Wendy Rutherford Branham v. State Farm Lloyds ( 2012 )

MEMORANDUM OPINION
No. 04-12-00190-CV
Wendy Rutherford BRANHAM,
Appellant
v.
STATE FARM LLOYDS,
Appellee
From the 150th Judicial District Court, Bexar County, Texas
Trial Court No. 2011-CI-18919
Honorable Olin B. Strauss, Judge Presiding
Opinion by: Catherine Stone, Chief Justice
Sitting: Catherine Stone, Chief Justice
Karen Angelini, Justice
Marialyn Barnard, Justice
Delivered and Filed: September 12, 2012
AFFIRMED
Wendy Rutherford Branham appeals a summary judgment granted in favor of State Farm
Lloyds. The trial court concluded that State Farm Lloyds had no duty to defend or indemnify
Branham in relation to a claim against her for misrepresentations she allegedly made in selling
her home. On appeal, Branham asserts the trial court erred in granting the summary judgment
because: (1) State Farm Lloyds had a duty to defend the claim; (2) Branham is entitled to
indemnity despite voluntarily settling the claim because State Farm wrongfully denied a defense
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of the claim; and (3) the intentional act exclusion of Branham’s policy did not apply. We
disagree with Branham’s contentions and affirm the trial court’s judgment.
BACKGROUND
Branham sued State Farm Lloyds for failing to provide a defense and indemnity with
regard to a lawsuit filed against her by Patrick and Melissa McCullough. The McCulloughs’
lawsuit was based on a contract they entered into with Branham to purchase a home from her. In
their petition, the McCulloughs alleged that Branham “falsely represented that there was no (1)
previous flooding into the home, (2) water penetration into the home, (3) active infestation of
termites or other wood destroying insects, (4) previous termite or wood destroying insect damage
repaired, and (5) termite or wood destroying insect damage needing repair.” The McCulloughs
further alleged that Branham “failed to disclose to Plaintiffs the previous problems with water
penetration and damage to the home and that Ms. Branham had filed a homeowners’ insurance
claim for water damages sustained in the home.” The McCulloughs also claimed that although
Branham “was paid on these water damage claims by her homeowners’ insurance carrier,” she
“did not make proper repairs to the home or if she did, only made cosmetic repairs to conceal the
damages.” The McCulloughs asserted numerous causes of action against Branham based on
these allegations including: (1) fraudulent concealment for making affirmative false
representations or omitting to disclose material facts, alleging the representations and
concealments were “made with knowledge of the real facts;” (2) breach of contract for “failing to
disclose the home’s previous water penetration problems and damages, thereby, fraudulently
inducing Plaintiffs into entering the contract;” (3) negligence for failing to properly disclose the
condition of the home; (4) DTPA violations; (5) negligent misrepresentations by supplying false
information and not exercising reasonable care or competence in communicating the
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information; (6) common-law fraud and fraud by non-disclosure; and (7) violation of section
27.01 of the Texas Business and Commerce Code for making misrepresentations in a transaction
involving real estate that Branham knew were false.
The parties filed competing motions for summary judgment. State Farm Lloyds’s motion
asserted it had no duty to defend or indemnify Branham because: (1) the McCulloughs’ petition
did not allege damages arising from a covered occurrence; (2) the McCulloughs’ petition did not
seek property damages as defined by Branham’s policy; and (3) the policy excluded coverage for
intentional conduct. The trial court granted State Farm Lloyds’s motion and entered a take
nothing judgment on Branham’s claims.
STANDARD OF REVIEW
We review a summary judgment de novo. Provident Life & Acc. Ins. Co. v. Knott, 128
S.W.3d 211, 215 (Tex. 2003). We must therefore consider all the evidence in the light most
favorable to the respondent, indulging all reasonable inferences in favor of the respondent, and
determine whether the movant proved that there were no genuine issues of material fact and that
it was entitled to judgment as a matter of law. Nixon v. Mr. Prop. Mgmt. Co., 690 S.W.2d 546,
548 (Tex. 1985). When competing motions for summary judgment are filed, and one is granted
and the other denied, we must review all issues presented and render the judgment the trial court
should have rendered. Comm’rs Court v. Agan, 940 S.W.2d 77, 81 (Tex. 1997).
DUTY TO DEFEND
“Under the eight-corners rule, the duty to defend is determined by the claims alleged in
the petition and the coverage provided in the policy.” Pine Oak Builders, Inc. v. Great American
Lloyds Ins. Co., 279 S.W.3d 650, 654 (Tex. 2009). If a petition does not allege facts within the
scope of coverage, an insurer is not legally required to defend a suit against its insured. Id.
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“Interpretation of insurance contracts in Texas is governed by the same rules as interpretation of
other contracts,” and “when terms are defined in an insurance policy, those definitions control.”
Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d 819, 823 (Tex. 1997).
