Mid-Continent Casualty Company v. Robert E. Krolczyk , 408 S.W.3d 896 ( 2013 )

Opinion issued August 15, 2013
In The
Court of Appeals
For The
First District of Texas
————————————
NO. 01-12-00587-CV
———————————
MID-CONTINENT CASUALTY COMPANY, Appellant/Cross-Appellee
V.
ROBERT E. KROLCZYK, Appellee/Cross-Appellant
On Appeal from the 155th District Court
Waller County, Texas
Trial Court Case No. XX-XXXXXXX
OPINION ON REHEARING *
In this agreed interlocutory appeal, we must determine whether the insurer,
Mid-Continent Casualty Company, owed its insured, Robert Krolczyk, a duty to
defend in a suit involving damage to a road built by Krolczyk. Mid-Continent
contends that it had no duty to defend because two exclusions in its commercial
general liability policy barred insurance coverage. Because the allegations
potentially support a covered claim outside the exclusions, we render a declaratory
judgment in favor of Krolczyk.
Background
This case arises from a dispute about the construction of a road built for a
subdivision and the insurance coverage for damage to that road. Krolczyk owned a
tract of land in Waller County, which he subdivided into seven lots and sold to
purchasers for home sites. As part of the development and sale of the lots,
Krolczyk built Hunter’s Ridge Road through the center of the subdivision. He
completed the base of the road in the year 2000, and he completed the paving and
sealing of the road in 2003. In 2006, Krolczyk sued the subdivision’s homeowners
association, named as the Hunter’s Ridge Maintenance Association, for damage to
the road. He alleged that the home owners had moved between 50 and 125
*
Appellant Mid-Continent Casualty Company moved for rehearing of our
June 6, 2013 opinion and judgment. We deny the motion for rehearing. We
withdraw our prior opinion and judgment and issue the following opinion
and judgment in their stead. All other pending motions are denied as moot.
2
dumptruck-loads of earth over his objection, damaging the road. He sought
declaratory relief to determine the rights and responsibilities of the parties for
repairs. The Hunter’s Ridge Homeowners Association, representing the
homeowners as an unincorporated association, intervened and filed counterclaims
against Krolczyk, alleging that he agreed to provide a paved road, but the road he
built was “totally inadequate” due to faulty construction. The Association’s factual
allegations pertinent to Krolczyk’s construction of the road include:
14. Hunter’s Ridge Road was not built as a single project, but as
three separate projects.
15. The first segment of the project constituted the construction of
the drainage ditches and base for the entire project, and the laying of
the asphalt for the first 1/3 of the length of the road.
16. The second 1/3 of the project was completed approximately 18
months after the initial phase.
17. The second 1/3 of Hunter’s Ridge Road’s construction
consisted of the laying of the asphalt surface but with no additional
compaction or reworking of the road base.
18. The last phase of Hunter’s Ridge Road was completed after the
second, again without reworking of the base after extended exposure
to the elements.
19. Krolczyk utilized washed concrete instead of stabilized
concrete as part of the base.
20. The drainage alongside the Hunter’s Ridge Road was not
adequate to prevent rain water from washing out some of the base
which had been exposed to the elements.
3
21. As a result of the inadequate base material used, the extended
exposure of the base to the elements, and the poor drainage
construction, the base under the Hunter’s Ridge Road failed.
22. The failure of the base of Hunter’s Ridge Road has caused the
asphalt surface to crack and pothole after less than one year of use.
....
27. Hunter’s Ridge Road, as constructed and in its current
condition, does not meet the county standards of Waller County, even
for the limited traffic it will handle.
28. Much of the current roadway was overlaid once before without
success of correcting the problems which were present at that time.
29. One of the causes for the lateral cracking found in the road bed
is poor joint construction.
Based on these allegations, the Association asserted causes of action against
Krolczyk for breach of contract, deceptive trade practices, common-law fraud,
negligent misrepresentation, and fraud in a real estate transaction. The Association
sought damages to replace two-thirds of the road.
Krolczyk tendered the Association’s claims to his insurer, Mid-Continent.
