2003)) (internal citation omitted). An

ambiguity exists where a policy is susceptible to more than one meaning. Coker v. Coker, 650

S.W.2d 391, 393 (Tex. 1983). Courts interpreting contractual provisions give terms their plain,

ordinary, and generally accepted meanings, unless otherwise defined by the parties. “‘Both the

insured and the insurer are likely to take conflicting views of coverage, but neither conflicting

expectations nor disputation is sufficient to create an ambiguity.’” Nat’l Union Fire Ins. Co. of

Pittsburgh, PA v. U.S. Liquids, Inc., 271 F. Supp. 2d 926, 932 (S.D. Tex. 2003) (quoting Forbau v.

Aetna Life Ins. Co., 876 S.W.2d 132, 134 (Tex. 1994)). “[I]f, and only if, the court finds an ambiguity

in the contract provisions, particularly in exclusionary clauses, the court should construe the policy

strictly against the insurer.” Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 271 F. Supp. 2d at 932; see

also Waffle House, Inc. v. Travelers Indem. Co. of Ill., 114 S.W.3d 601, 607 (Tex. App.—Ft. Worth

2003, pet. denied) (cautioning that exclusionary provisions “must be clearly expressed and must not

be ambiguously worded”). And, “if the insured’s construction of an exclusionary provision is

reasonable, it must be adopted, even if the insurer’s construction is more reasonable.” Nat’l Union

Fire Ins. Co. of Pittsburgh, PA, 271 F. Supp. 2d at 931.

III. Application

The court finds that based on the summary judgment record before it, Mid-Continent owed

Academy a duty to defend after the filing of the Budiman plaintiffs’ ninth amended petition.


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Additionally, Academy is entitled to select which of the triggered policies under which to claim a

defense.

A. Duty to Defend

“Under the eight-corners rule, the duty to defend is determined by the claims alleged in the

petition and the coverage provided in the policy.” Pine Oak Builders, Inc. v. Great Am. Lloyds Ins.

Co., 279 S.W.3d 650, 654 (Tex. 2009). “Resort to evidence outside the four corners of these two

documents is generally prohibited.” Nautilus Ins. Co., 566 F.3d at 454. “The duty to defend does not

depend upon the truth or falsity of the allegations: ‘A plaintiff’s factual allegations that potentially

support a covered claim is all that is needed to invoke the insurer’s duty to defend . . . .’” Id. (internal

citations omitted).

“The insured bears the initial burden of showing that the claim . . . is potentially within the

insurance policy’s scope of coverage.” Harken Exploration Co. v. Sphere Drake Ins. PLC, 261 F.3d

466, 471 (5th Cir. 2001). When the petition does not present facts within the scope of the policy’s

coverage, the insurer is not legally obligated to defend a suit on behalf of the insured. Pine Oak

Builders, Inc., 279 S.W.3d at 654. But, if the facts in the pleadings give rise to any claim covered

under the policy, then the insurer has a duty to defend the insured with respect to all of the claims.

Utica Nat’l Ins. Co. of Tex. v. Am. Indem. Co., 141 S.W.3d 198, 201 (Tex. 2004). Although the

allegations in the petition are interpreted liberally and in favor of the insured, the court must not “read

facts into the pleadings,” “look outside the pleadings,” or “imagine factual scenarios which might

trigger coverage.” Nat’l Union Fire Ins. Co. of Pittsburgh, PA v. Merchs. Fast Motor Lines, Inc., 939

S.W.2d 139, 142 (Tex. 1997). The court’s inquiry must turn on the facts alleged and the origin of

damages, rather than the legal theories asserted. See Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 271

F. Supp. 2d at 931; see also Am. Auto, Inc. v. Mayfield, 287 F. Supp. 2d 661, 664 (N.D. Tex. 2003).


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Nonetheless, “all doubts regarding the duty to defend [are resolved] in favor of the duty.” King v.

Dallas Fire Ins. Co., 85 S.W.3d 185, 187 (Tex. 2002).

In the Underlying Lawsuit, the first eight petitions clearly allege that the Budiman plaintiffs

suffered property damage to their homes. For instance, the seventh amended petition states that the

water leaking from the lakes is “raising the surrounding ground water levels to the point that Lake

water is escaping from multiple driveways, sidewalks and yards.” Dkt. 34, Ex. 8, ¶ 34. Additionally,

“the ground water level is too close to the foundations of the homes and is now and in the future

going to affect the foundations and structural integrity of the Plaintiffs’ homes. Id. Further, the

homes are experiencing “drywall cracks, joint separation in trim and windows, tiles breaking, mortar

cracks, and windows cracking without impact.” Id. In light of these allegations, Mid-Continent

recognizes they had a duty to defend Academy in the lawsuit up through the eight amended petition.

Beginning with the ninth amended petition, however, Mid-Continent contends that the

Budiman plaintiffs no longer allege “property damage” as that term is defined in the policies because

the plaintiffs omit the above allegations of physical damage to the homes and instead allege

diminution of value and possible future damage to the homes. See Dkt. 34, Exs. 10–12. Mid-

Continent contends that because diminution of value is an economic loss and not property damage

as a matter of law, the duty to defend is not triggered. See Dkt. 36 at 15. Additionally, possible future

damage does not trigger coverage; only actual damage during the policy period. Id. In response,

Academy argues first that the ninth, tenth, and eleventh petitions do allege property damage to the

plaintiffs’ homes; and, second, the policy’s definition of property damage requires only physical

injury to some tangible property, not necessarily physical injury to the plaintiffs’ homes. See Dkt. 40

at 7.


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The five policies are identical with respect to these provisions. For simplicity, only the August 1,2

2000—August 1, 2001 policy is referenced in the citations.

9

B. The Policies

The policies state that Mid-Continent 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. [Mid-Continent] will have the right and duty to defend the insured against any ‘suit’ seeking

those damages.” Dkt. 34, Ex. 13. Additionally, the insurance policy applies to bodily injury and2

property damage only if: (1) “the ‘bodily injury’ or ‘property damage’ is caused by an ‘occurrence’

and takes place in the ‘coverage territory’”; and (2) “the ‘bodily injury’ or ‘property damage’ occurs

during the policy period.” Id. Property damage is defined as:

a. Physical injury to tangible property, including all resulting loss of use of thatproperty. All such loss of use shall be deemed to occur at the time of the physicalinjury that caused it; orb. Loss of use of tangible property that is not physically injured. All such lossof use shall be deemed to occur at the time of the “occurrence” that caused it.

Id.

1. “Property Damage”

The ninth, tenth, and eleventh petitions allege diminution of value to the Budiman plaintiffs’

homes as a result water leaking from the lake walls. See Dkt. 34, Exs. 10–12. The petitions further

allege that seepage from the lake “may cause structural damage to Plaintiffs’ homes and foundations”.

