IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
January 4, 2010
No. 08-20532
Charles R. Fulbruge III
Clerk
TRINITY UNIVERSAL INSURANCE COMPANY; UTICA NATIONAL
INSURANCE; NATIONAL AMERICAN INSURANCE COMPANY,
SUBROGEES OF LACY MASONRY INC.,
PlaintiffsSAppellantsSCross-Appellees
v.
EMPLOYERS MUTUAL CASUALTY COMPANY,
DefendantSAppelleeSCross-Appellant
Appeal from the United States District Court
for the Southern District of Texas
Before JOLLY, DeMOSS, and PRADO, Circuit Judges.
PRADO, Circuit Judge:
This appeal presents an issue of first impression. In Mid-Continent
Insurance Co. v. Liberty Mutual Insurance Co., 236 S.W.3d 765 (Tex. 2007), the
Texas Supreme Court held that if relevant insurance policies to a dispute
contain pro rata or “other insurance” clauses, and a co-primary insurer pays
more than its pro rata portion of a settlement to indemnify an insured and
another co-primary insurer underpays, then the overpaying insurer cannot seek
reimbursement from the underpaying insurer under theories of contribution or
subrogation. In this appeal, we must decide whether the holding in Mid-
No. 08-20532
Continent extends to an insurer’s duty to defend its insured. If Mid-Continent
does not apply, then we must decide whether insurance companies that pay
defense costs may recoup a portion of those costs from a co-insurer that fails to
defend a common insured.
For the following reasons, we affirm the district court’s finding that
Defendant–Appellee–Cross-Appellant Employers Mutual Casualty Co. (“EMC”)
has a duty to defend its insured in the underlying suit. However, because the
district court erred in applying the rule of Mid-Continent to prohibit
Plaintiffs–Appellants–Cross-Appellees Trinity Universal Insurance Co., Utica
National Insurance, and National American Insurance Co. (collectively
“Appellants”) from recovering defense costs, we remand for a determination of
those costs. We do not reach the parties’ ancillary subrogation issue.
I. FACTUAL AND PROCEDURAL BACKGROUND
A. Factual Background
Appellants and EMC each issued commercial general liability (“CGL”)
insurance policies to Lacy Masonry, Inc., covering Lacy Masonry while it was
engaged as the mason in the design, construction, and renovation of McKenna
Memorial Hospital (“McKenna”) in New Braunfels, Texas. Each policy obligated
the issuing insurer to indemnify Lacy Masonry for “sums that [Lacy Masonry]
becomes legally obligated to pay as damages because of ‘bodily injury’ or
‘property damage’” to which the policy applied. Each policy further obligated the
issuing insurer “to defend [Lacy Masonry] against any ‘suit’ seeking those
damages.” The four policies contained materially identical pro rata or “other
insurance” clauses under which “each insurer contributes equal amounts until
it has paid its applicable limit of insurance or none of the loss remains,
whichever comes first.” EMC’s policy contained a “Designated Work
endorsement/exclusion” (the “Designated Work exclusion”) limiting its coverage
by excluding any injuries arising out of Lacy Masonry’s construction,
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No. 08-20532
installation, application, or other service of an “exterior insulation and finish
system” (“EIFS”), or any work Lacy Masonry performed on any exterior
component of a building if an EIFS was used on any part of that structure.
McKenna sued Lacy Masonry and several other companies, alleging each
was responsible for property damage caused during the design, construction, and
improvement of the hospital building. Lacy Masonry tendered the defense of the
suit to its insurers. Appellants, along with a fourth insurer that is not involved
in this case, agreed to defend Lacy Masonry and shared the defense costs. EMC,
however, denied that it had a duty to defend the suit under its policy and refused
to participate in or contribute to the defense. The participating insurers settled
with McKenna while this appeal progressed.
B. Procedural Background
Appellants sued EMC in the district court, alleging claims for breach of
contract, contribution, and attorney’s fees, and seeking a declaration that EMC
owes a duty to defend Lacy Masonry in the McKenna suit. The parties cross-
moved for summary judgment. The district court granted Appellants’ motion for
a declaratory judgment in part, finding that EMC had a duty to defend Lacy
Masonry in the underlying suit. The district court denied Appellants’ request
for a discretionary award of attorney’s fees, citing the Texas Declaratory
Judgment Act. See T EX. C IV. P RAC. & R EM. § 37.009. Despite finding that EMC
had violated its duty to defend, the district court dismissed Appellants’ claims
on the merits, finding that, under Mid-Continent, Appellants could not recover
defense costs from EMC under either contribution or subrogation theories. Both
parties timely appealed.
