Case: 09-50671 Document: 00511118775 Page: 1 Date Filed: 05/21/2010
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
May 21, 2010
No. 09-50671 Lyle W. Cayce
Clerk
ADMIRAL INSURANCE COMPANY,
Plaintiff - Appellant
v.
RANDALL K. FORD, doing business as R. K. Ford and Associates; R. K.
FORD & ASSOCIATES INCORPORATED; RKF CONSULTANTS
INCORPORATED, doing business as R. K. Ford & Associates,
Defendants - Appellees
Appeal from the United States District Court
for the Western District of Texas
Before JOLLY and GARZA, Circuit Judges, and STARRETT * , District Judge.
EMILIO M. GARZA, Circuit Judge:
Appellant Admiral Insurance Company (“Admiral”) appeals from the
district court’s grant of summary judgment in favor of Appellees (“Ford”). The
appeal asks us to determine the applicability of a professional services exclusion
in an insurance contract that Admiral sold to Ford.
I
Ford purchased two insurance policies from Admiral. The Commercial
General Liability (“CGL”) policy provided occurrence-based coverage with a $1
*
District Judge of the Southern District of Mississippi, sitting by designation.
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No. 09-50671
million limit per occurrence. The professional liability (“PL”) policy provided
“claims-made” coverage, which covered “oil and gas consultant” operations with
a $50,000 limit per claim.
The CGL policy contained an exclusion for designated professional
services. This exclusion provides, in relevant part:
SCHEDULE
Description of Professional Services:
1. ALL OPERATIONS OF THE INSURED
2.
3.
(If no entry appears above, the information to complete this
endorsement will be shown in the Declarations as applicable to this
endorsement.)
With respect to any professional services shown in the Schedule,
this insurance does not apply to “bodily injury,” “property damage,”
“personal injury,” or “advertising injury” due to the rendering or
failure to render any professional service.
After Ford purchased the policies, Exco Resources, Inc. (“Exco”) hired Ford
to create a drilling plan for an oil well and to consult and assist in the drilling
of the well. During drilling, the well had a blowout, and Exco sued Ford.
Admiral paid Ford $50,000 pursuant to the PL policy, then filed the instant
lawsuit for a declaratory judgment that it did not owe Ford any coverage under
either the CGL or the PL policy.1 Admiral claimed that the professional services
exclusion to the CGL excludes coverage for Exco’s lawsuit because the
underlying conduct required Ford’s specialized or technical knowledge. Ford
responded that because the professional services exclusion purports to apply to
1
Admiral has abandoned its effort to have the $50,000 paid pursuant to the PL policy
reimbursed.
2
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“all operations of the insured,” the exclusion destroyed any grant of CGL
coverage, and therefore should not be given effect.
On cross-motions for summary judgment, the district court ruled in favor
of Ford, finding that the professional services exclusion was illusory because it
defined professional services as all operations of the insured. The court found
that this broad description of professional services obliterated the entire
insurance policy, and gave the exclusion no effect. It found that Admiral owed
a duty to defend Ford in the underlying lawsuit. Admiral timely appealed.
The Exco litigation was settled before oral argument of this case. A
justiciable controversy remains, however, regarding Admiral’s duty to defend
since the determination of that duty affects the legal fees expended in defense
of the Exco litigation before it was settled.2
II
This Court reviews the district court’s grant of summary judgment de
novo. Am. Nat’l Gen. Ins. Co. v. Ryan, 274 F.3d 319, 323 (5th Cir. 2001) (citing
McClendon v. City of Columbia, 258 F.3d 432, 435 (5th Cir. 2001)). “The district
court’s interpretation of an insurance contract is a question of law that we also
review de novo.” Id. Because this is a diversity case involving a Texas contract,
“Texas rules of contract interpretation control.” Id. (citation omitted).
