Case: 10-10123 Document: 00511344496 Page: 1 Date Filed: 01/07/2011
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
January 7, 2011
No. 10-10123 Lyle W. Cayce
Clerk
VRV DEVELOPMENT L.P., formerly known as VRV DEVELOPMENT, INC.;
MARKEN MANAGEMENT GP L.L.C.; KENNY MARCHANT,
Plaintiffs - Appellants
v.
MID-CONTINENT CASUALTY COMPANY,
Defendant - Appellee
Appeal from the United States District Court
for the Northern District of Texas
Before REAVLEY, BENAVIDES, and CLEMENT, Circuit Judges.
FORTUNATO P. BENAVIDES, Circuit Judge:
This case arises from defendant Mid-Continent Casualty Co.’s refusal to
defend and indemnify plaintiffs VRV Development L.P. (“VRV L.P.”), Marken
Management GP L.L.C. (“Marken”), and Kenny Marchant (“Marchant”)
(collectively, “VRV”) in an underlying lawsuit in Texas state court. The district
court held that VRV is not entitled to defense and indemnity because VRV L.P.
is not covered under two commercial general liability (“CGL”) policies issued to
VRV Inc.1 We affirm on the alternative ground that the underlying lawsuit does
1
Effective January 1, 2005, VRV Inc. converted into a Texas limited partnership, VRV
L.P. Marken was created as part of the conversion process and is the general partner of VRV
L.P. Kenny Marchant is the sole limited partner of VRV L.P. Before the conversion, Kenny
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No. 10-10123
not allege a covered occurrence of property damage within the effective period
of the CGL policies.2
I. BACKGROUND
A. Events giving rise to this litigation
VRV Inc. entered into a contract to develop residential lots in Dallas
County for Goodman Family of Builders, L.P. Goodman’s successor in interest,
K. Hovnanian Homes - DFW, LLC (“Hovnanian”), eventually built new homes
on the developed lots and sold them to individual homeowners.
In May 2004, during the development process, VRV Inc. purchased a CGL
policy from Mid-Continent. VRV Inc. was designated as the “named insured,”
and its form of business was identified as a “corporation.” Kenny Marchant was
covered under the policy as VRV Inc.’s executive officer. The policy was effective
from May 25, 2004 until May 25, 2005.
VRV Inc. hired subcontractors to design and build retaining walls on the
residential lots. The retaining walls at issue in this case were located within the
property lines of four individual homeowners.
Effective January 1, 2005, VRV Inc. converted into a Texas limited
partnership, VRV L.P. The CGL policy with Mid-Continent was renewed from
May 25, 2005 until May 25, 2006, but VRV Inc. continued to be designated as the
named insured, and its form of business continued to be identified as a
“corporation.” There is no evidence or allegation that Mid-Continent was
informed of VRV Inc.’s conversion into VRV L.P. VRV L.P. did not renew its
Marchant was VRV Inc.’s president.
2
We “may affirm summary judgment on any legal ground raised below, even if it was
not the basis for the district court’s decision.” Performance Autoplex II, Ltd. v. Mid-Continent
Cas. Co., 322 F.3d 847, 853 (5th Cir. 2003).
2
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CGL policies after May 25, 2006.
A homeowner’s inspection conducted sometime between May and July
2006 identified a crack in a retaining wall. In January and March 2007, after
periods of heavy rainfall, the retaining walls collapsed, damaging the four
homeowners’ backyards and undermining support for a public utility easement
owned by the City of Dallas.3
In April 2007, Hovnanian sued, in relevant part, VRV for negligence and
breach of contract. The four homeowners intervened in the lawsuit and sued, in
relevant part, VRV L.P. and Marken for negligence and breach of implied
warranties. The City of Dallas also intervened and sued, in relevant part, VRV
for breach of duty to provide lateral and adjacent support for the City’s
easement.4
VRV demanded defense and indemnity from Mid-Continent, and filed this
action after Mid-Continent rejected its demands. Mid-Continent asserts that
VRV is not insured under the CGL policies issued to VRV Inc., no property
damage is alleged to have occurred during the effective policy periods, and
certain policy exclusions preclude coverage. The district court granted summary
judgment to Mid-Continent solely on the ground that VRV is not insured under
the CGL policies.