II. JURISDICTION AND STANDARD OF REVIEW
We have jurisdiction over this appeal from a final order of the district
court under 28 U.S.C. § 1291. We review de novo a district court’s award of
summary judgment, applying the same standard as the district court. Ford
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No. 08-20532
Motor Co. v. Tex. Dep’t of Transp., 264 F.3d 493, 498 (5th Cir. 2008). Summary
judgment is proper when “the pleadings, the discovery and disclosure materials
on file, and any affidavits show that there is no genuine issue as to any material
fact and that the movant is entitled to judgment as a matter of law.” F ED. R.
C IV. P. 56(c). “A genuine issue of material fact exists when the evidence is such
that a reasonable jury could return a verdict for the non-moving party.” Gates
v. Tex. Dep’t of Protective & Regulatory Servs., 537 F.3d 404, 417 (5th Cir. 2008)
(citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). “On
cross-motions for summary judgment, we review each party’s motion
independently, viewing the evidence and inferences in the light most favorable
to the nonmoving party.” Ford Motor Co., 264 F.3d at 498.
III. ANALYSIS
A. EMC’s Duty to Defend Lacy Masonry
EMC asserts that we need not reach the application of Mid-Continent
because the district court erred by finding that EMC had a duty to defend Lacy
Masonry in McKenna’s suit. EMC contends that the Designated Work exclusion
exempts it from defending Lacy Masonry. This argument lacks merit.
1. An Insurer’s Duty to Defend
Under a typical CGL policy an insurer assumes two distinct duties: the
duty to indemnify and the duty to defend. See Ohio Cas. Ins. Co. v. Time Warner
Entm’t Co., 244 S.W.3d 885, 890 (Tex. App.—Dallas 2008, writ denied). Whereas
the “duty to indemnify protects insureds ‘from payment of damages they may be
found legally obligated to pay,’” the duty to defend “‘protects the same parties
against the expense of any suit seeking damages’ covered by the policy.” Pine
Oak Builders, Inc. v. Great Am. Lloyds Ins. Co., 279 S.W.3d 650, 655 n.28 (Tex.
2009) (quoting Heyden Newport Chem. Corp. v. S. Gen. Ins. Co., 387 S.W.2d 22,
25 (Tex. 1965)).
The Texas Supreme Court recently summarized the duty to defend under
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No. 08-20532
Texas law. See Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487, 490S91 (Tex.
2008). “An insurer must defend its insured if a plaintiff’s factual allegations
potentially support a covered claim, while the facts actually established in the
underlying suit determine whether the insurer must indemnify its insured.” Id.
(citing GuideOne Elite Ins. Co. v. Fielder Rd. Baptist Church, 197 S.W.3d 305,
310 (Tex. 2006)). Therefore, “an insurer may have a duty to defend but,
eventually, no obligation to indemnify.” Id. (citing Farmers Tex. County Mut.
Ins. Co. v. Griffin, 955 S.W.2d 81, 82 (Tex. 1997)).
Texas follows the “eight-corners rule,” in which “‘an insurer’s duty to
defend is determined by the third-party plaintiff’s pleadings, considered in light
of the policy provisions, without regard to the truth or falsity of those
allegations.’” Id. at 491 (quoting GuideOne, 197 S.W.3d at 308). A court
“resolve[s] all doubts regarding the duty to defend in favor of the duty and . . .
construe[s] the pleadings liberally.” Id. (citations omitted). “‘Where the
complaint does not state facts sufficient to clearly bring the case within or
without the coverage, the general rule is that the insurer is obligated to defend
if there is, potentially, a case under the complaint within the coverage of the
policy.’” Id. (quoting Heyden Newport, 387 S.W.2d at 26 (citation omitted)).
The court must resolve all doubts regarding coverage in favor of the
insured, but it cannot “look outside the pleadings, or imagine factual scenarios
which might trigger coverage.” Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v.
Merchs. Fast Motor Lines, Inc., 939 S.W.2d 139, 141–42 (Tex. 1997). Although
the burden is typically “on the insured to show that a claim against him is
potentially within the scope of coverage under the policies,” when “the insurer
relies on the policy’s exclusions, it bears the burden of proving that one or more
of those exclusions apply.” Federated Mut. Ins. Co. v. Grapevine Excavation,
Inc., 197 F.3d 720, 723 (5th Cir. 1999). When assessing the insurer’s proffered
exclusion, “‘[t]he court must adopt the construction of an exclusionary clause
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No. 08-20532
urged by the insured as long as that construction is not unreasonable, even if the
construction urged by the insurer appears to be more reasonable or a more
accurate reflection of the parties’ intent.’” Utica Nat’l Ins. Co. of Tex. v. Am.