III
A
Admiral argues that the “all operations” language does not define
professional services, but rather provides the scope of the exclusion. According
to Admiral, the “all operations” language simply means that the parties intended
the legal definition of professional services to exclude coverage for professional
services in any of Ford’s operations. Admiral urges the court to apply the legal
2
Although both parties address the duty to indemnify in their briefing, the indemnity
issue is not before the court because the district court severed it from the instant appeal.
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definition of professional services, as articulated by Texas courts, which would
limit professional services to those that require the professional’s “specialized
knowledge or training.” In response, Ford essentially relies on the district
court’s plain language reading, urging the court not to “re-write” the exclusion.
Texas law instructs that we are to ascertain the scope of coverage by
examining the policy as a whole and determining the parties’ intent. Utica Nat’l
Ins. Co. of Tex. v. Am. Indem. Co., 141 S.W.3d 198, 202 (Tex. 2004). “‘The court
must adopt the construction of an exclusionary clause 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.’” Id. (quoting Nat’l Union Fire Ins. Co. v. Hudson Energy Co.,
811 S.W.2d 552, 555 (Tex. 1991)). Terms are given their ordinary meaning
unless the insurance policy shows that the words were meant in a technical or
different sense. Markel Ins. Co. v. Muzyka, 293 S.W.3d 380, 385 (Tex.
App.—Fort Worth 2009, no pet.). The court, however, must “read all parts of the
contract together . . . striving to give meaning to every sentence, clause, and
word to avoid rendering any portion inoperative.” Balandran v. Safeco Ins. Co.
of Am., 972 S.W.2d 738, 741 (Tex. 1998) (citations omitted).
Ford’s plain language argument, though simple, is nonetheless strange.
In effect, Ford reads the exclusion so broadly as to defeat any coverage, and then
claims that because the coverage is rendered illusory under this broad
interpretation, the exclusion should be given no effect. Whereas normally the
insured advances an interpretation that provides broader coverage, here Ford’s
interpretation of the exclusion is that all of its operations are excluded from
coverage. Needless to say, it is difficult to understand why Ford would purchase
a policy that it believed to exclude all of its operations from coverage.
Courts analyzing insurance contracts with essentially the same format as
the instant contract have not accepted the phrase following “description of
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professional services” as the definition of professional services.3 For example, in
Atlantic Lloyd’s Insurance Co. of Texas v. Susman Godfrey, L.L.P., 982 S.W.2d
472, 476–77 (Tex. App.—Dallas 1998, pet. denied), the insured, a law firm, had
written a description of its practice following the phrase “[d]escription of
professional services.” Id. at 476. Nonetheless, the court surveyed how other
courts had defined “professional services” before settling on a legal definition.
Id. The court found that “[t]o qualify as a professional service, the task must
arise out of acts particular to the individual’s specialized vocation, [and] . . . it
must be necessary for the professional to use his specialized knowledge or
training.” Id. at 476–77.
Although Texas courts have often applied a legal definition of “professional
services” in the context of a professional services exclusion to an insurance
contract, the district court found that a recent decision of this court prevented
it from applying the legal definition of professional services. The district court
stated that Davis-Ruiz Corp. v. Mid-Continent Cas. Co., 281 F. App’x 267, 272
(5th Cir. 2008) (unpublished) (per curiam), mandates that if the term
“professional services” is not defined in the policy, then “as a matter of law, no
court can determine if ‘professional services’ were rendered.” The district court,
however, misinterpreted Davis-Ruiz.
In Davis-Ruiz, the parties disputed an identical professional services
exclusion except in that case, the area under “Description of Professional
Services” was blank. 281 F. App’x at 271–72. The court then looked to the
specific instruction of the professional services exclusion, which said “if no entry
appears above, information required to complete this endorsement will be shown
in the Declarations as applicable to this endorsement.” Id. at 272. Accordingly,
3
See, e.g., Certain Underwriters at Lloyd’s, London v. Amwest Fin., Inc., No. Civ. H-04-
4024, 2005 WL 1994290, at *1–2, *7 (S.D. Tex. Aug. 17, 2005) (interpreting an identical
schedule with the description “financial lender”).
