Lubbock County Hospital District v. National Union Fire Insurance

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

_____________________

No. 97-10908
_____________________

LUBBOCK COUNTY HOSPITAL DISTRICT,
doing business as University
Medical Center,

Plaintiff-Appellee,

versus

NATIONAL UNION FIRE INSURANCE
COMPANY OF PITTSBURGH, PA;
AIG AVIATION INSURANCE SERVICES;
CALEDONIAN INSURANCE GROUP, INC.,

Defendants,

NATIONAL UNION FIRE INSURANCE
COMPANY OF PITTSBURGH, PA;
AIG AVIATION INSURANCE SERVICES,

Defendants-Appellants.
_________________________________________________________________

Appeal from the United States District Court for the
Northern District of Texas
_________________________________________________________________
June 24, 1998
Before JOLLY, WIENER, and STEWART, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

In this appeal, we consider whether any of three endorsements

to an aircraft liability insurance policy provides coverage for

environmental damages resulting from a 1000-gallon fuel spill that

would otherwise be excluded from coverage under the policy’s

pollution exclusion clauses. The district court granted summary
judgment for the insured, finding coverage under two of the three

endorsements. The insurer appealed. We ultimately find ourselves

in disagreement with the district court’s interpretation of the

endorsements and, therefore, we must reverse.

I

In 1989, Carelink, an association formed between the appellee,

University Medical Center (“UMC”), and Lubbock Methodist Hospital,

entered into an agreement with Rocky Mountain Helicopters, Inc.

(“Rocky Mountain”) for emergency transport services. The agreement

required Rocky Mountain to obtain aircraft hull insurance for the

value of the helicopters to be used in providing those services and

aircraft liability insurance for injuries to passengers or third

parties and damage to property. Rocky Mountain obtained its

aircraft liability insurance from the appellants, National Union

Fire Insurance Company of Pittsburgh, Pennsylvania, and AIG

Aviation Insurance Services (collectively, “National Union”).

Rocky Mountain provided the emergency transport services

through use of a helipad operated by UMC. UMC leased the property

on which the helipad was located from Texas Tech University Health

Sciences Center. During the term of the lease (including all times

relevant to this case), UMC had sole responsibility to Texas Tech

for operations and control of activities on the leased premises.

2
The leased premises included a refueling facility for helicopters

operating out of the helipad.

On June 21, 1990, approximately 1000 gallons of fuel escaped

from the fueling system at UMC’s helipad. Thereafter, UMC sued

Rocky Mountain to recover the costs of cleanup and monitoring.

Rocky Mountain in turn referred the claim to National Union, which

denied the claim but provided a defense, reserving the right to

assert its policy defenses later. UMC obtained a jury verdict in

state court against Rocky Mountain. The final judgment of nearly

$500,000 was affirmed on appeal.

UMC then brought the instant action in Texas state court

against National Union, seeking a declaration that the insurance

policy it issued to Rocky Mountain covered the damages for the fuel

spill. National Union removed the case to federal district court

on the basis of diversity. It contested coverage on the basis of

pollution exclusion clauses in the base policy. UMC argued that

coverage was nonetheless available under three endorsements to the

policy. Both parties filed motions for summary judgment. On

June 12, 1997, the district court granted summary judgment for UMC,

finding coverage under two endorsements to the policy. This appeal

followed.

II

A

3
 We review a grant of summary judgment de novo, applying the

same standard used by the district court. Nautilus Ins. Co. v.

Zamora, 114 F.3d 536, 538 (5th Cir. 1997). In deciding a motion

for summary judgment, the court must determine whether any genuine

issues of material fact exist and, if not, whether the moving party

is entitled to judgment as a matter of law. Knight v. Sharif, 875

F.2d 516, 522 (5th Cir. 1989). The district court’s interpretation

of an insurance contract and its exclusions is a question of law

and, thus, subject to de novo review. Zamora, 114 F.3d at 538.

B

Neither party disputes that Texas law governs interpretation

of the insurance policy at issue here. Under Texas law, the maxims

of contract interpretation regarding insurance policies operate

squarely in favor of the insured, National Union Fire Ins. Co. of

Pittsburgh, Pennsylvania v. Kasler Corp., 906 F.2d 196, 198 (5th

Cir. 1990), “and especially so when dealing with exceptions and

words of limitation,” Ramsay v. Maryland Am. Gen. Ins. Co., 533

S.W.2d 344, 349 (Tex. 1976). If a policy provision is ambiguous,

the court must adopt the insured’s construction of the provision,

“as long as that construction is not unreasonable, even if the

construction urged by the insurer appears more reasonable or a more

accurate reflection of the parties’ intent.” National Union Fire

Ins. Co. of Pittsburgh, Pennsylvania v. Hudson Energy Co., 811

4
S.W.2d 552, 555 (Tex. 1991). If, however, the policy provision is

susceptible of only one reasonable interpretation, the court must

enforce the provision as written. Id.

