United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS
For the Fifth Circuit August 23, 2004
Charles R. Fulbruge III
Clerk
No. 03-10861
PRIMROSE OPERATING COMPANY; CADA OPERATING, INC.,
Plaintiffs-Appellees,
VERSUS
NATIONAL AMERICAN INSURANCE COMPANY,
Defendant-Appellant.
Appeal from the United States District Court
For the Northern District of Texas
Before GARWOOD, WIENER, and DeMOSS, Circuit Judges.
DeMOSS, Circuit Judge:
Primrose Operating Company (“Primrose”) and CADA Operating,
Inc. (“CADA”) (collectively, “Plaintiffs”), filed suit in Texas
state court against National American Insurance Company (“NAICO”),
seeking damages for an alleged breach of NAICO’s duty to defend
Plaintiffs in a lawsuit filed against them in Texas state court.
NAICO removed to federal court based on complete diversity between
the parties. A jury found for Plaintiffs and awarded damages
against NAICO. NAICO filed a motion for judgment as a matter of
law, which the district court denied. Following the district
court’s entry of judgment, NAICO filed a motion to alter or amend
judgment and a renewed motion for judgment as a matter of law. The
district court denied these motions as well. NAICO now appeals the
orders entering judgment and denying NAICO’s motions.
BACKGROUND & PROCEDURAL HISTORY
The Senn family owns a ranch in West Texas. Primrose operated
an oil and gas lease on the ranch from 1992 to 1999, and CADA
succeeded Primrose in 1999 as the operator of that lease. In
September 1999, the Senns sued Plaintiffs,1 and several other oil
companies, for polluting their ranch, asserting claims including,
inter alia, negligence, gross negligence, trespass, and nuisance.
Primrose was insured during the time it operated the Senns’ lease
by three insurance companies: (1) Chubb Insurance Group (“Chubb”)
from April 1, 1991 to April 1, 1997; (2) Mid-Continent Casualty
Company (“Mid-Continent”) from April 1, 1997 to April 1, 1999; and
(3) NAICO from April 1, 1999 until the time CADA succeeded Primrose
as the lease operator in December 1999. CADA was solely insured by
NAICO from December 1999 until April 1, 2001.
Primrose reported the suit to all three insurers and requested
a defense. Chubb and Mid-Continent agreed to defend Primrose under
a reservation of rights and retained, and agreed to pay the bills
of, Kathleen McCulloch of Shafer, Davis, Ashley, O’Leary & Stoker
(the “Shafer” firm). NAICO, however, denied coverage and refused
1
CADA was not initially sued, but was added to the suit later.
2
to provide a defense for Primrose. NAICO also refused CADA’s
request for a defense. CADA, in turn, retained Ackels & Ackels
(the “Ackels” firm) for its defense in the Senn litigation. In
March 2001, Primrose retained Rick Strange of the law firm of
Cotton Bledsoe Tighe & Dawson (the “Cotton Bledsoe” firm), in
addition to the representation Primrose was then receiving from the
Shafer firm.2
At the time the Senn litigation went to trial in October 2001,
a number of the other defendant oil companies, although it is
unclear if all, had been dismissed. During the first week of
trial, CADA settled with the Senns and was dismissed from the suit.
Although Primrose received a judgment substantially in its favor,
the state court granted the Senns a partial new trial limited to
surface contamination issues. The case was retried against
Primrose in October 2002. The jury in the second state action
found that Primrose had negligently damaged the Senns’ ranch,
awarding the Senns damages in the amount of $2,194,000. Primrose
has appealed this judgment.3
Plaintiffs filed the present lawsuit in Texas state court in
March 2002, seeking damages for NAICO’s alleged breach of its duty
to defend Plaintiffs in their suit with the Senns. Plaintiffs,
2
The Cotton Bledsoe firm was retained to represent Primrose’s
uninsured interest in the Senn litigation.
3
At the time this opinion was issued, Primrose’s appeal of the
underlying suit was still pending. Meanwhile, Mid-Continent posted
a supersedeas bond and Chubb had withdrawn its defense.
3
both citizens of Texas with their principal places of business in
Texas, specifically asserted breach of contract claims under the
insurance policies issued to them by NAICO, in addition to claims
under the Texas Insurance Code, and the Texas Deceptive Trade
Practices Act (the “DTPA”). NAICO, a foreign corporation with its
principal place of business in Oklahoma, thereafter removed the
case to federal court based on complete diversity. The case was
presented to a jury, and after the close of all evidence, both
Plaintiffs and NAICO moved for judgment as a matter of law. The
district court denied Plaintiffs’ motion in its entirety, while
granting in part NAICO’s motion as it related to Plaintiffs’
failure to offer any evidence to support their DTPA claims and
CADA’s inability to present sufficient evidence supporting its
claims under the Texas Insurance Code.
The jury awarded Plaintiffs damages for NAICO’s breach of
contract and for Primrose’s claim under Article 21.55 of the Texas
Insurance Code. NAICO filed a motion for judgment as a matter of
law and an alternative motion for a new trial, both of which were
denied by the district court. After the district court entered
judgment for Plaintiffs, NAICO filed a motion to alter or amend the
judgment, arguing that the district court miscalculated prejudgment
interest and the statutory penalty under Article 21.55. NAICO also
renewed its motion for judgment as a matter of law and for a new
trial. The district court also denied these motions. NAICO timely
filed the instant notice of appeal with respect to the district
4
court’s orders entering judgment and denying NAICO’s motions for
judgment as a matter of law and to alter or amend the judgment.
DISCUSSION
I. NAICO’s Duty to Defend
NAICO first contends that the district court erred by failing
to grant its motion for judgment as a matter of law on the issue of
whether NAICO had a duty to defend Plaintiffs. This court reviews
a district court’s denial of a motion for judgment as a matter of
law de novo. Pineda v. United Parcel Serv., Inc., 360 F.3d 483, 486
(5th Cir. 2004). “A motion for judgment as a matter of law should
be granted if ‘there is no legally sufficient evidentiary basis for
a reasonable jury to find for a party.’” Id. (quoting FED. R. CIV.
P. 50(a)). “[I]f reasonable persons could differ in their
interpretations of the evidence, then the motion should be denied.
A post-judgment motion for judgment as a matter of law should only
be granted when the facts and inferences point so strongly in favor
of the movant that a rational jury could not reach a contrary
verdict.” Id. (internal quotations and citations omitted).
Under Texas law, an insurer may have a duty to defend a
lawsuit against its insured.4 See State Farm Lloyds v Borum, 53
S.W.3d 877, 889 (Tex. App.—Dallas 2001, no pet.) (finding that the
duty to defend is broader than the duty to indemnify). Texas
Because this is a diversity case, Texas substantive law
4
applies. Cleere Drilling Co. v. Dominion Exploration & Prod., Inc.,
351 F.3d 642, 646 (5th Cir. 2003).
5
employs the “eight corners” or “complaint allegation” rule when
determining whether an insurer has a duty to defend. Potomac Ins.