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the court looked to the Declarations, concluding that the exclusion should be
applied to the insured’s business as defined in the Declarations. Id. Although
there was no specific definition of professional services in the contract, the court
applied the legal definition of professional services to the insured’s business. Id.
Davis-Ruiz does not suggest that a court may only look to the contract to
define “professional services.” Using the legal definition of “professional service”
was not an issue. At issue was to which of the insured’s operations the exclusion
applied. Id. at 271–72 (“[T]he exclusion does not apply to all professional
services, but only to those shown in the Schedule[, which limited the exclusion
to those professional services that involved radiography].”). When the policy
does not specify a definition of professional services, a court is free to apply the
legal definition of “professional services” to the exclusion, and Texas courts, as
well as courts interpreting Texas law, often do so.
In conclusion, although the provision is confusingly worded and a literal
interpretation would imply that “all operations” are excluded as professional
services, the literal interpretation is unreasonable. Admiral has advanced the
only reasonable interpretation of the exclusion: that the parties intended the
legal definition of professional services to exclude coverage for professional
services in any of Ford’s operations.
B
Having determined that the professional services exclusion is operative,
we now turn to whether the exclusion defeats coverage. The parties dispute
whether Exco’s allegations against Ford meet the legal definition of “professional
services.” Admiral argues that the underlying suit is based only on Ford’s
failure to use his specialized or technical knowledge in preparing and
implementing the drill plan. Ford responds that some of Exco’s allegations are
not based on specialized knowledge, and thus fall outside the professional
services exclusion, thereby triggering Admiral’s duty to defend.
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In determining the applicability of a professional services exclusion, Texas
courts apply the “eight corners rule.” They look only to the four corners of the
policy and the four corners of the underlying complaint to determine whether a
duty to defend exists. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Merchs. Fast
Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997). The court must focus on the
factual allegations in the underlying pleading rather than the legal theories
alleged. Id. If the pleading contains allegations that, when fairly and
reasonably construed, state a cause of action that is potentially covered by the
policy, then the insurer has a duty to defend the insured in the underlying
lawsuit. Id. at 142. “If a petition does not allege facts within the scope of
coverage, an insurer is not legally required to defend the suit against its
insured.” Stumph v. Dallas Fire Ins. Co., 34 S.W.3d 722, 728 (Tex. App.—Austin
2000, no pet.) (citation omitted).
Since the insurance contract does not define professional services, the
relevant definition is that provided by Texas law:
[T]he task must arise out of acts particular to the individual’s
specialized vocation, [and] . . . it must be necessary for the
professional to use his specialized knowledge or training.
Susman Godfrey, 982 S.W.2d at 476–77.
The relevant pleading from the underlying suit is the Fourth Amended
Petition, which alleges breach of contract against Ford for failing to prevent the
blowout. Exco alleges that Ford breached the contract with Exco by failing to
“properly inspect the drill pipe for casing wear as it was pulled out of the hole,”
“instruct the mud logger to look for and report metal shavings,” and “use ‘ditch
magnets,’ a device that detects and segregates metal from the mud.” Exco’s
Fourth Amended petition also states that “[n]ot all operations of Ford were
professional in nature. While several of the above-described omissions made by
Ford required the use of Ford’s specialized training, certain of the omissions and
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failures to act were done with no necessary professional knowledge and were
outside of Ford’s professional capacity.”
Initially, we note that we are not bound by Exco’s self-serving statement
that not all of Ford’s operations were professional in nature. We need not accept
Exco’s legal characterization, only its factual allegations. See Merchs. Fast
Motor Lines, 939 S.W.2d at 141. Indeed, whether or not Ford’s alleged
operations were professional in nature is the very question we must answer.
Ford characterizes Admiral’s argument as stating that even actions that
do not require the exercise of specialized knowledge constitute “professional
services” if they occur in the course of implementing a drilling plan. Ford
correctly points out that Texas courts have rejected a status-based approach to
determining if an allegation should be considered a professional service. Ford
cites to Utica, 141 S.W.3d 198, as “most closely on point.” According to Ford,
Utica compels a conclusion that some of the allegations involve non-professional
conduct, thereby triggering coverage.