Dkt. 34, Ex. 10, ¶ 33. Additionally, the petitions state that “Defendants breached [their duties of care]

and that such acts and/or omissions constitute the proximate cause of Plaintiffs’ damages including

cost of repair and diminution of value to their homes.” Dkt. 34, Ex. 10, ¶ 47 (emphasis added).

Academy argues that this last statement alleges physical damage to the plaintiffs’ homes. See Dkt.

35 at 11–12. A closer reading of the petitions, however, makes clear that the “cost of repair” is


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Mid-Continent cites several cases in support of their proposition that the Budiman plaintiffs’ must have an3

ownership interest or existing use in the tangible property that suffers physical injury. See, e.g., Myers v. Cuevas, 119

S.W .3d 830 (Tex. App.—San Antonio 2002, no pet.); Mitchell v. LaFlamme, 60 S.W.3d 123 (Tex. App.—Houston

[14th] 2000, no pet.). The court, however, agrees with Academy that these cases are inapposite: whether someone has

standing to sue or a meritorious claim for damages is different from the question of whether there is a duty to defend.

See Don’s Bldg. Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20, 31 (Tex. 2008) (“By purchasing the policy, [the

insured] acquired a contractual right to a defense against both meritorious and nonmeritorious claims for property

damage.”).

10

referencing the cost of repairing the lakes, not the homes. This is evident from the preceding

paragraph, which states in relevant part:

Defendants owed Plaintiffs multiple duties of care regarding the disclosure ofrelevant facts, construction of the Lakes, and the protection of Plaintiffs’ propertyinterests, including but not limited to the repair work performed on the Lakes.Defendants owed Plaintiffs duties of care related to the disclosure of informationrelating to the condition of the premises that they were selling (including the Lakes),the potential for water intrusion onto the premises and into the improvements, thecondition of the common areas and the long-term costs and effect of the Lakes on thecommunity that they were marketing to the public. Defendants owed a duty of careto all Plaintiffs not to misrepresent facts that they knew or should have known to befalse that would be reasonably relied upon by Plaintiffs.

Dkt. 34, Ex. 10, ¶ 46 (emphasis added).

Although the Budiman plaintiffs do not allege physical damage to their homes in the ninth,

tenth, or eleventh petitions, this does not mean that they have not alleged “property damage” per the

terms of the policies. The plain language of the policies state that coverage is provided for “damages

because of property damage,” or in other words, “damages because of physical injury to tangible

property.” There is no requirement in the policy that the tangible property belong to the Budiman

plaintiffs, and the court cannot read into the policy terms that are not there. See Nat’l Union Fire Ins.3

Co. of Pittsburgh, PA v. Crocker, 246 S.W.3d 603, 606 (Tex. 2008) (“[W]e must give the policy’s

words their plain meaning, without inserting additional provisions into the contract.”). The plain

meaning of the phrase “because of” means “caused by.” See, e.g., Nautilus Ins. Co. v. ABN-AMRO

Mortgage Group, Inc., 2006 WL 3545034, at *6 (S.D. Tex. Dec. 8, 2006) (“The plain meaning of [the


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because of] provision is that all damages caused by ‘property damage’ are covered by the

policy . . . .“). The Budiman plaintiffs’ later petitions state that the diminution in value of their homes

is caused by the lakes leaking water onto their property. See Dkt. 34, Ex. 10, ¶ 47. This is an

allegation of damages caused by physical damage to tangible property (the lake) and is sufficient to

allege property damage per the terms of the policies.

2. During the Term of the Policies

In addition to showing that the Budiman plaintiffs’ petitions allege property damage, Academy

has the burden to show that the property damage occurred during the policy period. The policies

cover only property damage that “occurs during the policy period.” Dkt. 34, Ex. 10. As discussed

in the preceding section, the property damage alleged in the Budiman plaintiffs’ ninth, tenth, and

eleventh petitions is physical damage to the lakes; not physical damage to the plaintiffs’ homes.

Thus, the proper inquiry for the court is to ask whether the lakes suffered actual damage during the

term of one or more of the Mid-Continent policies. See Don’s Bldg. Supply, Inc. v. OneBeacon Ins.

Co., 267 S.W.3d 20, 31 (Tex. 2008) (“[T]he insurer’s duty to defend [the insured] depends on

whether the homeowners’ pleadings allege property damage that occurred during the policy term.”).

Texas has adopted the actual-injury rule in determining whether an insurer has a duty to

defend. Id. at 26. The actual injury rule deems property damage occurred for purposes of the policy

“when actual physical damage to the property occurred.” Id. at 24. In the present case, it is not clear

from the face of the Budiman plaintiffs’ petitions when the lakes were damaged. Nor do the petitions

specify when the lakes were constructed. However, the petitions are not entirely date deprived: the

petitions mention letters sent to the Budiman plaintiffs in February 2004 and September 2005, and

also reference a lawsuit filed by defendants in 2002 regarding the faulty construction of the lakes.

See, e.g., Dkt. 34, Ex. 10, ¶¶ 20, 29. Moreover, the petitions allege that at the time the defendants


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sold the homes to the Budiman plaintiffs, the defendants “knew that the walls of the Lakes were

breaking apart and that water was leaking from the Lakes into the adjacent properties upon which

Plaintiffs’ homes were located.” Id. at ¶ 20. Therefore, at some point prior to 2002, the lakes were

constructed and began leaking; the continuous leaking causing damage to the Budiman plaintiffs.

Construing the petitions liberally and resolving all doubts in favor of coverage, these allegations are

sufficient to trigger the duty to defend under the Mid-Continent policies. See Trinity Universal Ins.

Co. v. Employers Mut. Cas. Co., 592 F.3d 687, 691 (5th Cir. 2010) (“An insurer must defend its

insured if a plaintiff’s factual allegations potentially support a covered claim.” (quoting Zurich Am.

Ins. Co. v. Nokia, Inc., 268 S.W.3d 487, 490–91 (Tex. 2008)). Thus, Mid-Continent owed a duty to

defend after the filing of the Budiman plaintiffs’ ninth amended petition.

C. Apportionment of Defense Costs

The parties disagree as to how Academy’s defense costs should be allocated across the

multiple triggered policies. Academy argues that it is entitled to pick which of the triggered policies

provides a complete defense and Mid-Continent contends that the defense costs should be apportioned

pro rata across the triggered policies. See Dkts. 35, 36, 56, 57.

In Keene Corp. v. Insurance Co. of North America, the D.C. Circuit held that once coverage

under an insurance policy is triggered, each insurer is independently liable to fully indemnify the

insured up to the policy’s limit, subject to “other insurance” clauses. 667 F.2d 1034, 1047–49 (D.C.