Co. v. Jayhawk Med. Acceptance Corp., 198 F.3d 548, 551 (5th Cir.
2000). The eight corners rule requires the finder of fact to
compare only the allegations in the underlying suit—the suit
against the insured—with the provisions of the insurance policy to
determine if the allegations fit within the policy coverage. Id.
The duty to defend analysis is not influenced by facts ascertained
before the suit, developed in the process of litigation, or by the
ultimate outcome of the suit. Id. Fact finders, however, may look
to extrinsic evidence if the petition “does not contain sufficient
facts to enable the court to determine if coverage exists.”
Western Heritage Ins. Co. v. River Entm’t, 998 F.2d 311, 313 (5th
Cir. 1993).
The eight corners rule is to be applied liberally in favor of
the insured, with any doubts resolved in favor of the insured.
Guaranty Nat’l Ins. Co. v. Azrock Indus., Inc., 211 F.3d 239, 243
(5th Cir. 2000). “If any allegation in the complaint is even
potentially covered by the policy then the insurer has a duty to
defend its insured.” Enserch Corp. v. Shand Morahan & Co., Inc.,
952 F.2d 1485, 1492 (5th Cir. 1992) (emphases added); Terra Int’l,
Inc. v. Commonwealth Lloyd’s Ins. Co., 829 S.W.2d 270, 271–72 (Tex.
App.—Dallas 1992, writ denied) (observing that courts are to
“liberally construe the allegations in the third-party complaint to
6
determine if they fall within the provisions of the insurance
policies,” and “[i]f there is any doubt about whether the
allegations reflect a potential liability, such doubt must be
resolved in favor of the Insured”).
To determine if NAICO had a duty to defend, this court must
first look to the allegations in the underlying suit filed by the
Senns. As “an amended pleading completely supersedes prior
pleadings, . . . the duty to defend rests on the most recent
pleading.” Guaranty Nat’l Ins. Co. v. Vic Mfg. Co., 143 F.3d 192,
194 (5th Cir. 1998). Therefore, the operative pleading for
purposes of our analysis is the Senns’ Fourth Amended Original
Petition, in which the Senns alleged that Primrose and CADA, along
with several other oil companies, polluted their ranch through
releases of saltwater, oil, and other fluids. Specifically, the
Senns contended that these releases contaminated the surface,
subsurface, and groundwater of their ranch.
In an insurance coverage dispute analyzed under the eight
corners rule, “[t]he insured bears the initial burden of showing
that there is coverage, while the insurer bears the burden of
proving the applicability of any exclusions in the policy. Once
the insurer has proven that an exclusion applies, the burden shifts
back to the insured to show that the claim falls within an
exception to the exclusion.” Guaranty Nat’l, 143 F.3d at 193
(citation and footnote omitted). The insurance policies at issue
here contain three relevant sections: (1) Exclusion (f) of the
7
general commercial liability (“CGL”) policy, i.e., the “Pollution
Exclusion” clause; (2) the “Contamination or Pollution Coverage,”
(the “Pollution Endorsement”); and (3) the “Saline Substance
Contamination Coverage,” (the “Saline Endorsement”).5 Plaintiffs
argue and NAICO concedes that the CGL policy purchased from NAICO
covers the Senns’ allegations. NAICO contends, however, that an
exclusion to the CGL policies, the Pollution Exclusion clause, by
itself excludes coverage. In response, Plaintiffs argue that by
purchasing two endorsements, the Pollution Endorsement and the
Saline Endorsement, the claims represented by the Senns’
allegations are brought back within the language of the CGL policy.
A. The Pollution Exclusion Clause
The Pollution Exclusion does not afford coverage for:
f. Pollution
(1) “Bodily injury” or “property damage”
arising out of the actual, alleged
or threatened discharge, dispersal,
seepage, migration, release or
escape of pollutants:
(a) At or from any premises,
site or location which is
or was at any time owned
or occupied by, or rented
or loaned to, any
insured;
. . .
(d) At or from any premises,
site or location on which
5
The policies that NAICO issued to Primrose and CADA contain all
three sections; therefore, the same coverage arguments apply to
both Primrose and CADA.
8
any insured or any
contractors or
subcontractors working
directly or indirectly on
any insured’s behalf are
performing operations:
. . .
(2) Any loss, cost or expense arising
out of any:
(a) Request, demand or order
that any insured or
others test for, monitor,
clean up, remove,
contain, treat, detoxify
or neutralize, or in any
way respond to, or assess
the effects of
pollutants[.]
NAICO contends that section f(1)(a) of the Pollution Exclusion
applies to the Senns’ claims because Plaintiffs “occupied” the land
upon which pollutants were released. Plaintiffs do not dispute
that the Pollution Exclusion, by itself, would bar coverage;
however, according to Plaintiffs, the Pollution Endorsement
specifically operates to eliminate the Pollution Exclusion clause,
subject to six listed conditions. Plaintiffs argue, therefore,
that the Pollution Exclusion precludes NAICO’s duty to defend only
if one of the six conditions is not met. We agree.
B. The Pollution Endorsement
Only three of the six conditions necessary for the application
of the Pollution Endorsement—and the effective elimination of the
Pollution Exclusion—are contested. Specifically, NAICO argues
that: (1) Condition b (“sudden & accidental”); (2) Condition d
9
(“prior incidents”); and (3) Condition f (“violation of law”), are
not satisfied on the basis of the Senns’ allegations.
1. Condition b: Sudden, Accidental, and Unexpected
Condition b requires that the pollution incident be “an
accident and unintentional release, discharge, emission or escape
of pollutants” and that such an incident be “sudden and accidental
and is neither expected nor intended by any insured.” NAICO
contends that the pollution incidents of which the Senns complain
were expected by Plaintiffs and were neither sudden nor accidental.
This court has held that under Texas law, the “[sudden and
accidental] clause contains a temporal element in addition to the
requirement of being unforeseen or unexpected.” Guaranty Nat’l,
143 F.3d at 193–94. The “‘sudden and accidental’ requirement
unambiguously exclude[s] coverage for all pollution that is not
released quickly as well as unexpectedly and unintentionally.” Id.
at 194 (internal quotations and citations omitted).
