Allied World v. Old Republic ( 2023 )

Case: 22-10107 Document: 00516758318 Page: 1 Date Filed: 05/22/2023
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
FILED
May 22, 2023
No. 22-10107
Lyle W. Cayce
Clerk
Allied World National Assurance Company,
Plaintiff—Appellant,
versus
Old Republic General Insurance Corporation; Oscar
Renda Contracting, Incorporated,
Defendants—Appellees.
Appeal from the United States District Court
for the Northern District of Texas
USDC No. 4:21-CV-431
Before Stewart, Willett, and Oldham, Circuit Judges.
Andrew S. Oldham, Circuit Judge:*
The question presented is whether Old Republic General Insurance
Corporation has a duty to defend its insured under a Texas commercial
general liability policy. The district court said no. We say yes and reverse.
*
This opinion is not designated for publication. See 5th Cir. R. 47.5.
Case: 22-10107 Document: 00516758318 Page: 2 Date Filed: 05/22/2023
No. 22-10107
I.
Tarrant Regional Water District hired IPL Partners to work on an
integrated pipeline in Venus, Texas. IPL, in turn, hired Oscar Renda
Contracting, Inc., to perform excavation and pipelaying duties on the project.
Nabor Machuca-Mercado worked on the pipeline project as a laborer for
Oscar Renda.
In its contract with IPL, the Water District agreed to provide
insurance for the project. Both Old Republic General Insurance Corporation
and Allied World National Assurance Company issued policies to cover the
project.
Old Republic issued two relevant policies. First, Old Republic issued
a commercial general liability (“CGL”) policy to the Water District that
covered up to $2 million per accident involving certain enrolled contractors
on the pipeline project including Oscar Renda. Second, Old Republic issued
an employers’ liability (“EL”) policy directly to Oscar Renda that covered
up to $1 million per accident.
Allied World issued an excess liability policy to the Water District,
which provided $5 million in coverage excess of the CGL policy and EL
policy.
One day Machuca-Mercado disappeared from the pipeline worksite.
Minutes later Machuca-Mercado was found buried up to his head in pea
gravel. Tragically, he suffocated to death.
Machuca-Mercado’s children sued Oscar Renda (Machuca-
Mercado’s employer) for negligence in Texas state court. See Valera v. Oscar
Renda Contracting, Inc., Case No. 18-8351-431 (Dist. Ct., Denton County,
TX). Specifically, the Valera complaint alleges that Oscar Renda was
negligent, grossly negligent, negligent per se, and violated OSHA standards
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in failing to properly hire, train, retain, and supervise its employees, agents,
and independent contractors, and in failing to maintain a safe jobsite. The
Valera complaint further alleges that Oscar Renda is vicariously liable for the
negligent acts of its employees and seeks $20 million in wrongful death,
survival, and punitive damages.
Oscar Renda tendered the Valera suit to Old Republic for defense and
indemnity. Old Republic denied coverage to Oscar Renda under the CGL
policy based on the CGL policy’s employer liability exclusion but
acknowledged that Oscar Renda’s EL policy covers the Valera suit.
Allied World filed this declaratory judgment action against Old
Republic, and the parties cross-moved for summary judgment. The district
court granted partial summary judgment to Old Republic because it
concluded that the CGL policy excludes coverage for the Valera suit. Allied
World timely appealed.
II.
We review de novo the district court’s grant of partial summary
judgment to Old Republic and apply the same standards on appeal that the
district court applied below. See Landmark Am. Ins. Co. v. SCD Mem’l Place
II, LLC, 25 F.4th 283, 285 (5th Cir. 2022).
It’s undisputed that the preliminary conditions for coverage under the
CGL policy are met. The narrow question on appeal is whether the district
court correctly concluded that an exclusion to the CGL policy applies to the
Valera suit.
Texas law controls that question. See Lyda Swinerton Builders, Inc. v.
Ok. Sur. Co., 903 F.3d 435, 444 (5th Cir. 2018). Under Texas law, the duty
to defend obligates an insurer to “defend the insured in any lawsuit that
alleges and seeks damages for an event potentially covered by the policy.”
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Colony Ins. Co. v. Peachtree Constr., Ltd., 647 F.3d 248, 253 (5th Cir. 2011)
(quotation omitted). “The duty to defend depends on the language of the
policy.” Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co., 279 S.W.3d 650,
655 & n.28 (Tex. 2009). Whether an insurer has a duty to defend is a question
of law. See Ooida Risk Retention Grp., Inc. v. Williams, 579 F.3d 469, 472 (5th
Cir. 2009).
Texas courts apply the ordinary rules of contract interpretation to
insurance policies. Don’s Bldg. Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d
20, 23 (Tex. 2008). Under those interpretive rules, a policy’s “words and
phrases” are “given their plain and ordinary meaning.” Aggreko, LLC v.