In June 2009, Mid-Continent responded with a reservation-of-rights letter, noting
that the Association alleged that the road had been poorly constructed and that this
may limit or preclude coverage under the policy. Krolczyk filed an answer to the
Association’s claims, asserting a defense of contributory negligence for the
damage to the road. Later, Mid-Continent sent a letter acknowledging that its duty
to defend Krolczyk had been triggered, but it continued to reserve its right to
4
determine whether insurance coverage was limited by the policy. Although
Krolczyk had selected his own attorney, Mid-Continent attempted to select another
attorney to defend the lawsuit. Krolczyk’s attorney informed Mid-Continent that it
had created a conflict of interest when it issued the reservation-of-rights letter, and
therefore Krolczyk was entitled to select his own attorney.
A few weeks later, Mid-Continent informed Krolczyk that it had determined
that the policy did not cover the damages sought in the lawsuit. In response,
Krolczyk filed a petition seeking a declaratory judgment that he was entitled to a
defense under the insurance policies. Mid-Continent asserted a defense that a
property-damage exclusion in the policy, called the “your work” exclusion, applied
to preclude coverage. Krolczyk filed a motion for summary judgment, which the
trial court denied. After asserting that an additional “earth movement” exclusion
also applied, Mid-Continent filed its own motion for summary judgment. The trial
court denied all motions for summary judgment.
Krolczyk and Mid-Continent then jointly moved for permission to pursue an
interlocutory appeal. See Act of May 11, 2005, 79th Leg., R.S., ch. 97, § 5, sec.
10.3, 2005 Tex. Gen. Law 180 (amended 2011) (current version at TEX. CIV. PRAC.
& REM. CODE ANN. § 51.014(d) (West Supp. 2012)). The trial court granted the
motion and stayed litigation pending the appeal. The controlling issue as identified
5
by the parties is whether Mid-Continent owes Krolczyk a duty to defend under the
insurance policy.
Analysis
We review the trial court’s ruling on a summary-judgment motion de novo.
Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844, 848
(Tex. 2009). In our review of cross-motions for summary judgment, we review the
summary-judgment evidence presented by each party, determine all questions
presented, and render the judgment that the trial court should have rendered. Tex.
Mun. Power Agency v. Pub. Util. Comm’n, 253 S.W.3d 184, 192 (Tex. 2007).
When determining whether an insurer has a duty to defend, we follow the
eight-corners rule by looking at the four corners of the complaint for alleged facts
that could possibly come within the scope of coverage in the four corners of the
insurance policy. Evanston Ins. Co. v. Legacy of Life, Inc., 370 S.W.3d 377, 380
(Tex. 2012). The duty to defend is broader than, and distinct from, the duty to
indemnify. Utica Nat’l Ins. Co. of Tex. v. Am. Indem. Co., 141 S.W.3d 198, 203
(Tex. 2004). The duty to defend does not depend on the truth or falsity of the
allegations; a plaintiff’s factual allegations that could potentially support a covered
claim are all that is needed to invoke the insurer’s duty to defend. GuideOne Elite
Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d 305, 310 (Tex. 2006).
Insureds are favored when examining both the complaint and the policy. Legacy of
6
Life, 370 S.W.3d at 380. If the complaint includes even one covered claim, the
insurer must defend the entire suit. Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d
487, 491 (Tex. 2008).
Initially, the insured has the burden of establishing coverage under the terms
of the policy. Ulico Cas. Co. v. Allied Pilots Ass’n, 262 S.W.3d 773, 782 (Tex.
2008). If the insured proves coverage, then to avoid liability the insurer must
prove that the loss falls within an exclusion. Id. at 778. “When interpreting an
insurance contract, we ‘must adopt the construction of an exclusionary clause
urged by the insured as long as that construction is not unreasonable, even if the
construction urged by the insurer appears to be more reasonable or a more accurate
reflection of the parties’ intent.’” Evanston Ins. Co. v. ATOFINA Petrochems.,
Inc., 256 S.W.3d 660, 668 & n.25 (Tex. 2008) (quoting Nat’l Union Fire Ins. Co.
v. Hudson Energy Co., 811 S.W.2d 552, 555 (Tex. 1991)). Any limitations on
liability are strictly construed against the insurer and in favor of the insured, and
the insurer must express any intent to exclude coverage in clear and unambiguous
language. Id.