3
It is not clear whether Hovnanian’s petition, which alleges damage to “afflicted
properties” and properties “neighboring” the retaining wall, alleges that additional property
was damaged by the collapse of the retaining walls. For the purposes of this opinion, we
assume that it does and include these “afflicted properties” in our references to the four
homeowners' backyards.
4
References in this opinion to the “Hovnanian plaintiffs” refer collectively to
Hovnanian, the homeowners, and the City.
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B. The CGL policies
The two CGL policies at issue in this case are standard in the industry and
identical in most respects. The CGL policies require Mid-Continent to “pay
those sums that the insured becomes legally obligated to pay as damages
because of . . . ‘property damage,’” and to defend VRV against any lawsuit
seeking such damages. The “property damage” must, however, be caused by an
“occurrence” during the policy period. “Property damage” means:
(a) physical injury to tangible property, including all resulting loss of use
of that property. All such loss of use shall be deemed to occur at the time
of the physical injury that caused it; or
(b) loss of use of tangible property that is not physically injured. All such
loss of use shall be deemed to occur at the time of the ‘occurrence’ that
caused it.
An “occurrence” means “an accident, including continuous or repeated exposure
to substantially the same general harmful conditions.” Property damage that
occurs during the policy period “includes any continuation, change or resumption
of that . . . ‘property damage’ after the end of the policy period.”
Notwithstanding Mid-Continent’s general obligation to cover property
damage that occurs during the policy period, the CGL policies at issue in this
case do not cover property damage to work performed by VRV or its
subcontractors. Specifically, exclusion (l) to the CGL policies precludes coverage
for “‘[p]roperty damage’ to ‘your work’ arising out of it or any part of it and
included in the ‘products-completed operations hazard.’”5 “Your work” means,
5
We note that Mid-Continent’s standard CGL policy does not exclude property damage
to work performed by an insured’s subcontractors, but this “subcontractor exception” was
removed by an endorsement to VRV’s policies. See generally Lamar Homes, Inc. v. Mid-
Continent Cas. Co., 242 S.W.3d 1, 12 (Tex. 2007) (“More recently, the Insurance Services
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inter alia, “[w]ork or operations performed by you or on your behalf.” The
“[p]roducts-completed operations hazard” means any property damage “occurring
away from premises you own or rent and arising out of . . . ‘your work’ except . . .
[w]ork that has not yet been completed or abandoned.” Additionally, to the
extent property damage is not included in the “products-completed operations
hazard,” exclusion (j)(6) to the CGL policies precludes coverage for damage to
“[t]hat particular part of any property that must be restored, repaired or
replaced because ‘your work’ was incorrectly performed on it.”
II. STANDARD
The district court’s summary judgment order is reviewed de novo.
Sanders-Burns v. City of Plano, 594 F.3d 366, 380 (5th Cir. 2010). Summary
judgment is appropriate when “the movant shows that there is no genuine
dispute as to any material fact and the movant is entitled to judgment as a
matter of law.” F ED. R. C IV. P. 56(a); see also Celotex Corp. v. Catrett, 477 U.S.
317, 322 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,
587 (1986). All reasonable inferences are drawn in favor of the nonmoving party,
but a party cannot defeat summary judgment with conclusory allegations or
unsubstantiated assertions. Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th
Cir. 1994). VRV bears the burden of showing that the allegations in the
underlying lawsuit are covered by the CGL policies, but Mid-Continent bears the
burden of establishing that a policy exclusion applies. See, e.g., Nat’l Union Fire
Ins. Co. of Pittsburgh, Pa. v. Puget Plastics Corp., 532 F.3d 398, 401 (5th Cir.
2008); Lincoln Gen. Ins. Co. v. Reyna, 401 F.3d 347, 350 (5th Cir. 2005).
Office has issued an endorsement that may be included in the CGL to eliminate the
subcontractor exception to the ‘your-work’ exclusion.”); Pine Oak Builders, Inc. v. Great Am.
Lloyds Ins. Co. 279 S.W.3d 650, 653 (Tex. 2009).