Texas law defines “accidental” as an unforeseen and unexpected
event. Gulf Metals Indus., Inc. v. Chicago Ins. Co., 993 S.W.2d
800, 805 (Tex. App.—Austin 1999, pet. denied). The Senns do not
allege that Plaintiffs expected the pollution incidents of which
the Senns complain or that the incidents were accidental. The
Senns, however, alleged that Plaintiffs were negligent, causing
potentially permanent groundwater contamination, among other
damage, “because [Plaintiffs] failed to exercise ordinary care in
the conduct of its oil and gas operations.” Not expecting a
10
particular incident to occur and an accidental occurrence are
completely consistent with a claim of negligence. “[T]here is an
accident when the action is intentionally taken, but is performed
negligently, and the effect is not what would have been intended or
expected had the action been performed non-negligently.” Harken
Exploration Co. v. Sphere Drake Ins. PLC, 261 F.3d 466, 472 (5th
Cir. 2001) (emphases added); Hallman v. Allstate Ins. Co., 114
S.W.3d 656, 661 (Tex. App.—Dallas 2003, pet. filed).
This court has previously held that “[t]he operation of the
oil facilities is the action deliberately taken, but alleged to
have been performed negligently. The contaminated water . . .
caused by the pollutants . . . [is] the unintended and unexpected
effect[] of the non-negligent operation of an oil facility.”
Harken, 261 F.3d at 474.6 Moreover, a “pollution incident” is
6
NAICO’s attempt to distinguish Harken is unavailing. NAICO
claims that the focus here, per Condition b, is whether a pollution
incident was expected, while in Harken, the focus was on whether
the effects—i.e., the damages—were expected. As the definition of
a pollution incident requires that environmental damage result, the
focus here is the same as in Harken. Our inquiry asks whether
Plaintiffs expected a spill, release, etc., that would result in
environmental damage.
Further, it is irrelevant to argue, as NAICO does here, that the
spills of which the Senns complain were of a type that were
expected by Plaintiffs. The Senns do not allege, and NAICO does
not suggest, that Plaintiffs expected that its “day-to-day”
operations would lead to environmental damage, as required by the
definition of a pollution incident. Therefore, the mere
expectation of day-to-day normal spills does not mean that
Plaintiffs necessarily expected pollution incidents. See Harken,
261 F.3d at 474.
11
defined in the Pollution Endorsement as “[a]n occurrence consisting
of any actual emission, discharge, release or escape of pollutant
. . . [which] results in environmental damage.” (Emphasis added).
Therefore, at least one of the Senns’ negligence allegations could
have potentially resulted in an unexpected and accidental pollution
incident, thereby resulting in coverage under NAICO’s policies.
The temporal requirement of “sudden and accidental” requires
that the pollutant be released quickly. Guaranty Nat’l, 143 F.3d
at 194. Texas law defines “sudden” as an abrupt or brief event.
Pioneer Chlor Alkali v. Royal Indem. Co., 879 S.W.2d 920, 937 (Tex.
App.—Houston [14th Dist.] 1994, no writ). The Senns do not allege
that any of the pollution incidents resulted in a quick or sudden
release of damaging pollutants, and therefore, it is impossible to
discern from the complaint alone if the “sudden” requirement is
satisfied. As the complaint “does not contain sufficient facts to
enable [the] court to determine if coverage exists, it is proper to
look to extrinsic evidence” to determine whether the Senns’ claims
were potentially covered by the policy. Western Heritage, 998 F.2d
at 313.
NAICO argues the Senns alleged that the spills repeatedly
occurred in Plaintiffs’ “day-to-day operations” and that Primrose’s
president testified that all the spills of which the Senns complain
“are the typical type of . . . spills that you would expect to see
in Primrose’s normal operations.” NAICO contends that because of
Plaintiffs’ multiple spills over three years, a duty to defend
12
cannot be created by “microanalyzing the case and finding a single
spill that may have been sudden and accidental.” Guaranty Nat’l,
143 F.3d at 194. The alleged polluting, concludes NAICO, was
anything but sudden. We disagree.
NAICO’s reliance on Guaranty National is misplaced. In
Guaranty National, as here, the pleadings did not assert a “sudden
and accidental” pollution, thus enabling the court to look outside
the pleadings to determine if coverage existed. Id. at 194–95.
The underlying plaintiff in Guaranty National listed in its answers
to interrogatories that there were “seventy-seven spills at
nineteen of the facilities occurring over a period of approximately
forty years. Several of the listed spills actually [were] multiple
spills, so that the . . . pollution [was] the result of over a
hundred separate events.” Id. at 195. The contamination was
attributed to both small and large spills that occurred at dry
cleaning facilities as a result of allegedly defective dry cleaning
equipment manufactured by the insured. Id. The Guaranty National
court first acknowledged that “[a] single covered claim will
suffice to require the insurer to defend the entire case.” Id.
Nevertheless, it held that the insured could not “create a duty to
defend by microanalyzing the case and finding a single spill that
may have been ‘sudden and accidental.’” Id. In reaching this
conclusion, the court relied on a pollution exclusion in the policy
that prevented coverage “where the insured has engaged in the
13
deliberate discharge of contaminants in the routine course of
business over many years.” Id. (emphasis added) (internal
quotations omitted). Because of this exclusion, “the fact that the
insured may have also experienced isolated spills or minor
accidents over the same period is irrelevant.” Id. (citation
omitted). Such is not the case here where the policy at issue does
not have a “routine business pollution” exclusion.
In addition, the Senns’ Fourth Amended Petition does not
allege that the spills at issue occurred only in Plaintiffs’ day-
to-day operations. Rather, the Senns allege that Plaintiffs, “[i]n
their day-to-day operations, . . . have failed to prevent and/or
have caused to occur certain spills.” (Emphasis added).
Plaintiffs here were not engaged in activities involving their
deliberate discharge of contaminants in the routine course of
business.7 The “failure to prevent” spills leaves open the
possibility, which the jury was certainly entitled to consider,
that the alleged spills could been have sudden, i.e., quickly
7
In Guaranty National, the insured was a manufacturer of dry
cleaning equipment that used perchloroethylene (“perc”). 143 F.3d
at 193. The underlying plaintiffs alleged that the insured had
knowledge of the environmental hazards associated with perc, but
nevertheless instructed the companies who purchased the equipment
to drain perc into the sewage system knowing that it would sink to
the bottom and remain a potentially hazardous material. Id. at 194.
Clearly, the allegations and factual background in Guaranty
National can be distinguished from the Senns’ Fourth Amended
Petition and the facts as they exist here. We find unpersuasive
NAICO’s argument that Plaintiffs here were engaged in the
“deliberate discharge of contaminants in the routine course of
business.” Guaranty Nat’l, 143 F.3d at 195.
14
released.
Moreover, there was testimony elicited at trial revealing that
the oil companies’ flow lines carry their contents under extreme
pressure and that when the lines burst, the event occurs suddenly,
sometimes resulting in a spray of water as high as forty feet in
the air. There was also testimony establishing that the pressure
in the tank batteries and flow lines were checked at least daily,
therefore, Plaintiffs were made aware of any compromise in the
production equipment almost immediately. While the breaks causing
the leaks and spills were undoubtedly caused by conditions created
over a number of years, the policy’s “sudden” requirement is
satisfied as long as the actual break is “sudden and accidental.”