Although conceding that the underlying policy terms provide coverage, Mid-
Continent asserts that two exclusions apply: one for “your work,” excluding
coverage for damage to the work performed by Krolczyk, and another for “earth
movement.”
7
I. The “your work” exclusion
The “your work” exclusion, listed as term 2(j)(6) in the policy, provides that
the CGL insurance does not apply to:
“Property damage” to:
...
(6) That particular part of any property that must be restored, repaired
or replaced because “your work” was incorrectly performed on it. 1
“Your work” is defined, in relevant part, as “Work or operations performed by you
or on your behalf.” The “your work” exclusion is a business-risk exclusion, a
common feature in CGL insurance policies that is designed to exclude coverage for
defective work performed by the insured. Mid-Continent Cas. Co. v. JHP Dev.,
Inc., 557 F.3d 207, 211 (5th Cir. 2009). While the general purpose of business-risk
exclusions is to preclude coverage for damage to an insured’s own work, the actual
coverage for the type of risk depends on the policy’s specific language. Lamar
Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 13–14 (Tex. 2007).
1
Mid-Continent asserts that Krolczyk waived the issue of challenging the
application of the “your work” exclusion because he inadequately briefed it
in his cross-appellant’s brief. Krolczyk, however, presented the argument in
his cross-appellee’s brief that the exclusion does not defeat the duty to
defend when defective work by the insured causes damage to nondefective
work by the insured. As Krolczyk substantially complied with the rules for
briefing by acquainting us with his argument and proper authorities, he has
not waived this issue. See TEX. R. APP. P. 38.9.
8
Under the “your work” exclusion, liability coverage does not apply only
when two requirements are met: (1) the property damage is to “[t]hat particular
part” that must be restored, repaired, or replaced (2) because the insured
incorrectly performed work on it. JHP Dev., 557 F.3d at 215. When an insurance
contract’s term is susceptible to more than one interpretation, we adopt the
construction that most favors the insured. Nat’l Union Fire Ins., 811 S.W.2d at
555. An exclusion that unambiguously precludes coverage for all property damage
caused by the defective work of the insured should omit the limiting language
referencing a “particular part of any property,” and instead it should state
something like: “Property damage to property that must be restored, repaired or
replaced because your work was incorrectly performed on any part of it.” See
Gore Design Completions, Ltd. v. Hartford Fire Ins. Co., 538 F.3d 365, 371–72
(5th Cir. 2008) (construing the “that particular part” language not to exclude
coverage for the insured’s nondefective work damaged by defective work
performed elsewhere in the same project). The exclusion only precludes coverage
for repairing or replacing the insured’s defective work; “it does not exclude
coverage for damage to other property resulting from the defective work.”
Wilshire Ins. Co. v. RJT Const., L.L.C., 581 F.3d 222, 226 (5th Cir. 2009) (citing
Travelers Ins. Co. v. Volentine, 578 S.W.2d 501, 503 (Tex. Civ. App.—Texarkana
1979, no writ)); see also Mid-Continent Cas. Co. v. Bay Rock Operating Co., 614
9
F.3d 105, 115–16 (5th Cir. 2010) (holding that the j(6) term restricts the exclusion
to property damage to that particular part of the project that was subject to the
insured’s defective work); Gore Design, 538 F.3d at 371–72 (same).
