Summary
In McCollum, however, the court found that an identical exclusion barred coverage for only some of the damage alleged by the insured.
Summary of this case from Mid-Continent Cas. Co. v. JTH Customs Inc.Opinion
Civil Action No. 4:18-CV-4132
05-20-2020
MID-CONTINENT CASUALTY COMPANY, Plaintiff, v. MCCOLLUM CUSTOM HOMES, INC., Defendant.
Julie Ann Shehane, Summer L. Frederick, R. Brent Cooper, Cooper and Scully PC, Dallas, TX, for Plaintiff. Daniel F. Crowder, Crowder Law Firm, Houston, TX, for Defendant.
Julie Ann Shehane, Summer L. Frederick, R. Brent Cooper, Cooper and Scully PC, Dallas, TX, for Plaintiff.
Daniel F. Crowder, Crowder Law Firm, Houston, TX, for Defendant.
ORDER
Andrew S. Hanen, United States District Judge
Pending before the Court is Plaintiff Mid-Continent Casualty Company's motion for summary judgment. (Doc. No. 18). Defendant McCollum Custom Homes, Inc. filed a response. (Doc. No. 24). Plaintiff filed a reply, accompanied by a motion to strike certain exhibits from Defendant's response. (Doc. No. 25). Defendant responded to the motion to strike, (Doc. No. 26), and Plaintiff replied. (Doc. No. 27). I. Factual Background
This case arises out of an insurance dispute related to Plaintiff Mid-Continent Casualty Company's ("Mid-Continent") alleged duty to defend and indemnify Defendant McCollum Custom Homes, Inc. ("McCollum") in a lawsuit (the "Underlying Lawsuit") filed in the 215th Judicial District Court of Harris County, Texas by Thomas and Jodie Mark (the "Mark Family").
A. The Underlying Lawsuit
The Underlying Lawsuit is a construction defect suit. In pertinent part, in 2014 the Mark Family alleges that they purchased a "spec" home in Houston being constructed by McCollum that cost well over $2,000,000. McCollum was the general contractor for the project as well as the seller. Just over a year after moving into the home, the Mark Family began discovering a number of issues with the home, including "leaking windows; hundreds of dry-wall, mortar, and brick cracks; and extensive foundation movement." (Doc. No. 24-3 at 2). The root cause of these issues, as alleged in the state court petition, is a defective foundation caused by McCollum's failure to take proper account for the effects of the drought Houston experienced from 2011 to 2013. Id. at 5. The Mark Family claims that McCollum and its sub-contractors inadequately assessed risks relating to the moisture levels in the soil when removing trees from the area and building the home's foundation, and that McCollum failed to follow a drainage plan designed by a third party who was not sued. Id. at 5–7. These failures allegedly caused the physical movement of the home's foundation, which was manifested by the aforementioned cracks and defects. According to the First Amended Original Petition, "[t]he foundation movement contributed to and/or caused other significant problems." (Doc. No. 24-3 at 10). As alleged:
The home now contains hundreds of cracks in the sheetrock, over 30 brick, mortar, and stucco cracks (several of which are large enough to fit a person's finger), water leaks into the Home from roof and windows, the tile and concrete floors have begun cracking, multiple doors will not open or close any longer and are completely inoperable, and the pool is visibly displaced.
Id.
The defects and/or sub-standard conduct mentioned in the Mark Family's First Amended Original Petition can be summarized as follows:
1. Page 1: Latent construction defects including, but not limited to leaking windows, hundreds of drywall, mortar and brick cracks and extensive foundation movement;
2. Pages 4–5: Materially deficient soil foundation report conducted on the home by Star GeoTechnical and Testing Services LLP;
3. Page 5: McCollum failed to implement the drainage plan designed by Probstfeld and Associates;
4. Pages 5–6: Deficient foundation work performed by Gay & Loudermilk Engineers Inc.;
5. Page 8: Sheetrock cracks that increased over time;
6. Pages 8–9: Foundation movement which qualified as a major structural defect;
7. Page 9: Hundreds of cracks in sheetrock, over thirty brick, mortar, and stucco cracks, water leaks from the roof and windows, cracking tile and concrete floors, doors that could not open or close, a displaced pool and defective wood floors.
After making these general factual allegations, the Mark Family then listed their actual causes of action. McCollum was named in three: Breach of Contract (Page 10), Breach of Express Warranties (Page 15) and Deceptive Trade Practices (Page 15). Id. The other state court defendants were included under the categories of Professional Negligence (Pages 11–12), Gross Negligence (Page 13), and Negligent Misrepresentation (Page 18), but McCollum was not included in these allegations. Id.
