United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT February 10, 2004
Charles R. Fulbruge III
Clerk
No. 03-40650
VALMONT ENERGY STEEL, INC. and VALMONT MICROFLECT, INC.,
Plaintiffs-Appellees,
versus
COMMERCIAL UNION INSURANCE CO. and CU LLOYD’S OF TEXAS,
Defendants-Appellants.
Appeal from the United States District Court
For the Eastern District of Texas, Lufkin
Before JOLLY, HIGGINBOTHAM, and DeMOSS, Circuit Judges.
DeMOSS, Circuit Judge:
Defendants-Appellants Commercial Union Insurance Co.
(“Commercial”) and CU Lloyd’s of Texas (“CU Lloyd’s”)
(collectively, “Appellants”) seek reversal of the district court’s
decision to enforce a judgment obtained by Plaintiffs-Appellees
Valmont Energy Steel, Inc. and Valmont Microflect, Inc.
(collectively, “Valmont”) against Continental Manufacturing, Inc.
(“Continental”), a company insured by Appellants. The district
court concluded that Appellants’ insurance policies covered the
injury suffered by Valmont and enforced the judgment. Appellants
raise three points of error: that there was no “occurrence” within
the meaning of the insurance policies; that there was no “property
damage” within the meaning of the policies; and that the “your
product” exclusion in Appellants’ policies with Continental plainly
excluded coverage. Here, because we find the “your product”
exclusion unambiguous, we need not address the questions of whether
there was “property damage” and an “occurrence” within the meaning
of Appellants’ policies. We find the “your product” exclusion
clearly barred coverage of the damages suffered by Valmont. We
thus REVERSE the decision of the district court and RENDER judgment
in favor of Appellants.
BACKGROUND
The pertinent underlying facts are as follows: Valmont
entered into a contract with Continental for the purchase of steel
flanges for use in Valmont’s construction of microwave towers.
Under the terms of the contract, the steel flanges were required to
have a 50,000-pound yield and tensile strength. With each shipment
of flanges, Continental agreed to include either a Material Test
Report (“MTR”) that verified the grade and quality of the steel
used in the production of the flanges or a certification that
Continental had the original MTR verifying the steel specifications
on file in their Nacogdoches, Texas, offices. Continental
represented to Valmont that it had an MTR on file confirming that
each steel flange satisfied Valmont’s quality specifications.
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Continental shipped the flanges to Valmont, which used some flanges
in the construction of a microwave tower.
A Valmont customer service representative later noticed
inconsistencies in the paperwork submitted by Continental, and
Valmont requested that Continental supply the MTRs. Valmont then
reviewed the MTRs and contacted the steel manufacturer listed, U.S.
Steel Corp. (“U.S. Steel”). U.S. Steel responded that the MTRs had
been substantially altered and that it could not verify to Valmont
the origin of the steel used in the flanges or the steel’s
strength. Valmont subsequently submitted six of the flanges to an
independent tester to determine their tensile strength. In order
to test the flanges, each had to be destroyed; all six flanges
failed to meet the contract specifications.
In November 1998 Valmont filed a breach of contract suit
against Continental in district court relying upon diversity of
citizenship for jurisdiction. A bench trial was held in November
1999. In its findings of fact and conclusions of law, the district
court in such prior suit concluded that Continental had supplied
false information because the steel used in the flanges was not of
the quality specified; Continental had not maintained the original
certifications on file; Continental had not exercised reasonable
care in providing the certifications; and the flanges were unusable
by Valmont because they could not be tested without destroying
them. On February 2, 2000, the district court in such prior suit
found Continental liable to Valmont for negligent misrepresentation
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and awarded Valmont its “out of pocket” expenses, meaning the
difference between the purchase price of the flanges and the value
received, plus pecuniary loss – a total of $118,519.47.
Appellants had provided Continental with two commercial
insurance policies: a general liability policy and an umbrella
policy. Under the general policy, CU Lloyd’s agreed to “pay those
sums that the insured becomes legally obligated to pay as damages
because of . . . ‘property damage’ to which the insurance applies.”
The general policy defined “property damage” either as “[p]hysical
injury to tangible property, including all resulting loss of use of
that property,” or as “[l]oss of use of tangible property that is
not physically injured.” Property damage was covered by the
general policy only if it was “caused by an ‘occurrence.’” The
general policy defined “occurrence” as “an accident, including
continuous or repeated exposure to substantially the same general
harmful conditions.” Like the general policy, the umbrella policy
issued by Commercial applied to “property damage” caused by an
“occurrence.” The umbrella policy thus provided similar coverage
on an excess basis.