We look to the factual allegations of the underlying suit to determine
whether the insurer has a duty to defend. Zurich Am., 268 S.W.3d at 495. “The
duty to defend is not negated by the inclusion of claims that are not covered;
rather, it is triggered by the inclusion of claims that might be covered.” Id. at 495–
96. The relevant allegations in the underlying suit were that Krolczyk had built the
road in three phases. In the first phase Krolczyk built drainage ditches and the
base of the whole road, and he laid asphalt to surface the first third of the road
length. Eighteen months later, he laid asphalt for the second third of the road
length, but he did not rework the road base. Finally, “after extended exposure to
the elements,” he surfaced the remaining length of the road, but again he did not
rework the base. The Association also alleged that the drainage alongside the road
was “not adequate to prevent rain water from washing out some of the base.” The
road base allegedly “failed” as a result of Krolczyk’s failure to rework the base or
construct adequate drainage, and this failure allegedly “caused the asphalt surface
to crack and pothole after less than one year of use.” The road was rendered
useless and unable to meet the standards of Waller County.
10
In Mid-Continent Casualty Co. v. JHP Development, Inc., 557 F.3d 207,
214–15 (5th Cir. 2009), which presented a similar question, the Fifth Circuit
interpreted the same exclusion not to preclude coverage for the insured’s
nondefective work damaged by the insured’s own defectively performed work. A
construction company installed concrete firewalls, exterior finishes, electrical
wiring, stud framing, interior drywall, and wood flooring for a condominium
project. Id. at 210. The builder failed to water-seal the exterior finishes and
firewalls, which later allowed rain to severely damage both the defective exterior
work and the nondefective interior work it had performed. Id. Even though the
insured had performed both the defective work and the nondefective work, the
court held that the insurer had a duty to defend: “[E]xclusion j(6) bars coverage
only for property damage to parts of a property that were themselves the subject of
defective work by the insured; the exclusion does not bar coverage for damage to
parts of a property that were the subject of only nondefective work by the insured
and were damaged as a result of defective work by the insured on other parts of the
property.” Id. at 215; see also Am. Home Assur. Co. v. Cat Tech, L.L.C., 660 F.3d
216, 223 (5th Cir. 2011).
In JHP Development, there was no allegation that the builder had performed
defective work on the interior portions of the project. See JHP Dev., 557 F.3d at
217. Attempting to distinguish JHP Development on this basis, Mid-Continent
11
asserts that the Association here alleged that all of Krolczyk’s work on the road
was defectively performed. But the allegations here are unclear as to whether all
of the work was defectively performed by Krolczyk. An insurer must defend the
suit “[i]f a complaint potentially includes a covered claim.” Zurich Am., 268
S.W.3d at 491. Although we do not look outside the pleadings or “imagine factual
scenarios which might trigger coverage,” we interpret the allegations in the suit
liberally to favor the insured. Nat’l Union Fire Ins. Co. v. Merch. Fast Motor
Lines, Inc., 939 S.W.2d 139, 141–42 (Tex. 1997). Additionally, “we may draw
inferences from the petition that may lead to a finding of coverage.” Gore Design,
538 F.3d at 369 (quoting Gen. Star Indem. Co. v. Gulf Coast Marine Assocs., 252
S.W.3d 450, 456 (Tex. App.—Houston [14th Dist.] 2008, pet. denied)).
Construing the Association’s petition liberally in favor of Krolczyk and
without regard to the truth or falsity of the allegations, the allegations suggest that
there is a potentially covered claim. The Association alleged that Krolczyk laid
asphalt on the surface of the road, which “after less than one year of use” cracked
and formed potholes due to the “failure of the base.” There is no specific
allegation that the surfacing work was performed defectively; instead, the
allegations state that the surface became damaged due to defects in the work
performed on the road base, such as failing to perform “additional compaction or
reworking of the road base” after it had lain dormant with “extended exposure to
12
the elements,” the use of “washed concrete instead of stabilized concrete as part of
the base,” and the failure to provide adequate drainage “to prevent rain water from
washing out” the exposed base. The Association also alleged that “[o]ne of the
causes for the lateral cracking found in the road bed is poor joint construction.”