See Pioneer, 879 S.W.2d at 937 (rejecting the argument that an
incident was not “sudden and accidental” based on the extended
period of time during which corrosion damage to three liquefier
tubes developed). This evidence supports the jury’s finding that
at least one of the alleged spills could have potentially occurred
suddenly. Liberal application of the eight corners rule in favor
of Plaintiffs, in concert with the deference given to the jury
verdict, support a finding that Condition b was satisfied.
2. Condition d: Incidents Prior to the Policy Period
Condition d provides that the injury or damage from a
pollution incident must “not [be] caused or contributed to in any
degree by any pollution incident that commenced prior to the
beginning of the policy period.” In their pleadings, the Senns
15
lumped Plaintiffs together and alleged a wide variety of negligent
acts of the two, but did not distinguish which of the two
plaintiffs had done what. The Senns further alleged that “such
acts of negligence have produced an indivisible injury to [the
Senns’] property.”
NAICO argues that the allegation of an “indivisible injury” is
“fatal” to Plaintiffs’ claims. First, with respect to CADA,
assuming the injury to be indivisible, NAICO argues that the damage
caused by CADA was thus “indivisible” from that caused by Primrose.
NAICO argues, therefore, that because the damages caused by
Primrose obviously took place prior to NAICO’s coverage of CADA,
this necessarily means that the alleged damage was “caused or
contributed to . . . by [a] pollution incident that commenced prior
to the beginning of the policy period.” The coverage for Primrose,
according the NAICO, fails for the same reason. The Senns do not
distinguish between damages caused by Primrose before NAICO’s
coverage began for Primrose and after the coverage began. Because
the acts of negligence caused indivisible damage, NAICO contends,
the damages occurring after NAICO’s coverage of Primrose are also
necessarily “caused or contributed to” by pollution incidents prior
to the beginning policy.
We find NAICO’s argument unpersuasive. NAICO fails to
distinguish among the alleged negligent acts, the resulting
16
“pollution incidents,”8 and the injury arising from the pollution
incidents. The allegations state that the “acts of negligence have
produced an indivisible injury,” not that the negligent acts or the
pollution incidents themselves are indivisible. (Emphasis added).
The allegation of an indivisible injury does not compel the
conclusion that a pollution incident caused by either Primrose or
CADA during NAICO’s coverage was necessarily caused, or contributed
to, by a pollution incident attributed to a negligent act of
Primrose prior to NAICO’s coverage. From the allegations alone, it
is fully possible that a pollution incident caused entirely by
Primrose during NAICO’s coverage resulted in an injury that is now
completely indivisible from an injury resulting entirely from a
pollution incident caused by CADA.9
Because the Senns do not specifically allege when the
pollution incidents occurred, it is impossible to determine from
the pleadings alone whether any pollution incident occurred during
NAICO’s coverage of Primrose.10 This court, therefore, may look to
8
A pollution incident is defined as “[a]n occurrence consisting
of any actual emission, discharge, release or escape of pollutants
. . . . The entirety of any such actual emission, discharge or
escape shall be deemed to be one pollution incident.”
9
For instance, the Senns allege that Plaintiffs’ negligence
caused groundwater contamination. As Plaintiffs have occupied the
same land, but at different times, groundwater damage is likely an
indivisible injury—it may be difficult to identify what portion of
the injury came from which Plaintiff. Yet, the pollution incidents
causing the damage would be wholly independent of each other.
10
As CADA was insured solely by NAICO, any claim against CADA
necessarily falls within the period of NAICO’s coverage.
17
extrinsic evidence to answer this question. Western Heritage, 998
F.2d at 313. As the parties have stipulated that some spills
occurred after April 1, 1999, i.e., when NAICO’s coverage of
Primrose began, and because NAICO does not contend there were no
pollution incidents that occurred during its coverage of Primrose,
the allegations represent claims that are potentially covered by
NAICO’s policy. Enserch Corp., 952 F.2d at 1485 (concluding that
“[i]f any allegation in the complaint is even potentially covered
by the policy then the insurer has a duty to defend its insured”)
(emphasis added). Because Plaintiffs have established coverage
during all relevant time periods, they have accordingly satisfied
the requirements for Condition d.
3. Condition f: Failure to Comply with Laws, etc.
Condition f states that the pollution incident must “not
result from or [must not be] contributed by [the insured’s] failure
to comply with any government statute, rule, regulation, or order.”
NAICO claims that because the Senns state in the introduction to
their allegations that the laws of Texas mandate that any spill be
cleaned up, and that because the failure to clean up the spills
resulted in the continued migration of the pollutants, the alleged
pollution incidents are necessarily “contributed to by
[Plaintiffs’] failure to comply with” Texas laws.
NAICO’s argument is meritless. The Senns’ negligence
allegations are completely independent of any allegation of
18
statutory or regulatory noncompliance—the Senns alleged that
Plaintiffs committed several acts of negligence, none of which
involved a duty based on any statute or regulation.11 Further,
because “[c]ompliance with industry and statutory standards is
evidence of the use of reasonable care, but it is not dispositive
of that issue,” the Senns may prevail on their negligence claims
even if Plaintiffs are found not to have violated any law at all.
See Morris v. JTM Materials, Inc., 78 S.W.3d 28, 50 (Tex. App.—Fort
Worth 2002, pet. filed).
C. Saline Endorsement
NAICO argues that the Saline Endorsement, as part of the
entire CGL policy, is subject to both the Pollution Exclusion and
the Pollution Endorsement. Plaintiffs contend that because they
purchased the Saline Endorsement, NAICO’s duty to defend is
triggered when the Senns specifically alleged that Plaintiffs
polluted their ranch through the releases of saltwater. Because we
have determined, as discussed supra, that all six conditions of the
Pollution Endorsement have been satisfied, the Pollution
Endorsement cannot have a limiting effect on the Saline
Endorsement’s creation of coverage for the Senns’ allegations
relating to saltwater contamination. Nevertheless, we further
11
The Senns’ reference to the laws and statutes of Texas is found
in the “Background Information” of their pleading, not in the
section alleging and discussing negligence. Further, the referred-
to, unspecified laws and statutes apparently dealt with the
requirement of cleaning up after a spill, and not with the
avoidance of the spill in the first place.
19
conclude that the Saline Endorsement is not conditioned either on
the Pollution Exclusion or the Pollution Endorsement.
Under Texas law, an insurance policy “must be considered as a
whole, and each part given effect and meaning.” Valmont Energy
Steel, Inc. v. Commercial Union Ins. Co., 359 F.3d 770, 773 (5th
Cir. 2004). Further, under Texas law “[a]n endorsement cannot be
read apart from the main policy, and the added provisions will
supersede the previous policy terms to the extent they are truly in
conflict.” U.E. Texas One-Barrington, Ltd. v. Gen. Star Indem.