Chartis Specialty Ins. Co., 942 F.3d 682, 688 (5th Cir. 2019). “An
interpretation that gives each word meaning is preferable to one that renders
one surplusage.” U.S. Metals, Inc. v. Liberty Mut. Grp., Inc., 490 S.W.3d 20,
23–24 (Tex. 2015). “No one phrase, sentence or section [of a contract]
should be isolated from its setting and considered apart from other
provisions.” RSUI Indem. Co. v. The Lynd Co., 466 S.W.3d 113, 118 (Tex.
2015). Instead, courts must interpret the policy as whole. Forbau v. Aetna Life
Ins. Co., 876 S.W.2d 132, 133 (Tex. 1994).
If a contract is unambiguous, it will be enforced as written. Don’s Bldg.
Supply, 267 S.W.3d at 23. A contract provision is not ambiguous merely
because the parties disagree about its scope. ACE Am. Ins. Co. v. Freeport
Welding & Fabricating, Inc., 699 F.3d 832, 842 (5th Cir. 2012). But when “a
contract is susceptible to more than one reasonable interpretation,” courts
“resolve any ambiguity in favor of coverage.” Don’s Bldg. Supply, 267 S.W.3d
at 23. Further, under Texas law, “exceptions and limitations of liability are
even more strictly construed against the insurer.” W. Heritage Ins. Co. v.
Magic Years Learning Ctrs. & Child Care, Inc., 45 F.3d 85, 88 (5th Cir. 1995).
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Two provisions in the CGL policy are important: the Exclusion and
the Endorsement.
The Exclusion. In the CGL policy’s main coverage form, there is a
section titled “Section 2. Exclusions, e. Employer’s Liability.” The
Exclusion states that the CGL policy does not apply to “bodily injur[ies]” to:
(1) An “employee” of the insured arising out of and in the
course of:
(a) Employment by the insured; or
(b) Performing duties related to the conduct of the
insured’s business; or
(2) The spouse, child, parent, brother or sister of that
“employee” as a consequence of paragraph (1) above.
The Endorsement. A related endorsement near the end of the CGL
policy is entitled “Fellow Employee Wrap-Up Exclusion Deleted.” Relevant
here, the Endorsement modifies the Exclusion. The text of the Endorsement
reads:
With respect to Supervisory personnel, SECTION I –
COVERAGES, COVERAGE A BODILY INJURY AND
PROPERTY DAMAGE LIABILITY, 2. Exclusions, e.
Employer’s Liability, is amended to include:
This paragraph e does not apply to “bodily injury” to
an “employee” when such “bodily injury” is caused by
another “employee.”
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We first (A) explain why reversal is required under our reading of the
CGL policy. Then we (B) explain why reversal is also required under the
district court’s reading of the CGL policy.
A.
The CGL policy requires reversal based on its text and structure. All
agree that the Endorsement amends the Exclusion to include an additional
sentence (the “Carveout Sentence”). The Carveout Sentence states that the
Exclusion does not apply to a “bodily injury” to one “employee” that was
“caused by” another “employee.” Put differently, the Endorsement
narrows the Exclusion by carving out a class of bodily injuries—employee
injuries caused by other employees.
The Endorsement also includes a prefatory phrase that reads “[w]ith
respect to Supervisory personnel.” But it’s clear from the Endorsement’s
structure that that prefatory phrase has no effect whatsoever on the CGL
policy. That’s because the Endorsement amends the Exclusion by adding the
indented text only to the Exclusion. The prefatory phrase, by contrast, is
located at the beginning of an un-indented line of text that ends by stating the
Exclusion is “amended to include” followed by a colon and then the indented
Carveout Sentence. The effect of the Endorsement couldn’t be plainer: Only
the indented language after the colon gets added to the policy. The prefatory
phrase is located before the colon. So the prefatory phrase “[w]ith respect to
Supervisory personnel” is not added to the policy and has no legal effect.
Under our reading, the Endorsement’s sole addition to the Exclusion
is the Carveout Sentence. The modified Exclusion—with the added text
from the Endorsement italicized—reads like this:
2. Exclusions
This insurance does not apply to:
* * *
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e. Employer’s Liability
“Bodily injury” to:
(1) An “employee” of the insured arising out of
and in the course of:
(a) Employment by the insured; or
(b) Performing duties related to the
conduct of the insured’s business; or
(2) The spouse, child, parent, brother or sister
of that “employee” as a consequence of
paragraph (1) above.
This exclusion applies whether the insured may be liable as
an employer or in any other capacity and to any obligation to
share damages with or repay someone else who must pay
damages because of the injury.
This exclusion does not apply to liability assumed by the
insured under an “insured contract”.
This paragraph e does not apply to “bodily injury” to an
“employee” when such “bodily injury” is caused by another
“employee.”
The practical effect is that any on-the-job bodily injuries to employees
caused by other employees receive coverage under the CGL policy post-
Endorsement.