Cir. 1981). Further, it is the insured’s right to select which of the triggered policies provides

indemnification. Id. at 1050. The court reasoned that only this solution provides the insured “the

security it purchased with each policy.” Id. Additionally, the court noted that the duty to defend is

broader than the duty to indemnify, and because each insurer is fully liable for indemnification, it

follows that each insurer is also fully liable for defense costs. Id. at 1050.


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In American Physicians Insurance Exchange v. Garcia, the Texas Supreme Court adopted the

Keene reasoning and held that an insured may select from multiple consecutive insurance policies the

one under which it is to be indemnified. 876 S.W.2d 842 (Tex. 1994). The Austin Court of Appeals

extended Keene even further and held that an insurer’s duty to indemnify is not reduced when there

is concurrent coverage among multiple insurers. CNA Lloyds of Tex. v. St. Paul Ins. Co., 902 S.W.2d

657, 661 (Tex. App.—Austin 1995, writ dism’d by agr.). The Austin Court of Appeals later extended

this holding to the duty to defend. Tex. Prop. & Cas. Ins. Guar. Ass’n v. Sw. Aggregators, Inc., 982

S.W.2d 600 (Tex. App.—Austin 1998, no pet.).

Academy argues that Texas has adopted the Keene reasoning, and, therefore, it should be

allowed to select which one of the triggered policies is fully liable for the defense costs. Although

the policies are similar, they differ in the amount and type of deductible—some are occurrence based,

others claims based; some have defense costs outside the deductible, others include defense costs.

See Dkt. 34, Exs. 13–17. Mid-Continent acknowledges that the Texas courts have adopted Keene’s

reasoning, but contends that the Fifth Circuit has not. Specifically, Mid-Continent points to Gulf

Chemical and Metallurgical Corp. v. Associated Metals and Minerals Corp., 1 F.3d 365 (5th Cir.

1993), and Lafarge Corp. v. Hartford Casualty Insurance Co., 61 F.3d 389 (5th Cir. 1995), which

hold that in ceratin circumstances the duty to defend can be prorated across triggered policies. Dkt.

56 at 1–2. Further, Mid-Continent contends that the need to apportion the defense costs is further

supported by the fact that Academy contractually agreed to bear a portion of the defense costs through

those policies that contain deductibles applying to defense costs. Id. at 4. This contention, Mid-

Continent argues, is supported by the Fifth Circuit’s reasoning in Trinity Universal, in which the court

held that one insurer could seek contribution for defense costs from another non-paying insurer, not


148

14

because of the “other insurance” clause in the policy, but because of a “common obligation” to

provide a defense that exists between the insurers. 592 F.3d at 695.

Mid-Continent’s reliance on Gulf Chemical and Lafarge is misplaced because both cases pre-

date Southwest Aggregators. More recent Fifth Circuit cases have acknowledged that Texas has

adopted the Keene reasoning and have cited Southwest Aggregators approvingly. See, e.g., Trinity

Universal, 592 F.3d at 695; Indian Harbor Ins. Co. v. Valley Forge Ins. Group, 535 F.3d 359, 363

(5th Cir. 2008). Furthermore, Trinity Universal is distinguishable from the present case because it

held that an insurer could seek contribution for defense costs from another non-paying triggered

insurer. This holding was based on the common obligation each triggered insurer owed the insured

to provide a complete defense. To hold, however, that because Academy has a deductible in some

of the policies that applies to defense costs it is obliged to provide its own complete defense would

absolutely negate the insurer’s duty to defend. The better rule, therefore, under the Keene/Garcia line

of cases, is that Academy is entitled to select the policy from among the triggered policies that will

provide a complete defense. Academy chooses policy GL-000037547 (effective August

1,2000–August 1, 2001) as providing a complete defense to the underlying lawsuit; that policy has

a $1,000 per claim deductible and the deductible does not apply to defense costs. Dkt. 57 at 7–8.


149

15

CONCLUSION

For the reasons above, Academy’s motion for summary judgment is GRANTED and Mid-

Continent’s motion for summary judgment is DENIED. Mid-Continent owed Academy a duty to

defend after the filing of the ninth amended petition. Additionally, Academy is entitled to select

which of the triggered policies provides a complete defense.

It is so ORDERED.

Signed at Houston, Texas on August 24, 2010.

___________________________________ Gray H. Miller

United States District Judge


150

Page 1476 Fed.Appx. 316, 2012 WL 1382459 (C.A.5 (Tex.))(Not Selected for publication in the Federal Reporter)(Cite as: 476 Fed.Appx. 316, 2012 WL 1382459 (C.A.5 (Tex.)))

This case was not selected for publication in theFederal Reporter.

Not for Publication in West's Federal Reporter SeeFed. Rule of Appellate Procedure 32.1 generallygoverning citation of judicial decisions issued on orafter Jan. 1, 2007. See also Fifth Circuit Rules28.7, 47.5.3, 47.5.4. (Find CTA5 Rule 28 and FindCTA5 Rule 47)


MID–CONTINENT CASUALTY COMPANY,Plaintiff–Appellant

v.ACADEMY DEVELOPMENT,

INCORPORATED; Chelsea Harbour, Limited;Legend Classic Homes, Limited; Legend Home

Corporation, Defendants–Appellees.

No. 11–20219.April 20, 2012.

Background: Insurer that issued commercialgeneral liability policies to related real estatedevelopment entities brought action for declaratoryjudgment that it did not have a duty to defendinsureds in a state court action brought against themby homeowners. The United States District Courtfor the Southern District of Texas, 2010 WL3489355, entered a summary judgment in favor ofinsureds. Insurer appealed.

Holdings: The Court of Appeals held that:(1) homeowners' petition, alleging diminution inthe value of their homes, alleged “propertydamage” sufficient to trigger insurer's duty todefend under Texas law;(2) homeowners did not have to have an ownershipinterest in property allegedly damaged in order forinsurer to have a duty to defend under Texas law; and(3) insureds were entitled to choose any one of the

policies under which insurer was to provide acomplete defense, under Texas law.

Affirmed.

West Headnotes

[1] Insurance 217 2277

217 Insurance217XVII Coverage––Liability Insurance

217XVII(A) In General217k2273 Risks and Losses

217k2277 k. Property damage. MostCited Cases

Under Texas law, homeowners' petition againstreal estate developers alleging diminution in valueof homes attributable to damage to their propertiesby water leakage from man-made lakes alleged“property damage” sufficient to trigger insurer'sduty to defend under commercial general liabilityinsurance policies.




217k2277 k. Property damage. MostCited Cases

Under Texas law, homeowners' petition againstreal estate developers alleging diminution in valueof homes attributable to defective lakes alleged“property damage” sufficient to trigger insurer'sduty to defend under commercial general liabilityinsurance policies.




217k2277 k. Property damage. Most

© 2014 Thomson Reuters. No Claim to Orig. US Gov. Works.

