IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
August 7, 2009
No. 06-10930 Charles R. Fulbruge III
Clerk
CENTURY SURETY COMPANY,
Plaintiff-Appellee
v.
HARDSCAPE CONSTRUCTION SPECIALTIES INC.,
Defendant-Appellant
Appeal from the United States District Court
for the Northern District of Texas
Before KING, DENNIS, and ELROD, Circuit Judges.
JENNIFER W. ELROD, Circuit Judge:
In this Texas insurance coverage case, the scope of a commercial policy
exclusion turns on the difference between tort and contract allegations in an
underlying lawsuit. Because we conclude that the underlying suit alleges only
breaches of contract, we hold in favor of the insurer.
I.
A.
Hillwood Residential Services, L.P. and Hardscape Construction
Specialties, Inc. executed a contract wherein Hardscape agreed to construct a
swimming pool facility for Hillwood at one of Hillwood’s residential
developments. The project included two pools, a bath house and pool equipment
No. 06-10930
building, sidewalks, fences, a playground, landscaping, and other improvements
to Hillwood’s property. The Hillwood-Hardscape contract contained the
following indemnity provision:
Contractor [Hardscape Construction, Inc.] shall indemnify and hold
Hillwood Property Company, its employees, shareholders, agents,
officers and directors harmless from and against any damage,
liability or cause of action arising directly or indirectly out of or in
connection with the performance of Contractor’s services.
On the same day, Hardscape and Elite Concepts by Michale Nantz 1 executed a
contract wherein Elite agreed to construct the swimming facility pools. The
Hardscape-Elite contract contained the following provision:
The Subcontractor [Elite Concepts] agrees to be bound to the
Contractor [Hardscape Construction specialties, Inc.] under this
Agreement according to the same terms and conditions as the
Contractor is bound to the Owner under the Contract Documents
which pertain or relate to the scope of work in this Subcontract as
described in the Subcontract Work paragraph above.
Elite, in turn, hired Wang Engineering, Inc. to design the pools and Tornado
Excavation, Inc. to construct piers and beams for one of the pools.
Elite held an insurance policy issued by Century Surety Company that
covered certain “occurrences,” which the policy defined as “an accident, including
continuous or repeated exposure to substantially the same general harmful
conditions.” The policy excluded “‘bodily injury’ or ‘property damages’ for which
the insured is obligated to pay damages by reason of the assumption of liability
1
We refer to Elite Group International, Inc., Elite Concepts by Michale Nantz, f/k/a
Elite concepts, and Michael Nantz d/b/a Elite Concepts collectively as “Elite.”
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No. 06-10930
in a contract or agreement,” but excepted from that exclusion certain contractual
obligations to pay for another party’s tort liability.
After the subcontractors completed the swimming facility, Hillwood sued
Hardscape, Elite, Wang, and Tornado in a Texas state court, and alleged that
faulty design and construction had caused physical and aesthetic damage to the
pool and some of its surroundings. The petition asserts claims of negligence,
gross negligence, breach of contract, breach of implied warranty, and breach of
express warranty. In response, Hardscape demanded that Elite defend and
indemnify Hardscape, citing the Hillwood-Hardscape and Hardscape-Elite
contracts, and Elite forwarded the demand to Century. After Century failed to
respond, Hardscape made the demand directly upon Century, who failed to
respond.
B.
Century then sued Hardscape, Hillwood, and Elite in the United States
District Court for the Northern District of Texas. Century’s complaint invoked
the district court’s diversity jurisdiction, see 28 U.S.C. § 1332, and sought a
declaratory judgment relieving Century of any duty to defend Elite in the
Hillwood lawsuit and of any duty to indemnify Elite or Hardscape, see 28 U.S.C.
§ 2201; Fed. R. Civ. P. 57. In cross-motions for summary judgment, Hardscape
and Century sought judgment as a matter of law on issues of coverage and
exclusion. The district court concluded that the Century policy’s “occurrence”
term did not cover the lawsuit-triggering construction errors, granted Century’s
motion, and denied Hardscape’s. Hardscape now appeals from the final
judgment. See 28 U.S.C. § 1291.
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II.
“We review a district court’s grant of summary judgment de novo,” and
apply the same Rule 56 standard as the district court. Stover v. Hattiesburg
Pub. Sch. Dist., 549 F.3d 985, 991 (5th Cir. 2008); see also Ford Motor Co. v. Tex.
