Data Specialties Inc v. Transcontinental ( 1997 )

REVISED
United States Court of Appeals,
Fifth Circuit.
No. 96-11582.
DATA SPECIALTIES, INC., Plaintiff-Appellee,
v.
TRANSCONTINENTAL INSURANCE COMPANY, Defendant-Appellant.
Oct. 27, 1997.
Appeal from the United States District Court for the Northern
District of Texas.
Before KING, DUHÉ and WIENER, Circuit Judges.
DUHÉ, Circuit Judge:
Defendant-Appellant Transcontinental Insurance Company
("Transcontinental") appeals the district court's grant of summary
judgment for Plaintiff-Appellee Data Specialities, Inc. ("DSI").
The district court concluded that Transcontinental was obligated to
provide coverage to and reimburse its insured DSI for construction
expenses under its standard commercial general liability policy
("CGL"). This case requires us to determine how a Texas court
would construe the scope of coverage of a CGL policy when the
insured is not at fault but seeks to recover expenses incurred in
completing its contractual obligations, an apparent res nova issue
in that state. We conclude that there is no coverage under a CGL
policy when the insured is not at fault and thus reverse the
district court.
I.
1
DSI is an electrical contractor. Transcontinental is DSI's
general liability insurer. The Haggar Clothing Company hired DSI
to reconstruct the electrical system at its damaged manufacturing
facility in Texas.
While DSI and representatives of TU Electric were testing the
electrical switchboard DSI had installed as part of its
subcontract, a short circuit resulted in an explosion. The
switchboard and other property in the Haggar plant were damaged.
Investigators determined that a defective General Electric circuit
breaker caused the explosion.
Following the explosion, DSI completed its contract by hiring
a local electrical contractor, McBride Electric, to repair and
rebuild portions of the electrical system. DSI paid McBride
Electric for its work. DSI incurred additional overhead expenses
for its supervision of the McBride work. DSI sought reimbursement
for these expenses under its CGL policy. After investigating the
explosion, Transcontinental determined there was no coverage under
the CGL policy and denied the balance of the claim.
DSI sued seeking a determination of its rights under the CGL
policy and a finding that Transcontinental breached the policy by
not reimbursing DSI the expense it incurred to complete its
contract with Haggar. Transcontinental denied coverage on two
grounds: (1) that DSI was seeking to recover its own out-of-pocket
expenses arising from the explosion, and (2) no one claimed that
DSI was potentially at fault for the explosion. Transcontinental
also pled DSI's breach of the "no-voluntary payment" provision of
2
the policy.1
Both parties moved for summary judgment. Both motions were
granted in part and denied in part.2 The district court concluded
that the policy covered DSI's claim. Transcontinental appealed.
DSI argues that it was contractually obligated to repair the
damage at the plant and, because there was "property damage," the
policy affords coverage. Transcontinental argues that the DSI
expenditure was made merely to preserve DSI's reputation and good
business relationship with Haggar. We need not consider these
arguments because we conclude that Transcontinental's policy
provides coverage only for damages which the insured is legally
obligated to pay as a result of its tortious conduct. Whether DSI
had a contractual obligation to complete additional work following
the explosion or breached the no-voluntary payment clause are moot
issues in light of the lack of coverage.
II.
We review the district court's grant of summary judgment de
novo. Davis v. Illinois Cent. R.R., 921 F.2d 616, 617-18 (5th
Cir.1991). Summary judgment is appropriate if the record discloses
"that there is no genuine issue of material fact and that the
1
The policy contained two conditions to coverage: (1) "No
insureds will, except at their own cost, voluntarily make a
payment, assume any obligation or incur any expense, other than for
first aid, without out consent" and (2) "No person or organization
has a right under this Coverage Part: ... b. To sue us on this
Coverage Part unless all of its terms have been fully complied
with."
2
DSI did not appeal the partial granting of Transcontinental's
summary judgment motion that the cost of replacing the damaged
electrical switchboard itself was excluded from policy coverage.
3
moving party is entitled to a judgment as a matter of law."
Fed.R.Civ.P. 56(c). The underlying facts of this action are not
disputed. Therefore we are left with determining whether the
district court erred, as a matter of law, in interpreting the terms
of the insurance policy. See Guaranty Nat. Ins. Co. v. North River
Ins. Co., 909 F.2d 133, 135 (5th Cir.1990) (holding that the
"[i]nterpretation of an insurance policy is a question of law.").