Page 2 of 7

4/8/2014http://web2.westlaw.com/print/printstream.aspx?rs=WLW14.01&destination...151


Cited CasesUnder Texas law, homeowners who brought

state court action against real estate developers fordiminution in value of homes attributable todefective lakes did not have to have an ownershipinterest in the property allegedly damaged in orderfor developers' insurer to have a duty to defenddevelopers under their commercial general liabilityinsurance policies.


217 Insurance217XXIII Duty to Defend

217k2920 Scope of Duty217k2923 k. Effect of other insurance.

Most Cited CasesUnder Texas law, where related real estate

development entities insured by separatecommercial general liability insurance policiesfrom same insurer were sued together byhomeowners for diminution in value of homesattributable to defective lakes, triggering insurer'sduty to defend, insureds were entitled to choose anyone of the policies under which insurer was toprovide a complete defense, rather than a pro rataapportionment across all five policies.

*317 Bruce Edwin Ramage, Senior Counsel, LevonG. Hovnatanian, Martin, Disiere, Jefferson &Wisdom, L.L.P., Houston, TX, forPlaintiff–Appellant.

Lee Howard Shidlofsky, Esq., Douglas PaulSkelley, Esq., Shidlofsky Law Firm, P.L.L.C.,Austin, TX, for Defendants–Appellees.

Appeal from the United States District Court for theSouthern District of Texas, USDC 4:08–CV–21.

Before JOLLY, DAVIS, and BARKSDALE,Circuit Judges.

PER CURIAM: FN*

FN* Pursuant to 5TH CIR. R. 47.5, thecourt has determined that this opinionshould not be published and is notprecedent except under the limitedcircumstances set forth in 5TH CIR. R.47.5.4.

**1 In this insurance, duty-to-defend dispute,Mid–Continent Casualty Company challenges asummary judgment holding it had that duty for astate-court action against its insureds, AcademyDevelopment, Inc., Chelsea Harbour, Ltd., LegendClassic Homes, Ltd., and Legend Home Corp.(defendants). AFFIRMED.

I.Defendants are related entities; they developed

and built the Chelsea Harbour residentialsubdivision in Fort Bend County, Texas. ChelseaHarbour was developed as a lake-front community,and a key component was constructing lakes inorder to have lake-side homes.

In 2005, defendants were sued in Texas statecourt by purchasers of homes in the subdivision(underlying-action plaintiffs). Among other claims,they raised negligent misrepresentation andviolations of the Texas Deceptive Trade PracticesAct. Underlying-action plaintiffs alleged, inter alia,that defendants knew when they sold the homes thatthe lake walls were failing and that water wasleaking from the lakes onto adjacent home sites.They sought, inter alia, damages for diminution inthe value of their homes resulting from thedefective lakes. The action was tried in 2008, witha jury returning a verdict for defendants.

Legend Classic Homes, Ltd. is a named insuredunder five consecutive, non-overlapping,commercial general liability (CGL) policies issuedby Mid–Continent. The other defendants are namedinsureds for each policy. The policies cover theperiod August 2000 to August 2005 and provide inrelevant part:

*318 We [Mid–Continent] will pay those sums


Page 3 of 7



that the insured becomes legally obligated to payas damages because of ... “property damage” towhich this insurance applies. We will have theright and duty to defend the insured against any“suit” seeking those damages.

(Emphasis added.) The policies further provide:This insurance applies to ... “property damage”only if: (1) The ... “property damage” is causedby an “occurrence” that takes place in the“coverage territory”; (2) The ... “propertydamage” occurs during the policy period....

And, they contain the following definition of“property damage”:

“Property damage” means: (a) Physical injury totangible property, including all resulting loss ofuse of that property. All such loss of use shall bedeemed to occur at the time of the physical injurythat caused it; or (b) Loss of use of tangibleproperty that is not physically injured. All suchloss of use shall be deemed to occur at the time ofthe “occurrence” that caused it.

The policies varied in deductible amount and inthe deductible's applying to defense costs. The lastthree policies contained a higher deductible and italso applied to defense costs. In all other respects,the policies are identical.

Mid–Continent initially provided a defense fordefendants in the underlying state-court actionunder a reservation of rights. But, after theunderlying-action plaintiffs filed their ninthamended petition, Mid–Continent informeddefendants it would not pay for defense costsincurred after that filing. The basis for that decisionwas Mid–Continent's maintaining that, in the ninthamended petition, underlying-action plaintiffs nolonger alleged “property damage” as defined in thepolicies. (Prior petitions had included allegationssuch as: “Plaintiffs' homes are experiencing anunreasonable amount of drywall cracks, jointseparations in trim and windows, tiles breaking,mortar cracks, and windows cracking without

impact”.)

**2 In January 2008, Mid–Continent filed thisdiversity action, seeking a declaration that it owedno duty to defend or indemnify defendants upon thefiling of the ninth amended petition. (The duty toindemnify became moot when the verdict wasreturned for defendants in the underlying state-court action.) The parties filed cross motions forsummary judgment regarding two issues: (1)whether Mid–Continent had a duty to defend afterthe ninth amended petition was filed; and (2) howdefendants' defense costs should be apportionedamong the policies, i.e., whether defendants wereentitled to choose a single triggered policy todefend the underlying state-court action or wererequired to apportion the defense costs pro rataamong all five triggered policies.

The district court granted summary judgmentto defendants, ruling Mid–Continent owed a duty todefend. Mid–Continent Cas. Co. v. Academy Dev.,Inc., No. H–08–21, 2010 WL 3489355 (S.D.Tex.Aug. 24, 2010). The court concluded the policieswere triggered by the ninth amended petitionbecause, by alleging diminution in the value oftheir homes caused by defective lakes, underlying-action plaintiffs alleged “damages because of ...‘property damage’ ”. Id. at *4–7. The court alsorejected Mid–Continent's contention that defensecosts be apportioned across the policies, rulingdefendants were instead entitled to select the policyunder which they would demand a defense. Id. at*7–8.

II.Mid–Continent challenges both rulings. The

summary judgment, including the *319 court'sinterpretation of the policies, is reviewed de novo.Admiral Ins. Co. v. Ford, 607 F.3d 420, 422 (5thCir.2010). For this diversity action, Texas lawcontrols.

