Opinion
Case No. A-03-CA-242-SS.
February 24, 2004
ORDER
BE IT REMEMBERED on the 24th day of February 2004 the Court reviewed the file in the above-styled cause, and specifically the Plaintiffs' [#10] and Defendant's [#11] cross-motions for summary judgment, Plaintiff's response [#12], and Defendant's reply [#13]. Having considered the cross-motions, responses, the relevant law, and the case file as a whole, the Court now enters the following opinion and orders.
Background
This is an insurance coverage dispute. The plaintiffs, Mid Arc, Inc. and Morris Craig Dimitt (together, "Plaintiffs"), have sued their general comprehensive liability ("GCL") insurer, Mid-Continent Casualty Company ("Mid-Continent"), alleging Mid-Continent had a duty to defend Plaintiffs in a lawsuit against them filed by Kevin and Karen DeMartini ("the DeMartinis"), Cause No. GN 103131 in the 126th Judicial District Court of Travis County, Texas ("the underlying lawsuit"). See Pls'. Mot. for Summ. J. Ex. D ("Underlying Pet."). After a trial on the merits, the DeMartinis prevailed and the trial court entered a judgment against Plaintiffs for $84,215.00, prejudgment interest of $7,267.87, $18,500.00 in attorney's fees, costs of court, and post judgment interest at 10%. See Pls'. Mot. for Summ. J. Ex. G ("Underlying Judgment"). Plaintiffs also contend Mid-Continent must indemnify them for this money they have become obligated to pay as a result of the underlying lawsuit.
In October 1999, Mid-Arc, Inc. entered into a contract with the DeMartinis to construct and sell to them two duplex properties in Travis County ("the Properties"). Subsequently, the DeMartinis filed the underlying lawsuit, alleging Plaintiffs failed to properly grade and landscape the Properties, causing severe flooding, drainage problems, damage to the Properties, and diminution in their value. Underlying Pet. ¶ 7. Additionally, the DeMartinis alleged the Properties had not been constructed in a manner sufficient to be granted Certificates of Occupancy after inspections by the City of Austin and that the City of Austin "red-tagged" the Properties pending the Plaintiffs' performance of specified repairs. Id. ¶ 8. The DeMartinis sued Plaintiffs under theories of breach of contract, violation of the Texas Deceptive Trade Practices Act ("DTPA"), breach of implied warranties of good and workmanlike performance and habitability, breach of residential construction act, fraudulent inducement, and negligent misrepresentation. Id. ¶¶ 12-26.
Mid-Contininent issued a GCL policy, number 04-GL-000039777 ("the Policy"), naming Plaintiffs as insureds. See Def.'s Mot. for Summ. J. Ex. C ("the Policy"). The coverage period of the policy was November 8, 2000 to November 8, 2001. Id. No one disputes that the events giving rise to the DeMartinis' lawsuit took place within the policy period. Instead Mid-Continent has moved for summary judgment on the grounds it had no duty to defend Plaintiffs in the underlying lawsuit since the DeMartinis did not allege an "occurrence" as that term is defined in the Policy. In addition to arguing the DeMartinis alleged no "occurrence" that triggers coverage, Mid-Continent argues they alleged no "property damage" as that term is defined by the Policy. Finally, Mid-Continent contends that even if the DeMartinis alleged in the underlying lawsuit "property damage" caused by an "occurrence," any alleged property damage would fall into one of several of the Policy's exclusions. Plaintiffs respond that the DeMartinis did in fact allege "property damage" caused by an "occurrence" and Mid-Continent owed them a duty to defend, and now that judgment has been entered by the state court, Mid-Continent must indemnify them because none of the exclusions Mid-Continent relies upon apply.
Summary Judgment Standard
Summary judgment may be granted if the moving party shows there is no genuine issue of material fact, and it is entitled to judgment as a matter of law. See Fed.R.Civ.P. 56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-248 (1986). In deciding summary judgment, the Court should "construe all facts and inferences in the light most favorable to the nonmoving party." Hart v. O'Brien, 127 F.3d 424, 435 (5th Cir. 1997), cert. denied, 525 U.S. 1103 (1999). The standard for determining whether to grant summary judgment "is not merely whether there is a sufficient factual dispute to permit the case to go forward, but whether a rational trier of fact could find for the nonmoving party based upon the record evidence before the court." James v. Sadler, 909 F.2d 834, 837 (5th Cir. 1990) (citing Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986)).