B. The Insurance Agreement
The house's construction began in 2012 and was completed by March of 2015 when the Mark Family began occupying it. In September of 2015, McCollum bought a commercial general liability ("CGL") insurance policy from Mid-Continent (the "Insurance Agreement"). Under the Insurance Agreement, Mid-Continent agreed to cover damages incurred by McCollum "because of ‘bodily injury’ or ‘property damage’ to which [the Insurance Agreement] applies." (Doc. No. 19-2 at 12). Further, the policy placed Mid-Continent under a "duty to defend the insured against any ‘suit’ seeking those damages." Id. The policy continues by stating that Mid-Continent "will have no duty to defend the insured against any ‘suit’ seeking damages for ‘bodily injury’ or ‘property damage’ to which this insurance does not apply." Id. The agreement defines "property damage" as "[p]hysical injury to tangible property, including all resulting loss of use of that property" or "[l]oss of use of tangible property that is not physically injured." Id. at 26.
Mid-Continent, at least in the present motion, does not question coverage due to the fact that the alleged improper acts of the insured occurred years before it purchased the insurance.
The Insurance Agreement also contains two exclusions relevant to this Court's analysis. The first of these exclusions is the "Earth Movement" exclusion. Under this exclusion:
Mid-Continent cites a third exclusion, the "Damage to Property" exclusion, as being applicable. The Court does not rely on this exclusion in reaching its conclusion, so it is only mentioned in the discussion of the alleged flooring damage and the potential indemnity issues arising from the alleged defective drainage system.
This insurance does not apply to any "bodily injury" or any "property damage", that is directly or indirectly caused by, involves, or is in any way connected or related to any movement of earth, whether naturally occurring or due to manmade or other artificial causes.
Movement includes, but is not limited to, settlement, cracking, contraction, compaction, compression, consolidation, subsidence, shrinking, expansion, heaving, swelling, caving-in, erosion, vibration, shock, earthquake, landslide, mudflow, wind-driven, freezing, thawing or any other movement of earth, regardless of the cause.
Earth includes, but is not limited to any dirt, soil, terrain, mud, silt, sediment, clay, rock, sand, fill material or any other substances or materials contained therein.
(Doc. No. 19-2 at 56).
The second relevant exclusion is the "Defective Work" exclusion. Under this exclusion:
This insurance does not apply to:
1. Defective Work
"Defective Work" includes any and all costs associated with the removal or replacement of the defective, deficient or faulty work.
Id. at 54.
The following definitions are applicable to this latter exclusion:
22. "Your work":
a. Means:
(1) Work or operations performed by you or on your behalf; and
(2) Materials, parts or equipment furnished in connection with such work or operations.
b. Includes:
(1) Warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of "your work"; and
(2) The providing of or failure to provide warnings or instructions.
23. "Defective Work" means "Your Work" that is defective, deficient, non-conforming, not in accordance with plans and specifications, fails to satisfy applicable building code(s), fails to meet industry practice standards, is not fit for its intended use, not performed in a workman like manner or is faulty, and is included in the products-completed operations hazard.
Id. at 27, 54.
C. The Present Lawsuit
After the Mark Family filed suit against McCollum, Mid-Continent began providing a defense to McCollum in the Underlying Lawsuit under a reservation of rights. See (Doc. No. 17 at 9). Concurrently, Mid-Continent filed this declaratory judgment suit, seeking a declaration that the Insurance Agreement imposes no duty to defend or indemnify McCollum for the damages alleged in the Underlying Lawsuit. See (Doc. Nos. 1 & 17).
II. Standard of Review
Summary judgment is warranted "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). "The movant bears the burden of identifying those portions of the record it believes demonstrate the absence of a genuine issue of material fact." Triple Tee Golf, Inc. v. Nike, Inc. , 485 F.3d 253, 261 (5th Cir. 2007) (citing Celotex Corp. v. Catrett , 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) ). Once a movant submits a properly supported motion, the burden shifts to the non-movant to show that the Court should not grant the motion. Celotex , 477 U.S. at 321–25, 106 S.Ct. 2548.
The non-movant then must provide specific facts showing that there is a genuine dispute. Id. at 324, 106 S.Ct. 2548 ; Matsushita Elec. Indus. Co. v. Zenith Radio Corp. , 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). A dispute about a material fact is genuine if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The Court must draw all reasonable inferences in the light most favorable to the nonmoving party in deciding a summary judgment motion. Id. at 255, 106 S.Ct. 2505. The key question on summary judgment is whether a hypothetical, reasonable factfinder could find in favor of the nonmoving party. Id. at 248, 106 S.Ct. 2505.
III. Relevant Legal Framework
This Court is sitting in diversity, and both sides agree that Texas law governs here. See (Doc. Nos. 18 at 15 & 24 at 11). "In Texas, insurance policies are construed according to ordinary contract principles." New York Life Ins. Co. v. Travelers Ins. Co. , 92 F.3d 336, 338 (5th Cir. 1996). "The interpretation of an insurance policy is a question of law." Id.