Dep’t of Transp., 264 F.3d 493, 498 (5th Cir. 2001) (“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.”).
“We may affirm summary judgment on any legal ground raised below, even if it
was not the basis for the district court’s decision.” Performance Autoplex II Ltd.
v. Mid-Continent Cas. Co., 322 F.3d 847, 853 (5th Cir. 2003).
Texas law governs this case, and places the burden of establishing
coverage upon the insured, the burden of establishing an exclusion upon the
insurer, and the burden of establishing an exception to an exclusion back upon
the insured. See, e.g., Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d
523, 527–28 (5th Cir. 2004) (“This Court reviews whether an insurer has a duty
to defend its insured in an underlying suit as a de novo question of law.”). In the
motions for summary judgment and supporting briefs filed below, Century and
Hardscape disputed both the scope of the policy’s coverage and the scope of the
exception to one of the policy’s exclusions. The parties present the same
arguments here, and we address each in turn.
A.
First, the parties dispute whether Hardscape demonstrated that the
Hillwood suit falls within the policy’s definition of a covered “occurrence.”
Century argued below that the suit does not, because “occurrence” does not
encompass damage to a contract’s object; Hardscape argued that “occurrence”
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No. 06-10930
need not be so limited, and that the term includes all negligent acts not expected
by the insured.
Although Texas courts were divided on this question at the time of the
district court’s decision, Lamar Homes, Inc. v. Mid-Continent Casualty Co., 242
S.W.3d 1 (Tex. 2007), has since resolved the split by holding that “allegations of
unintended construction defects may constitute an ‘accident’ or ‘occurrence’”
under commercial general liability (CGL) policies. Id. at 4–16 (“[A] claim does
not involve an accident or occurrence when either direct allegations purport that
the insured intended the injury (which is presumed in cases of intentional tort)
or circumstances confirm that the resulting damage was the natural and
expected result of the insured’s actions, that is, was highly probable whether the
insured was negligent or not.”); accord Pine Oak Builders, Inc. v. Great Am.
Lloyds Ins. Co., 279 S.W.3d 650, 652 (Tex. 2009). Lamar Homes addressed the
terms of an industry-standard CGL policy, and thus it is no surprise that the
relevant policy terms in Lamar Homes and this case are identical. See Lamar
Homes, 242 S.W.3d at 5 & n.1. Both policies cover bodily injury or property
damage that is “caused by an ‘occurrence,’” and both policies define “occurrence”
as “an accident, including continuous or repeated exposure to substantially the
same general harmful conditions.” See id. at 6 & n.4. Furthermore, because the
Hillwood suit allegations align with the Lamar Homes allegations, we are bound
to hold that the Century policy’s “occurrence” term covers the Hillwood suit. See
id. at 9 (“Here, the complaint alleges an ‘occurrence’ because it asserts that [the
underlying defendant’s] defective construction was a product of its negligence.
No one alleges that [the underlying defendant] intended or expected its work or
its subcontractors’ work to damage the [underlying plaintiff’s] home.”).
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No. 06-10930
B.
Second, the parties dispute whether Hardscape met its burden of
demonstrating that the Hillwood suit falls within the policy’s “insured contract”
exception to the “contractual liability” exclusion.2 That exception provides, in
part, that the contractual liability exclusion does not apply to damages assumed
in “any other contract or agreement pertaining to your business . . . under which
you assume the tort liability of another party to pay for ‘bodily injury’ or
‘property damage’ to a third person or organization,” and defines “tort liability”
as “a liability that would be imposed by law in the absence of any contract or
agreement.” Accordingly, the Hillwood petition triggers the exclusion’s
exemption only if it properly alleges a tort cause of action against Hardscape
under the “eight corners”3 rule applied by Texas courts.4
In its simplest form, the eight corners rule provides that “the petition’s
allegations and the policy’s language determine the insurer’s duty to defend,”
Farmers Tex. County Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 82 (Tex. 1997);
2
The parties agree that the Hillwood suit fell within the contractual-liability exclusion,
which excluded any “‘bodily injury’ or ‘property damage’ for which the insured is obligated to
pay damages by reason of the assumption of liability in a contract or agreement.”