A.To determine whether an insurer is obligated to

defend against an action, Texas law applies the


Page 4 of 7



familiar “eight corners” rule: the duty to defend isdetermined exclusively by the allegations in thecomplaint and the language of the insurance policy.Nat'l Union Fire Ins. Co. v. Merchs. Fast MotorLines, Inc., 939 S.W.2d 139, 141 (Tex.1997). Inthat regard, the allegations in the complaint are readliberally in favor of coverage. Evanston Ins. Co. v.Legacy of Life, Inc., 645 F.3d 739, 745 (5thCir.2011) (Texas law). “If any allegation in thecomplaint is even potentially covered by the policythen the insurer has a duty to defend its insured.”Primrose Operating Co. v. Nat'l Am. Ins. Co., 382F.3d 546, 552 (5th Cir.2004) (internal quotationmarks omitted) (emphasis in original) (Texas law);Nautilus Ins. Co. v. Country Oaks Apartments Ltd.,566 F.3d 452, 455 (5th Cir.2009) (Texas law)(“[A]ll reasonable inferences must be drawn in theinsured's favor”.). In reviewing the underlyingcomplaint, “[i]t is the factual allegations instead ofthe legal theories alleged which determine theexistence of a duty to defend”. Zurich Am. Ins. Co.v. Nokia, Inc., 268 S.W.3d 487, 495 (Tex.2008)(internal quotation marks omitted); see also JimWalter Homes, Inc. v. Reed, 711 S.W.2d 617,617–18 (Tex.1986) (“[W]e must look to thesubstance of the cause of action and not necessarilythe manner in which it was pleaded”.).

**3 It is undisputed that the underlying-actionplaintiffs sought damages for, inter alia, diminutionin the value of their homes. And, the “damagesbecause of ... ‘property damage’ ” provision in aCGL policy includes recovery sought for economiclosses, such as diminution in value, that are“attributable” to property damage. Nat'l Union FireIns. Co. v. Puget Plastics Corp., 532 F.3d 398, 403(5th Cir.2008) (Texas law). Accordingly, thequestion at hand is whether the ninth amendedpetition alleged diminution in value attributable to“property damage” . For the following reasons, weconclude that it did, and, consequently, hold theduty to defend was triggered.

1.[1] First, the ninth amended petition alleged

diminution in the value of underlying-actionplaintiffs' homes attributable to damage to theirproperty, as distinct from damage to their homes. Italleged:

[T]he walls of the Lakes were breaking apart and... water was leaking from the Lakes into theadjacent properties upon which Plaintiffs' homeswere located.

Upon information and belief, continuous andexcessive water leakage from the Lakes that flowlaterally and under the Plaintiffs' homes andproperties may have caused structural damage toPlaintiffs' homes and foundations. Over time, thiswill cause Plaintiffs to incur excessive repaircosts to the foundations and structures of theirhomes.

Plaintiffs contend in this lawsuit that the failureof the Lakes directly affects the value of thehomes in the community.

Because it is phrased in uncertain terms, i.e., “may have caused structural damage”, the allegationof damage to underlying-action plaintiffs' homes,even when read liberally, as required, is insufficientto allege “property damage” under the policies. But,the ninth amended petition refers to their “homesand properties ” (emphasis added), which canreasonably be read to distinguish between theirhouses and their *320 other property (land underand surrounding the house, e.g., lawn borderinglake). Re-stated, the uncertain language pertainsonly to the allegation of damage to “Plaintiffs'homes ” (emphasis added). By alleging waterleakage onto their properties, as distinct from theirhomes, and not being uncertain, the ninth amendedpetition alleged “property damage” under thepolicies, and that this damage affected the value oftheir homes.

2.[2] Alternatively, the ninth amended petition

also alleged diminution in the value of the homesattributable to the defective lakes. This is also


Page 5 of 7



sufficient to trigger the duty to defend under thepolicies. Regarding the lakes, the ninth amendedpetition alleged:

[T]he Lakes and wall were not property designedand constructed ..., the walls had excessive cracksand displacements ..., water was escaping underand around the sloped paving, between the slopedpaving and the wall, at the outfall structure,perhaps through the clay liner at greater depths,through cracks in the wall, and other similarproblems.

**4 [T]he condition of the Lakes hadsubstantially decreased the value of the ChelseaHarbour subdivision; specifically, a loss of valuefrom approximately $6.5 million to $2.25 milliondollars for a loss in diminution of value in therange of $3.75 to $4.5 million dollars.

Plaintiffs will show that the problems with theLakes have affected the value of their propertyand their homes. Plaintiffs maintain a good faithbelief that the condition of the Lakes has in thepast, and continues, to cause damage to the valueof their residential properties.

Plaintiffs contend in this lawsuit that the failureof the Lakes directly affects the value of thehomes in the community.... Plaintiffs' homes andproperties have suffered diminution of value dueto the past, present and future conditions of theLakes.

Defendants owed multiple duties of careregarding ..., construction of the Lakes, and theprotection of Plaintiffs' property interests,including but not limited to the repair workperformed on the Lakes.... Defendants were ...negligent in the hiring and supervision of theentities that both constructed and repaired theLakes.... Plaintiffs would show that allDefendants breached the above described dutiesand that such acts ... constitute the proximatecause of Plaintiffs' damages, including cost ofrepair and diminution of value to their homes.

Plaintiffs would also show that Defendants failedto construct and/or repair the Lakes in a good andworkmanlike manner.

Under Texas law, allegations of unintendedconstruction defects or faulty-workmanshipconstitute allegations of “property damage” under aCGL policy sufficient to trigger an insurer's duty todefend. Lamar Homes, Inc. v. Mid–Continent Cas.Co., 242 S.W.3d 1, 4 (Tex.2007). Accordingly, thepetition alleges property damage to the lakes thatresulted in diminution in the value of underlying-action plaintiffs' homes.

Mid–Continent contends that, even if the ninthamended petition alleges property damage to thelakes, these allegations do not trigger the duty todefend because underlying-action plaintiffs did notpossess an ownership interest in the lakes. Thiscontention is unavailing.

Our court has previously rejected a similarattempt by Mid–Continent to read an ownershiprequirement into a CGL policy's *321 “damagesbecause of ... ‘property damage’ ” provision. InMid–Continent Cas. Co. v. Bay Rock OperatingCo., 614 F.3d 105 (5th Cir.2010), working-interestowners of a Texas oil well engaged Hollimon OilCorporation (HOC) to operate the well, with HOCin turn engaging Bay Rock to supervise and managedrilling the well. The well suffered a blowout,causing property damage, and HOC incurred costsas a result. The costs incurred by HOC werecovered under a well-control policy with St. PaulSurplus Line Insurance Company. St. Paul (asHOC's subrogee) and the working-interest ownersfiled an action in state court against Bay Rock,claiming it negligently caused the blowout. A juryfound Bay Rock negligent and awarded damages toSt. Paul and the working-interest owners.

**5 Bay Rock had CGL and umbrella policieswith Mid–Continent, which sought a declaration infederal court that the damages awarded against BayRock were not covered under the policies.Summary judgment was awarded Bay Rock. On


Page 6 of 7



appeal, Mid–Continent contended, inter alia, thatthe damages awarded against Bay Rock did notconstitute “damages because of ... ‘propertydamage’ ” under the policies, because, unlike theworking-interest owners, HOC did not have anownership interest in the damaged property. Ourcourt held this contention without merit: “Nothingin the Policies require the claimant—HOC—tohave an ownership interest in the property that wasdamaged for coverage to exist.” Id. at 111.