Under Texas law, insurance cases involve shifting burdens. "[T]he insured has the [initial] burden of establishing coverage under the terms of the policy." Gilbert Texas Const., L.P. v. Underwriters at Lloyd's London , 327 S.W.3d 118, 124 (Tex. 2010). "If the insured proves coverage, then to avoid liability the insurer must prove the loss is within an exclusion." Id. "If the insurer proves an exclusion applies, the burden shifts back to the insured to show that an exception to the exclusion brings the claim back within coverage." Id. Importantly, "[u]nder Texas law, the burdens of proof in a declaratory judgment action brought by an insurer seeking a declaration of non-coverage are the same as they would be if the action had been brought by the insured against the insurance company claiming the existence of coverage for a particular claim or event." Med. Protective Co. v. Turner , No. 3:15-CV-0366-L, 2015 WL 3631701, at *4 (N.D. Tex. June 10, 2015) (citation and quotation marks omitted).
An insurer's duty to defend the insured in a lawsuit is governed by the "eight-corners" rule. Under the "eight-corners" rule, "[a]n insurer's duty to defend is determined by the allegations in the pleadings and the language of the insurance policy." Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. Merchants Fast Motor Lines, Inc. , 939 S.W.2d 139, 141 (Tex. 1997). "The focus of the inquiry is on the alleged facts, not on the asserted legal theories." Northfield Ins. Co. v. Loving Home Care, Inc. , 363 F.3d 523, 528 (5th Cir. 2004). In applying the rule, a court should "give the allegations in the petition a liberal interpretation." Nat'l Union Fire Ins. , 939 S.W.2d at 141. As such, "[w]here the complaint does not state facts sufficient to clearly bring the case within or without the coverage, the general rule is that the insurer is obligated to defend if there is, potentially, a case under the complaint within the coverage of the policy." Heyden Newport Chem. Corp. v. Southern Gen. Ins. Co. , 387 S.W.2d 22, 26 (Tex. 1965). "Terms in insurance policies that are subject to more than one reasonable construction are interpreted in favor of coverage." Lloyd's London , 327 S.W.3d at 133. "[T]he duty to defend is triggered by a single alleged injury that falls within the scope of the coverage provision." Nat'l Cas. Co. v. W. World Ins. Co. , 669 F.3d 608, 616 (5th Cir. 2012). On the other hand, "exclusions negate the insured's duty to defend only when all of the alleged injuries that fall into the coverage provision are subsumed under the exclusionary provision." Id.
In contrast to the duty to defend, an insurer's "duty to indemnify is determined by the facts as they are established in the underlying suit." Lloyd's London , 327 S.W.3d at 132–33. Generally, a motion to indemnify is not ripe to be considered until the resolution of the underlying lawsuit. Farmers Tex. County Mut. Ins. Co. v. Griffin , 955 S.W.2d 81, 84 (Tex. 1997). Nevertheless, "the duty to indemnify is justiciable before the insured's liability is determined in the liability lawsuit when the insurer has no duty to defend and the same reasons that negate the duty to defend will likewise negate any possibility the insurer will ever have a duty to indemnify." Id.
IV. Discussion
A. Whether Mid-Continent Owes a Duty to Defend McCollum in the Underlying Lawsuit
1. Whether the Injuries Alleged in the First Amended Original Petition Fall Within the Scope of the Coverage Provision
Almost the entirety of the briefing by each side is related to the applicability of the exclusions. There is, however, one issue related to coverage that must be discussed first. In its motion, Mid-Continent argued that the only allegations discussing any damages to the home's hard wood flooring arose from allegations of defective installation, which it contends are not covered under the policy because they are not "property damage," which the policy defines as "physical injury to tangible property." (Doc. No. 18 at 16–17). In response, McCollum pointed out that Mid-Continent was relying upon a superseded version of the petition in the Underlying Lawsuit and attached the current version, the First Amended Original Petition, to its response. (Doc. No. 24 at 12). The First Amended Original Petition contains more detailed allegations related to the flooring, alleging the floors crowned and developed unacceptable marks. (Doc. No. 24-3 at 10). It is not clear, based upon its reply brief, whether Mid-Continent is still contesting coverage in light of the new allegations. (Doc. No. 25 at 10). The Court is not entirely convinced that these most recent allegations transform the alleged damages to the floors to "physical injury to tangible property," but nonetheless, the Court will consider, hypothetically, that the damage to the floors is covered for the purposes of its analysis of the duty to defend.