Under our reading, this is an easy case. The allegations in the Valera
complaint make it plain that the underlying litigation involves a bodily injury
to an employee that was caused by another employee. First in the “Parties”
section, the Valera complaint alleges: “Whenever in this petition it is alleged
that [Oscar Renda] committed any act or omission, it is meant that [Oscar
Renda]’s officers, directors, vice-principals, agents, servants, and/or
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employees committed such act or omission.” Next in the “Cause of Action”
section the complaint alleges all the different ways Oscar Renda (a.k.a. its
employees per the previous allegation) was negligent: “[Oscar Renda]’s
gross negligence, negligence, and or negligence per se, were a proximate
cause of Mr. Mercado’s injuries and death, including but not limited to, to
wit: In failing to properly hire, train, retain, and supervise employees . . .
[listing many other ways Oscar Renda was negligent] . . . . Each of these acts
and omissions, whether taken singularly or in any combination constitute
negligence, which proximately caused the injuries and death of the
decedent.” Taken together, these allegations implicate the CGL policy and
require reversal under our reading of the policy.
B.
The district court and the parties assume that the Endorsement’s
prefatory phrase “[w]ith respect to Supervisory personnel” limits the
application of the Carveout Sentence. But even on that view, we still must
reverse. That’s for three reasons: (1) Allied World’s proposed reading is a
reasonable one; (2) it does not create surplusage; and (3) we construe any
ambiguity in favor of coverage.
1.
Allied World reads the prefatory phrase as limiting the Carveout
Sentence to underlying suits alleging that the conduct of supervisory
personnel contributed to the employee’s injury. This reading is reasonable.
The parties don’t dispute the definitions and grammatical function of
the words “with respect to Supervisory personnel.” They agree that the
phrase “with respect to” means “referring to,” “concerning,” or “with
reference or regard to something.” Evanston Ins. Co. v. Atofina Petrochemicals
Inc., 256 S.W.3d 660, 666 n. 19 (Tex. 2008) (citing The Random House
Dictionary of the English Language 1640 (2d ed. 1987); The
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Compact Edition of the Oxford English Dictionary 2512
(1971)). And they agree that “supervisory” modifies “personnel” and that
“personnel” refers to “the body of people employed in any work, staff.”
Personnel, Oxford American Dictionary 498 (1st ed. 1980);
Personnel, Webster’s II New College Dictionary 841 (3d ed.
2005). The issue “is not the precise grammar of the phrase, but how it
functions in the context” of the whole agreement. See Don’s Bldg. Supply, 267
S.W.3d at 23.
Given the agreed-on definitions, the most natural way to read the
disputed phrase (assuming, of course, that it has any effect at all) is that the
Endorsement carves out from the Exclusion lawsuits that “concern
supervisory personnel.” Even though it came to the opposite conclusion, the
district court seems at times to read the Endorsement this way too. For
example, in describing “the result” of the Endorsement, the district court
stated that “if a supervisor allegedly contributes to a fellow employee’s injury, the
supervisor qualifies as an insured and the CGL policy covers liability for that
injury.” (Emphasis added). This statement is more in line with Allied
World’s understanding of the prefatory phrase than Old Republic’s.
Assuming the prefatory phrase applies at all, Allied World’s proposed
reading is at least reasonable.
2.
Further, Allied World’s proposed interpretation does not create
surplusage. That’s because the result of the Endorsement under Allied
World’s view is that there is coverage in instances—like the Valera suit—
where a supervisor allegedly contributes to a fellow employee’s injury and
the employer is sued.
Old Republic’s reading of the prefatory phrase, by contrast, does
create surplusage. Old Republic would read it as limiting the Carveout
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Sentence to underlying lawsuits that name supervisory personnel as
defendants. But Old Republic effectively concedes that under its preferred
reading, the Exclusion doesn’t apply to individual supervisory personnel in
the first place. Even so, it argues that the preference to avoid surplusage can
be overcome where “it is impossible to avoid the redundancy without
rendering other language superfluous.” Red Br. 28 (citing Whole Women’s
Health v. Jackson, 642 S.W.3d 569, 581–82 (Tex. 2022)). Here, of course, it’s
not impossible to avoid the surplusage—as Allied World’s interpretation
demonstrates.
3.
As we held above, the CGL policy clearly covers the Valera suit. But
even assuming that the CGL policy is “susceptible to more than one
reasonable interpretation,” we “resolve any ambiguity in favor of” Allied
World and coverage. Don’s Bldg. Supply, 267 S.W.3d at 23; accord Landmark
Am. Ins., 25 F.4th 283, 286 (5th Cir. 2022) (“When an insurance contract is
ambiguous—meaning that it is susceptible to more than one reasonable
interpretation—we adopt the interpretation that affords coverage.”).
Further, given that the disputed provision is an exclusion, Texas law dictates
that it should be “even more strictly construed against the insurer.” Magic
Years, 45 F.3d at 88.
* * *
For these reasons, we REVERSE the district court’s grant of partial
summary judgment to Old Republic and REMAND for further proceedings
consistent with this opinion.
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