III

National Union contends that pollution claim advanced by UMC

is excluded from coverage under the policy based on its pollution

exclusion clauses. National Union argues that, under the base

policy, potential coverage for UMC’s claim would have to be found

within “Coverage C” (covering liability for injury to persons or

property arising out of the ownership, use, operation, or

maintenance of Rocky Mountain’s aircraft) or “Coverage E” (covering

liability for injury to persons or property arising out of Rocky

Mountain’s operations).1 However, because the claim is based on

1
Generally, the base policy created seven areas of coverage,
Coverages A-G. An endorsement to the policy, Endorsement # 11,
created two additional areas of coverage, Coverages Y and Z. The
coverage areas at issue in this appeal, Coverages C and E, provide
coverage, in relevant part, as follows:

Coverage C - Aircraft Liability

To pay on behalf of the Insured all sums which
the Insured shall become legally obligated to
pay as damages . . . because of injury to
property caused by an occurrence and arising
out of the ownership, hire, lease, use,
operation or maintenance of the aircraft
specified in the Schedule of Insured Aircraft.

* * *

Coverage E - Premises and General Liability

5
pollution not “caused by or resulting in a crash, fire, explosion

or collision or a recorded in flight emergency causing abnormal

aircraft operation,” coverage under Coverage C is excluded under

the policy. Similarly, because the claim is based on an escape of

pollutants from a site on which Rocky Mountain was operating,

coverage under Coverage E is excluded under the policy. UMC seems

to accept that, for these reasons, it cannot successfully claim

coverage under Coverage C or Coverage E.

UMC nevertheless claims coverage under three endorsements to

the base policy. The district court agreed with UMC in part,

finding coverage under two of the three endorsements--Endorsement

# 10 and Endorsement # 11.2 On appeal, National Union contends

that neither of these endorsements cover UMC’s claim. We consider

each in turn.

A

To pay on behalf of the Insured all sums which
the Insured shall become legally obligated to
pay as damages . . . because of injury to
property, caused by an occurrence and arising
out of premises or operations of the Named
Insured at such premises, and including
activities incidental thereto.
2
Although UMC renews its argument that coverage exists under
the third endorsement, Endorsement # 8, we agree with the district
court that this claim has no merit warranting further discussion
here.

6
 We begin with Endorsement # 10. Endorsement # 10 provides

coverage for damages “resulting from [Rocky Mountain’s] negligent

operation, maintenance, or use of aircraft in ‘air transportation,’

as that term is defined in the Federal Aviation Act of 1958.” The

language upon which we focus our analysis is the phrase “aircraft

in ‘air transportation.’” The Federal Aviation Act defines air

transportation to include “interstate air transportation.” 49

U.S.C. § 40102(5). The Act then further defines “interstate air

transportation” as “the transportation of passengers or property by

aircraft as a common carrier for compensation, or the

transportation of mail by aircraft” between two or more states

“when any part of the transportation is by aircraft.” 49 U.S.C.

§ 40102(25). Thus, it would appear that coverage under Endorsement

# 10 requires both (1) negligent operation, maintenance, or use of

an aircraft and (2) that such operation, maintenance, or use be in

interstate air transportation.

(1)

National Union argues that coverage under Endorsement # 10 is

unavailable because UMC’s claim does not involve interstate air

transportation. First, National Union asserts that the claim is

based on maintenance3 performed in preparation for a flight

3
Under Texas law, the term “maintenance” in insurance policies
includes the act of refueling a vehicle or aircraft. See, e.g.,
Nationwide Property & Cas. Ins. Co v. McFarland, 887 S.W.2d 487,

7
involving transportation of neither mail nor passengers or property

for compensation. Second, National Union points out that the

flight in question did not, at any time, cross state lines, nor was

it intended to. We note that UMC has not challenged the district

court’s determination that the flight was not for compensation.

Whether the flight could qualify as an interstate flight as opposed

to an intrastate flight is, therefore, irrelevant. Because UMC’s

claim does not concern a flight for compensation or the transport

of mail, it does not involve an aircraft in “air transportation” as

that term is defined by the Federal Aviation Act.

UMC insists, however, that the coverage provision of

Endorsement # 10 is ambiguous as to whether the “maintenance” of an

aircraft must involve air transportation.4 UMC suggests that the

provision can reasonably be interpreted to require air

transportation only in connection with the “use” of an aircraft.