With respect to "physical injury to tangible property," Texas law draws a distinction between cases where defective installation requires only repair to fix the defective work and cases where the defective work causes physical damages to other parts the home. The latter is considered "physical injury to tangible property," but the former is not. See Bldg. Specialties, Inc. v. Liberty Mut. Fire Ins. Co. , 712 F. Supp. 2d 628, 645 (S.D. Tex. 2010) (providing a fuller discussion and holding that a complaint alleging defective duct work that needed to be replaced without allegations of "any physical damage to the duct work itself or to other parts of the house or to the loss of use" did not allege "physical injury to tangible property"); see also Lamar Homes, Inc. v. Mid–Continent Casualty Co. , 242 S.W.3d 1, 10 (Tex. 2007) ("[F]aulty workmanship that merely diminishes the value of the home without causing physical injury or loss of use does not involve ‘property damage.’ "). Here, there are allegations of physical damages to the floors, i.e. crowning and unacceptable marks, but the First Amended Original Petition also mentions the damages are "loss of value to the home, cost of repair," and the nebulous "other damages for which the Marks bring this suit." (Doc. No. 24-3 at 10). Again, the Court believes the issue is a close call, but the Court will assume arguendo that coverage exists.
With respect to the remaining injuries that McCollum claims trigger the duty to defend—the entirety of which have been enumerated above—Mid-Continent admits that they are "physical injury to tangible property" and thus, fall within the general scope of coverage. (Doc. No. 18 at 17). Nevertheless, Mid-Continent argues that all the alleged defects, including the flooring defects, are subject to exclusions in the policy. That argument is addressed below.
2. Whether Exclusions Negate Mid-Continent's Duty to Defend
The next question is whether exclusions negate Mid-Continent's duty to defend in this case. McCollum points to five categories of allegations that purportedly trigger Mid-Continent's duty to defend. Those five categories of allegations are: (1) the crowning of the floors in the home; (2) the development of unacceptable marks on the flooring planks; (3) pool damage purportedly due to actions of a third party; (4) leaks from the window and roof; and (5) damages to walls, bricks, roof, windows, door, three types of flooring, and pool. (Doc. No. 24 at 7). After reviewing the First Amended Original Petition and the parties' briefing, the Court believes that it would be more expeditious, yet accurate, to whittle the number of categories down, and so it combines and reduces the five groups into three.
Neither party has suggested that any allegations of damage to the foundation of the home, itself, may trigger the duty to defend.
First, the Court finds that the crowning of the floors in the home and the unacceptable marks on the flooring planks are raised by allegations of mishandling of the flooring material by McCollum and/or its agents. The allegations differ in slight respects—the purported crowning is due to alleged mishandling of the flooring before, during, and after installation, while the purported unacceptable marks are due to the alleged failure to properly sand the planks following the installation. See (Doc. No. 24-3 at 10). Neither party has attempted to demonstrate any meaningful legal distinction between the two allegations. Consequently, they will be considered together.
Second, the Court finds that the allegations of leaks from the window and roof should be considered jointly with the allegations of damages to walls, bricks, roof, windows, door, three types of flooring, and pool. These allegations are grouped together in the First Amended Original Petition's list of other problems that have befallen the home due to foundation movement. McCollum argues in its response here that the leaky windows and roof could be due to "drainage issues." (Doc. No. 24 at 13). The First Amended Original Petition does not allege any causation for the leaky windows or roof connected to drainage issues. As such, the Court will consider these two larger groups of alleged injuries together, referring to them collectively as the "laundry list" of other alleged damages. In sum, after the Court combines these two categories, three categories of allegations remain: (1) the purported damages to the flooring from McCollum's alleged mishandling of the materials; (2) the alleged pool damages which McCollum claims are due to actions of a third party; and (3) the laundry list of other alleged damages.
a) Floor Damage
McCollum asserts that the damages to the floors are not covered by any exclusion in the Insurance Agreement. In relevant part, the First Amended Original Petition in the Underlying Lawsuit alleges:
[T]he Marks have discovered that the wood floors throughout much of the home are defective. Based on investigation, the wood flooring was not handled properly prior to installation including but not necessarily limited to not being maintained in a climate-controlled environment before, during, and after installation. The floors were not installed onto an appropriate subfloor system. The floors are crowned as a result of improper installation and sanding before the floors were dried or because moisture content of the planks differed above and below to an unacceptable degree. The floors were not properly sanded following installation resulting in unacceptable marks on the flooring planks. These defects in the materials and negligent construction of the Marks' home has caused damage to the Marks including a loss of value to the home, cost of repair and other damages for which the Marks bring this suit.
(Doc. No. 24-3 at 10) (emphasis added). McCollum argues that this allegation cannot be excluded by the Earth Movement exclusion. Mid-Continent maintains that this injury clearly falls within the Defective Work exclusion quoted above. See (Doc. No. 19-2 at 54).