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III. DISCUSSION
The district court held that VRV is not entitled to defense and indemnity
because only VRV Inc. and not VRV L.P. is insured under the CGL policies. We
need not determine whether VRV L.P. acquired some or all of VRV Inc.’s rights
to defense and indemnity when the latter converted its organizational form
pursuant to Article 5.20 of the Texas Business Corporations Act.6 Even if VRV
Inc.’s rights to defense and indemnity transferred by operation of law to VRV
6
At the time of the conversion, Article 5.20 provided that after an entity’s conversion
from one organizational form into another:
(1) the converting entity shall continue to exist, without interruption, but in the
organizational form of the converted entity rather than in its prior
organizational form;
(2) all rights, title, and interests to all real estate and other property owned by
the converting entity shall continue to be owned by the converted entity in its
new organizational form without reversion or impairment, without further act
or deed, and without any transfer or assignment having occurred . . .; [and]
(3) all liabilities and obligations of the converting entity shall continue to be
liabilities and obligations of the converted entity in its new organizational form
without impairment or diminution by reason of the conversion . . . .
Texas Business Corporations Act, art. 5.20(A)(1)-(3) (1997). Article 5.20 is now codified as
amended at Texas Business Organizations Code § 10.106 (2006).
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L.P.,7 the Hovnanian plaintiffs still do not allege a covered occurrence of
property damage during the effective period of the CGL policies.
A. Duty to defend
Texas substantive law governs the insurance contracts at issue in this
diversity action. See Erie R.R. v. Tompkins, 304 U.S. 64, 78 (1938); Bexar Cnty.
Hosp. Dist. v. Factory Mut. Ins. Co., 475 F.3d 274, 276 (5th Cir. 2007). Under
Texas law, an insurer’s duty to defend is determined by the “eight corners” rule,
that is, by the four corners of the underlying pleadings and the four corners of
the relevant insurance policies. Northfield Ins. Co. v. Loving Home Care, Inc.,
363 F.3d 523, 528 (5th Cir. 2004); King v. Dallas Fire Ins. Co., 85 S.W.3d 185,
187 (Tex. 2002). In most cases, the underlying pleadings and insurance policies
are the only documents relevant to an insurer’s duty to defend. Liberty Mut. Ins.
Co. v. Graham, 473 F.3d 596, 599-600 (5th Cir. 2006); GuideOne Elite Ins. Co.
v. Fielder Rd. Baptist Church, 197 S.W.3d 305, 308 (Tex. 2006). The insurer is
obligated to defend the insured if the underlying allegations, taken as true,
potentially assert a claim for coverage under the insurance policies. St. Paul
Fire & Marine Ins. Co. v. Green Tree Fin. Corp.-Tex., 249 F.3d 389, 393 (5th Cir.
7
Compare Keller Founds., Inc. v. Wausau Underwriters Ins. Co. __F.3d__, 2010 WL
4673026, at *5 (5th Cir. 2010) (holding that rights to defense and indemnity did not follow
partial sale of assets because “the liabilities in question were assumed through a contract that
also specifically excluded the transfer of the insurance policy covering those liabilities”), with
Imperial Enters., Inc. v. Fireman’s Fund Ins. Co., 535 F.2d 287, 292-93 (5th Cir. 1976) (holding
that “no-assignment clause should not be applied ritualistically and mechanically to forfeit
coverage,” at least in circumstances when the policy transferred by operation of law as opposed
to personal assignment); see also In re Baird, 567 F.3d 1207, 1214 (10th Cir. 2009); Globecon
Grp., LLC v. Hartford Fire Ins. Co., 434 F.3d 165, 170-71 (2d Cir. 2006); N. Ins. Co. of N.Y. v.
Allied Mut. Ins. Co., 955 F.2d 1353, 1358 (9th Cir. 1992); Ocean Accident & Guar. Corp. v. Sw.
Bell Tel. Co., 100 F.2d 441, 446 (8th Cir. 1939); 2 COUCH ON INSURANCE § 34:25 (3d ed. 2010);
3 COUCH ON INSURANCE § 35:7 (3d ed. 2010).
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2001). The duty to defend does not rely on the truth or falsity of the underlying
allegations, and facts ascertained before suit, developed in the process of
litigation, or determined by the ultimate outcome of the suit do not affect the
duty to defend. OOIDA Risk Retention Grp., Inc. v. Williams, 579 F.3d 469, 472
(5th Cir. 2009); Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487, 491 (Tex.