III.
Texas law clearly states that for an insurance company to be
liable for a breach of its duty to satisfy a claim presented by its
insured, the insured must prove that its claim falls within the
insuring agreement of the policy. Employers Casualty Co. v. Block,
744 S.W.2d 940, 944 (Tex.1988)(overruled on other grounds by State
Farm Fire and Casualty v. Gandy, 925 S.W.2d 696 (Tex.1996)). The
insurer's duty to indemnify, or provide coverage, is triggered by
the actual facts establishing liability in the underlying suit.
Heyden Newport Chem. Corp. v. Southern Gen. Ins. Co., 387 S.W.2d
22, 25 (Tex.1965). DSI must prove that the money it spent hiring
McBride and overseeing its work is reimbursable under the CGL
policy. Both parties stipulated that the explosion occurred during
the policy period, was caused by a faulty switch (circuit breaker),
and was not the result of any DSI negligence.
What is not clear under Texas law is whether a standard CGL
policy covers a contractual obligation triggered by an event for
which the insured was not at fault. We must determine how a Texas
court might answer this res nova issue. To do so, we must
4
interpret, as a Texas court would, the following language in
Transcontinental's CGL policy: "We will pay those sums that the
insured becomes legally obligated to pay as damages because of
"bodily injury' or "property damage' to which this insurance
applies." (emphasis supplied).
Sitting as an Erie court, we may consult a variety of
sources: dicta in Texas court decisions, the general rule on the
issue, and the rules in other states that Texas might look to, as
well as treatises and law journals. State Farm Fire and Casualty
Co. v. Fullerton, 118 F.3d 374, 378 (5th Cir.1997), citing Hill v.
London, Stetelman, & Kirkwood, Inc., 906 F.2d 204, 207 (5th
Cir.1990). After reviewing these sources, we conclude that a Texas
court would rule that the CGL policy language "legally obligated to
pay as damages" applies only to tort-based obligations.
Although Texas courts have not directly ruled on the meaning
of the phrase in question, they have discussed the purpose of
standard liability insurance and CGL insurance. In Brightwell v.
Rabeck, 430 S.W.2d 252, 255 (Tex.Civ.App.—Fort Worth 1968, writ
ref'd n.r.e.), the court stated that the basic premise behind
liability insurance is that the insurance company accepts "the
responsibility to discharge the insured's obligation, if any,
arising through negligent tort committed by the latter." In
reviewing a CGL policy in a factually similar case,3 a Texas court
3
Charter had contracted to repair a shopping center roof owned
by Weingarten Realty. A wind storm damaged the roof and Weingarten
requested payment from Charter for the damages. Charter paid the
requested sum to preserve its good business relationship with
Weingarten. There was no suit and no settlement agreement. The
5
noted that a CGL policy is intended to cover claims made against
the insured by third parties. Charter Roofing Co., Inc. v. Tri-
State Insurance Co., 841 S.W.2d 903 (Tex.App.—Houston [14th Dist.]
1992, writ denied). The Texas Supreme Court has indirectly
addressed the purpose of a CGL policy. The court pointed out that
the "insurer does not pay because (the assured) is alleged to be
legally responsible but because (the assured) has been adjudicated
to be legally responsible." Heyden Newport Chem. Corp. v. Southern
Gen. Ins. Co., 387 S.W.2d 22, 25 (Tex.1965). It did not, however,
define "legally responsible." Most recently, the Texas high court
in National Union Fire Ins. Co. of Pittsburgh, Pa. v. Merchants
Fast Motor Lines, Inc., 939 S.W.2d 139 (Tex.1997), noted that under
a trucker's liability policy the insurer's duty to defend4 rests
upon allegations in the suit filed against the insured, the policy
language, and the requirement of a causal connection between the
accident and the insured's action. Thus, Texas courts seem to say
that an insurer is obligated under a CGL or a standard liability
policy when the insured's conduct is tortious in nature, a claim
has been made against the insured for this tortious activity, and
there has been an adjudication of the insured's liability.
The parties stipulated that DSI was not negligent. Haggar
third party, Weingarten, never filed a claim. Only Charter
demanded payment from Tri-State.