Branham acknowledges that several of our sister courts have held that an insurance
carrier has no duty to defend a homeowner who makes misrepresentations in selling a home. See
Huffhines v. State Farm Lloyds, 167 S.W.3d 493 (Tex. App.—Houston [14th Dist.] 2005, no
pet.); Freedman v. Cigna Ins. Co., 976 S.W.2d 776 (Tex. App.—Houston [1st Dist.] 1998, no
pet.); State Farm Lloyds v. Kessler, 932 S.W.2d 732 (Tex. App.—Fort Worth 1996, writ denied).
Branham argues, however, that the facts in those cases are distinguishable, at least with regard to
Branham’s negligence claims, or, alternatively, that the holdings in these decisions are
questionable under the Texas Supreme Court’s holding in Lamar Homes, Inc. v. Mid-Continent
Cas. Co., 242 S.W.3d 1 (Tex. 2007).
A. Cases Holding No Duty to Defend
In Kessler, John and Alison Fanning sued Paul and Mary Kessler for breach of contract,
breach of warranty, and DTPA violations arising from the Kesslers’ sale of their home to the
Fannings. 932 S.W.2d at 734. The Fannings alleged the Kesslers misrepresented that the home
had no drainage or foundation problems when the home actually had severe drainage and
foundation problems. Id. The Fannings further alleged that the Kesslers knew the statements
were false when they made them. Id. The trial court signed a judgment declaring that the
Kesslers’ insurance company, State Farm, had a duty to defend the Kesslers. Id. at 733. The
Fort Worth court reversed the trial court’s judgment, holding State Farm did not have a duty to
defend because: (1) the Fannings’ petition did not allege property damage as defined by the
policy; and (2) the Fannings’ petition did not allege damages arising from an occurrence or loss
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as defined by the policy. Id. at 734. We will focus our analysis on the definition of occurrence
or loss.
In order for State Farm to have a duty to defend under the Kesslers’ policies, the alleged
damages had to result from an “occurrence” or “loss.” Id. at 738. The policies defined
occurrence and loss as an “accident” that results in property damage. Id. The Fort Worth court
then noted, “Under Texas law, when the insured’s acts are voluntary and intentional, the results
or injuries, even if unexpected, are not caused by an ‘accident,’ and therefore the event is not an
‘occurrence’ under the policy.” Id. The Fannings’ petition alleged the Kesslers made statements
concerning the property that they knew or should have known were false, especially given
allegations that the Kesslers attempted to cover up the problem. Id. Accordingly, the Fort Worth
court held that all of the Fannings’ allegations revolved around the Kesslers’ alleged intentional
acts; therefore no accident occurred. Id.
In Freedman, Alfred and Sylvia Freedman sold their house to the Marxes. 976 S.W.2d at
777. The Marxes subsequently learned that the roof had needed repairs while the Freedmans
lived there and sued the Freedmans for not disclosing the problems with the roof, alleging the
Freedmans intentionally defrauded them. Id. The Marxes alleged causes of action for DTPA
violations, common-law fraud, fraud in a real estate transaction, and negligence. Id. The
Freedmans’ insurers, Cigna Insurance Company of Texas and Insurance Company of North
America, refused to defend the Freedmans, and the Freedmans eventually settled the Marxes’
suit. Id. The Freedmans then sued Cigna and ICNA. Id. Cigna and ICNA moved for summary
judgment, asserting as one ground that they had no duty to defend the Freedmans because the
Marxes sued them for an event that was not an “occurrence” under the insurance policies. Id.
The trial court granted the motion, and the Houston court affirmed. Id.
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The definition of “occurrence” in the Freedmans’ policies was the same as the definition
in the Kesslers’ policies, defining “occurrence” as an “accident” resulting in property damage.
Id. at 778. The Houston court noted, “An accident is commonly defined as an unexpected
happening without intention or design.” Id. The court further noted, “As a matter of law,
fraudulent promises, misrepresentations, and untrue statements do not fall within the plain
meaning of the definition of an occurrence.” Id. Although the Freedmans represented the roof
on the house needed no repair, the Marxes alleged that the roof was repaired at least 18 times in
the seven years preceding the sale, 12 times in the preceding four years, and 3 times while the
property was listed for sale, and the Freedmans took affirmative steps to conceal the roof defect.
Id. The Houston court held, “On the face of the Marxes’ pleadings, the event for which the
Freemans sought coverage was an intentional act,” i.e., their statements to the Marxes, “and not
an ‘accident.’” Id.
The Houston court then examined the effect of the Marxes pleading negligence as an
alternative to fraud. Id. The court noted, “The label the plaintiff puts on the cause of action is
not controlling; it is the allegation of the facts which give that control.” Id. The court further
noted, “The Marxes alleged that the Freedmans intentionally omitted any mention of the roof’s
problems in their oral and written representations” and “claimed the Freedmans destroyed
records of roof repair, and fixed the water damages to conceal any evidence of the problems.”
Id. at 779. The court concluded that the Marxes alleged intentional acts by the Freedmans and
reasoned, “Even though the Marxes added negligence as an alternative claim, the mere allegation
of negligence does not control the issue of duty to defend. The facts alleged by the Marxes
control, and the facts do not give rise to a duty to defend.” Id.
