DPC Industries, Inc. v. American International Specialty Lines Insurance

Case: 09-20634 Document: 00511213196 Page: 1 Date Filed: 08/24/2010

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit

FILED
August 24, 2010

No. 09-20634 Lyle W. Cayce
Clerk

DPC INDUSTRIES, INC.

Plaintiff-Appellant,
v.

AMERICAN INTERNATIONAL SPECIALTY LINES INSURANCE CO.,

Defendant-Appellee.

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

Before DAVIS, SMITH and HAYNES, Circuit Judges.
W. EUGENE DAVIS, Circuit Judge:
Plaintiff DPC Industries, Inc. appeals the summary judgment rendered
against it and the dismissal of its claim for additional insurance coverage
against its liability insurer, American International Specialty Lines Insurance
Co. We affirm.
I.
This case involves an insurance coverage dispute relating to a release of
a toxic chemical from a plant operated by an affiliate of the plaintiff which is one
of the insureds under the disputed policy. American International Specialty
Lines Insurance Co. (“AISLIC”) issued a combined Primary and Umbrella
comprehensive general liability policy to the named insured DX Holding
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No. 09-20634

Company, Inc.(“DX Holding”). The primary policy provides a limit of $1 million
per occurrence and a general aggregate limit of $2 million under both Coverage
A for general liability for bodily injury and property damage and Coverage D
(parts 1 and 2) for pollution coverage. The umbrella policy provides a second
layer of coverage with a policy limit of $10 million under Coverage A and $4
million under Coverage D. The higher limit under Coverage A was a major
reason for this litigation.
Endorsement No. 2 to the policy adds a Broad Form Named Insured
definition which includes as a named insured any subsidiary or subsidiary
thereof of the named insured. DPC Industries, Inc. (“Industries”), the appellant
in this case, is a subsidiary of DX Holding, the named insured. DPC
Enterprises, Inc. is a subsidiary of Industries. DPC Enterprises is general
partner of DPC Enterprises, L.P. (collectively “Enterprises”). DX Holding and
its subsidiaries will be collectively referred to as the DX entities or DX
subsidiaries. Because the limit under coverage A is $10,000,000 and the limit
for pollution damage under Coverage D is only $4,000,000, Industries sought to
get as much coverage as possible under coverage A as opposed to Coverage D.
Two other provisions of the insurance policy are relevant to this case. The
policy contains a “Separation of Insureds” provision. That provision reads -
Except with respect to the Limits of Insurance, and any rights or
duties specifically assigned to the first Named Insured, this
insurance applies:

a. As if each named Insured were the only Named Insured; and

b. Separately to each insured against whom claim is made or
suit is brought.

The effect of this provision is that each insured is treated individually as far as
determination of available coverage, except that one insurance limit applies to
all insureds collectively.

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The policy also includes an exclusion to Coverage A referred to as the
“covered by other coverages exclusion” or “exclusion u.”
2. Exclusions
This insurance does not apply to:
. . . .
u. Covered by Other Coverages

Any claim or part thereof which may be alleged as
covered under this Coverage of this Policy, if we have
accepted coverage or coverage has been held to apply
for such claims or part thereof under any other
Coverage in this Policy. This exclusion does not apply
to any claim for medical expenses under Coverage C
caused by bodily injury which is covered under
Coverage A.

A similar exclusion applies to coverage under Coverage D-2.1 These exclusions
prevent stacking of insurance coverages provided in the policy and make it clear
that the coverage under Coverage A and the coverage under Coverage D-2 for
pollution are mutually exclusive for each insured.
Enterprises owns and operates a plant described as a chlorine repackaging
facility in Festus, Missouri. Industries provides technical support and training
to the Festus facility. The accident giving rise to the personal injuries and
property damage in this case occurred on August 14, 2002, when chlorine gas
was released from the Festus facility. AISLIC was notified of the accident by
Jack Holcomb of DX Service Company. On August 26, 2002, AISLIC accepted
coverage for the claim under the above described policy’s Coverage D, subject to

1
Exclusion a. to Coverage D-1 and D-2 states that this insurance coverage under D
does not apply to claims or loss:

a. Which may be alleged as covered in whole or in part under this Coverage
of this Policy, if we have accepted coverage or if coverage has been held
to apply for such claim under any other Coverage of this Policy.