Both parties bear burdens of producing evidence in the summary judgment process. Celotex Corp. v. Catrett, 477 U.S. 317, 327 (1986). First, "[t]he moving party must show that, if the evidentiary material of record were reduced to admissible evidence in court, it would be insufficient to permit the nonmoving party to carry its burden of proof." Hart, 127 F.3d at 435 (citing Celotex, 477 U.S. at 327). The nonmoving party must then "set forth specific facts showing a genuine issue for trial and may not rest upon the mere allegations or denials of its pleadings." Id. (citing FED. R. CIV. P. 56(e); Anderson, 477 U.S. at 249). However, "[n]either 'conclusory allegations' nor 'unsubstantiated assertions' will satisfy the non-movant's burden." Wallace v. Texas Tech Univ., 80 F.3d 1042, 1047 (5th Cir. 1996).
Analysis
In a diversity cases such as this insurance dispute, this Court must apply the substantive law of Texas. Harken Exploration Co. v. Sphere Drake Ins. P.L.C., 261 F.3d 466, 470 n. 3 (5th Cir. 2001). The issues in this case are whether Mid-Continent had a duty to defend Plaintiffs in the underlying litigation and whether it has a duty to indemnify Plaintiffs for the damages the underlying lawsuit has obligated them to pay. An insurer's duty to defend is distinct from its duty to indemnify, and the duty to defend is broader than the duty to indemnify. St. Paul Fire Marine Ins. Co. v. Green Tree Financial Corp.-Texas, 249 F.3d 389, 391 (5th Cir. 2001); Hardy v. Hartford Ins. Co., 236 F.3d 287, 290 (5th Cir. 2001). Texas courts generally apply the "eight corners rule," also known as the "complaint allegation rule," in deciding whether an insurer has a duty to defend. Potomac Ins. Co. of Illinois v. Jayhawk Med. Acceptance Corp., 198 F.3d 548, 551 (5th Cir. 2000). According to the rule, courts should ordinarily determine whether an insurer has a duty to defend "solely from the allegations in the most recent [underlying] petition and the language of the insurance policy." Harken, 261 F.3d at 471. There are shifting burdens involved in insurance coverage disputes, as the Fifth Circuit recently articulated:
The insured bears the initial burden of showing that the claim against her is potentially within the insurance policy's scope of coverage. If the insurer relies on the policy's exclusions to deny coverage, the burden shifts to the insurer to prove the exclusion applies. If the insurer is successful, the burden shifts back to the insured to show that an exception to the exclusion brings the claim against her potentially within the scope of coverage under the insurance policy.Harken, 261 F.3d at 471 (internal citations omitted).
Thus, under the eight corners rule, this Court must look to the most recent petition in underlying litigation to determine whether the alleged misconduct on the part of Plaintiffs triggers coverage by Mid-Continent. "'The general rule is that the insurer is obligated to defend [its insured] if there is, potentially, a case under the [underlying petition] within the coverage of the policy.'" Harken, 261 F.3d at 471 (quoting Nat'l Union Fire Ins. Co. of Pittsburgh, PA. v. Merch. Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997)). "The focus of this inquiry is on the facts alleged, not on the actual legal theories." Green Tree Financial, 249 F.3d at 391 (citing Maayeh v. Trinity Lloyds Ins. Co., 850 S.W.2d 193, 195 (Tex.App.-Dallas 1992, no writ)). Any doubt that exists regarding whether the factual allegations of the underlying petition against the insured state a cause of action within the coverage of the policy sufficient to compel the insurer to defend the action must be resolved in the insured's favor. Harken, 261 F.3d at 471.
Plaintiffs maintain the following allegations by the DeMartinis gave rise to Mid-Continent's duty to defend them in the underlying lawsuit:
After the closings on the purchases of the Properties, Plaintiffs discovered that the Properties were not properly graded or landscaped, causing severe flooding, drainage problems, damage to the Properties, and diminution in the value of the Properties. On information and belief, such problems were proximately caused by Defendants' cutting too deeply into the hillside on which the foundations of the properties were constructed.