Co., 243 F. Supp. 2d 652, 661 (W.D. Tex. 2001).
The CGL base policy excludes coverage for injuries and damages
caused by the release of pollutants. “Pollutants” are defined as
“any solid, liquid, gaseous or thermal irritant or contaminant,
including smoke, vapor, soot, fumes, acids, alkalis, chemicals and
waste. Waste includes materials to be recycled, reconditioned or
reclaimed.” “Saline substances,” however, are not included in the
Pollution Exclusion’s definition of “pollutants.” The Pollution
Endorsement defines pollutants in exactly the same terms as the
Pollution Exclusion, except that the Pollution Endorsement
explicitly adds “saline substances” as being a covered pollutant.
Interpreting the insurance policy as a whole, including the
two endorsements, the intent of the parties was: (1) to have the
CGL base policy bar coverage for a claim involving any “pollutant,”
as that term was defined in the Pollution Exclusion clause; (2) to
20
have the Pollution Endorsement offer coverage for pollution
incidents, including those involving saline substances, subject to
the six listed conditions; and (3) to have the Saline Endorsement
increase the amount of Plaintiffs’ coverage for damages caused by
saline substances, while also expressly defining property damage
covered under this endorsement as including property damage “caused
directly or indirectly by a saline substance.”
NAICO asserts that the Saline Endorsement was limited by the
six conditions found in the Pollution Endorsement, and therefore
argues that Plaintiffs must satisfy those conditions before
enjoying the benefits of the Saline Endorsement. We first note the
language of the Saline Endorsement, which provides that “[t]his
endorsement modifies insurance provided under the following:
COMMERCIAL GENERAL LIABILITY COVERAGE FORM.” There is no mention
anywhere in the policy that the Saline Endorsement is modified or
conditioned on the Pollution Endorsement. Also, it follows that
because Plaintiffs paid two separate premiums for two separate
coverages, one endorsement cannot be read to be dependent on the
other. Either endorsement could have been purchased separately, as
there was no requirement that an insured was compelled to purchase
both together. Moreover, if there were any confusion as to the
applicability of these endorsements to Plaintiffs’ request for a
defense in the underlying Senns litigation, it is important to note
that NAICO wrote Plaintiffs’ policies. If it had wanted to, NAICO
could have drafted the endorsements in a manner so as to make the
21
Saline Endorsement subject to the conditions found in the Pollution
Endorsement. By not doing so, NAICO cannot now read such a
condition precedent into the policies.
NAICO also suggests that the Saline Endorsement operated only
to increase the amount of coverage to $2 million, not provide for
additional covered events, i.e., property damage resulting from
saltwater contamination. If we were to accept NAICO’s argument
here, the $2 million coverage limit would render the entire Saline
Endorsement meaningless because essentially everything covered by
the endorsement would necessarily be excluded by the Pollution
Exclusion clause. We see no reason why Plaintiffs would elect to
purchase an endorsement that increased the amount payable to them
on a coverage claim, but failed to provide a basis upon which they
could make such a claim.
II. Damages Sustained by Primrose for Hiring Extra Counsel
Having determined that NAICO had a duty to defend Plaintiffs,
we next address the propriety of the damages awarded Primrose for
its hiring of the Cotton Bledsoe firm. The jury awarded Primrose
$183,741 in damages -- the amount of the attorney’s fees charged by
the Cotton Bledsoe firm. NAICO contends that Primrose did not
sustain any damages because Primrose received a paid-for defense
from its other insurers through the Shafer firm. NAICO argues that
it was unnecessary for Primrose to hire the Cotton Bledsoe firm to
ensure an adequate defense against the Senns’ claims.
22
“On the issue of whether damages should be awarded at all,
this Court treads lightly upon jury verdicts, as the standard of
review is very deferential.” Vogler v. Blackmore, 352 F.3d 150,
154 (5th Cir. 2003). Absent an error of law, this court will
sustain the amount of damages awarded by the fact finder, unless
the amount is “clearly erroneous or so gross or inadequate as to be
contrary to right reason.” Id. Thus, reversal is proper only if no
reasonable jury could have arrived at the verdict. Id.
The potential error of law focuses on whether the award of
damages for Primrose’s retention of the Cotton Bledsoe firm
exceeded the scope of NAICO’s duty to defend. When an insurer has
a duty to defend, even where “a claim falls partially within and
partially outside of a coverage period, the insurer’s duty is to
provide its insured with a complete defense.” Tex. Prop. and Cas.
Ins. Guar. Ass’n/Southwest Aggregates v. Southwest Aggregates,
Inc., 982 S.W.2d 600, 606 (Tex. App.—Austin 1998, no pet.)
(emphasis added). 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. Willcox v.
Am. Home Assurance Co., 900 F. Supp. 850, 856 (S.D. Tex. 1995)
(emphasis added); see also Tex. United Ins. Co. v. Burt Ford
Enters., Inc., 703 S.W.2d 828, 835 (Tex. App.—Tyler 1986, no writ).
To find an error of law with respect to the scope of the duty to
defend, this court is faced with determining whether the duty to
provide a “complete defense” is necessarily satisfied when other
23
insurers provide one law firm to defend the insured or whether the
cost of hiring an additional firm is unreasonable as a matter of
law. NAICO does not provide this court with any authority to
suggest that either is the case.12 Whether any one firm in a
12
NAICO cites two cases which fail to support its contention
that, as a matter of law, an insured is not entitled to recover
costs for additional counsel. NAICO first cites Champion v. Farm
Bureau Insurance Co., 352 So. 2d 737 (La. Ct. App. 1977), disavowed
on other grounds by Dugas Pest Control of Baton Rouge, Inc. v.
Mutual Fire, Marine & Inland Insurance Co., 504 So. 2d 1051, 1054
(La. Ct. App. 1987), for the proposition that an insured is “not
entitled to recover the costs which he may incur by engaging
separate counsel.” Champion, 352 So. 2d at 742. NAICO, however,
reads too much into the language of Champion, which found that:
All that is required of the insurer to satisfy its
obligation to defend is to provide the insured with an
adequate defense on the merits. The insured may retain his
own counsel if he so chooses. The mere fact that he engages
separate counsel to represent him, however, does not of itself
prove that the insurer failed to fulfill its contractual duty.
If the insurer provides the insured with an adequate defense,
then the latter is not entitled to recover the costs which he
may incur by engaging separate counsel.
Id. (emphases added). Champion does not state that the insured may
not recover the cost of additional counsel if the defense provided
by the insurer is somehow not adequate. That is the very question
that must be decided here.