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a reservation of rights. The only insured referenced in the August 26 letter is
DX Holding - the parent of Industries and Enterprises. DX’s response on August
27, 2002 only mentions coverage for DPC Enterprises, L.P.
Numerous claimants filed claims for bodily injury and property damage
resulting from the release. Lawsuits were brought against Enterprises and
other subsidiaries of DX Holding. Unsettled claims were consolidated and
certified as a class action in a lawsuit styled Jeanette Adams, et al, v. DPC
Enterprises, Del. Inc. et al, in Missouri state court. Goodwin Brothers
Construction Company filed a separate lawsuit against Enterprises, Industries
and Jason Wisdom, manager of the Festus facility, in April 2004. The Goodwin
suit specifically named Industries as a defendant.
Starting in October 2005, Holcomb of DX Service Company began efforts
to obtain coverage under Coverage A and thereby obtain the benefit of the higher
liability policy limit for subsidiaries of DX Holding who were not owners of the
Festus facility. Numerous letters were sent to and responses received from
AISLIC. Holcomb notified AISLIC that the claims asserted against DX entities
which did not own and operate the Festus plant, including Industries, were
entitled to the benefit of coverage A in the policy. Mr. Holcomb noted that those
entities do not own and operate the Festus facility and that the allegations
involved claims of negligent training, supervision and maintenance of the
facility. Accordingly, DX Holding put AISLIC on notice that they were making
a claim for coverage under Coverage A of the policy. AISLIC denied coverage
under Coverage A on the basis of the pollution exclusion in exclusion g., the
professional services exclusion in exclusion I.2.b. and exclusion u. Every letter
sent by AISLIC contains a reservation of rights to assert a defense to coverage.

AISLIC entered into multiple settlement agreements with plaintiffs on
behalf of the DX entities. Every settlement obtained releases for all DX entities

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including Industries. AISLIC also settled the Goodwin litigation by paying
$450,000 to settle the suit. AISLIC obtained releases for all defendants,
including Industries, which is a released party in the Goodwin Settlement
Agreement. AISLIC also paid defense costs for all the DX entities, including
Industries. The Adams suit against DX entities including Industries was not
settled at this point. Upon exhausting its policy limits under Coverage D-2,
AISLIC withdrew its defense.
Industries and its affiliates settled the Adams litigation with their own
funds in May 2007 for $9,400,000. Industries filed suit against AISLIC in Texas
state court for breach of contract, damages and attorneys’ fees based on AISLIC’s
wrongful denial of coverage under Coverage A of the general liability policy and
sought reimbursement of its settlement costs from the $6 million differential
between the policy limits of Coverage A and the policy limits of Coverage D of
the umbrella policy. AISLIC timely removed the case to federal court based on
diversity of citizenship. AISLIC filed a motion for summary judgment claiming
that exclusion u., the other coverages exclusion, exclusion g., the pollution
exclusion, and exclusion I.2.b., the professional services exclusion, preclude
coverage under Coverage A. Industries filed a cross-motion for summary
judgment.
The district court granted summary judgment in favor of AISLIC, finding
primarily that AISLIC provided coverage to Industries under Coverage D-2 and
therefore that exclusion u. precludes coverage under Coverage A. This appeal
followed.
II.
The issue presented to us is whether Industries is entitled to the benefit
of the additional limit of liability under coverage A of the defendant’s policy. As
an initial matter not specifically addressed by the parties, we note that the

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pollution coverage provided in Coverage D-2 applies to the chlorine release and
the injuries and damages resulting therefrom. Coverage D-2 states:
We will pay those sums that the insured becomes legally obligated
to pay as loss because of claims in the coverage territory for bodily
injury, property damage or clean-up costs beyond the boundaries of
the insured property [within the specified time frame of the policy.]