The Court agrees with Mid-Continent and finds that the allegations of the floors crowning and developing unacceptable marks fall within the Defective Work exclusion. The First Amended Original Petition alleges the following causes of the floor damage: (1) improper handling prior to installation; (2) not maintaining the wood in a climate controlled environment before, during, and after installation; (3) failure to properly acclimate the flooring; (4) improper installation onto an appropriate subfloor system; (5) sanding the floors before they dried; (6) not properly sanding the floors; and (7) failure to keep the planks at a proper moisture level. (Doc. No. 24-3 at 10). Each of these alleged causes could only be attributed to McCollum's work on the floors being "defective, deficient, non-conforming," or "fail[ing] to meet industry practice standards." (Doc. No. 19-2 at 55). As such, the allegations relating to the floors crowning and developing unacceptable marks fall within the Defective Work exclusion and cannot trigger a duty to defend the Underlying Lawsuit. Moreover, all of these alleged defects would also fall within the property damage exclusion since the flooring must be repaired or replaced due to McCollum's allegedly shoddy work.
The policy has an exclusion for:
j. "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.
(Doc. No. 19-2 at 15).
b) Pool Damage
McCollum asserts that Mid-Continent has a duty to defend McCollum in the Underlying Lawsuit because the pool that was allegedly displaced was built by a third-party and that third-party's negligence may be the reason for the pool's displacement. (Doc. No. 24 at 7, 12, 13, 15). Neither of these statements appear in the First Amended Original Petition. Indeed, in that pleading there is only one statement mentioning the pool. In the paragraph discussing the laundry list of damages, the First Amended Original Petition states: "the pool is visibly displaced." (Doc. No. 24-3 at 10). This sole reference follows the allegation in the First Amended Original Petition that states that "[t]he foundation movement contributed to and/or caused other significant problems." Id. Therefore, the only inference that can be taken from the First Amended Original Petition is that the damage allegedly resulted from the foundation movement which was alleged to have been caused by the deficient soil foundation report, the failure to follow a proper drainage plan, and the defective work performed on the foundation. In support of its claim, McCollum cites a deposition excerpt from the Underlying Lawsuit, which states that the pool was built by a third-party. See (Doc. No. 24 at 7) (citing Doc. No. 24-6 at 23). Mid-Continent replied that considering this evidence as a justification for imposing a duty to defend would violate the eight-corners rule. The Court agrees. Whatever evidence there may be as to the potential involvement or fault of a third-party, there is no allegation relating to that pool company in the First Amended Original Petition. The eight-corners rule constrains this Court's consideration to the First Amended Original Petition and the insurance agreement. See King v. Dallas Fire Ins. Co. , 85 S.W.3d 185, 187 (Tex. 2002) ("An insurer's duty to defend is determined solely by the allegations in the pleadings and the language of the insurance policy."). Even assuming arguendo the fault of a third-party not named in the First Amended Original Petition, McCollum has not cited any case or provision in the policy stating that the potential liability of a third-party triggers Mid-Continent's duty to defend McCollum or that Mid-Continent is somehow otherwise responsible. Indeed, the policy only imposes a duty to defend in a suit against the insured where the damages sought are covered by the policy. See (Doc. No. 19-2 at 12); see also id. ("[W]e will have no duty to defend the insured against any ‘suit’ seeking damages for ‘bodily injury’ or ‘property damage’ to which this insurance does not apply."). As such, the mere existence of the third-party pool company does not impose a duty to defend on Mid-Continent. Thus, the pool damage is either not a covered event or, given the sole allegation contained in the First Amended Original Petition, excluded by the Earth Movement exclusion discussed below.
See the listing of pleaded house defects on pages 2 and 3 above.
McCollum asserts that the laundry list of other problems alleged in the First Amended Original Petition is covered by the Insurance Agreement. See (Doc. No. 24 at 7). Mid-Continent argues that the Defective Work and Earth Movement exclusions negate its duty to defend for the laundry list of defects resulting from the defective foundation. The Court will address these exclusions separately.
1. Whether the Defective Work Exclusion Negates Mid-Continent's Duty to Defend the Laundry List of Other Damages
Mid-Continent argues first that the Defective Work exclusion negates its duty to defend for the laundry list of damages resulting from the defective foundation. Under this exclusion:
This insurance does not apply to:
1. Defective Work
"Defective Work" includes any and all costs associated with the removal or replacement of the defective, deficient or faulty work.
The following definition is added to Section V – Definitions
23. "Defective Work" means "Your Work" that is defective, deficient, non-conforming, not in accordance with plans and specifications, fails to satisfy applicable building code(s), fails to meet industry practice standards, is not fit for its intended use, not performed in a workman like manner or is faulty, and is included in the products-completed operations hazard.
(Doc. No. 19-2 at 54). Under the most favorable (to the insured) reading of the First Amended Original Petition, the Court finds that the Defective Work only excludes some of the laundry list of damages. Importantly, it does not appear from the face of the First Amended Original Petition that all of the remaining problems were themselves "defective," "deficient," "faulty," etc. For example, brick, mortar, and stucco cracks, water leaks from the roof and windows, cracking tile, sheet rock, and concrete floors, doors that could not open or close, and a displaced pool might or might not be excluded under the Defective Work exclusion. That being said, the Court does find that the Defective Work exclusion excludes the damages to the foundation.