NAICO also cites Ringler Associates, Inc. v. Maryland Casualty
Co., 96 Cal. Rptr. 2d 136 (Cal. Ct. App. 2000), for the proposition
that Primrose cannot claim as damages the costs of hiring the
Cotton Bledsoe firm because Primrose “was fully protected from
having to pay any costs of its own defense by other insurers.” Id.
at 154. Ringler, however, is distinguishable. As the court there
had already decided that the insurer at issue had no duty to
defend, the statement that the insured was “fully protected from
having to pay any costs of its own defense” was merely dicta. Id.
at 153–54. Further, there is no indication at all in Ringler that
the insured had incurred any costs associated with its defense.
The other insurers had provided and paid for the insured’s defense,
id. at 143, 147, 154, and there is nothing indicating that the
insured hired additional counsel or even alleged that the defense
provided by the other insurers was in any way inadequate. Ringler,
therefore, does not address the situation squarely before this
court, i.e., whether an insured may be compensated for hiring
24
particular case would constitute a complete defense is a fact-
intensive question, not a matter of law. See Satterwhite v. Safeco
Land Title, 853 S.W.2d 202, 206 (Tex. App.—Fort Worth 1993, writ
denied) (“[R]easonable attorneys’ fees is a question of fact for
the jury . . . .”).
NAICO contends that Primrose is not entitled to recover any
damages as a result of NAICO’s refusal to provide a defense in the
underlying Senns’ suit because Primrose actually received from its
other insurance carriers the very defense Primrose expected to
receive from NAICO. NAICO also suggests that Primrose never
criticized or called into question the competency of Ms. Kathleen
McCulloch, the Shafer firm’s lead counsel, in defending it in the
underlying case.
Primrose responds that its concern was not with Ms.
McCulloch’s quality of representation, but rather with the
uninsured exposure with which Primrose was faced. According to
testimony elicited at trial, Primrose’s president indicated that he
chose to retain additional counsel, the Cotton Bledsoe firm,
because of several factors, including, inter alia,: (1) the major
oil companies that were defendants in the underlying suit had been
dismissed, leaving Primrose as the “target defendant”; (2) Primrose
was facing demands in excess of its limits with Chubb and Mid-
Continent; (3) Primrose was essentially left uninsured for any
counsel in addition to that provided for by other insurers.
25
pollution incident that occurred subsequent to April 1, 1999 (the
time period during which NAICO insured Primrose); (4) the Senns
were alleging damages that occurred subsequent to April 1, 1999;
and (5) Primrose was being defended by Chubb and Mid-Continent
under a reservation of rights and Primrose realized that either
carrier could withdraw its defense at any time. Primrose’s
president also testified that if NAICO had agreed to provide a
defense, he would have had “the assurance that [NAICO] would stand
behind its policy of insurance,” indicating that it was NAICO’s
ultimate refusal to share in the exposure to liability, not the
sharing of expenses, that triggered Primrose’s decision to retain
the Cotton Bledsoe firm.13
In sum, the evidence presented by Primrose establishes that
while the Shafer firm may have provided an adequate defense, a
reasonable jury could nevertheless have found that the Cotton
Bledsoe firm was necessary to ensure that Primrose received a
“complete defense” against the Senns – a finding that is neither
clearly erroneous nor so gross as to be contrary to right reason.
III. Chris Boyer’s Testimony as An Expert
At trial, Chris Boyer testified as to the reasonableness of
the attorney’s fees charged Plaintiffs by the two law firms
13
There was also testimony from Chris Boyer, an expert called by
Primrose, establishing the reasonableness of the fees charged by
the Cotton Bledsoe firm. NAICO takes issue with several aspects of
Boyer’s testimony at trial, which we address in Part III infra.
26
retained independently of any insurer—the Cotton Bledsoe firm (for
Primrose) and the Ackels firm (for CADA). Boyer was the only
witness to testify as to the reasonableness of these fees. NAICO
argues that the district court erred in two respects: (1) Boyer
should not have been allowed to testify as an expert because he
lacked the necessary factual foundation for his opinions; and (2)
the district court should have excluded Boyer’s testimony because
Plaintiffs did not provide a required written report about Boyer,
they did not properly respond to NAICO’s discovery requests
regarding Boyer’s testimony, and because Boyer relied on previously
undisclosed information and documents in forming his opinion as to
the reasonableness of the attorneys’ fees.
This court reviews the admissibility of expert testimony for
abuse of discretion. Vogler, 352 F.3d at 153. The discretion of
the district judge and their ultimate decision will not be
disturbed on appeal unless manifestly erroneous. United States v.
Tucker, 345 F.3d 320, 326 (5th Cir. 2003). “If it is found that
the district court abused its discretion in denying the admission
of expert evidence, [this court] must then consider whether the
error was harmless, affirming the judgment unless the ruling
affected a substantial right of the complaining party.” Id.
With respect to the admissibility of expert testimony, the
district court is “to ensure that an expert testimony rests upon a
reliable foundation.” Guillory v. Domtar Indus. Inc., 95 F.3d
27
1320, 1331–32 (5th Cir. 1996). NAICO argues that Boyer’s testimony
lacked the proper foundation to qualify as expert testimony. NAICO
contends that Boyer could not give his opinion about the
reasonableness of the fees charged by the Cotton Bledsoe firm
because he did not know to what extent those fees were duplicative
of the work performed by the Shafer firm. With regard to CADA and
its additional counsel, NAICO contends that the general
descriptions of the work performed by the Ackels firm were
insufficient for Boyer to express any expert opinion as to the
reasonableness of the work completed or the charged fees.
Federal Rule of Evidence 703 provides for the admissibility of
an expert’s opinion if the sources underlying that opinion are “of
a type reasonably relied upon by experts in the particular field in
forming opinions or inferences upon the subject.” FED. R. EVID.
703. Boyer was provided with complete copies of the bills from
both the Cotton Bledsoe firm and the Ackels firm, which contained
the hourly rates charged and the total number of hours worked by
each firm. Because trial courts are considered experts as to the
reasonableness of attorney’s fees, the district court was properly
qualified to conclude that the information upon which Boyer relied
was of a “type reasonably relied on” by such expert witnesses. In
re TMT Trailer Ferry, Inc., 577 F.2d 1296, 1304 (5th Cir. 1978)
(“[A]ppellate courts, as trial courts, are themselves experts as to
the reasonableness of attorneys’ fees . . . .” (citation omitted)).
Further, the problems NAICO cites with Boyer’s testimony go to
28
the weight of the evidence, not to its admissibility. While Boyer
admittedly did not review the bills of the Shafer firm in
determining the reasonableness of the fees charged by the Cotton
Bledsoe firm, the jury was also presented with the testimony of Ms.