As described by Industries, the claims against it in the Adams and Goodwin
cases were claims of negligent training, supervision and maintenance of the
facility. Industries’s role in the DX entities was to provide technical support and
training to the Festus facility. Accordingly, claims of bodily injury, property
damage and clean up costs arising from Industries’ alleged negligence that
contributed to the chlorine release fall within Coverage D-2.
Industries argues first that Coverage D-2 does not apply because it does
not own or operate the Festus plant. Therefore, it argues that coverage for its
liability is under Coverage A. Industries’ argument is based on Endorsement
No. 9 to the policy which states: “It is agreed that the following location(s) are
insured property(ies) under Coverage D - Pollution Legal Liability, subject to all
Policy terms, conditions and exclusions and shall be deemed listed in Item 6 of
the Declarations.” Item 6 is on the first page of the policy and titled “Insured
Property: Coverage D Pollution Legal Liability.” The Festus facility is listed on
the endorsement as an “owned or operated” location. Industries thus argues
that Coverage D-2 has no application to the claims against it because it does not
own or operate the Festus facility. We agree with the district court’s analysis of
this issue. Nothing in the policy or Endorsement No. 9 requires that an insured
property be actually owned or operated by the specific entity seeking coverage
related to that facility.

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III.
Industries makes two additional arguments that the district court erred
in granting summary judgment to AISLIC on this coverage dispute. First, it
argues that exclusion u. for prior accepted coverage does not apply because
Industries never sought and AISLIC never accepted coverage of it under any
other coverage in the policy. Industries states that it only sought coverage under
Coverage A and well-settled Texas law gives the insured the right to choose the
applicable coverage. In addition, Industries states that when AISLIC merely
agreed to defend Industries subject to a reservation of rights, this did not
amount to acceptance of coverage. Industries further submits that the
settlements paid by AISLIC were on behalf of Enterprises and do not constitute
acceptance of coverage for Industries.
Addressing Industries’s first argument, we find unhelpful the case law
cited by the parties on Texas law purporting to address whether the insurer or
insured gets to choose which coverage applies when there is more than one
option.2 None of the cases address the question in this case, which requires an
application of the AISLIC insurance contract to the facts in the summary
judgment record. Texas law specifically recognizes freedom of contract,
including contracts between an insured and insurer, which must be upheld
absent strong public policy reasons for holding otherwise. Am. Intern. Specialty
Lines Ins. Co. v. Res-Care Inc., 529 F.3d 649, 662-663 (5th Cir. 2008)(internal
citations and quotations omitted); Fairfield Ins. Co. v. Stephens Martin Paving,
LP, 246 S.W.3d 653, 665 (Tex. 2008). Thus, assuming Texas law gives the
insured, where the contract is silent, the right to choose among a policy’s
coverage options, no public policy reason is presented to prevent the parties from

2
Industries relies on United States Fire Insurance Co. v. Scottsdale Insurance Co., 264
S.W.3d 160, 166-70 (Tex. App. - Dallas 2008, no pet.); American Physicians Insurance
Exchange v. Garcia, 876 S.W.2d 842, 855 (Tex. 1994).

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giving this option to the insurer in a contract. We agree with the district court
that resolution of this case turns on the terms of the policy.
The relevant portions of the policy provide -
2. Exclusions
This insurance does not apply to:
. . . .
u. Covered by Other Coverages

Any claim or part thereof which may be alleged as
covered under this Coverage of this Policy, if we have
accepted coverage or coverage has been held to apply
for such claims or part thereof under any other
Coverage in this Policy. This exclusion does not apply
to any claim for medical expenses under Coverage C
caused by bodily injury which is covered under
Coverage A.