The parties appear to have focused their discussion of the Defective Work on the interpretation of a Your Work exclusion, and how the Defective Work exclusion purportedly amended the Your Work exclusion. The original Insurance Agreement apparently had a Your Work exclusion in it. Nevertheless, by the plain terms of the applicable policy, the Your Work exclusion was "deleted and replaced by" the Defective Work exclusion and the language of the Defective Work exclusion does not mirror the Your Work exclusion. Id. at 55. Therefore, the Court does not believe the arguments or case law interpreting the Your Work exclusion have any significant bearing on the resolution of whether the Defective Work exclusion applies.
2. Whether the Earth Movement Exclusion Negates Mid-Continent's Duty to Defend the Laundry List of Other Problems
In the alternative, Mid-Continent claims that the Earth Movement exclusion negates any duty to defend the laundry list of other problems because those defects were all allegedly caused by foundation movement, which resulted from movement of the earth. See (Doc. No. 25 at 6). In support of this position, Mid-Continent argues that the core allegations in the First Amended Original Petition are that McCollum and/or its agents failed to conduct a proper risk assessment related to the soil before building the home's foundation. See id. The earth moved and took the foundation with it, and the foundation movement allegedly caused the problems in the Marks' home. See id. In response, McCollum makes two arguments. First, they argue that the First Amended Original Petition alleges that there were different causes for the other injuries to the home, by stating "[t]he foundation movement is a major problem, but it is not the only one." (Doc. No. 24-3 at 10). Second, McCollum argues that the Earth Movement exclusion cannot apply because McCollum "did not cause the soil to move." (Doc. No. 24 at 14). In support of this argument, McCollum cites the Fifth Circuit's opinion in Wilshire Ins. Co. v. RJT Constr., LLC , 581 F.3d 222 (5th Cir. 2009), which McCollum claims stands for the proposition that a complaint must allege the builder's operations resulted in the movement of the earth for the Earth Movement exclusion to apply. (Doc. No. 24 at 14). In reply to that position, Mid-Continent argues, first, that McCollum selectively and non-contextually quoted the First Amended Original Petition, and second, that the exclusion at issue in RJT Constr. was materially different from the exclusion here.
The duty to defend is not tethered to only the core allegations, but instead all allegations must be considered. See Northfield Ins. , 363 F.3d at 528. Nevertheless, the Court agrees with Mid-Continent that the Earth Movement exclusion negates its duty to defend for the laundry list of damages. The Earth Movement exclusion states that the policy does not apply to damage "that is directly or indirectly caused by, involves, or is in any way related to any movement of earth, whether naturally occurring or due to man-made or other artificial causes." (Doc. No. 19-2 at 56). The allegations, as pleaded in the First Amended Original Petition, all fall clearly within the purview of this language. The Underlying Lawsuit was brought due to the deficiency of the soil foundation investigation report prepared by McCollum or its sub-contractor. The allegations allege that the report failed to take account of the effect of a lengthy drought in the Houston area. (Doc. No. 24-3 at 5). According to the First Amended Original Petition, this led to an inadequate analysis regarding proper design of the home's foundation. Id. at 6. The alleged improper design of the home's foundation—which purportedly failed to take into account potential changes in soil content—led to foundation movement when the earth shifted. Id. at 9. "The foundation movement [allegedly] contributed to and/or caused other significant problems." Id. at 10. The "other significant problems" are the laundry list of defects McCollum claims are covered under the policy. (Doc. No. 24-3). As the foundation movement, which resulted from the movement of the earth, "contributed to and/or caused" these injuries, the First Amended Original Petition alleges property damages that are "directly or indirectly caused by" or "connected or related to any movement of earth." A plain reading of the Insurance Agreement shows these allegations are within the scope of the Earth Movement exclusion.
Under the Insurance Agreement, "[e]arth includes, but is not limited to any dirt, soil, terrain, mud, silt, sediment, clay, rock, sand, fill material, or any other substances or materials contained therein." (Doc. No. 19-2 at 56).
The Court does not find either of McCollum's arguments to the contrary to be persuasive. First, Mid-Continent is correct that McCollum reads the First Amended Original Petition out of context. McCollum cites to the first sentence in a paragraph which reads that "[t]he foundation movement is a major problem but is not the only one." (Doc. No. 24-2 at 10). For the purpose of completeness, the Court will cite the entirety of the paragraph, which reads:
The foundation movement is a major problem but is not the only one. The foundation movement contributed to and/or caused other significant problems. The home now contains hundreds of cracks in the sheetrock, over 30 brick, mortar, and stucco cracks (several of which are large enough to fit a person's finger), water leaks into the Home from roof and windows, the tile and concrete floors have begun cracking, multiple doors will not open or close any longer and are completely inoperable, and the pool is visibly displaced. In short, the Home suffers from material structural defects, including a defective foundation that is moving – and twisting the Home around it.