2008). All doubts regarding the duty to defend are resolved in favor of the
insured. Northfield, 363 F.3d at 528. Nonetheless, in reviewing the underlying
pleadings, the court must focus on the factual allegations that show the origin
of the damages rather than on the legal theories advanced. Nat’l Union Fire Ins.
Co. of Pittsburgh, Pa. v. Merch. Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex.
1997). The court may not “read facts into the pleadings” or “imagine factual
scenarios which might trigger coverage.” Gore Design Completions, Ltd. v.
Hartford Fire Ins. Co., 538 F.3d 365, 369 (5th Cir. 2008); Pine Oak Builders, Inc.
v. Great Am. Lloyds Ins. Co., 279 S.W.3d 650, 655 (Tex. 2009). “If a petition does
not allege facts within the scope of coverage, an insurer is not legally required
to defend a suit against its insured.” Merchants Fast, 939 S.W.2d at 141.
Our first step is to identify the relevant allegations in the four corners of
the underlying pleadings. Each of the Hovnanian plaintiffs alleges that VRV or
its subcontractors negligently designed and built the retaining walls during the
policy period, that is, between May 25, 2004 and May 25, 2006. The homeowners
allege that they identified a crack in one retaining wall sometime between May
and July 2006, and we assume that this crack existed during the policy period.
The homeowners also allege that the retaining walls ultimately collapsed into
their backyards in January and March 2007. Lastly, the City alleges that the
“collapse” and “failure” of the retaining walls affected the City’s use and
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enjoyment of a public utility easement. Specifically, the City alleges that “[t]he
collapse deprived [a water transmission main] of its natural lateral support of
soil.” In short, read in light most favorable to VRV, the Hovnanian plaintiffs
allege that the retaining walls were damaged during the policy period, and that
the homeowners’ backyards and the City’s easement were damaged when the
retaining walls collapsed in 2007.
Our next step is to determine whether these allegations support a claim for
coverage under the four corners of the CGL policies. We find that they do not,
because they do not allege a covered occurrence of property damage during the
effective period of the CGL policies.
First, although the alleged property damage to the retaining walls occurred
during the policy period, this damage is excluded from the CGL policies. In
general, CGL policies protect an insured when his work damages another’s
property, but they do not serve as “a performance bond covering an insured’s own
work.” Wilshire Ins. Co. v. RJT Const., LLC, 581 F.3d 222, 226 (5th Cir. 2009).
In this case, exclusion (l) precludes coverage for damage to work completed by
VRV and its subcontractors, and the Hovnanian plaintiffs allege that the
retaining walls were built by VRV and its subcontractors. The alleged damage
to the retaining walls thus is excluded from the CGL policies and does not trigger
Mid-Continent’s duty to defend. See, e.g., id. (observing that “your work”
exclusion precludes coverage for damage to foundation built by insured).8
8
See also Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 11-12 (Tex.
2007) (observing that “your work” exclusion “generally excludes coverage for ‘property damage’
to the insured’s completed work”); 9A COUCH O N INSURANCE § 129:17 (3d ed. 2010) (“[W]here
all of the damage that is being claimed is damage to the work of the insured which is caused
by the work of the insured, the ‘your work’ exclusion will apply to preclude coverage.”).
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Second, the alleged damage to the homeowners’ backyards and the City’s
easement occurred only when the retaining walls collapsed in 2007, well after the
expiration of the CGL policies in May 2006. Because this property damage did
not occur during the policy period, it does not trigger Mid-Continent’s duty to
defend.