Underlying Pet. ¶ 7. Plaintiffs maintain these allegations constitute allegations of an "occurrence" resulting in "property damage" and therefore are covered by the Policy. The Policy defines "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." Policy at 000527.
Recently, this Court ruled on motions for summary judgment in a case that required resolution of exact question at issue in this case: what constitutes an "occurrence" under a GCL policy that defines an "occurrence" as an "accident." See Vesta Fire Ins. Co. v. Nutmeg Ins. Co, et al., Cause No. A-00-CA-468-SS (Order on Motions for Summary Judgment entered Sept. 29, 2003). The Court ultimately concluded that an underlying petition that factually alleges deficient and substandard construction, regardless of the legal theories it asserts, fails to allege an "accident" or therefore an "occurrence" and consequently, does not give rise to duty to defend on the part of the construction companies' GCL insurers. In relevant part, this Court reasoned:
The insurers contend Embrey and Crescent have failed to allege an "occurrence" under their respective policies. The GCL insurance polices define "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." [citations omitted]. In the majority of cases, the GCL policies interpreted by the courts define occurrence nearly identically. In spite of the GCL policies consistent definition of "occurrence" as an accident, including repeated exposure to the same harmful condition, courts have been inconsistent in their resolution of which factual scenarios constitute an occurrence or accident.
In Hatrick v. Great American Lloyds, 62 S.W.3d 270 (Tex.App.-Houston [1st Dist.] 2001, no pet.), a Houston Court of Appeals addressed the same issue with policy language identical to the language in this case. In lawsuit underlying Hartrick, homeowners sued the construction company (Claremont) that built their home after discovering structural problems and defects in the house's foundation. The homeowners alleged the foundation of the house failed because Claremont did not properly prepare the soil or clear the land and built the foundation of inadequate compressive strength. Id. at 272, 276. The causes of action against Claremont were negligence, violating the Deceptive Trade Practices Act, and breach of implied warranties of good and workmanlike construction and suitability for habitation. Id. at 272. The insurer provided counsel to defend Claremont but reserved the right to deny coverage if the outcome in the underlying lawsuit established no covered damages. Id. at 273. The jury in the underlying case found Claremont not negligent and found no violation of the DTPA, but determined Claremont breached the warranties of habitability and good and workmanlike performance. Id. The insurer refused to indemnify Claremont for the defective workmanship damages arguing they were not "property damages" as a result of an "occurrence." Id. The Hartrick plaintiffs (suing as third party beneficiaries under the insurance contract) argued the insurer had a duty to indemnify because the jury awarded damages for defective construction work that resulted in "property damage." Id. at 276.
The Houston Court of Appeals did not accept the plaintiffs' argument and held Claremont had no duty to indemnify because for an injury to qualify as an "occurrence" or "accident" from the viewpoint of the insured, it cannot be "the natural and probable consequence of an action or occurrence which produced the injury." Id. (quoting Mid-Century Ins. Co. v. Lindsey, 997 S.W.2d 153, 155 (Tex. 1999). To ascertain whether an injury is the result of an occurrence, i.e., is accidental, courts should inquire into " both the insured's intent and the reasonable foreseeable effect, or consequences of the insured's conduct." Id. (emphasis in original). The court concluded that the injuries to the house — "the pitching and heaving of the foundation and resulting damage to the house and loss of market value" — were the reasonably foreseeable results of failing to comply with the implied warranties by failing to properly prepare the soil and clear the land and failing to build the foundation strong enough to support the house. Id. at 277. And, "by not doing what it was required to do, Claremont could reasonably anticipate the injury to [the homeowners]." Id. at 278.