(Doc. No. 24-2 at 10) (emphasis added). Reading the two bolded sentences together, the paragraph in context is clearly understood as alleging that the other major problems mentioned in the first sentence manifested due to the foundation's movement. The paragraph does not suggest, much less allege, alternative causes of these problems. In its response here, McCollum states "there are allegations about roof and windows leaking and pool problems, possibly related to some drainage issues. " (Doc. No. 24 at 13) (emphasis added). The First Amended Original Petition mentions problems related to drainage once , alleging that a drainage plan was prepared by a third-party and that McCollum did not follow that drainage plan. See (Doc. No. 24-3 at 6). The discussion of a drainage plan directly follows allegations that McCollum did not take proper care when it came to the moisture content of the soil. See id. at 5-6. Read together and in context, these two segments of the First Amended Original Petition allege that McCollum did not take care to properly assess the risks presented by the moisture content of the soil and that this failure was exacerbated by its failure to implement a proper drainage plan. These two actions contributed to McCollum building the foundation on soil susceptible to movement. The earth moved and allegedly caused the house's defects. Even assuming drainage issues contributed to the problem, the property damages as alleged are still "connected or related to ... movement of earth." (Doc. No. 19-2 at 56).
The entirety of the First Amended Original Petition does not suggest, much less allege, an alternative cause.
In its entirety, the First Amended Original Petition reads:
B. Probstfeld & Associates Prepares Drainage Plan
18. On May 8, 2013, Probstfeld & Associates, Inc., prepared a drainage plan for the subject property at the request of MCHI.
19. MCHI did not implement the drainage plan as designed by Probstfeld & Associates, Inc.
(Doc. No. 24-3 at 6).
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McCollum's second argument does not fare any better. McCollum argues that it did not cause the soil to move, and thus, that the Earth Movement exclusion cannot apply. In support of this argument, McCollum cites RJT Constr. , where the Fifth Circuit held that, under the insurance policy at issue, the "movement of land must ‘result from the [insured's] operations.’ " 581 F.3d at 226. The holding is not shocking by any means. The insurance policy in RJT Constr. explicitly stated that "this policy shall not apply to any claim of liability ... caused by, resulting from, attributable or contributed to, or aggravated by the subsidence of land as a result of landslide, mudflow, earth sinking or shifting, resulting from your operations or your subcontractor's operations." Id. at 225-26 (emphasis added). If anything can be taken from RJT Constr. , it is that courts should give full effect to the language in insurance policies. That does not help McCollum. Here, the Insurance Agreement, in no uncertain terms, extends the policy exclusion to negate coverage for movement of the earth "whether naturally occurring or due to man-made or other artificial causes." (Doc. No. 19-2 at 56). Moreover, the Insurance Agreement defines the term movement broadly to cover a variety of geophysical disruptions " regardless of the cause. " Id. Consistent with RJT Constr. and the normal rules of contractual interpretation, the fact that McCollum may not have moved the soil is irrelevant and does not trigger a duty to defend.
3. Whether the Damage to Property Exclusions Have Any Applicability Here
Mid-Continent argues that "to the extent the Court determines the [Mark Family] ha[s] alleged that [McCollum's] work was, or may have been, ongoing at the time of any alleged damage," the Damage to Property exclusions precludes coverage. (Doc. No. 18 at 21). Both parties seem to agree that the allegations in the First Amended Original Petition indicate that construction was completed when the damages came into being. See, e.g. , (Doc. No. 18 at 22) (opening brief of Plaintiff arguing the Mark Family's allegations "reasonably mean that [McCollum's] ‘work’ was complete at the time of the damage"); (Doc. No. 24 at 17) (response brief of Defendant arguing that "[i]t is clear that certain allegations relate to design rather than contemporaneous operations"); (Doc. No. 25 at 12) (reply brief of Defendant confirming its belief that "[t]he allegations in the Marks' First Amended Petition indicate that the construction was completed at the time the alleged damage incepted"). The Court does not see any purpose in disturbing the parties' agreement on this issue, and therefore, the Court will not address the Damage to Property exclusions.
4. Conclusion
In sum, all of the defects/causes of action in the First Amended Original Petition that McCollum argues are covered under the Insurance Agreement are subject to exclusions. Therefore, Mid-Continent does not owe McCollum a duty to defend in the Underlying Lawsuit. As such, the Court GRANTS Mid-Continent's motion for summary judgment with respect to the duty to defend.