The general policy contained an exclusion that stated no
coverage was provided for “‘[p]roperty damage’ to ‘your product’
arising out of it or any part of it.” The term “your product” was
defined in the general policy as “[a]ny goods or products . . .
manufactured, sold, handled, distributed or disposed of by” the
insured. That definition of “your product” expressly included
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“[w]arranties or representations made at any time with respect to
the fitness, quality, durability, performance or use of ‘your
product.’” The umbrella policy also contained an identical “your
product” exclusion and similarly defined “your product.”
After judgment for Valmont was entered in the prior suit,
Continental filed for bankruptcy and Appellants refused to
indemnify Continental because the damages caused by Continental
were outside the scope of the policies. On February 23, 2001,
Valmont filed the present diversity suit as judgment creditor
against Appellants in district court, alleging Appellants were
liable to pay Valmont’s damages under the terms of their policies
with Continental. On October 3, 2001, Appellants moved for summary
judgment, arguing first, that Continental’s negligent
misrepresentations did not cause “property damage” because Valmont
was awarded only economic damages in the underlying suit; second,
that negligent misrepresentation did not constitute an “occurrence”
within the meaning of the policies; and third, that the “your
product” exclusion barred any coverage.
The district court disagreed and denied Appellants’ motion on
September 30, 2002. The court found “property damage” because the
flanges were rendered unusable by Continental’s carelessness.
Under the plain terms of the policies, the loss of use of the
flanges constituted “property damage.” Pursuant to case law, the
court further held that Continental’s negligent misrepresentations
constituted an “occurrence.” Lastly, the district court concluded
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that the “your product” exclusion did not bar coverage here because
the exclusion conflicted with the “products-completed operations
hazard” definition and the “Products-Completed Operations Aggregate
Limit” in the policies – which appeared to provide coverage. Given
the conflict, the district court concluded the “your product”
exclusion was ambiguous and allowed coverage. Valmont then moved
for summary judgment on January 31, 2003. The district court
relied on its findings from its order denying Appellants’ motion
for summary judgment and granted Valmont’s motion for summary
judgment on March 31, 2003. Appellants timely appealed.
DISCUSSION
We review a district court’s summary judgment rulings de novo,
and apply the same standard as the district court. Travelers Cas.
& Sur. Co. of Am. v. Baptist Health Sys., 313 F.3d 295, 297 (5th
Cir. 2002) (citing Potomac Ins. Co. v. Jayhawk Med. Acceptance
Corp., 198 F.3d 548, 550 (5th Cir. 2000)). Under Fed. R. Civ.
P. 56(c), district courts properly grant summary judgment if,
viewing the facts in the light most favorable to the nonmovant, the
movant shows there is no genuine issue of material fact such that
the movant is entitled to judgment as a matter of law. Id.; see
also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986).
The district court’s interpretation of an insurance contract is a
question of law also subject to de novo review. Canutillo Indep.
Sch. Dist. v. Nat’l Union Fire Ins. Co., 99 F.3d 695, 700 (5th Cir.
6
1996) (applying Texas law) (citations omitted). Both parties
agree that the policies should be interpreted under Texas law. In
Texas, courts employ general rules of contract construction to
insurance policies. Balandran v. Safeco Ins. Co. of Am., 972
S.W.2d 738, 740-41 (Tex. 1998). The terms of an insurance policy
are unambiguous as a matter of law if they can be given definite or
certain legal meaning. Nat’l Union Fire Ins. Co. v. CBI Indus.,
Inc., 907 S.W.2d 517, 520 (Tex. 1995) (citing Coker v. Coker, 650
S.W.2d 391, 393 (Tex. 1983)). The policy must be considered as a
whole, and each part given effect and meaning. Canutillo, 99 F.3d
at 700 (citation omitted). If the court finds no ambiguity, the
court’s duty is to enforce the policy according to its plain
meaning. Puckett v. United States Fire Ins. Co., 678 S.W.2d 936,
938 (Tex. 1984) (citation omitted). “The fact that the parties
disagree as to coverage does not create an ambiguity, nor may
extrinsic evidence be admitted for the purpose of creating an
ambiguity.” Sharp v. State Farm Fire & Cas. Ins. Co., 115 F.3d
1258, 1261 (5th Cir. 1997) (applying Texas law); see also CBI
Indus., 907 S.W.2d at 520.