3
The rule is also sometimes referred to as the “complaint allegations” rule. E.g.,
Federated Mut. Ins. Co. v. Grapevine Excavation Inc., 197 F.3d 720, 723 (5th Cir. 1999)
4
Lamar Homes’s discussion of coverage under the “occurrence” term addressed no such
tort/contract-based exclusion. See Lamar Homes, 242 S.W.3d at 7–16. There, the insurer
attempted to employ a contract-tort distinction to advance its no-coverage argument, but only
as an implied element of the definition of “occurrence.” See id. at 8. Lamar Homes faced no
exclusion similar to Century’s. See id. at 13 (“Contrary to the carrier’s contentions, the CGL
policy makes no distinction between tort and contract damages. The insuring agreement does
not mention torts, contracts, or economic losses; nor do these terms appear in the definitions
of ‘property damage’ or ‘occurrence.’”); see also id. at 15 (“The dissent’s preoccupation with
ownership is merely a stalking-horse for the carrier’s contention that CGL policies are for tort
claims only. The policy, however, does not include this limitation.”).
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No. 06-10930
accord Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487, 490–91 (Tex. 2008);
Nat’l Union Fire Ins. Co. of Pittsburgh, PA v. Merchs. Fast Motor Lines, Inc., 939
S.W.2d 139, 141 (Tex. 1997).5 Texas courts also adhere to a specific pleading
requirement: “A court must focus on the factual allegations rather than the
legal theories asserted in reviewing the underlying petition.” Griffin, 955
S.W.2d at 82; accord Merchs. Fast Motor Lines, 939 S.W.2d at 141–42 (“We will
not read facts into the pleadings.”); see also Heyden Newport Chem. Corp. v. S.
Gen. Ins. Co., 387 S.W.2d 22, 26 (Tex. 1965) (“While we have said above that the
court is limited to a consideration of the allegations and the insurance policy in
determining an insurer’s duty to defend, we wish to point out that in considering
such allegations a liberal interpretation of their meaning should be indulged.”);
Zurich, 268 S.W.3d at 491 (“We resolve all doubts regarding the duty to defend
in favor of the duty and we construe the pleadings liberally.” (citations omitted)).
Thus, to fall within the exclusion’s exception, the Hillwood petition must make
specific factual contentions that, when construed liberally, could constitute “a
liability that would be imposed by law in the absence of any contract or
agreement.” Our inquiry, therefore, focuses on the difference between common
law tort and contract causes of action in Texas.
To determine the nature of a Texas lawsuit, “[w]e must look to the
substance of the cause of action and not necessarily the manner in which it was
pleaded.” Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617, 617–18 (Tex. 1986).
Texas courts characterize actions as tort or contract by focusing on the source of
liability and the nature of the plaintiff’s loss:
5
This case does not require that we employ an exception to the eight corners rule, the
existence of which is unsettled in Texas law, see Northfield, 363 F.3d at 529.
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As one prominent authority has explained: “Tort obligations are in
general obligations that are imposed by law—apart from and
independent of promises made and therefore apart from the
manifested intention of the parties—to avoid injury to others.” If
the defendant’s conduct—such as negligently burning down a
house—would give rise to liability independent of the fact that a
contract exists between the parties, the plaintiff’s claim may also
sound in tort. Conversely, if the defendant’s conduct—such as
failing to publish an advertisement—would give rise to liability only
because it breaches the parties’ agreement, the plaintiff's claim
ordinarily sounds only in contract.
In determining whether the plaintiff may recover on a tort
theory, it is also instructive to examine the nature of the plaintiff's
loss. When the only loss or damage is to the subject matter of the
contract, the plaintiff's action is ordinarily on the contract.
Sw. Bell Tel. Co. v. DeLanney, 809 S.W.2d 493, 494–95 & n.2 (Tex. 1991) (citing
W. Keeton et al., Prosser and Keeton on the Law of Torts § 92, at 655 (5th ed.
1984)); see Formosa Plastics Corp. USA v. Presidio Eng’rs & Contractors, Inc.,
960 S.W.2d 41, 45 (Tex. 1998); Int’l Printing Pressmen & Assistants’ Union of N.
Am. v. Smith, 198 S.W.2d 729, 735 (Tex. 1947); see also Hyundai Motor Co. v.