B. Whether Mid-Continent Has a Duty to Indemnify McCollum
Mid-Continent argues that it has no duty to indemnify McCollum because it prevailed on its duty to defend arguments and because "no facts can be developed in the underlying tort suit that will change claims that are fundamentally excluded ... into covered losses." (Doc. No. 18 at 23). In response, McCollum makes two arguments. First, it argues that separate third parties built the pool and designed the drainage plan, and thus, that it cannot be held liable for those damages. Second, McCollum cites to a group of expert reports prepared for the plaintiffs in the Underlying Lawsuit and argues that these damages allegations "require a more thoughtful analysis." (Doc. No. 24 at 17).
The Court agrees with Mid-Continent that, at least as facts currently stand, summary judgment should be granted on the duty to indemnify. As mentioned, "the duty to indemnify is justiciable before the insured's liability is determined in the liability lawsuit when the insurer has no duty to defend and the same reasons that negate the duty to defend will likewise negate any possibility the insurer will ever have a duty to indemnify." Griffin , 955 S.W.2d at 84. The Court found that a summary judgment should be granted finding Mid-Continent does not owe a duty to defend. The Court will next address whether the same reasons negate any possibility that Mid-Continent will ever have a duty to indemnify.
McCollum's first argument confuses the issue before the Court. McCollum contends that there is a fact issue as to whether it "is responsible for physical damage to a pool it did not build and for a drainage system that [it] may or may not have constructed, but did not design." (Doc. No. 24 at 17). In the event McCollum is not responsible for the physical damage caused to the pool or by drainage system, there are no property damages for which it is responsible. If that is the case, then no indemnity is needed. If, on the other hand, McCollum is responsible for these damages as currently pleaded, they fall plainly within the Earth Movement exclusion as the Court held in Section A.2.c.2. In either event, Mid-Continent has no duty to indemnify.
McCollum's second argument also misses the mark. McCollum argues that expert reports in the Underlying Lawsuit present potential issues for coverage under the duty to indemnify: (1) $500,000 in "interior repairs caused by the various defects asserted"; (2) costs to repair the flooring; and (3) replacement of the drainage system. The first category of damages has no evidence to support it, as McCollum, itself, admits that it attached the wrong exhibit. See (Doc. No. 26). Even more, based on later paragraphs, the Court believes the defects correspond to the "laundry list" of damages that the Court has already found are excluded under the Earth Movement exclusion. See supra at 14–18. The second category of damages (the costs to repair the flooring) was similarly held to be excluded under the Defective Work exclusion. See supra at 10–11.
The third category of damages presents a different question, but the Court similarly finds it less than compelling. In an "expert report" prepared by David E. Ballard, one of the experts employed by the plaintiff in the Underlying Lawsuit, Ballard prepared a potential cost report to replace the drainage system in the home built by McCollum. (Doc. No. 24-7). The Court has not addressed the cost of replacing the drainage system in deciding the existence of a duty to defend because it was not raised as a ground for triggering the duty to defend. Nevertheless, McCollum has not met its burden of raising a fact issue that these damages are covered by the policy. The Insurance Agreement covers damages resulting from "bodily injury" or "property damage." (Doc. No. 19-2 at 12). The policy defines "property damage" as "physical injury to tangible property." Id. at 26. As the Court discussed in footnote 3, Texas law draws a distinction between cases where defective installation requires payment only to fix the defective work and cases where the defective work causes physical damages to other parts of the home. See Bldg. Specialties, Inc. v. Liberty Mut. Fire Ins. Co. , 712 F. Supp. 2d 628, 645 (S.D. Tex. 2010) (providing a fuller discussion). The latter category is considered physical injury to tangible property, while the former is not. Id. McCollum has only argued here that costs to replace the drainage system are sought in the Underlying Lawsuit. No allegation has been made that replacement is needed due to physical damage to the drainage system. Instead, the allegation is that McCollum "did not implement the drainage plan as designed by Probstfeld & Associates, Inc." (Doc. No. 24-3 at 6). As such, those alleged damages are not damages from "physical injury to tangible property," and thus, they are not covered under the policy. Therefore, McCollum has not met its burden of showing an issue of material fact concerning coverage. Even assuming coverage existed, the Court finds the cost of replacing the defective drainage system would fall plainly within the Defective Work exclusion. See (Doc. No. 19-2 at 54) (" ‘Defective Work’ includes any and all costs associated with the removal or replacement of the defective, deficient or faulty work.").
Consistent with the foregoing, the Court finds Mid-Continent has shown that "the same reasons that negate the duty to defend will likewise negate any possibility the insurer will ever have a duty to indemnify." Griffin , 955 S.W.2d at 84. Therefore, Mid-Continent's motion for summary judgment with respect to the duty to indemnify as to the current allegations found in the First Amended Original Petition is GRANTED.
V. Conclusion
For the foregoing reasons, Mid-Continent's Motion for Summary Judgment (Doc. No. 18) is GRANTED. Mid-Continent's Motion to Strike (Doc. No. 25) is DENIED as moot.