McCulloch, who described how she and Strange worked on separate
facets of the case in an effort to avoid double billing, while also
providing Primrose “the best defense that [McCulloch and Strange]
possibly could.” In addition, although the descriptions in the
Ackels firm’s bills were general in nature, this contention merely
weakens, to some extent, Boyer’s testimony. Nevertheless, “[a]s a
general rule, questions relating to the bases and sources of an
expert’s opinion affect the weight to be assigned that opinion
rather than its admissibility and should be left for the jury’s
consideration.” United States v. 14.38 Acres of Land, More or Less
Situated in Leflore County, 80 F.3d 1074, 1077 (5th Cir. 1996)
(emphasis added) (internal quotations and citations omitted). It
is the role of the adversarial system, not the court, to highlight
weak evidence:
As the Court in [Daubert v. Merrell Dow Pharmaceuticals,
Inc., 509 U.S. 579 (1993)] makes clear, . . . the trial
court’s role as gatekeeper is not intended to serve as a
replacement for the adversary system: “Vigorous
cross-examination, presentation of contrary evidence, and
careful instruction on the burden of proof are the
traditional and appropriate means of attacking shaky but
admissible evidence.”
14.38 Acres of Land, 80 F.3d at 1078 (quoting Daubert, 113 S.Ct. at
2798). The weaknesses NAICO points out in Boyer’s testimony are
29
weaknesses that NAICO could, and did, attack and highlight to the
jury at trial.
Moreover, the fair and reasonable compensation for the
professional services of a lawyer can certainly be ascertained by
the opinion of members of the bar who have become familiar through
experience and practice with the character of such services.
Boyer, who has been a practicing attorney since 1977, is certified
by the Texas Board of Legal Specialization in the oil and gas
industry and was a participating attorney in the underlying Senns
suit.14 It is clear that Boyer was qualified to give his opinion
regarding the value of the services rendered, both from his own
general knowledge in the practice area, as well as from his
personal experience relating to the nature and extent of the
services rendered in this particular litigation.
NAICO also claims that Boyer’s testimony should have been
excluded because Plaintiffs did not comply with the disclosure
rules in FED. R. CIV. P. 26(a), which govern the disclosure of
information relating to an expert witness. Under Rule 26, a party
must disclose expert witnesses who may testify at trial. FED. R.
CIV. P. 26(a)(2)(A). The disclosure must “be accompanied by a
14
In the Senns litigation, Boyer represented one of the major oil
company defendants that was later dismissed from the case after it
was established that the termination of the oil company’s interest
in the mineral estate preceded the Senns’ subsequent purchase of
the surface rights to the property at issue.
30
written report prepared and signed by the witness.”15 Id.
26(a)(2)(B). Rule 37 provides that a party who fails to disclose
information required by Rule 26(a) is not permitted to use the
information as evidence at a trial, “unless such failure is
harmless.” Id. 37(c)(1).
The admission or exclusion of expert testimony is a matter
left to the discretion of the trial court, and that decision will
not be disturbed on appeal unless it is manifestly erroneous.
First Nat’l Bank v. Trans Terra Corp. Int’l, 142 F.3d 802, 811 (5th
Cir. 1998) (internal quotations and citations omitted). Further,
the admission of expert testimony in violation of Rule 26(a) is
subject to harmless error analysis, id. & n.30 (citing FED. R. CIV.
P. 37(c)(1)), and a decision not to exclude under Rule 37(c)(1) is
also reviewed for abuse of discretion. Tex. A&M Research Found. v.
Magna Transp., Inc., 338 F.3d 394, 401–02 (5th Cir. 2003).
Plaintiffs concede that they failed to provide a written
report to NAICO regarding Boyer’s expert testimony. They do point
out, however, that they did notify NAICO in a letter dated November
27, 2002, and again in the Pre-Trial Disclosure, that Boyer would
be an expert witness on the reasonableness of the attorney’s fees
in question. The content of the letter disclosure included the
following:
15
As Plaintiffs appear to concede that they did not provide a
written report, it is unnecessary to analyze the required contents
of the written report
31
In addition to our other experts, we may call Chris Boyer
. . . as an expert on attorney’s fees. We anticipate he
will testify that the fees and expenses incurred by
Primrose and [CADA] were reasonable and necessary. He is
being provided copies of the applicable invoices.
Enclosed please find a copy of his resume.
Plaintiffs also provided NAICO with a copy of the bills from the
Cotton Bledsoe firm and the Ackels firm. Boyer testified at trial
that Primrose and CADA incurred damages in the amount of $183,741
and $225,761, respectively, which were the exact amounts reflected
in the invoices generated by the Cotton Bledsoe firm and the Ackels
firm, respectively.
As Plaintiffs failed to provide required information regarding
Boyer’s expert testimony, the sole issue before us is whether such
failure was harmless to NAICO. In performing a Rule 37(c)(1)
harmless error analysis to determine whether the district court
properly exercised its discretion in allowing Boyer’s testimony,
this court looks to four factors: “(1) the importance of the
evidence; (2) the prejudice to the opposing party of including the
evidence; (3) the possibility of curing such prejudice by granting
a continuance; and (4) the explanation for the party’s failure to
disclose.” Tex. A&M Research, 338 F.3d at 402.
The focus of our inquiry is whether NAICO was prejudiced by
Plaintiffs’ failure to comply with discovery rules requiring the
disclosure of information about Boyer and the testimony he was to
provide at trial. Plaintiffs notified NAICO almost six months
before trial that they intended to call Boyer as an expert witness.
32
Plaintiffs also revealed to NAICO the nature of the testimony Boyer
was going to provide. NAICO also received copies of all the
billing invoices upon which Boyer was to rely for his testimony.
Moreover, Boyer’s ultimate calculations merely involved dividing
the total fees charged by the additional firms by the total hours
worked. NAICO, which had previously received the bills, certainly
could have performed the same calculations. NAICO knew, or should
have known, that Boyer was going to testify as to the
reasonableness of the attorney’s fees incurred by Primrose and that
Boyer was basing his opinion primarily on a review of the bills of
the Cotton Bledsoe and Ackels firms. NAICO, therefore, was not
prejudiced by Boyer’s testimony, and thus Plaintiffs’ failure to
disclose information about Boyer amounts to harmless error.
As such, the district court did not abuse its discretion by
allowing Boyer to offer expert testimony as to the reasonableness
of the attorney’s fees, and thus the corresponding amount of
damages awarded by the jury was proper.
IV. Calculation of Prejudgment Interest
NAICO argues that the district court erred in assessing
prejudgment interest. NAICO contends that the district court
improperly calculated the interest by basing the date of the
alleged breach of contract—when NAICO refused to defend
Plaintiffs—as the accrual date even though Plaintiffs, at that
time, had not incurred any damages in the form of attorney’s fees.
33
NAICO asserts that the prejudgment interest for damages incurred by
Plaintiffs should be calculated from the time Plaintiffs actually
paid each bill for attorney’s fees.
This court generally reviews a decision on a motion to alter
or amend judgment for abuse of discretion. Pioneer Natural Res.