Rodriguez ex rel. Rodriguez, 995 S.W.2d 661, 664 (Tex. 1999) (“Liability for
personal injuries caused by a product’s defective design can be imposed under
several legal theories, among them negligence, breach of warranty, and strict
products liability.”); Am. Nat’l Petroleum Co. v. Transcon. Gas Pipe Line Corp.,
798 S.W.2d 274, 283 (Tex. 1990) (“[W]hether a purchaser may sue for breach of
warranty or strict liability for a defective product depends on whether the
product merely did not perform as promised (contract) or whether it caused
physical harm to person or property (tort).”). But of course, “[t]he difficulty in
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No. 06-10930
determining whether the action is in tort or in contract is in the application of
the rule,” Int’l Printing Pressmen, 198 S.W.2d at 735, and thus the process of
characterization resists rigid categories in favor of an analysis that accounts for
all of a claim’s particular contours.6
Century argues that an action seeking to recover damages to the subject
matter of a contract constitutes a contract claim only, not a tort claim, and that
the Hillwood petition is just such a suit. Hardscape does not dispute the
dichotomy and argues only that the petition alleges damage to property beyond
the Hillwood-Hardscape contract’s subject matter. 7 In the Hillwood petition’s
“Factual Background,” Hillwood alleges that Elite performed much of the work
on the pools, and that the following damage arose as a result of construction and
design defects:
6
Take, for example, the following holdings from the Supreme Court of Texas. A claim
for failure to perform a contract to publish a Yellow Pages advertisement that seeks damages
in the form of lost profits is a contract action. DeLanney, 809 S.W.2d at 493–95; see Formosa
Plastics, 960 S.W.2d at 45. So is a claim for wrongful expulsion from a Union that bases the
right to membership on a contract. Int’l Printing Pressmen, 198 S.W.2d at 735–36. In
contrast, a claim for failure to properly repair a water heater that seeks damages for the
resulting house fire is a tort action, Montgomery Ward & Co. v. Scharrenbeck, 204 S.W.2d 508
(Tex. 1947); see DeLanney, 809 S.W.2d at 494, and so is a claim for fraudulent inducement,
Formosa Plastics, 960 S.W.2d at 45–47 (“[T]ort damages are recoverable for a fraudulent
inducement claim irrespective of whether the fraudulent representations are later subsumed
in a contract or whether the plaintiff only suffers an economic loss related to the subject
matter of the contract.”). Cf. G., C. & S. F. R’y Co. v. I. T. Levy, 59 Tex. 542 (1883) (a claim
against a common telegram carrier for failure to deliver an important telegram is a tort claim).
7
Because the policy speaks in terms of Elite assuming “the tort liability of another
party,” our inquiry focuses on characterizing the claims against Hardscape with reference to
the Hillwood-Hardscape contract. We are not asked to characterize a claim against Elite, in
which case we might refer to the Hardscape-Elite contract for the scope of our tort/contract
distinctions.
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No. 06-10930
Soon after the construction of the swimming facility, cracks first
began to appear in the walls and floor of the competition pool. The
cracks increased over time, both in width and length. The cracks
caused aesthetic damage and permitted water to escape from the
competition pool. The pools began showing signs of structural
problems. The decking surrounding the pools, including the “cool
deck” installed over the original decking, became uneven.
Hillwood then asserts a claim for “Negligence” in general terms: Hardscape and
Elite owed Hillwood a duty to properly design and construct the pools, and each
defendant acted negligently in the execution of the duties. With more detail,
Hillwood alleges that it suffered the following damages:
As a direct and proximate result of the negligent acts and omissions
as described above, Plaintiff [Hillwood] has suffered damages in the
form of the costs of diagnosing and correcting defects. The
structural maladies and poor workmanship discovered in the
swimming facility were beyond repair, and required demolition and
reconstruction of the swimming pools and decking. Further,
structures at the swimming facility have shown signs of movement
and instability, including the arbor cover over the tot pool. Plaintiff
has incurred costs determining the quality of the soils in the area
and assessing the structural integrity of the original pools. Plaintiff
has incurred further costs in attempting to maintain the defectively
designed and constructed pools and replacing the water lost through
the cracks in the pools. Plaintiff has incurred costs in the
demolition of the original pools and the design and construction of
a properly designed and constructed swimming facility.
Most of these allegations are easily classified as giving rise to contract
claims—namely, because the damages occurred only to the subject matter of the
Hillwood-Hardscape contract, and because no liability would arise independently
of the contract. Thus, Hillwood made contract claims when it alleged that Elite’s
failure to properly design and construct the pools caused cracks in the walls and
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No. 06-10930
floor of the pool, aesthetic damage, pool structural damage, and the like.