Under this interpretation, the provision would cover (1) operation

of aircraft, (2) maintenance of aircraft, and (3) use of aircraft

in air transportation. Thus, UMC argues, the fact that the flight

492-94 (Tex. App. 1994, writ denied).
4
Maintenance, of course, rarely occurs in the actual course of
air transportation. National Union concedes, however, that if a
loss occurs during air transportation as a result of prior
maintenance, the loss would be covered under Endorsement # 10,
regardless of when or where the maintenance was performed.

8
in question did not involve air transportation is immaterial to

coverage.

This interpretation, UMC further contends, is consistent with

“Exclusion (k)” to Endorsement # 10. Exclusion (k) excludes from

coverage “[a]ny loss arising from operations other than the

carriage by aircraft of persons or property as a common carrier for

compensation or hire, or the carriage of mail by aircraft, in

interstate, overseas, or foreign air transportation.” If “air

transportation” is interpreted to modify and thus apply to

operations, maintenance, and use in the coverage provision,

Exclusion (k) would be rendered superfluous because the

“operations” covered by the endorsement would already be restricted

to those involving air transportation. UMC argues that, under its

interpretation, the exclusion serves a meaningful purpose, namely,

exempting from coverage operations not involving air

transportation. When the coverage provision is read together with

Exclusion (k), Endorsement # 10 would apply to: (1) operations of

aircraft in air transportation, (2) maintenance of aircraft, and

(3) use of aircraft in air transportation.

The district court apparently agreed with UMC and adopted this

interpretation of Endorsement # 10. Having found that UMC’s claim

did not involve interstate air transportation, the court

nevertheless granted summary judgment because National Union had

9
failed to present sufficient evidence that UMC’s claim did not

involve “maintenance” of an aircraft under the endorsement.5 The

court’s ruling in this respect indicates that it found coverage

extending to maintenance of aircraft not in “air transportation.”

(2)

We believe the district court erred in finding coverage under

Endorsement # 10. Although UMC’s interpretation adds meaning to

the otherwise superfluous Exclusion (k), it does so only through an

unreasonable reading of the coverage provision. Again, the

coverage provision applies to the “operation, maintenance, or use

of an aircraft in air transportation.” UMC reads “in air

transportation” to modify only the use of an aircraft, but reads

“of an aircraft” to modify operation and maintenance as well as

use.6 Yet we fail to see how the phrase “of an aircraft” can be

read to modify operation, maintenance, and use, while “in air

transportation” be read to modify only use. The phrase “in air

transportation” clearly modifies “of an aircraft” and, therefore,

if the latter modifies each of the terms operation, maintenance,

and use, it must do so together with the former. Inasmuch as UMC’s

5
See supra note 3.
6
Of course, it must do so to avoid the patently unreasonable
result that Endorsement # 10 covers operations and maintenance
generally, that is, of any such activity without regard for the
subject or nature of the activity.

10
interpretation impermissibly separates these phrases, it amounts to

nothing less than a rewriting of otherwise unambiguous policy

language.

Grammatical deficiencies aside, UMC’s interpretation of the

endorsement would result in coverage for all maintenance-related

losses involving an aircraft, regardless whether the aircraft ever

left the ground. It is improbable that Endorsement # 10, a

standard, government-printed endorsement required by the Department

of Transportation for all federally regulated air taxi operators,

was intended to extend so far. Cf. Ridgeway v. Gulf Life Ins. Co.,

578 F.2d 1026, 1031-32 (5th Cir. 1978) (refusing to give broad

reading to standard endorsement required by state law). Indeed,

UMC’s interpretation makes a non-bargained-for, federally-mandated

endorsement into a comprehensive general liability policy that

effectively guts much of the base policy agreed upon by the

parties. Although certainly a “possible” result, we refuse to

torture the plain terms of the endorsement’s coverage provision to

reach what seems a more dubious result. Our task here is to

determine the true intent of the parties as expressed in the terms

of the policy, see National Union Fire Ins. Co. of Pittsburgh,

Pennsylvania v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex. 1995),

not simply to seek out and credit any possible meaning those terms

might bear.

11
 In short, because we find UMC’s interpretation of Endorsement

# 10 unreasonable, we reject it.7 We think that the endorsement

unambiguously covers claims based on the negligent maintenance of

aircraft only if they involve aircraft in “air transportation.”

UMC’s claim does not involve air transportation and, therefore, is

not covered by Endorsement # 10.