USA, Inc. v. Paper, Allied Indus., Chem. & Energy Workers Int’l
Union Local 4-487, 328 F.3d 818, 820 (5th Cir. 2003). To the
extent that a ruling was a reconsideration of a question of law,
however, the standard of review is de novo. Id. Because the
method of calculating prejudgment interest is a question of law,
the review is de novo.
Prejudgment interest begins to accrue on the earlier of 180
days after the date the defendant receives written notice of a
claim or the day suit is filed. Johnson & Higgins of Tex., Inc. v.
Kenneco Energy, Inc., 962 S.W.2d 507, 531 (Tex. 1998). However,
how this rule applies to cases where damages accrue at times
subsequent to either date is an issue that the Texas Supreme Court
has not yet addressed.16 This court must predict how the Texas
Supreme Court would decide this issue. In making an “Erie guess”
16
Plaintiffs assert that neither Texas’s interest statutes nor
its case law require anything but a lump sum calculation, but
concede that the Texas Supreme Court has not addressed this
question directly. NAICO contends that the district court’s
application of prejudgment interest misapplied Johnson & Higgins,
but does not direct this court to where the Texas Supreme Court
addressed this particular issue. While this court has previously
decided this issue favoring NAICO’s position, we applied
Mississippi law. Liberty Mut. Fire Ins. Co. v. Canal Ins. Co., 177
F.3d 326, 339 (5th Cir. 1999).
34
in a diversity case, this court will “seek guidance by looking to
the precedents established by intermediate state appellate courts
only when the state supreme court has not spoken on an issue.”
Webb v. City of Dallas, 314 F.3d 787, 795 (5th Cir. 2002) (internal
quotations and citations omitted). However, if “convinced by other
persuasive data that the highest court of the state would decide
otherwise,” this court will not defer to the decisions of the
intermediate state appellate courts. Herrmann Holdings Ltd. v.
Lucent Techs. Inc., 302 F.3d 552, 558 (5th Cir. 2002) (internal
quotations and citations omitted).
In two unpublished cases, the Dallas appellate court in 2001
twice held that while prejudgment interest was to be calculated on
the total amount of damages at the time of judgment, the accrual
date should be based on one point in time, regardless of whether
the total amount of damages had occurred at that time. Am.
Technical Res., Inc. v. Network Staffing Servs., Inc., No. 05-00-
01124-CV, 2001 WL 969210, at *6 (Tex. App.—Dallas Aug. 28, 2001, no
pet.) (not designated for publication) (holding that prejudgment
interest should not be calculated based on a month-by-month basis);
Basic Capital Mgmt., Inc. v. Phan, No. 05-00-00147-CV, 2001 WL
893986, at *8 (Tex. App.—Dallas Aug. 9, 2001, no pet.) (not
designated for publication) (holding that prejudgment interest
should not be calculated based on a paycheck-by-paycheck basis).
These cases, however, do not factor into this court’s Erie guess.
35
As a preliminary matter, unpublished cases are not precedent in
Texas, TEX. R. APP. P. 47.7, and secondly, neither case provides a
persuasive argument suggesting how the Texas Supreme Court would
decide the issue.
Language in Johnson & Higgins, however, does offer insight
into how the Texas Supreme Court would likely decide the issue. In
that case, the Texas Supreme Court explained the rationale and the
desired incentives behind the charging of prejudgment interest.
The court determined that “[p]rejudgment interest is compensation
allowed by law as additional damages for lost use of the money due
as damages during the lapse of time between the accrual of the
claim and the date of judgment.” Johnson & Higgins, 962 S.W.2d at
528 (internal quotations and citations omitted). Further,
“prejudgment interest [is] necessary to fully compensate injured
plaintiffs.” Id. at 529 (emphasis added). In fashioning
prejudgment interest rules, the Texas Supreme Court has been
“primarily concerned with advancing two ends: (1) encouraging
settlements and (2) expediting both settlements and trials by
removing incentives for defendants to delay without creating such
incentives for plaintiffs.” Id. Texas’s prejudgment rules should
“serve the goal of compensating plaintiffs, without
overcompensating them or simultaneously punishing defendants” and
should “accurately reflect the damages incurred by the plaintiff
for the lost use of money.” Id. at 532–33.
The goals of prejudgment interest laws, as expressed in
36
Johnson & Higgins, are better served by a rule that such interest
be calculated from the time a plaintiff actually loses the use of
the money rather than when the actual breach occurred. In this
case, therefore, the prejudgment interest should be assessed
against NAICO based on the dates Plaintiffs paid each bill for
attorney’s fees rather than the date NAICO refused to defend
Plaintiffs. How such a rule is consistent with and serves the
goals expressed in Johnson & Higgins is explained by the Supreme
Judicial Court of Massachusetts in a case involving the same issue
in the same context:
While the defendant was in breach of its duty to defend
Sterilite on January 5, 1976, there was no duty at that
time to reimburse Sterilite for legal expenses incurred
at later dates. This duty arose when Sterilite, on
notice that the defendant would refuse to pay for those
expenses, was forced to pay those expenses itself. The
dates of the payment of the various bills, which are
readily ascertainable, determine the points at which
Sterilite was obliged to commit sums which it rightfully
should not have been obliged to commit. Before those
bills were paid, Sterilite was not deprived of the use of
its money. No interest is due on sums when Sterilite was
not deprived of the use of those sums. Any other rule
would result in a windfall for Sterilite, which the
Legislature did not intend. Therefore, prejudgment
interest . . . should be calculated in this case on the
basis of the various dates on which the legal bills were
paid by Sterilite.
Sterilite Corp. v. Continental Cas. Co., 494 N.E.2d 1008, 1011
(Mass. 1986).
In this case, Plaintiffs did not lose the use of their money
until they paid their attorney’s fees. Granting Plaintiffs
prejudgment interest accruing at a date any earlier than when they
37
actually paid such fees would overcompensate them, punish NAICO,
and not accurately reflect Plaintiffs’ damages. This court,
therefore, concludes that Texas’s prejudgment interest goals would
be better served by adopting the rule proposed by NAICO and
followed by Massachusetts in Sterilite. As such, the district
court abused its discretion in denying NAICO’s motion, and we
remand the cause so that the district court may properly calculate
and assess prejudgment interest in accordance with the rule
announced herein.
CONCLUSION
Having carefully reviewed the record of this case, the
parties’ respective briefing and arguments, and for the reasons set
forth above, we AFFIRM the post-trial rulings of the district
court. However, we further conclude that the district court erred
in denying NAICO’s motion to amend or alter the judgment on the
issue of calculating prejudgment interest. We therefore, REVERSE
that portion of the district court’s order and accordingly REMAND
this case for further proceedings not inconsistent with this
opinion.
AFFIRMED in part, REVERSED in part, and REMANDED.
38