Meanwhile, in CU Lloyd's of Texas v. Main Street Homes, Inc., 79 S.W.3d 687, 694-95 (Tex.App. — Austin, 2002), the Austin Court of Appeals, evaluating similar policy language and factual allegations, distinguished Hartrick on the grounds it was decided in the context of an indemnity dispute. Main Street, like the Archstone litigation, involved a dispute over whether the insurer had a duty to defend. In the underlying lawsuit, homeowners alleged the general contractor (Main Street) built the homes with knowledge the foundation designs were inadequate for the soil conditions but without disclosing this knowledge to the purchasers. Id. at 693-94. The Austin Court of Appeals, like the Houston Court of Appeals in Hartrick, emphasized that "both the actor's intent and the reasonable foreseeable effect of his conduct bear on the determination of whether an occurrence is accidental." Id. at 693 (quoting Lindsey, 997 S.W.2d at 155). However, the Austin court interpreted this standard differently:
Thus, if the tortfeasor's acts are deemed intentionally harmful, there is no accident, therefore no occurrence, no duty to defend, and no policy coverage. However, if intentionally performed acts are not intended to cause harm but do so because of negligent performance, a duty to defend arises.
Id. (citing Federated Mut. Ins. Co. v. Grapevine Excavation, Inc., 197 F.3d 720, 729 (5th Cir. 1999)) (emphasis in original). The Main Street court ultimately concluded it "need not determine whether the [underlying] petition alleges an intentional tort as the petitions against [the general contractor] include allegations of negligence," which according to this appellate court, was sufficient to trigger the insurer's duty to defend. Id. at 694 (citing Grapevine, 197 F.3d at 730). In other words, although the court paid lip service to the notion that it must consider whether the consequences of the contractor's behavior were foreseeable in determining whether there had been an "occurrence," it ultimately articulated a much broader duty to defend on the part of insurers by concluding that any allegations of negligence would trigger an insurer's duty to defend.
Although Main Street suggests it is reconcilable or distinguishable from Hartrick because it involves a duty to defend instead of a duty to indemnify, this Court finds the interpretations of "occurrence" by the two Courts somewhat contradictory. Because the Texas Supreme Court has not resolved the question and the Texas appellate courts have not articulated a consistent answer to this question, this Court will look to a recent decision by a Fort Worth federal district court for guidance. Cf. Hamilton v. Segue Software Inc., 232 F.3d 473, 479 (5th Cir. 2000) (deferring to Texas appellate courts in the absence of Texas Supreme Court precedent in a situation where the appellate courts were proceeding in a discernable direction).
In Jim Johnson Homes, Inc. v. Mid-Continent Casualty Co., 244 F. Supp.2d 706 (N.D. Tex. 2003), the plaintiffs in the underlying arbitration action (the Jeters) claimed the contractor, Johnson Homes, breached their home construction contract by constructing a foundation contrary to the foundation plan and the foundation engineer's directions and otherwise failing to construct the home in compliance with their wishes. Id. at 710-711. The Jeters alleged the improper construction of the foundation was irreparable and the entire foundation therefore had to be demolished and rebuilt. Id. at 711. They also alleged the contractor lied to them when it represented that the foundation would be designed and inspected by a registered engineer. Id. The Jeters sued the contractor for breach of contract and fraud and for violating the Texas DTPA. As an alternative cause of action, the Jeters alleged the contractor "was guilty of negligence that was a proximate cause of the Jeters' damages," and specifically, that the contractor negligently designed and constructed improvements and retrained, employed and supervised designers, employees and engineers. Id. Additionally, in another alternative allegation, the Jeters alleged the contractor's employees and subcontractors committed negligent acts in constructing the home that proximately caused them damages. Id. at 711-12.
The federal district court in Johnson Homes evaluated the Texas case law and concluded according to the "better reasoned authority" the underlying plaintiffs had not alleged an "occurrence" under the GCL policy because they had not alleged claims of accidental damage to property. Id. at 715. Relying on Hartrick and Devoe v. Great Amer. Ins., 50 S.W.3d 567 (Tex.App.-Austin 2001, no pet.), but rejecting Main Street as an anomaly, the Court explained:
The Jeters' complaint is that [the contractor] did not do what he had contracted to do in the construction of their home. The construction work went on over a period of time, and a fair inference from the Jeters' allegations in their demand is that the things about which they are complaining were done voluntarily and intentionally by the plaintiff. The Jeters are complaining of deficient and substandard construction, not an accident or occurrence.