The Texas Supreme Court has found that “[i]f, however, the
language of a policy or contract is subject to two or more
reasonable interpretations, it is ambiguous.” CBI Indus.,
907 S.W.2d at 520. Courts can only consider the parties’
interpretation of a contract if the court first determines a
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contract to be ambiguous. Id. (citing Sun Oil Co. (Delaware) v.
Madeley, 626 S.W.2d 726, 732 (Tex. 1981)). If the court finds an
ambiguity in the contract provisions, particularly in an exclusion
clause, the court should construe the policy strictly against the
insurer. Bailey, 133 F.3d at 369; Balandran, 972 S.W.2d at 741
(noting that, where an ambiguity is found, courts should adopt the
insured’s interpretation as long as it is reasonable, even where
the insurer’s interpretation is a more reasonable interpretation).
Whether the district court erred in finding that the “your product”
exclusion in the insurance policies was ambiguous and
unenforceable.
Appellants argue that any “property damage” to the flanges
purchased by Valmont clearly falls within the policies’ unambiguous
“your product” exclusion, which clause bars coverage of those
damages. Again, both the general and umbrella policies contained
a “your product” exclusion – located in subsections k and h,
respectively, of “Exclusions” under “Section I-Coverages” – that
expressly stated no coverage was provided for “‘property damage’ to
‘your product’ arising out of it or any part of it.” The term
“your product” was defined in both policies as “[a]ny goods or
products . . . manufactured, sold, handled, distributed or disposed
of by” the insured. The definition of “your product” in the
general policy expressly included “[w]arranties or representations
made at any time with respect to the fitness, quality, durability,
performance or use of ‘your product’”; and the umbrella policy
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similarly defined “your product” to include “warranties or
representations” made by Continental about its products. Thus,
Appellants assert that any physical damage to the flanges sold by
Continental to Valmont and any loss of the use of the flanges was
“property damage” to the insured Continental’s “product” arising
out of the insured Continental’s “product” – Continental’s
representations with respect to the quality of its flanges.
Appellants argue that the district court’s refusal to enforce the
“your product” exclusion as ambiguous constitutes legal error.
Under Texas law, Appellants bear the burden of establishing
that a policy exclusion constitutes an avoidance of or affirmative
defense to coverage. Tex. Ins. Code Ann. art. 21.58(b) (Vernon
Supp. 2004); see also Performance Autoplex II Ltd. v. Mid-Continent
Cas. Co., 322 F.3d 847, 854 (5th Cir. 2003). The district court
did not dispute and Valmont does not appear to dispute that, when
viewed in isolation, the “your product” exclusion appeared to bar
coverage of the damage to the flanges at issue in this case.
However, the district court refused to apply the “your product”
exclusion because it determined that other provisions in the
policies – the provisions relating to “products-completed
operations hazard” – appeared to grant coverage and thus rendered
the “your product” exclusion ambiguous. Valmont contends that the
district court’s interpretation of the “your product” exclusion as
ambiguous is correct.
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Both policies define “products-completed operations hazard” in
their respective “Section V-Definitions” to include: “all . . .
‘property damage’ occurring away from premises you own or rent and
arising out of ‘your product’ . . . except . . . [p]roducts that
are still in your physical possession.” In the general policy,
“Section III-Limits of Insurance” lays out certain limits of the
provided “property damage” coverage:
2. The General Aggregate Limit is the most we will pay
for the sum of:
. . .
b. Damages under Coverage A, except damages
because of . . . “property damage”
included in the “products-completed
operations hazard”;
. . .
3. The Products-Completed Operations Aggregate Limit is
the most we will pay under Coverage A for damages
because of . . . “property damage” included in the
“products-completed operations hazard.”
Coverage A of “Section I-Coverages” of the general policy provided
for “property damage liability.” The umbrella policy contained
similar provisions laying out that policy’s “General Aggregate
Limit” and “Products-Completed Operations Aggregate Limit,” also
located in its “Section III-Limits of Insurance.”
Valmont urges that the definition of “products-completed
operations hazard” conflicted with the “your product” exclusion.
While the “your product” exclusion removed coverage for “property
damage” to Continental’s “product” arising from its “product,” the
plain language of the “products-completed operations hazard”
appeared to extend coverage to “property damage” arising out of
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Continental’s “product,” as long as the damage occurred off
Continental’s premises and not while Continental still had physical
possession of its “product.” The district court was persuaded by
this argument, concluding that the “your product” exclusion and
“products-completed operations hazard” definition, when read
together with the “Products-Completed Operations Aggregate Limit”
and in the context of each entire policy, potentially created an
ambiguity in the scope of coverage. The court worried that if it
applied the “your product” exclusion, then the “products-completed
operations hazard” definition and the “Products-Completed
Operations Aggregate Limit” would have an uncertain meaning;
accordingly, the court determined that the ambiguity should be
construed in favor of coverage such that the “your product”
exclusion was not enforceable.