[3] Likewise, the policies at issue here do notrequire the underlying-action plaintiffs to have anownership interest in the property allegedlydamaged in order for Mid–Continent to have a dutyto defend. And under Texas law, “we must give thepolicy's words their plain meaning, withoutinserting additional provisions into the contract”.Nat'l Union Fire Ins. Co. v. Crocker, 246 S.W.3d603, 606 (Tex.2008). Furthermore, the onlyrelevant inquiry here is whether, under the eight-corners rule, there is a duty to defend, not whetherthe underlying-action plaintiffs had standing to suefor damage to the lakes. See Don's Bldg. Supply,Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20, 31(Tex.2008) (insured has “right to a defense againstboth meritorious and nonmeritorious claims forproperty damage”).

B.Mid–Continent contends defense costs should

be apportioned pro rata across all five of thepolicies. Defendants counter they are entitledinstead to choose any one of the policies underwhich Mid–Continent is to provide a completedefense. As stated, the policies for the last threeyears contained higher deductible amounts, and thedeductible also applied to defense costs.

[4] Under the policies, the event that must takeplace for, inter alia, the duty to defend to betriggered is “property damage”. Underlying-actionplaintiffs alleged the lakes were defective and theirproperty damaged throughout the five policyperiods. Texas courts have rejected the pro ratamethod for calculating an insurer's duty to defend

when more than one policy is triggered by a claim.See Tex. Prop. & Cas. Ins. Guar. Ass'n v. Sw.Aggregates, Inc., 982 S.W.2d 600, 604–07(Tex.App.-Austin 1998, no pet.); CNA Lloyds ofTexas v. St. Paul Ins. Co., 902 S.W.2d 657, 661(Tex.App.-Austin 1995, writ dism'd). The reasoningbehind this rule is that, when an insurer's policy istriggered, “the insurer's duty is to provide itsinsured with a complete defense. This is becausethe contract obligates the insurer to defend itsinsured, not to provide a pro rata defense.” *322Sw.Aggregates, 982 S.W.2d at 606 (emphasis inoriginal). Accordingly, the district court did not errby permitting defendants to select any one of thetriggered policies for their defense.

III.**6 For the foregoing reasons, the judgment is

AFFIRMED.

C.A.5 (Tex.),2012.Mid-Continent Cas. Co. v. Academy Development,Inc.476 Fed.Appx. 316, 2012 WL 1382459 (C.A.5(Tex.))

END OF DOCUMENT


Page 7 of 7


Cox Operating, L.L.C. v. St. Paul Surplus Lines Ins. Co., Slip Copy (2014)

2014 WI.. 109397Only the Westlaw citation is currently available.

United States District Court,S.D. Texas,

Houston Division.

COX OPERATING, L.L.C., Plaintiff,

v.ST. PAUL SURPLUS LINES

INSURANCE COMPANY, Defendant.

and post-judgment interest. Dkts. 526, 527. Specifically, the

court assessed statutory penalty interest against St. Paul basedon the jury's findings that it failed to comply with the Texas

Prompt Payment of Claims Act, TEX. INS.CODE § 542.051,et seq. (HTPPCA"). The court found that the penalty interest

should begin accruing on October 15, 2006-75 days after the

jury found St. Paul had all of the infonnation it required to

secure final proof of loss on Cox's claim. The court further

rejected St. Paul's objections to the jury award on the bases

that the jUly awarded Cox double recovery for amounts paid

by other insurers and clean-up costs submitted one year after

the completion of the pollution work.

MEMORANDUM OPINION AND ORDER

Opinion

GRAY H. MILLER, Disoict Judge.

Donald Everett Godwin, Alexandra Stravinsky, Jon-Bernard

Schwartz, Godwin Lewis PC, Alexandra Fernandez, Jack T.

Jamison, Godwin Ronquillo PC, Dallas, TX, for Plaintiff.

Both parties have filed competing motions to alter or amend

the court's judgment. Cox argues that the court should

alter the judgment to reflect an earlier accrual date for

the penalty interest under the TPPCA. St. Paul reurges its

previous arguments that the judgment erroneously includesamounts paid by other insurers and excessive statutory and

prejudgment interest.

II. LEGAL STANDARD

Federal Rule of Civil Procedure 59(e) allows a party to movethe court to alter or amend a judgment no later than ten days

after the entry of the judgment. Amendment of a judgment isan "cxtraordinaryremedy." Temp/etv. HydroChem fIlC., 367

F.3d 473, 479 (5th Cir.2004). The moving party must present

compelling reasons for the court to reconsider its judgment

and "must clearly establish either a manifest error of law or

fact or must present newly discovered evidence." Simoll v.

UnitedStates. 891 F.2d 1154, 1159 (5th Cir.1990). The court

has considerable discretion to grant or deny a motion to alter

or amend the judgment under Rule 59(e). Hale v. Townley, 45

F.3d 914,921 (5th Cir. I 995).

Jan. 10, 2014.Civil Action No. H-07-2724.

*1 Pending before the court are plaintiffs and defendant's

motions to alter or amend judgment. Dkts. 550, 553. After

considering the parties' arguments and the applicable law,

the court is of the opinion that defendant's motion should be

DENIED and plaintiffs motion should be GRANTED in part.

Attorneys and Law Firms

Erik David Garza, Wendy Hall, Attorneys at Law, James

Clifton Hall, Ill, William P. Mai"nes, Stephanie Rennell

Tippit, Wesley K. Keel, Hall Maines Lugrit;l PC, RobertBenjamin Dubose, Alexander Dubose et aI., Houston, TX,

Charles T. Frazier, Jr., Alexander Dubose et aI., Dallas, TX,for Defendant.

III. ANALYSIS1. BACKGROUND

Following a 23 day jury trial, the jury rendered a verdict infavor of plaintiff, Cox Operating L.L.C. ("Cox"), awardingCox $9,465, I03.22 in damages for amounts owed by St. Paul

Surplus Lines Insurance Company ("St.Paul") for. pollutioncleanup costs covered under the applicable excess insurance

policy. The court entered an order and final judgment onAugust 16, 2013, awarding Cox damages and statutory

penalty interest based on the jury's verdict, and prejudgment

The parties' motions are largely a restatement of arguments

that have been addressed by the court in its Memorandum

Opinion and Order dated August 16, 2013, entering final

judgment in this case. Dkt. 526. With one exception, the courtfinds no reason to disturb its ruling and final judgment in this

case.