Similarly, the resulting need to identify, diagnose, and correct the design and
construction defects gave rise only to contract claims. See DeLanney, 809 S.W.2d
at 494–95 & n.2.
One of the petition’s allegations deserves a closer analysis. Hardscape
places much reliance upon the petition’s allegation that “[t]he decking
surrounding the pools, including the ‘cool deck’ installed over the original
decking, became uneven,” and argues that damage to the cool deck would
constitute an excepted tort if someone other than Hardscape were responsible
for the damaged decking. As the argument goes, because the petition does not
make clear who constructed the referenced cool deck, we should resolve the
ambiguity in favor of Hardscape and coverage. See Merchs. Fast Motor Lines,
939 S.W.2d at 141 (“[I]n case of doubt as to whether or not the allegations of a
complaint against the insured state a cause of action within the coverage of a
liability policy sufficient to compel the insurer to defend the action, such doubt
will be resolved in insured’s favor.”).
Hardscape’s argument fails because no such ambiguity exists—the
Hillwood petition makes clear that Elite constructed all of the decking pursuant
to the Hardscape-Elite contract. Century attached three contract documents to
its petition which, in combination, make clear that Hardscape charged Elite with
the construction of all pool decking. First, Century attached the
Hillwood-Hardscape contract and the contract’s Exhibit A, which sets out plans
and specifications for the various parts of the pool complex project. As part of
the “Pools/Deck” category, the contract makes an allotment for “DECKING;
9,100 SF,” which the exhibit describes as “LUMP SUM BID FOR TYPE C/@;
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No. 06-10930
2,3/LSD.01 BUFF COOL DECK FINISH.” The provision includes a hand
written reference to “rock salt.” Second, Century attached two pages of a
document entitled “BID INSTRUCTION/BID SHEET FOR POOLS,” which set
out bids for each part of the project in categories that corresponded to the
Hillwood-Hardscape contract’s Exhibit A.8 The bid sheet addressed “Decking”
bids for 9,100 square feet, and listed the “POOL SUB-TOTAL WITH ROCK
SALT/COLOR FINISH” as $348,875. Finally, Century attached the
Hardscape-Elite contract, which charged Elite with performing the work
indicated in “Exhibit A of this contract” for $348,875. Although Century did not
attach the Hardscape-Elite contract’s exhibit, and although the bid sheet did not
refer to Elite, the documents read in conjunction leave no doubt that Hardscape
charged Elite alone with the decking portion of the contract. In this case, we
have no ambiguity to construe in Hardscape’s favor. The decking portion of the
Hillwood petition’s allegations sounds in contract because the damage occurred
only to the subject matter of the Hillwood-Hardscape contract, and because any
liability arising from damage to the decking exists only as a result of the
contract. See DeLanney, 809 S.W.2d at 494–95 & n.2.9 A different result might
obtain if, for example, Hillwood had alleged that the faulty pool construction
damaged its business interests or adjacent property, cf. Scharrenbeck, 204
S.W.2d 508, but that is not this case.
8
The sheet includes a statement that “[t]he intent of bids is to include all aspect os that
particular item or areas, i.e., all lump sun bids shall be ‘turn-key’.” The two pages of the bid
sheet do not refer to Elite.
9
For identical reasons, the petition’s allegation that “structures at the swimming
facility have shown signs of movement and instability, including the arbor over the tot pool”
alleges only a breach of contract.
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No. 06-10930
Thus, despite the fact that the Hillwood petition alleges a cause of action
that falls within the Century policy’s definition of “occurrence,” the policy’s
“contractual liability” exclusion operates to exclude the claims arising from the
Hillwood suit, and no tort claim triggers the exclusion’s “insured contract”
exception. Century thereby defeated both the duty to defend and indemnity
claims. See Farmers Tex. County Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 83–84
(Tex. 1997) (“[T]he duty to indemnify is justiciable before the insured’s liability
is determined in the liability lawsuit when the insurer has no duty to defend and
the same reasons that negate the duty to defend likewise negate any possibility
the insurer will ever have a duty to indemnify.”). We hold that the district court
did not err when it granted Century’s motion for summary judgment, and that
it did not err when it denied Hardscape’s motion for summary judgment.
III.
For the foregoing reasons, we AFFIRM the judgment of the district court.
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