B

We next consider Endorsement # 11. Endorsement # 11 adds

coverage for, among other things, property damage resulting from

the operations of any contractor designated by Rocky Mountain under

the endorsement. Specifically, it creates “Coverage Z,” which

provides coverage for:

all sums which [Rocky Mountain] shall become legally
obligated to pay as damages because of . . . property
damage . . . caused by an occurrence and arising out of
(1) operations performed for [Rocky Mountain] by the
contractor designated in the Declarations . . . or (2)
acts or omissions of [Rocky Mountain] in connection with
[its] general supervision of such operations.

Coverage Z admittedly does not apply to UMC’s claim. However, the

endorsement also contains exclusions. With respect to pollution-

7
We recognize that by rejecting UMC’s interpretation and
adopting National Union’s, we must accept that Exclusion (k) merely
restates in exclusionary terms what the coverage provision states
in inclusionary terms. Although not a preferred result, it surely
is not an uncommon one. Contracts do sometimes implement several
provisions to restate in different ways a certain point--perhaps
for emphasis. In the absence of a reasonable alternative
interpretation, we read the coverage provision and Exclusion (k) to
perform this function.

12
related claims, the exclusions state that “[t]his policy does not

apply . . . to . . . property damage arising out of

the . . . escape of . . . pollutants into or upon land, . . . but

this exclusion does not apply if such . . . escape is sudden and

accidental.” (Emphasis added.) UMC produced sufficient summary

judgment evidence to establish that its claim was based on a sudden

and accidental escape of pollutants.

The district court found coverage based on its determination

that Endorsement # 11's exclusions applied to the entire “policy”

as opposed to merely the endorsement itself. To the extent this

seemingly clear language could be construed as ambiguous, the court

interpreted it against the insurer, National Union. The court

recognized that Endorsement # 11 did not apply to this case because

it covered only operations involving Rocky Mountain’s contractor.

The court concluded, however, that the base policy ultimately

covered UMC’s claim because the pollution exclusion contained in

Endorsement # 11 amended the pollution exclusions in the base

policy such that a sudden and accidental escape of pollutants was

no longer excluded.

Although we agree in part with the district court’s reasoning,

we must ultimately reject it as applied to the endorsement language

at issue here. The district court is correct that, under Texas

law, broad endorsements may be construed to substantially alter the

13
terms of a base policy. See, e.g., INA of Texas v. R.D. Leonard,

714 S.W.2d 414, 416-17 (Tex. App. 1986, writ refused n.r.e.). And

it is true that the exclusions to Endorsement # 11 purport to apply

to the “policy,” not simply the endorsement. In deciphering the

meaning of endorsements, however, we must be “particularly wary of

isolating individual words, phrases, or clauses and reading them

out of the context of the [policy] as a whole.” Mustang Tractor &

Equip. Co. v. Liberty Mut. Ins. Co., 76 F.3d 89, 91 (5th Cir. 1996)

(citing State Farm Life Ins. Co v. Beaston, 907 S.W.2d 430, 433

(Tex. 1995)). Specific provisions in the endorsement must be read

in context with not only the base policy, but also the other

provisions of the endorsement.

Examining the exclusions of Endorsement # 11 as a whole, it is

clear to us that use of the phrase “[t]his policy” should not be

construed as an attempt to have these exclusions apply to, and

override the other provisions of, the base policy. The phrase

precedes each of the exclusions in the endorsement. If, as UMC

argues, the phrase extends the pollution exclusion contained in

Endorsement # 11 to the coverage provisions of the base policy and

not just to those of the endorsement itself, then so too must it

extend the endorsement’s other exclusions to the entire policy.

Thus, Exclusion (c) to Endorsement # 11, which excludes coverage

for “property damage arising out of any act or omission by [Rocky

14
Mountain],” would apply to the base policy. So would Exclusion

(f), which excludes coverage for “damage to . . . property used by

[Rocky Mountain].”

We do not find this construction of Endorsement # 11

reasonable. Not only would it render nearly the entire base policy

a nullity, but also would ultimately result in UMC’s claim being

excluded from coverage, despite falling within the exception of the

endorsement’s pollution exclusion. It is simply implausible to

think that the parties intended the exclusions contained in the

endorsement to eliminate most of the coverage provided under the

base policy. Instead, we agree with National Union that the

endorsement’s exclusions apply only to the coverages provided by

the endorsement. If the claim does not fall within the coverage

provisions of the endorsement, its exclusions are irrelevant.

Here, UMC’s claim does not involve the operations of Rocky

Mountain’s contractors and, therefore, is not covered by

Endorsement # 11. The endorsement’s exclusions never come into

play.

IV

In sum, UMC’s claim is excluded from coverage under the

pollution exclusion clauses of the base policy issued by National

Union. Endorsements # 8, # 10, and # 11 cannot reasonably be

15
interpreted to cover the claim. Accordingly, the judgment of the

district court is

R E V E R S E D.

16