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Finally, the decision in Huffhines contains reasoning similar to Kessler and Freedman. In
Huffhines, the sellers received an engineering report on the property before the sale detailing
various defects; however, the sellers assured the buyers that they were unaware of anything on
the property in need of repair. 167 S.W.3d at 495. The buyers later sued the sellers, alleging
common law fraud, statutory fraud, DTPA violations, and negligence, and State Farm denied any
duty to defend. Id. at 496. Once again, the analysis focused on whether the buyers had alleged
property damage resulting from an “occurrence,” which was similarly defined by the policy in
question as an “accident.” Id. at 498.
The Houston court noted, “‘whether an event is [an] accident is determined by its
effect.’” Id. (quoting Trinity Universal Insurance Co. v. Cowan, 945 S.W.2d 819, 827 (Tex.
1997)). The Houston court further noted that an effect is produced by accidental means if the
actor did not intend to produce the effect and the actor cannot be charged with the design of
producing the effect. Id. The Houston court then reasoned that the event or conduct alleged by
the buyers in Huffhines was the sellers assuring the buyers they were not aware of any defects
when the sellers had knowledge of defects. Id. at 499. The Houston court then held that the
damages resulting from the undisclosed defects were an effect the sellers could be charged with
producing and, therefore, was not an accident. Id. Following the reasoning in Freedman, the
court also held State Farm did not have a duty to defend against the buyers’ negligence claim,
asserting, “A mere characterization of negligence, alternatively made, is insufficient to convert
claims based on knowing misrepresentation into a claim for recovery of property damage caused
by an accident within the meaning of the insurance policies.” Id. at 501.
We find the reasoning in Kessler, Freedman, and Huffhines persuasive. Branham
contends those decisions are factually distinguishable based on the extent of the
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misrepresentations in those cases because she could have “negligently” forgotten about the prior
damage and insurance claim in the instant case. The McCulloughs, however, do not allege that
Branham forgot about the prior damage. See Huffhines, 167 S.W.3d at 497 (courts “will not read
facts into the petition” or “look outside of the petition, or imagine factual scenarios which might
trigger coverage”). Instead, the McCulloughs’ factual allegations assert Branham made false
representations and made cosmetic repairs to conceal the prior damage for which she received
insurance proceeds to repair. The McCulloughs’ “mere characterization of negligence,
alternatively made, is insufficient to convert [their claims] based on knowing misrepresentation
into a claim for recovery of property damage caused by an accident within the meaning of the
insurance polic[y].” Id. at 501.
B. Texas Supreme Court’s Ruling in Lamar Homes
Branham also contends that these prior decisions have questionable precedential value
after the Texas Supreme Court’s decision in Lamar Homes. We disagree. The manner in which
the Texas Supreme Court defined the term “accident” in Lamar Homes is consistent with these
prior decisions. In Lamar Homes, the court explained, “An accident is generally understood to
be a fortuitous, unexpected, and unintended event.” 242 S.W.3d at 8. An accident occurs “as the
culmination of forces working without design, coordination, or plan.” Id. “[A]n intentional tort
is not an accident and thus not an occurrence regardless of whether the effect was unintended or
unexpected.” Id. “But a deliberate act, performed negligently, is an accident if the effect is not
the intended or expected result; that is, the result would have been different had the deliberate act
been performed correctly.” Id. “Thus, 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
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expected result of the insured’s actions, that is, was highly probable whether the insured was
negligent or not.” Id. at 9. In the instant case, the damages resulting from Branham’s
misrepresentation of known facts, as alleged by the McCulloughs, were not unexpected but were
the natural and expected result of Branham’s design or plan to conceal the true facts. Moreover,
the McCulloughs clearly allege that Branham intended the injury. Accordingly, we read the
definition of the term “accident” in Lamar Homes as being consistent with the holdings in
Kessler, Freedman, and Huffhines, and hold that the trial court did not err in concluding that
State Farm did not have a duty to defend Branham in the McCulloughs’ lawsuit.
DUTY TO INDEMNIFY
Branham’s argument regarding State Farm’s duty to indemnify is based on her contention
that State Farm breached its duty to defend. Because we have held State Farm did not breach its
duty to defend, Branham’s argument fails. Moreover, since any money paid by Branham in
settlement of the McCulloughs’ claim could not be for property damages resulting from an
“occurrence,” State Farm did not have a duty to indemnify Branham.
CONCLUSION
Based on the allegations in the McCulloughs’ petition and the definition of occurrence in
Branham’s insurance policy, we conclude State Farm did not have a duty to defend Branham
against that petition. 1 The trial court’s judgment is affirmed.
Catherine Stone, Chief Justice
1
Because we hold no duty to defend exists based on the absence of an occurrence, we need not address whether the
damages alleged by the McCulloughs were property damages as defined by the policy or the applicability of the
intentional act exclusion which were alternative grounds asserted in State Farm’s motion for summary judgment also
challenged by Branham on appeal. See TEX. R. APP. P. 47.1.
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