Under these alleged facts, “that particular part” of the work that was
defectively performed would be excluded from coverage, such as Krolczyk’s
construction of the road base, while parts of the work that were not defectively
performed by Krolczyk would be covered, such as his later work paving or
repaving the road. Dorchester Dev. Corp. v. Safeco Ins. Co., 737 S.W.2d 380, 382
(Tex. App.—Dallas 1987, no writ) (“[I]f defective work is performed by or on
behalf of the insured, and such defective work causes damage to other work of the
insured which was not defective, then there would be coverage for repair,
replacement or restoration of the work which was not defective.”), abrogated on
other grounds by Don’s Bldg. Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20,
26 (Tex. 2008). Although the allegations describing Krolczyk’s work paving the
road include allegations that he failed to rework the road base, under a liberal
reading, these do not necessarily mean that Krolczyk performed the paving work
defectively; rather, mention of the failure to rework the base could have simply
been an explanation how the paving work was damaged by the defective work on
the base.
13
Mid-Continent urges that we consider the road as a unitary whole, so the
“that particular part” language would necessarily refer to Krolczyk’s work on the
road altogether rather than to separate parts of the road project. 2 Two factors lead
us to reject this interpretation. First, the allegations themselves expressly divide
the road into three distinct phases. They also separately describe different aspects
of the project, including construction of the base, providing adequate drainage, and
surfacing the road. Second, construction of a road is a large project that can be
2
Mid-Continent references Gar-Tex Construction Co. v. Employers Casualty
Co., 771 S.W.2d 639 (Tex. App.—Dallas 1989, writ denied), as an example
of a case in which a large construction project, a clearwell, was held to not
have separate parts for insurance purposes. The case is inapposite. Gar-Tex
was not a duty-to-defend case, but an indemnity case in which the
construction company was found to have caused the damage due to its faulty
work on the clearwell site. Id. at 643. Thus, there was no nondefective
work to which a “that particular part” exclusion would not have applied. See
id. at 643–44 (distinguishing those cases in which the insured’s faulty work
damages nondefective work because the damage to the clearwell was a
direct result of Gar-Tex’s failure to follow specifications).
The other Texas case that Mid-Continent offers to support its argument that
the road must be considered an indivisible whole, Southwest Tank & Treater
Manufacturing Co. v. Mid-Continent Casualty Co., 243 F. Supp. 2d 597
(E.D. Tex. 2003), was rejected as applying to multi-part construction
projects such as in this case. Gore Design Comp., Ltd. v. Hartford Fire Ins.
Co., 538 F.3d 365, 371 n.8 (5th Cir. 2008) (“The only case cited for that
proposition [that the exclusion applies to the entire project, not just the
electrical system in question] is Sw. Tank & Treater Mfg. Co. v. Mid-
Continent Cas. Co., 243 F. Supp. 2d 597, 603–04 (E.D. Tex. 2003). That
case is not binding precedent on this court, and it has not been relied upon as
authority by this court. The court there also focused on the insured’s work
on the entire tank that was damaged, rather than on a particular part.”).
14
completed using varied construction techniques, equipment, and materials. This
makes the application of the “your work” exclusion to a road construction project
comparable to other authorities which have applied the exclusion to large projects
with several major subparts. 3 Likewise, the construction of a road is not
comparable to a small, unitary item that lacks separate parts on which different
types of work are performed. 4 Favoring the insured in construing both the
complaint and the policy, we conclude that the road project was not an indivisible
whole under these allegations, but instead it was composed of several particular
parts to which the j(6) exclusion may or may not apply.
3
See, e.g., Mid-Continent Cas. Co. v. Bay Rock Operating Co., 614 F.3d 105,
115–16 (5th Cir. 2010) (holding an intermediate casing seat and surrounding
formation was validly found to be separate part of oil well for liability
purposes); Mid-Continent Cas. Co. v. JHP Dev., Inc., 557 F.3d 209, 215 (5th
Cir. 2009) (considering exterior walls of condominium project as different
particular part than interior drywall and electrical work); Gore Design, 538
F.3d at 371 (component of electrical system different particular part from
aircraft as a whole).
4
See, e.g., Vinsant Elec. Contractors v. Aetna Cas. & Sur. Co., 530 S.W.2d
76, 76–77 (Tenn. 1975) (holding a switchboard is a “unit of property within
itself, self-contained” and constituted one “particular part” for purposes of
policy exclusion, although it was composed of many smaller electrical
components).