VRV points out that property damage that occurs during the policy period
“includes any continuation, change or resumption of that . . . ‘property damage’
after the end of the policy period.” Thus, according to VRV, we should deem the
damage to the homeowners’ backyards and the City’s easement to have occurred
at the same time as the underlying damage to the retaining walls. We rejected
an almost identical bootstrapping argument offered by an insurance company in
Wilshire Insurance v. RJT Construction. 581 F.3d at 224. In Wilshire, RJT
leveled the foundation of a home in 1999. Id. In 2005, the homeowner observed
cracks in the walls and ceilings of his home. Id. In 2007, the homeowner sued
RJT for negligence. Id. RJT was covered by a CGL policy only from 2004
through 2006. Id. RJT’s insurer sought a declaratory judgment that it had no
duty to defend or indemnify on the ground that the damage occurred at the time
of the faulty foundation work, that is, before the effective date of the CGL policy.
We held that cracks in the house were an occurrence of covered property damage
during the policy period. Id. at 225. We explained that “[t]his is not a case where
latent internal rot long lies undiscovered before external signs warn of the
festering damage. The cracks are not merely a warning of prior undiscovered
damage; they are the damage itself. It is of no moment that the faulty foundation
work occurred [before the policy period] . . . .” Id. In other words, we refused to
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conflate an allegedly defective foundation with the separate property damage
that ultimately resulted.
Although the timing of the relevant insurance policy distinguishes the
result in Wilshire from this case, the reasoning adopted in Wilshire and now
applied this case is the same. What Wilshire recognized is that “property
damage” does not necessarily “occur” at the first link in the causal chain of events
giving rise to that property damage. Nearly all property damage will be traceable
back to earlier events, but this is not the nature of our inquiry. As the Texas
Supreme Court has instructed, we must focus on the time of the “actual physical
damage” to the property, and not the time of the “negligent conduct” or the
“process . . . that later results in” the damage. Don’s Bldg. Supply, Inc. v.
OneBeacon Ins. Co., 267 S.W.3d 20, 24, 29-30 (Tex. 2008). It may be difficult at
times to determine precisely when actual physical damage occurs, but we must
draw a line somewhere. Id. at 29 (“Pinpointing the moment of injury
retrospectively is sometimes difficult, but we cannot exalt ease of proof or
administrative convenience over faithfulness to the policy language.”).
Here, the homeowners’ backyards and the City’s easement were actually,
physically damaged not by the negligent design and construction of the retaining
walls, nor by a continuous exposure to the walls between May 2004 and May
2006, but rather by the “collapse” and “failure” of the walls in January and March
2007. In other words, this is not a case involving festering, undiscovered damage
to covered property during the policy period. See, e.g., id., 23, 31 (finding duty to
defend when water damage to house began shortly after application of defective
stucco, and contractor was insured at the time the water damage began). This
is a case in which potentially covered property damage occurred only after the
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policy period. Of course, the damage to the retaining walls may have festered
and changed over time, but the damage to the retaining walls is excluded from
the CGL policies. Because the Hovnanian plaintiffs have not alleged a covered
occurrence of property damage during the effective period of the CGL policies,
they have not triggered Mid-Continent’s duty to defend.
B. Duty to indemnify
Unlike the duty to defend, an insurer’s duty to indemnify is based on the
“actual facts” brought out in the underlying action. OOIDA, 579 F.3d at 472.
Thus, an insurer’s duty to indemnify typically can be resolved only after the
conclusion of the underlying action. Id. The duty to indemnify may be resolved
at summary judgment, however, when “the insurer has no duty to defend and the
same reasons that negate the duty to defend likewise negate any possibility the
insurer will ever have a duty to indemnify.” Farmers Tex. Cnty. Mut. Ins. Co. v.
Griffin, 955 S.W.2d 81, 84 (Tex. 1997) (emphasis omitted). In this case, Mid-
Continent has no duty to indemnify for the same reason it has no duty to defend:
there is no evidence of a covered occurrence of property damage within the
effective period of the CGL policies. Without evidence of a covered occurrence of
property damage, there is no possibility that Mid-Continent will ultimately have
a duty to indemnify VRV. At summary judgment, it was VRV’s burden to set out
specific facts demonstrating that its claim for indemnity was covered by the CGL
policies. See, e.g., Puget Plastics, 532 F.3d at 401. VRV did not satisfy this
burden, and Mid-Continent therefore was entitled to summary judgment.
IV. CONCLUSION
For the reasons stated, Mid-Continent was entitled to summary judgment
on VRV’s claims for defense and indemnity.
AFFIRMED.
12