A. Texas Prompt Payment of Claims Act

157

Cox Operating, L,L.C. v. 5t.Paul Surplus Lines Ins. Co., Slip Copy (2014)

*2 The parties reurge this court to adopt vastly different

views of the proper accrual date for the statutory penalty

interest under the TPPCA. The case law on this subject

arguably supports both positions, leaving the court with little

definitive guidance as'to the proper accrual date. However,

without further guidance from the Texas Supreme Court

or Fifth Circuit, the court must make a decision that gives

effect to the jury's verdict and applies the statute in the

tenTIS expressed by the Texas legislature. Thus, upon further

consideration of the cases analyzing the TPPCA and the

parties' additional briefing, the court has concluded that an

amendment to the judgment is warranted with respect to the

TPPCApenaity interest accrual date.

Based on the jury's finding that St. Paul immediately violated

its claimschandling obligations under Section 542.055, the

court has focused its attention on those cases wherein a

violation of Section 542.055 was found. And, while the

jurisprudence is not wholly consistent as to the proper accrual

date, the court is persuaded that the penalty interest should

begin accruing 60 days after 81. Paul received notice of the

claim and failed to commence an investigation and request all

items, statements, and fonns that St. Paul reasonably believed

would be required from Cox. This amended accrual date will

give effect to each of the jury's findings and the statutory

provisions at issue.

to acknowledge receipt of the claim, commence aninvestigation, and request documents after notice of theclaim. TEX. INS.CODE § 542.055{a). Neither partydisputes that St. Paul is an eligiblesurplus lines insurer.

As noted above, few courts have addressed statutory penalty

interest under the TPPCA where a violation of Section

542.055 occurred. In Philadelphia Indemnity, the insured

notified the insurer regarding its claim, and the insurer failed

to make a timely request for additional infonnation within the

statutory deadline. Phita. rndem.Ins. Co. v. CR.£. S. Mgmt.,

L.L.c.. 2001 WL 1100218, *3 (S.D.Tex.2011)(Atlas,J.). The

insurer asserted that it had not violated the TPPCA because

it requested i,nformation numerous times and the insured

continued to supplement and revise its losses for months

after notice of the claim. !d. The court rejected this position,

finding that the statute did not provide a defense in the case

of subsequent revisions to the insured's loss. !d. The court

noted "[u]nder the statute's plain language, if [the insurer]

had made a timely request for items, it could have obtained

additional time for review of the claims, because after such

timely request [the insurer] would have been obligated to

make payment on accepted claims not more than seventy

five days after receipt of all reasonably requested items." !d.

Thus, without a timely request under Section 542.055, the

court assessed penalty interest 75' days 2 from notice of the

claim. Id. at * 4.

*3 The same situation was presented in GuideOne Ltoyd.~

Ins. Co. v. First Baptist Church of Bcc(!'ord, 268 S.W.3d

822 (Tex.App.-Fort Worth 2008, no pet). The insurer never

requested any infonnation from the insured within the

statutory deadline following notice of the claim. Id. at 834.

The insurerarguedthatitwas not required to pay any statutory

penalty interest because the jury did not make an explicit

finding as to when the penalty interest should begin to accrue.

Id.at 833. The court rejected this argument, finding that

the undisputed facts allowed a detennination of the proper

accrual date./d. at 834. In holding that an express jury finding

was not necessary, the court affirmed the trial court's accrual

Relevant to the court's analysis, Section 542.055 requires that

not later than the 30th business day 1 after the date the insurer

receives notice ofa claim, "the insurer shall: (I) acknowledge

receipt of the claim; '(2) commence any investigation of

the Claim; and (3) request from the Claimant all items,

statements, and forms that the insurer reasonably believes,

at that time, will be required from the claimant." TEX.

INS.CODE § 542.055. Section 542.058 further provides that

"if an insurer, after receiving all items, statements, and forms

reasonably requested and required under Section 542.055"

delays payment of the claim for more than 60 days, then

the "insurer shall pay damages and other items as provided

by Section 542.060." Jd. § 542.058(a). It is under Section

542.060(a) that "the insurer is liable to pay the holder of the

policY,or.,tht:'~I::[ll::n<.:ial)'.,111a1<:ing"the. claim ,underthe.p{)!i<;y,in addition to the amount of the claim, interest on the amount

of the claim at the rate of 18 percent a year as damages" if

the insurer is liable fora claim under an insurance policy and

fails to comply with the TPPCA. rd. § 542.060(a).

Eligible surplus lines insurers are given 30 business days,as opposed 1015 business days for general insurers,

2 Under Section 542.059, "Ii)n the event of a weatherrelated catastrophe or major natural disaster, as definedby the commissioner, the claim-handling deadlinesimposed under the subchapter are extended for anadditional 15 days." TEX. INS. CODE § 542.059(b).Thus, if the facts in Philadelphia Indemnity had notinvolved a weather-related catastrophe, the statutorypenalty interest would have accrued 60 days from noticeof the claim.,

158

Cox Operating, L.L.C. v. St. Paul Surplus Lines Ins. Co., Slip Copy (2014)~'~"'~~I~_""."""W"""""'''''"'-'''"'·'>c.M_.~' __ '~_'T'•••~''·C'''''''_''''.~'-'''''~~",~_~~~.~~'-'~""~'_" __.·I"_'"_''''''~'''''''MW.~_'''._"r·~_,_~,·~'_~T"~" ,""-·'··~,",V"~··""~IW'.···W .•, I.W~·.''''''~'w.-.-'c,"''_·~'''~~'"~~~_~~~~~~_''''''',_""",

date, which was 75 days following notice of the claim. Id .

at n. 7.

Cox heavily relies on Primrose Operating Co. v. Nat'lAm.

Ills. Co., 2003 WL 21662829 (N.D.Tex.2003) (Cummings,

1.), and strongly advocates for a result consistent with the

holding in Primrose. In Primrose, the insurer was foundto

be in violation of 542.055, and the court assessed statutory

penalty interest upon the date of the first statutory violation,

i.e. 15 days after notice of the claim. Id. at *I, *3. This

court, however, does not find that the outcome in Primrose is

consistent with the statutory framework of the TPPCA.

It is undisputed thatSt. Paul, like the insurer in Primrose.

violated Section 542,055; however, insurers are entitled to 60

days upon receipt of items requested to pay the claim under

Section 542.058. When an insurer fails to timely request

such information, it does not in tum lose the benefit of

Section 542.058 to the 60 days given to pay the claim.

Practically speaking, when an insurer fails to timely request

information under Section 542.055, it waives the right to do

so (and the additional benefits of requesting more time) and

signals to the insured that it has all the information that it

reasonably believes will be required from the insured. It is

only 60 days after receiving all the information reasonably

requested that the insurer must pay the claim, and if it fails

to do so, "the insurer shall pay damages and other items as

provided by Section 542.060," TEX. INS.CODE § 542.058.