Thus, Exclusion u. states that once AISLIC accepts coverage under any other
coverage available under the policy, no coverage is available under Coverage A.
This provision plainly gives the insurer the right to accept coverage under
Coverage D to the exclusion of Coverage A.
Industries argues next that AISLIC did not “accept coverage” under any
coverage of the policy within the meaning of this exclusion because it merely
agreed to defend Industries subject to a reservation of rights. It further argues
that settlements paid by AISLIC were on behalf of Enterprises, which is a
separate entity from Industries.
The facts in this case about coverage of the various DX entities are blurred
because neither side did a good job early on to clarify what entities were
requesting coverage or what entities were being defended or indemnified by
AISLIC. After the accident was reported by Holcomb, who is listed as
representing DX Service Company, AISLIC responded and referred to the
insured as DX Holding Company. Neither Industries nor Enterprises, the actual

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owner of the facility, was mentioned. This pattern continued even when events
in the Adams litigation and claims in the Goodwin case led Holcomb to request
coverage under Coverage A in October 2005. In that letter Holcomb did not
mention the individual entities requesting coverage under Coverage A by name,
referring only to “numerous other entities” who were “additional named
insureds.” Industries was not mentioned by name until January 2006.
Industries is correct that every correspondence from AISLIC contained
language reserving its right to contest coverage so as to avoid waiver of that
right. However, it is undisputed that AISLIC paid to defend Industries from
claims arising out of the chlorine gas leak. AISLIC argues that payment of
defense costs means that it “accepted coverage . . . for such claims” because the
policy defines the term “claim” as a demand alleging liability for a “loss under
Coverage D-1 or D-2.” Further under the policy, “Loss, as used in Coverages D-2
and D-2, means: . . . b. Costs, charges and expenses incurred in the defense,
investigation or adjustment of claims.” (emphasis added). Thus payment of
defense costs is payment of a claim under the terms of the policy.3 The district
court accepted this argument.
However, we need not decide whether providing a defense under a
reservation of rights under an eroding policy is equivalent to “accepting
coverage” to trigger exclusion u., because the record contains uncontradicted
evidence that AISLIC provided indemnity coverage to Industries. Industries

3
Coverage D under the primary policy (which was followed in form by the
umbrella policy) contained this provision: “Defense costs, . . . reduce the applicable
limit of insurance.” Thus, unlike the typical comprehensive general liability policy
where defense costs are excluded from the calculation of the policy limits, Coverage D
was an eroding policy under which defense costs “count” against and “erode” the policy
limits. See North American Specialty Lines Ins. Co. v. Royal Surplus Lines Ins. Co.,
541 F.3d 552, 559 (5th Cir. 2008)(“In many liability policies, the policy limits refer only
to the indemnity obligation . . ., and the obligation to defend a liability suit is not
capped by the policy limits. In an eroding policy . . the insurer’s payments to defense
counsel to defend the liability suit count against policy limits.”).

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was named as a defendant in the Goodwin case as early as April 2004. The
record contains a Settlement Agreement and Release of Claims, dated
September 2006, to which Industries is a released party. AISLIC paid $450,000
for this settlement. Industries argues that because the payments to claimants
under this agreement were made by Enterprises and reimbursement from
AISLIC went to Enterprises, this does not constitute acceptance of coverage of
Industries as a separate entity. Industries cites no case law for this proposition.
Qualification for “acceptance of coverage” does not depend on whether or how the
settlement was apportioned between Enterprises and Industries and the other
named defendants covered by the Settlement Agreement. Industries was a
named defendant in the case and a released party to the Settlement Agreement
obtained as a result of the insurer’s payment. Industries clearly benefitted from
the releases obtained in that agreement. Accordingly, the district court did not
err in finding that AISLIC accepted coverage of Industries under Coverage D-2
of the policy and thus Industries was precluded from coverage under any other
provision of the policy because of the anti-stacking provision in exclusion u.
CONCLUSION
For the reasons stated above, we agree with the district court that AISLIC
accepted coverage under Coverage D 4 of the policy which triggered exclusion “u”
precluding coverage under Coverage A.5 We therefore affirm the district court’s
judgment.
AFFIRMED.

4
Having contracted for and paid a premium based upon both a lower total limit
for Coverage D and an eroding policy, the insured cannot now rewrite the policy. See
541 F.3d at 559 (“[I]f the insured wanted a policy that had an unlimited defense
obligation, rather than an eroding one, it should have contracted for such a policy.”)
5
As a result, we need not decide whether the pollution exclusion or professional
services exclusion of Coverage A would bar coverage under that section.

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