Johnson Homes, 244 F. Supp.2d at 716. In reaching this conclusion, the court emphasized the purpose of comprehensive liability insurance coverage for builders: protecting the builder from liability caused by its product, not providing replacement or repair of the builder's product. Id. at 714 (citing T.C. Bateson Constr. Co. v. Lumbermens Mut. Cas. Co., 784 S.W.2d 692, 694-95 (Tex.App.-Houston [14th Dist.] 1989, writ denied)). As the court explained, interpreting a GCL policy to cover construction deficiencies would "'enable a contractor to receive initial payment for the work from the homeowner, then receive subsequent payment from his insurance company to repair and correct deficiencies in his own work,'" which "simply is not the intended function of liability insurance.'" Id. (quoting Bateson, 784 S.W.2d 692 at 695). The court also rejected the argument that an alternative allegation in the underlying action that a builder's failure to properly perform a building contract constitutes negligence could "convert claims based on breach of express and implied covenants and warranties in a building contract into a claim for recovery of property damages caused by an accident with in the meaning of a liability insurance policy." Id. at 716.
Applying the logic and reasoning articulated by the federal court in Johnson Homes to this case, this Court concludes that the [underlying] petitions do not allege an "occurrence" within the meaning of the various GCL policies because they complain of deficient and substandard construction, not an accident. Although Archstone sued Embrey and Crescent for breach of contract, breach of warranty, negligence, and negligent construction, their factual allegations are the contractors failed to construct the foundations of the apartment complexes in accordance with the construction contracts and its implicit warranties. As the Johnson Homes court explained, this is not a complaint about an accident and therefore no "occurrence" is alleged under the policies. Embrey and Crescent have not succeeded in demonstrating that any of the GCL insurers have a duty to defend them in the Archstone litigation.Vesta Fire Ins. Co. v. Nutmeg Ins. Co, et al., Cause No. A-00-CA-468-SS (Order on Motions for Summary Judgment entered Sept. 29, 2003) at 15-20.
The Texas Supreme Court did not refuse a petition for review in Hartrick or Main Street, which would have given the opinion the same precedential value as an opinion of the Texas Supreme Court. TEX. R. APP. P. 56.1(c); U.S. v. Johnson, 160 F.3d 1061, 1064 (5th Cir. 1998).
Much like the underlying plaintiffs in Vesta, the DeMartinis in their underlying lawsuit complained about Plaintiffs' performance of their contractual and warranty obligations to them and specifically, the DeMartinis complain Plaintiffs negligently landscaped and excavated, damaging the Properties. So like Embrey and Crescent in Vesta, Plaintiffs are seeking coverage for their own faulty work as opposed to damage caused by their construction to something other than their work. As such, Plaintiffs have not alleged an occurrence under the Policy.
In response, Plaintiffs attempt to distinguish Vesta, Jim Johnson, and another case cited by Mid-Continent, Tealwood Construction Inc. v. Scottsdale Ins. Co., Cause No. 3:02-CV-2158-L (N.D. Tex. Nov. 19, 2003). Plaintiffs argue in Vesta and Jim Johnson, the contractors "voluntarily chose the manner in which they constructed the foundations" and in Tealwood, the insured voluntarily chose the paint it used in the renovation process that resulted in the faulty renovation and gave rise to the underlying lawsuit. In comparison, contend Plaintiffs, the DeMartinis alleged an accident, namely that Plaintiffs "excavated too deeply when performing grading operations." Pls.' Resp. at 6. The Court sees no difference between these cases — all involve the insured performing their duties negligently resulting in damage to the insured's own work or product as opposed to something other than the insured's own work or product. The Court has already explained above why such allegations do not constitute allegations of an "occurrence." Accordingly, Mid-Continent is entitled to summary judgment because it had no duty to defend Plaintiffs under the Policy in the underlying lawsuit. Consequently, it has no duty to indemnify Plaintiffs for damages awarded to the DiMartinis by the state court. See American States Ins. Co. v. Bailey, 133 F.3d 363, 368 (5th Cir. 1998) (holding if an insurer has no duty to defend, it has no duty to indemnify).
In accordance with the foregoing:
IT IS ORDERED that Plaintiffs' Motion for Summary Judgment [#10] is DENIED.
IT IS FURTHER ORDERED that Defendant's Motion for Summary Judgment [#11] is GRANTED.