After considering the “your product” exclusion, the “products-
completed operations hazard” definition, and the “Products-
Completed Operations Aggregate Limit” within the context of each
policy as a whole, we conclude that the district court erred when
it determined there was a conflict among the provisions. Both
policies clearly included the “your product” exclusion under the
subsection “Exclusions” in their respective “Section I-Coverages.”
Thus, “Section I-Coverages” is where coverage is both granted as to
damages because of “property damages” caused by an “occurrence,”
and then limited by exclusions such as the “your product”
exclusion. Clearly, “Section V-Definitions” is where terms such as
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“property damage,” “your product,” and “products-completed
operations hazard” used in each policy are defined. However, the
district court incorrectly assumed that the “Products-Completed
Operations Aggregate Limit” in “Section III-Limits of Insurance” of
each policy also functioned to grant coverage. What “Section III-
Limits of Insurance” did instead is simply explain the amount of
damages each policy will cover – read together with the definition
of “products-completed operations hazard,” it delineated the
declared limits of the insurance for off-premises “property damage”
arising from Continental’s product. The two Section III provisions
cited above – the “General Aggregate Limit” and the “Products-
Completed Operations Aggregate Limit” – thus divided the amount of
coverage offered under each policy into two components, each of
which contained its own coverage limitation. The General Aggregate
Limit for each policy provided coverage of up to $2,000,000 for all
“property damage” except damage occurring away from Continental’s
premises arising from Continental’s product – “products-completed
operations hazard.” Damage that occurred away from Continental’s
premises arising from Continental’s product – “products-completed
operations hazard” – had its own declared “Products-Completed
Operations Aggregate Limit,” also of $2,000,000 for each policy.
Therefore, because the “Products-Completed Operations
Aggregate Limit” provision did not separately grant “products-
completed operations hazard” coverage, there is no discord with the
“your product” exclusion. The three clauses can easily be read
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together without conflict. Under Section I, Appellants were
obligated to indemnify Continental for all damages because of
“property damage” caused by an “occurrence” that Continental became
legally obligated to pay, except for “property damage” to
Continental’s own “product” arising from its own “product.”
Included in this overall “property damage” coverage is coverage for
“products-completed operations hazard”; that is, Appellants were
required to indemnify Continental for all damages because of
“property damage” caused by an “occurrence” occurring away from
Continental’s premises and arising out of its “products,” but not
for damages because of “property damage” to Continental’s
“products” themselves. The “your product” exclusion thus works
together cleanly with the definition of “products-completed
operations hazard.”
Put simply: for each policy, Section I grants broad coverage
of damages due to “property damage”; the Section I “your product”
exclusion limits that coverage; and Section III sets out limits on
the amount of coverage Appellants will pay, depending on the
location of the damage. Because we find that the “your product”
exclusion is susceptible to only one reasonable interpretation and
can be given definite meaning within each policy as a whole, such
exclusion is unambiguous as a matter of law. Therefore, our duty
is to enforce the policy according to its plain meaning.
Presupposing that the sums Continental became legally obligated to
pay to Valmont as damages for negligent misrepresentation were
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because of “property damage” caused by an “occurrence,” a plain
reading of “your product” exclusions k and h, respectively, of the
general and umbrella policies clearly bars coverage of the
“property damage” to Continental’s “product” (the steel flanges
sold to Valmont) arising from Continental’s “representations” made
with respect to the “quality” of Continental’s “product,”
regardless of the location where such “property damage” occurred.
Thus, Appellants are not obligated to indemnify Continental.1
CONCLUSION
Having carefully reviewed the record of this case and the
parties’ respective briefing and for the reasons set forth above,
we conclude that the district court erred in denying summary
judgment to Appellants and in granting summary judgment to Valmont.
Therefore, we REVERSE the decision of the district court below and
RENDER judgment on behalf of Appellants.
REVERSED and RENDERED.
1
We note that because of the amount of the damages at issue here
($118,519.47), only the general policy issued by CU Lloyd’s would
have provided any applicable coverage to Continental to pay damages
to Valmont, not the excess umbrella policy issued by Commercial.
However, as both CU Lloyd’s and Commercial were sued by Valmont and
both here appeal the district court’s decision, we considered the
application of the “your product” exclusion found in both policies.
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