Indem. Co., 141 S.W.3d 198, 202 (Tex. 2004) (quoting Nat’l Union Fire Ins. Co.
of Pittsburgh, Pa. v. Hudson Energy Co., 811 S.W.2d 552, 555 (Tex. 1991)).
Thus, in determining whether EMC had a duty to defend Lacy Masonry,
we must compare the allegations in McKenna’s Fourth Amended Petition (the
“Petition”) to Lacy Masonry’s EMC insurance policy (the “EMC Policy”) and
determine whether the allegations in the Petition potentially fall within the
scope of the policy’s coverage. See Zurich Am. Ins. Co., 268 S.W.3d at 491;
Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 13 (Tex. 2007).
2. The EMC Policy
The EMC Policy is a standard CGL policy that provides insurance
coverage for “property damage” caused by an “occurrence.” As the Texas
Supreme Court recently recognized when construing a similar policy, “claims for
damage caused by an insured’s defective performance or faulty workmanship
may constitute an ‘occurrence’ when ‘property damage’ results from the
unexpected, unforeseen or undesigned happening or consequence of the insured’s
negligent behavior.” Lamar Homes, Inc., 242 S.W.3d at 16 (quotations omitted).
Two portions of the EMC Policy are particularly relevant: (1) the body of the
policy itself (and the definitions of terms therein) and (2) the Designated Work
exclusion.
The body of the EMC Policy defines covered “property damage” as
“[p]hysical injury to tangible property, including all resulting loss of use of that
property” or “[l]oss of use of tangible property that is not physically injured.”
However, the Designated Work exclusion exempts from coverage “‘property
damage’ included in the ‘products/completed operations hazard’ and arising out
of ‘your work’ shown” in a schedule included in the exclusion.
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No. 08-20532
The EMC Policy defines a “products/completed operations hazard” as “all
. . . ‘property damage’ occurring away from premises you own or rent and arising
out of ‘your product’ or ‘your work,’” subject to certain exceptions not relevant
here. The EMC Policy also defines “your work” as “(1) [w]ork or operations
performed by you or on your behalf; and (2) [m]aterials, parts or equipment
furnished in connection with such work or operations.”
The Designated Work exclusion adds a schedule that specifies when“your
work” is “Designated Work” excluded from coverage. The exclusion exempts
“[a]ny work or operations with respect to any exterior component, fixture or
feature of any structure i[f] an [EIFS] is used on any part of that structure.”1
The schedule further defines an EIFS as “an exterior cladding or finish system
used on any part of any structure” consisting of certain materials.
As the district court succinctly summarized, the Designated Work
exclusion in the EMC Policy:
excludes coverage for injuries to or loss of use of tangible property
on premises not owned or rented by the insured, Lacy Masonry, if
those injuries arise out of either its construction, installation,
application, or other service of an EIFS, and also excludes coverage
for any work or operations performed by Lacy Masonry on any
exterior components or features of a structure if EIFS is used on
that structure or any part of the structure.
Trinity Universal Ins. Co. v. Employers Mut. Cas. Co., 586 F. Supp. 2d 718, 723
(S.D. Tex. 2008).
3. Comparison of the EMC Policy to the Petition
Appellants and EMC dispute the construction of the Petition. EMC
contends that the Petition only alleges damages arising from Lacy Masonry’s
construction of an EIFS or its work on the exterior components of a building that
1
In the Designated Work exclusion, “if” is written as “in.” Reading this word as “in”
would limit the scope of the Designated Work exclusion. This reading is problematic, however,
as it renders the remainder of the sentence nonsensical. Most likely, this is a typographical
error. Regardless, EMC has a duty to defend Lacy Masonry even if this word is read as “in.”
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No. 08-20532
has an EIFS, either of which would bring its work within the scope of the
Designated Work exclusion. Appellants argue that the Petition potentially
alleges property damages stemming from Lacy Masonry’s work on non-exterior
components of the building, which the EMC Policy would cover.