Assessing statutOly penalty interest on the date of the first

violation of Section 542.055, as was done in Primrose,

does not hatIDonize and give effect to each provision of the

TPPCA. See Helena Chem. Co. v. Wilf"iIlS, 47 S.W.3d486,

493 (Tex.200 1) (courts must consider the statute as a whole

and not give one provision a "meaning out of harmony or

inconsistent with other provisions"); Miss. PoultryAss'n. Inc.

v. Madigan, 31 F.3d 293, 304 (5th Cir.1994) (statutes should

be interpreted so as not to render one part inoperative).

Further, Cox correctly points out that to begin the accrual date

after 81. Paulhad received all of the information necessary

t{) adjust the claim, as the court previously ruled, ignores the

jury's finding that St. Paul' immediately violated the TPPCA

when it failed to: timely request such information. While St.

Paul may not have been in a position to evaluate the claim

on December 16,2005, that resulted from its failure to meet

its claim handling deadline. St. Paul cannot avoid statutory

penalty interest when it was 81. Paul's failure to commence an

investigation and request documents that hindered the process

under the TPPCA. Under Section 542.058, St. Paul was given

60 days to pay the claim after requesting all information

needed from the insured. However, because St. Paul failed to

meet its initial obligation to request all items, statements, aop

forms from Cox in a timely manner afternotice of the claim,

it relinquished its ability to do so under that statute, and is

required to pay statutOly penalty interest under the TPPCA

60 days 3 after the jury found Cox filed its notice ofc1aim, or

Decemberl6, 2005.

3 The court also reverses i~ position that Section 542.059 -,applies In this case given that the Texas Insurance

Commissioner did not declare Hurricane Katrina to be a

weather-related catastrophe. Therefore, statutory penalty

interest will begin to accrue as provided in Section

542.058.

*4 Additionally, Cox requests that the penalty interest

continue to accrue through the date this amended judgment

is entered; however, it cites no authority in support of its

position. The court declines to order additional interest for the

time that the court required to consider the issues presented

and amend the judgment. Penalty interest accrues until the

date judgment is rendered. Republic Undenvriters Ins. Co. v.

Mex-Tex, lnc., 150 S.W.3d 423,427-28 (Tex.2004); Great

Am. Ins. Co. v.AFS/iBEXFin. Services, IIlC., 612 F.3d 800,

809 (5th Cir.2010). Judgment was rendered in this case on

August 16,2013, and remains intact with the one exception

set out herein.

B. Double Recovery

St. Paul further urges this court to amend the judgment

because it contends the jUly awarded Cox amounts already

paid by other insurers, resulting ina double recovery. The

court does not dispute that under the "one satisfaction rule"

in Texas, "a plaintiff should not be compensated twice for the

same injury." Stewart Title Guar. Co. v. Sterling, 822 S.W.2d

1,7 (Tcx.1991); RSR Corp. v. In!'1 Ins. Co.. 2009 WL 927527,

'i' II (N.D.Tex.2009). Even in a contractualcontext, a plaintiff

is prevented fromrecovering more than the amount orits loss

from multiple defendants. Id. .. Osbome v. Jauregui. Inc.. 252

S.W.3d 70, 75 (Tex.App.-Austin2008, no pet.). Thejury's

award would only be in violation of the one satisfaction rule

if Cox were comp~nsated twice for the sa~e expenses. RSR

Corp,. 2009 WL 927527, at*14. The law and tacts, however,

do not support 81. Paul's position that Cox was compensated

twice for the same pollution cleanup costs.

81. Paul presented evidence and advocated its position to

the jury regarding its theory that Cox was seeking double

159

Cox Operating, L.L.C. v. St. Paul Surplus lines Ins. Co., Slip Copy (2014)

compensation for the same pollution cleanup costs under

its excess liability coverage and its removal of wreckage

and debris ("ROWD") coverage. The evidence presented did

not show, as a matter of law, that Cox was (or will be)

compensated twice for the same claimed expenses. At best,conflicting evidence was presented to the jury regarding the

potential overlap in claimed expenses to St. Paul for pollution

cleanup costs and payments made by other insurers under

Cox's ROWD claim. Ultimately, however, Paul Foreman, the

initial adjuster on Cox's ROWD claim, testified that there was

no allocation on a per invoice basis as to the amounts paid

on the ROWD claims between insureds or as it related to the

pollution claim because the claimed ROWD loss exceeded the

policy limits. Foreman only cursOlily reviewed the pollutionclaim for potential ROWD charges, and he admitted that he

did not look at the Quarantine Bay pollution claim at all. In

fact, the ROWD-related charges that Foreman picked up fromthe pollution claim were those not accepted by the pollution

claims adjuster.

Following the extensive evidence presented on St. Paul's

theory, the jury awarded an amount that did not encompass

the same costs already paid by other insurers. Specifically,

in the verdict form, the jury awarded Cox $9,465,] 03.22,representing the "sum of money, if any, [ ] St. Paul [was]

required to pay Cox Operating under the Excess Policy, over

and above those amounts already paid, for pollution cleanup costs resulting from Hurricane Katrina." Dkt. 489, Q. 2

(emphasisadded); Given the conflicting testimony and jury's

verdict, the court cannot say that the jury's award constitutes

a manifest error oflaw:or fact with respect to other insurancepayments.

*5 51. Paul relies heavily on the ruling in Mid-ContinentIns. Co. v. Liberty Mut. Ins. Co., 236 S.W.3d 765, 775

(Tex2007) to support its contention that Cox should not be

End of Document

able to recover the same losses from multiple insurers. While

addressing whether a claim for contribution existed between

insurers when a pro-rata "other insurance" clause existed in

the policies, the Texas Supreme Court noted:

[W]here there are several policies ofinsurance on the same l;sk and the

insured has recovered the full amount

of its loss from one or more, but

not all, of the insurance carriers, the'

insured has no further rights against

the insurers who have not contributed

to its recovery.

ld. The Texas ,Supreme Court reiterates the proposition that aninsured is limited to the actual amount orits loss, even when

covered for the same risk by mUltiple insurers. However, thecourtalso makes clear that the insured must "recover[ ] the

full amount of its loss" before a double recovery exists. There

is no definitive evidence that Cox's pollution cleanup costs

were the same as those paid by ROWDinsurers, and Cox's

total claim far exceeded the ROWD policy limits and the

jury's award.

IV. CONCLUSION

For the reasons stated herein, the court DENIES St.

Paul's motion to alter or amend judgment (Dkt.553) andGRANTS in pmt Cox's motion to alter or amend judgment

(Dkt.550). The court will issue an amended final judgmentcontemporaneously herewith reflecting the court's revised

position on the proper accrual date for statutory penalty

interest under the Texas Prompt Payment Claims Act. With

this one exception, the remainder of the final judgment issued

on August 16, 2013 shall remain unchanged.

@ 2014 Thomson R()utcrs. No claim to original U.S, GoVernment Works.

160