Utica involved a claim against an association of doctors by numerous
plaintiffs who contracted Hepatitis C from contaminated drugs. Id. at 200. The
drugs were contaminated by a technician who had used them to support his drug
addiction and then filled the bottles with saline to hide the theft. Id. Although
the complaint alleged negligence in both securing and administering the drugs,
the court did not address whether the failure to secure the drugs constituted a
failure in professional services because the insurer conceded for purposes of the
appeal that the failure to secure the drugs would implicate a general rather than
professional duty. Id. at 202 n.3. Thus, contrary to Ford’s presentation, Utica
does not address the question presented by this case.
Although the other cases Ford cites are more relevant, they do not
necessarily support a conclusion that coverage exists. For example, in Guaranty
National Insurance Co. v. North River Insurance Co., 909 F. 2d 133, 135 (5th Cir.
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1990), this court held that a professional services exclusion did not bar coverage
when the complaint alleged that a hospital failed to properly secure windows to
prevent escape or suicide. Although this holding indicates that not all of a
professional’s actions are “professional services,” it says little about whether the
allegations in the instant case are akin to securing a window. Likewise, in Aetna
Fire Underwriters Insurance Co. v. Southwestern Engineering Co., 626 S.W.2d
99 (Tex. App.)Beaumont 1981, writ ref’d n.r.e.), when a pipeline was damaged,
the court found coverage because it could not determine whether the error was
from bad plans (professional service) or bad digging (non-professional in nature).
The case supports the idea that a professional services exclusion does not bar
coverage when some of the allegations involve professional services and others
do not: it says little about how the activities alleged by Exco should be classified.
Aside from Exco’s bald statement that certain (unspecified) acts were non-
professional, the only arguably non-professional conduct alleged was failing to
look for metal shavings or to use a magnet to detect shavings in mud. The actual
performance of these acts is perhaps akin to conduct that we have found to be
non-professional. But Exco is not suing Ford because Ford was told to watch for
pipe wear and metal shavings and failed to do so. Rather, the complaint is that
Ford failed to act upon its specialized knowledge that those tasks needed to be
performed (i.e., Ford failed to instruct the mud logger to look for shavings).
Indeed, the specific failures are listed as sub-parts of a general failure “to
perform adequate and competent drilling operations.” In other words, the
allegations are not that Ford incorrectly performed some non-professional
activity, but that Ford failed to properly implement a plan to drill a well over
16,000 feet deep.
Ultimately, the underlying suit alleges the existence of and failure to fulfill
a contract, the very subject of which was Ford’s expertise in drilling operations.
Ford essentially argues that a claim that a party caused injury by negligently
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performing its professional services is not covered by a professional services
exclusion because some of the breaching conduct was arguably non-technical in
nature. As Admiral points out, this reading of the exclusion renders it almost
meaningless since the implementation of a drilling plan invariably involves
menial tasks. Ford was tasked with ensuring that the well did not blow out.
Taking, or not taking, certain measures to ensure that the drill pipe did not fail
under the particular drilling conditions requires Ford’s specialized knowledge
and training, and thus is an excluded professional service.4
IV
Because we conclude that the professional services exclusion applies and
that Admiral has no duty to defend under the CGL policy, the judgment of the
district court is REVERSED and RENDERED.
4
In its motion for summary judgment, Admiral also argued that no coverage was
available under either the excess or umbrella policies. The excess coverage does not apply to
“any loss not covered by the underlying insurance.” The umbrella policy “applies only to the
exposures that are not covered by the [excess coverage] and are not otherwise excluded by this
policy or any of the underlying policies.” Because we hold that the professional services
exclusion defeats coverage in the underlying CGL policy, we likewise find no coverage under
either the excess or umbrella policies.
10