15
Thus, under a liberal reading, the Association’s complaint potentially
includes a covered claim, and the “your work” exclusion does not abrogate Mid-
Continent’s duty to defend the suit.5
II. The “earth movement” exclusion
Mid-Continent also argues that the “earth movement” exclusion applies to
bar coverage in the suit. That exclusion states:
This insurance does not apply to . . . “property damage” . . . arising
out of, caused by, resulting from, contributed to, aggravated by, or
related to earthquake, landslide, mudflow, subsidence, settling,
slipping, falling away, shrinking, expansion, caving in, shifting,
eroding, rising, tilting or any other movement of land, earth or mud.
Mid-Continent urges us to adopt a construction of the exclusion to include minor
movements of the earth caused by rain or the elements, noting that Webster’s Ninth
New Collegiate Dictionary defines “erode” as “to wear away by the action of
water, wind, or glacial ice.” The Association alleged that some of the damage to
the road was caused by the “washing out [of] some of the base which had been
exposed to the elements.” The Association attributed the failure of the base of the
road, and ultimately the road itself, partially to “the extended exposure of the base
to the elements.” Thus, Mid-Continent argues that all of the property damage that
5
Because we conclude that the j(6) “your work” exclusion does not abrogate
Mid-Continent’s duty to defend, we need not examine the parties’ additional
arguments about Krolczyk’s contention that a “products-hazard operations”
exception applies to the exclusion.
16
allegedly occurred in the underlying case was at least “related to” the “movement
of land, earth or mud.” Krolczyk responds by pointing out that the exclusion states
that the movement must be that “of land, earth or mud,” but the allegations are that
the road base was made of man-made materials including concrete. Aside from the
allegations concerning the road base, there is no allegation that the road damage
was related to the movement of land, earth, or mud.
We apply the ordinary and generally-accepted meaning of a policy’s terms,
unless the policy shows the words were meant in a technical or other sense.
Gilbert Texas Constr., L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118,
126 (Tex. 2010). For the “earth movement” exclusion to apply, the property
damage must be related to the movement “of land, earth or mud.” The ordinary
meanings of land, earth, and mud do not encompass concrete or other man-made
materials. Favoring the insured as we must when examining the eight corners of
the petition and the insurance policy, we adopt Krolczyk’s interpretation of the
exclusion that it does not apply to the movement of man-made materials, as his
construction is not unreasonable. See ATOFINA Petrochems., Inc., 256 S.W.3d at
668.
As for the allegations contained in the pleadings, they do not specify
whether the “part of the base” of the road that was “exposed to the elements” and
washed out by rain water was built of land, earth, or mud. The only other aspect of
17
the pleading which relates to the potential application of the earth-movement
exclusion is that “Krolczyk utilized washed concrete instead of stabilized concrete
as part of the road base.” When the allegations in the pleadings do not state facts
sufficient to clearly bring the case within or without the coverage, the insurer is
obligated to defend as long as there is potentially a covered claim under the
pleadings. Lexington Ins., 355 S.W.3d at 210–11. As the road base could have
been built of materials other than earth, land, or mud, and the allegations do not
mention any other earth movement, the allegations do not clearly establish that the
exclusion does or does not apply. Accordingly, we conclude that the “earth
movement” exclusion does not abrogate Mid-Continent’s duty to defend Krolczyk.
18
Conclusion
Mid-Continent has not proven that the exclusions in its commercial general
liability insurance policy bar coverage of the claims in the underlying suit.
Accordingly, it owes Krolczyk a duty to defend against the claims asserted by the
Association. We hold that the trial court improperly denied summary judgment to
Krolczyk, although it properly denied summary judgment in favor of Mid-
Continent. We therefore render a declaratory judgment that Mid-Continent owes a
duty of defense to Krolczyk.
Michael Massengale
Justice
Panel consists of Justices Jennings, Bland, and Massengale.
19