4
The duty to defend is broader than the obligation to pay or
provide coverage. Colony Ins. Co. v. H.R.K., Inc. 728 S.W.2d 848,
850 (Tex.App.1987) For DSI to successfully seek repayment, it must
at least meet the same basic requirements that are required when an
insured urges a duty to defend.
6
made no claim against DSI as a result of the explosion. The only
claim presented was DSI's demand for reimbursement from
Transcontinental for the costs DSI incurred in completing its
construction contract following the accident. No suit was filed
nor did Haggar and DSI enter a settlement agreement. Under the
Texas cases discussing liability insurance, DSI's claim for
coverage under its CGL policy would fail.
For this Court to determine how a Texas court would rule on
this issue, we must also look to other sources to glean the meaning
of "legally obligated to pay as damages." Other states have more
clearly described the purpose of a CGL policy and the context in
which the phrase "legally obligated to pay as damages" is to be
read. The Ninth Circuit, in reviewing California law on this
point, noted that state courts uniformly interpret such language to
cover tort but not contract liability. Chamberlain v. Allstate
Ins. Co., 931 F.2d 1361 (9th Cir.1991). In International Surplus
Lines Ins. Co. v. Devonshire Coverage Corp., 93 Cal.App.3d 601, 155
Cal.Rptr. 870 (Cal.App. 2 Dist.1979), the state appellate court
stated that "legally obligated to pay as damages" is synonymous
with "damages for a liability imposed by law." It recognized that
the latter phrase has been uniformly interpreted as referring to a
liability arising ex delicto as distinguished from ex contractu.
Citing Ritchie v. Anchor Casualty Co., 135 Cal.App.2d 245, 286 P.2d
1000.
The Wyoming Supreme Court held that CGL's policy coverage
encompassed only liability for tortious conduct and did not extend
7
to liability arising from a breach of contract. Action Ads, Inc.
v. Great Am. Ins. Co., 685 P.2d 42 (Wyo.1984). When an employee
was injured and discovered he had no medical insurance coverage, he
sued his employer for breach of contract. His employment contract
required the employer to provide medical insurance. The employer,
Action Ads, contacted its liability insurer, Great American, and
requested that the insurer defend the action and pay any resulting
judgment in favor of the employee. The court concluded that the
coverage clause, identical to the one at issue here, encompassed
liability that the law imposes on all insureds for their tortious
conduct and not liability that a particular insured may choose to
assume pursuant to contract. Id. 685 P.2d at 45.
The Alaska Supreme Court specifically addressed the meaning of
the phrase in question in a CGL policy in Olympic, Inc. v.
Providence Wash. Ins. Co. of Alaska, 648 P.2d 1008, 1012 (Alaska
1982). The court held that "legally obligated to pay as damages
..." refers to liability imposed by law for torts and not to
damages for breach of contract, except contracts for indemnity.
The only exception to this general rule, the court noted, arises
when the contract breach itself results in injury to persons or
property. Id.Illinois law, as interpreted by the Federal district court for
the Northern District of Illinois, emphasizes the difference
between coverage for tort liability and contract liability, with
only the former being covered in a CGL policy. In Aetna Cas. &
Sur. v. Spancrete of Ill., Inc., 726 F.Supp. 204 (N.D.Ill.1989),
8
the insurer sought a declaratory judgment that it was not required
to defend or indemnify a general contractor's breach of contract
action when its insured subcontractor failed to name the general
contractor as an additional insured under its CGL policies. The
court agreed, noting that Aetna had to indemnify Spancrete for
damages that it became legally obligated to pay as a result of
bodily injury or property damage. It found that the CGL policy did
not provide coverage for damages resulting from a breach of
contract. Id. at 206.
If Texas courts look to the law of other states, we conclude
they would find that the insured must be liable for damages arising
from its own tortious conduct to trigger liability insurance
coverage. A breach of contract action does not fall within CGL
coverage.
In an Erie analysis, courts also rely on treatises to elicit
a general rule on the issue. Various insurance commentators
provide a uniform reading of the phrase "legally obligated to pay
as damages." For example, Windt notes that many courts have held
that the phrase refers to liability imposed by law for torts and
not to damages for breach of contract.5 Another commentator, Long,
further describes the phrase in question in a general liability
insurance policy as one that "does not recompense the insured for
his own loss." He states that "liability insurance protects the
insured against damages which he may be liable to pay by virtue of
5
ALLAN D. WINDT, 2 INSURANCE CLAIMS & DISPUTE at 244(3d ed.1995).