The district court found that the allegations in the Petition potentially fall
within the scope of the EMC Policy’s coverage. We agree. The Petition alleged
that Lacy Masonry, as the “mason for the Project[,] . . . was responsible for the
proper installation of all masonry work,” and listed a wide array of alleged
defects on various portions of the building, including “water infiltration caused
by improperly installed masonry.” (emphasis added.) This water infiltration
could have been caused by defects in interior masonry or from a source inside the
building. Indeed, the Petition specifically identifies “water infiltration at the
interior and exterior building envelope,” which would likely include portions of
the building other than its exterior. (emphasis added.) As previously noted,
“[w]here the complaint does not state facts sufficient to clearly bring the case
within or without the coverage . . . the insurer is obligated to defend if there is,
potentially, a case under the complaint within the coverage of the policy.”
Heyden Newport, 387 S.W.2d at 26 (quotation marks omitted). In this case, the
potential clearly exists.
We must liberally construe the Petition and resolve all ambiguities in
favor of coverage. See Allstate Ins. Co. v. Hallman, 159 S.W.3d 640, 643 (Tex.
2005). Because the allegations do not clearly and unambiguously fall outside the
scope of the EMC Policy’s coverage, the district court properly found that EMC
has a duty to defend Lacy Masonry. We affirm the district court’s finding on this
issue.
B. The Rule of Mid-Continent as Applied to Defense Costs
Mid-Continent and Liberty Mutual were co-primary insurers of Kinsel
Industries. Mid-Continent, 236 S.W.3d at 768S69. Both Mid-Continent’s and
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No. 08-20532
Liberty Mutual’s insurance policies contained an “other insurance” clause, and
both insurers assumed responsibility for a pro rata share of Kinsel’s liability
stemming from a car accident. Id. at 769. Liberty Mutual entered into
settlement negotiations and agreed to settle for $1.5 million. Id. Mid-Continent
contributed only $150,000 to the settlement, leaving Liberty Mutual to pay the
balance. Id.
Liberty Mutual sued Mid-Continent in Texas state court to recover the
amount it had contributed to the settlement over its pro rata share. Mid-
Continent removed the case to federal district court. The district court found for
Liberty Mutual, ruling that the subrogation clause in Liberty Mutual’s policy
allowed it to recover from Mid-Continent on Kinsel’s behalf. Id. Mid-Continent
appealed, and we certified the question to the Texas Supreme Court. Liberty
Mut. Ins. Co. v. Mid-Continent Ins. Co., 405 F.3d 296, 297 (5th Cir. 2005).
The Texas Supreme Court rejected Liberty Mutual’s claims for
contribution and found that it did not have a right of subrogation because Kinsel
was fully indemnified. Mid-Continent, 236 S.W.3d at 768, 772. The Texas
Supreme Court cited its earlier decision in Traders & General Insurance Co. v.
Hicks Rubber Co., 169 S.W.2d 142 (Tex. 1943), where it held that an “other
insurance” clause precludes a claim for contribution asserted by one co-insurer
against another. Mid-Continent, 236 S.W.3d at 772. The court also noted that
“this direct claim for contribution between co-insurers disappears when the
insurance policies contain ‘other insurance’ or ‘pro rata’ clauses.” Id. (citation
omitted). The court reasoned:
The effect of the pro rata clause precludes a direct claim for
contribution among insurers because the clause makes the contracts
several and independent of each other. With independent
contractual obligations, the co-insurers do not meet the common
obligation requirement of a contribution claim—each co-insurer
contractually agreed with the insured to pay only its pro rata share
of a covered loss; the co-insurers did not contractually agree to pay
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No. 08-20532
each other’s pro rata share.
Id. (citations omitted). Thus, the court held that “a co-insurer paying more than
its proportionate share cannot recover the excess from the other co-insurers.”
Id. (citing Hicks Rubber Co., 169 S.W.2d at 148).
Given the Texas Supreme Court’s decision, we reversed the district court’s
judgment and remanded with instructions to enter a take-nothing judgment
against Liberty Mutual. Liberty Mut. Ins. Co. v. Mid-Continent Ins. Co., 508
F.3d 261, 262–63 (5th Cir. 2007) (per curiam).
1. Application of Mid-Continent to Appellants’ Contribution
Claim for Defense Costs
Despite finding that EMC had breached its duty to defend Lacy Masonry,
the district court found that, under the Texas Supreme Court’s decision in Mid-
Continent, Appellants could not recover defense costs from EMC under either a
contribution or subrogation theory. Although the district court correctly
explained much of the Mid-Continent decision, it mischaracterized the holding
with respect to its denial of Liberty Mutual’s contribution claim. Mid-Continent
only addressed the question of whether one co-insurer has a right of contribution
or subrogation against a non-paying co-insurer to recover money paid to
indemnify a common insured for a loss. Mid-Continent left open the separate
question of whether a co-insurer that pays more than its share of defense costs
may recover such costs from a co-insurer who violates its duty to defend a
common insured.
Texas courts have repeatedly affirmed that an insurer’s duty to defend is
separate from and broader than its duty to indemnify. See, e.g., Zurich Am. Ins.
Co., 268 S.W.3d at 490. The language of the EMC Policy confirms this duty. By
its express terms, the “other insurance” provision speaks only to an insured’s
“loss.” It provides that, if there are co-primary insurance policies, EMC will
share the cost of paying for any loss that Lacy Masonry suffers. It does not
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No. 08-20532
indicate a similar proration of costs incurred in fulfilling its separate and
distinct duty to defend Lacy Masonry. The “other insurance” clause applies only
to the duty to indemnify, not the duty to defend.
The fact that the “other insurance” clause applies only to EMC’s duty to
indemnify is dispositive of this issue. To prevail on a claim for contribution, a
party must show that “(1) the several insurers share a common obligation or
burden and that (2) the insurer seeking contribution has made a compulsory
payment or other discharge of more than its fair share of the common obligation
or burden.” Mid-Continent, 236 S.W.3d at 772 (numbering added). In Mid-
Continent, the Texas Supreme Court held that “[t]he effect of the pro rata [‘other
insurance’] clause precludes a direct claim for contribution among insurers
because the clause makes the contracts several and independent of each other.”
Id. at 772. Because the duty to indemnify is “several and independent,” Liberty
Mutual could “not meet the common obligation requirement of a contribution
claim. Each co-insurer contractually agreed with the insured to pay only its pro
rata share of a covered loss; the co-insurers did not contractually agree to pay
each other’s pro rata share.” Id.
The same is not true as to EMC and its duty to defend Lacy Masonry. The
EMC Policy provides that EMC “will have the right and duty to defend the
insured against any ‘suit’ seeking” damages covered by the EMC Policy. An
“other insurance” clause does not modify this obligation so as to render it several
and independent. Although EMC may owe only one-fifth of the cost to indemnify
Lacy Masonry, it—along with Appellants—had a complete duty to defend Lacy
Masonry. The duty to defend creates “a debt which is equally and concurrently
due by” all of its insurers. Id. (internal quotation marks omitted). Indeed, this
conclusion is supported by the uniform holdings of Texas courts that if even a
single claim in a lawsuit potentially falls within an insurance policy’s coverage,
the insurer has a duty to provide a complete defense. See, e.g., Tex. Prop. & Cas.
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No. 08-20532
Ins. Guar. Ass’n/Sw. Aggregates, Inc. v. Sw. Aggregates, Inc., 982 S.W.2d 600,
606 (Tex. App.—Austin 1998, no pet.); see also Indian Harbor Ins. Co. v. Valley
Forge Ins. Group, 535 F.3d 359, 363 (5th Cir. 2008) (noting the “complete
defense” obligation of an insurer under Texas law). As one Texas court stated,
“[t]his is because the contract obligates the insurer to defend its insured, not to
provide a pro rata defense.” Sw. Aggregates, 982 S.W.2d at 606. Contrary to the
district court’s conclusion, Appellants satisfied the “common obligation”
requirement for a contribution claim.
Because EMC admits that it did not participate in or contribute to Lacy
Masonry’s defense, Appellants satisfy the second requirement for a contribution
claim, “that the insurer seeking contribution has made a compulsory payment
or other discharge of more than its fair share of the common obligation or
burden.” Mid-Continent, 236 S.W.3d at 772. Accordingly, the district court
erred in finding that Appellants could not recover from EMC a one-fifth portion
of the cost of defending Lacy Masonry in the McKenna suit. Therefore we
reverse the district court’s finding on this issue and remand for the
determination of defense costs to which Appellants are entitled and with
instructions to enter judgment for Appellants in that amount.
2. Subrogation
The parties briefly address Appellants’ right of subrogation against EMC.
Our holding that Appellants succeed on their contribution claim precludes
discussion of subrogation and we need not reach that issue.
IV. CONCLUSION
We AFFIRM that portion of the district court’s judgment in which the
district court found that EMC has a duty to defend Lacy Masonry. However,
because the district court incorrectly applied Mid-Continent, we REVERSE that
portion of the district court’s judgment and hold that Appellants are entitled to
collect a proportionate share of defense costs from EMC. We REMAND for the
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No. 08-20532
determination of the defense costs.
AFFIRMED IN PART, REVERSED IN PART, and REMANDED.
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