9
his own actions."6 In discussing liability insurance, an
authoritative publication explains that coverage exists when "the
insured's liability is attributable to his own negligence...."7
Commentators in a more specialized liability insurance area,
the CGL policy, clearly recognize that there must be underlying
tortious conduct by the insured for coverage to exist. In
describing the scope of a CGL policy, the Construction Industry
Handbook notes that to cover most of the liability risks arising
out of its operations, a contractor purchases commercial general
liability insurance (known before 1986 as comprehensive general
liability). It states that the CGL policy is essentially designed
to cover the contractor for its tort liability. It protects the
contractor primarily against its own negligence, usually limiting
liability coverage only to the construction period.8 Section 11.3
of the Handbook notes that an insurer is not obligated to pay the
sums the insured becomes legally liable to pay as damages unless
the underlying requirement is met: the damages must be caused by
the insured's negligence.
Others analyzing the phrase at issue in a CGL policy find it
has the same meaning as a "liability imposed by law." This phrase,
according to the commentators, refers to the liability of an
6
ROWLAND N. LONG, THE LAW OF LIABILITY INSURANCE § 1.01[1], AT 1-3
(1992).
7
7A John Alan Appleman, Insurance Law and Practice § 4493 at
56 (1979).
8
DEUTSCH, KERRIGAN & STILES, CONSTRUCTION INDUSTRY INSURANCE HANDBOOK, §
11.1 (1991).
10
insured arising from a breach of a duty that exists independent of
any contractual relationship between the insured and the injured
party. They emphasize that the breach of a duty imposed by law
gives rise to an action sounding in tort.9
In light of the interpretation of the phrase "legally
obligated to pay as damages" given by courts of other states and by
insurance treatises, the necessary requirement for coverage is that
the insured's tortious conduct must have caused the damages. We
conclude that Texas courts would look first for the existence of
this requirement in determining coverage. The answer to the
coverage question under Transcontinental's CGL policy is
simple—there is no coverage. Both parties stipulated that DSI was
not at fault. The damages DSI claims it has suffered in additional
expenditures to complete its contract with Haggar are not those
suffered by a third party. Haggar made no third party claims
against DSI. The CGL policy does not afford coverage in this
situation.
IV.
What DSI seeks to do is to convert the Transcontinental CGL
policy into a builder's risk policy. The Construction Industry
Insurance Handbook distinguishes between liability and builders'
risk insurance.10 Normally a party will have two primary insurance
needs: insurance against loss of his property and insurance
9
Barry R. Ostrager and Thomas R. Newman, Handbook on Insurance
Coverage Disputes § 7.01 (8th ed.1995).
10
DEUTSCH, KERRIGAN & STILES, CONSTRUCTION INDUSTRY INSURANCE HANDBOOK, §
9.6.
11
against his liability for the claims of others. When a contractor
negligently causes an accident damaging his own property and that
of others, he needs two separate policies to collect for his lost
property and to be protected against claims of others whose
property he damaged. The CGL policy covers the contractor for its
tort liability.11 Builders' risk insurance, however, provides
property insurance for a project under construction.12 This
coverage reimburses the owner, or any party with an insurable
interest such as a mortgage holder, for the accidental loss,
damage, or destruction of the property, regardless of fault.13
"Builders' risk is not permanent insurance. It is usually issued
to insure a building "only during the course of the construction'
" period and perhaps for a short additional period after the
construction is completed.14
Given our resolution of the foregoing issues we need not
consider whether there was a contractual obligation for DSI to
repair the damage nor whether DSI breached the "no voluntary
payment" provision of the CGL policy.
Accordingly, we reverse the decision of the district court and
render judgment in favor of Transcontinental.
REVERSED and RENDERED.
11
Id. at § 11.1.
12
Id. at § 9.4.
13
Id. at § 9.3.
14
Brunswick G. Deutsch and Ralph L. Kaskell, Jr., Builders'
Risk Insurance, CONSTRUCTION LAWYER, April 1989, at 8.
12
13