Friday, December 15, 2017

LYDA SWINERTON BUILDERS, INCORPORATED, v. OKLAHOMA SURETY COMPANY: Fifth Circuit: Oklahoma Surety Co. had a duty to defend Lyda Swinerton Builders Inc., as well as a $1 million damages award to LSB.




 IN THE UNITED STATES  COURT OF APPEALS FOR THE FIFTH CIRCUIT
No. 16-20195

LYDA SWINERTON BUILDERS, INCORPORATED,
Plaintiff-Appellee/Cross-Appellant

v.

OKLAHOMA SURETY COMPANY,

Defendant-Appellant/Cross-Appellee

Appeals from the United States District Court for the Southern District of Texas

Before DAVIS, GRAVES, and COSTA, Circuit Judges. 

JAMES E. GRAVES, JR., Circuit Judge:

This case involves several issues of Texas law relating to an insurer’s duty to defend and the damages that an insured may recover when an insurer breaches that duty. The district court, after disposing of much of the case through a series of partial summary judgment rulings and conducting a bench trial on one remaining claim, issued a final judgment that largely (though not entirely)
favored the insured. The insurer and the insured now cross-appeal
from that judgment. 

We AFFIRM in part and REVERSE in part.

http://www.ca5.uscourts.gov/opinions/pub/16/16-20195-CV0.pdf

Parties Ask 5th Circuit To Determine Whether Duty To Defend Was Owed

(February 7, 2017, 3:41 PM EST) -- NEW ORLEANS — Parties in an insurance dispute recently asked the Fifth Circuit U.S. Courts of Appeals to determine whether a federal district court erred in determining that an insurer owed an additional insured a duty to defend in an underlying construction defects lawsuit (Lyda Swinerton Builders Inc. v. Oklahoma Surety Co., No. 16-20195, 5th Cir.).
Lyda Swinerton Builders Inc. (LSB) was a general contractor for a construction project and employed several subcontractors to assist with the work.  Each of the subcontractors was required to name LSB as an additional insured.

Oklahoma Surety Co. (OSC) insured subcontractor A.D. Willis Co. Inc. under a general liability insurance policy with a $1 million per occurrence limit, with general aggregate and products-completed operation aggregate limits of $2 million, respectively.  The policy also contained an additional insured endorsement naming general contractor “Lyda Builders & its parent & affiliate companies” as an additional insured under the policy.

Failure To Supervise

Adam Development Properties L.P. sued LSB and its parent, Swinerton Inc., in the 361st Judicial District Court, Brazos County, Texas, alleging that LSB failed to properly supervise its subcontractors and stating a claim for property damage.  Adam then filed a first amended petition adding claims for breach of contract, negligence, guaranty and negligent misrepresentation against LSB.  Adam later filed a second amended petition, stating the same claims and naming Willis as a third-party defendant.  Adam Development sought economic damages and attorney fees and costs.

LSB tendered the underlying lawsuit to more than a dozen insurance carriers for the subcontractors, and each carrier denied LSB a defense, causing LSB to tender the lawsuit to its own carrier and requiring LSB to pay a $500,000 deductible and other fees.

LSB then sued the subcontractor insurance carriers in the U.S. District Court for the Southern District of Texas, stating claims for breach of contract, violation of Section 541 the Texas Insurance Code, Tex. Ins. Code Ann. § 541, declaratory relief and attorneys’ fees.  A settlement was eventually reached with each of the subcontractor carriers except OSC.

Duty To Defend

LSB then filed a motion for partial summary judgment against OSC regarding OSC’s duty to defend it in the underlying lawsuit, and the District Court granted the motion in part, ruling that OSC owed LSB a duty to defend in the underlying lawsuit and that OSC had breached that duty.

The District Court then considered several other summary judgment motions filed by LSB and OSC, denying OSC’s cross-motion for partial summary judgment on OSC’s breach of the duty to defend and indemnify, granting LSB’s motions for partial summary judgment on OSB’s duty to defend based on the original petition in the underlying lawsuit and OSC’s violation of the Texas Prompt Payment of Claims Act (PPCA), Tex. Ins. Code Ann. § 542.051, based on the duty to defend, and determined that OSC was liable for damages for breach of the duty to defend in the amount of $655,600.27 and costs and prejudgment interest.  The District Court deferred the issue of whether OSC violated Chapter 541 of the Texas Insurance Code in refusing to defend LSB in the underlying lawsuit.

After a July 6, 2015, bench trial on the issue of whether OSC violated Chapter 541, the District Court determined that LSB failed to show that it suffered any injury separate from the denial of benefits it was owed under the OSC policy and, thus, failed to show any independent injury as required for recovery under Chapter 541.  The District Court also ruled that LSB could not recover the PPCA statutory interest but allowed LSB to supplement with evidence of the dates and amounts it paid for defense costs under the PPCA.

Final Judgment

The District Court entered final judgment, ruling that OSC owed LSB a duty to defend under the original petition in the underlying lawsuit and that OSC breached that duty and, thus, violated the PPCA.  The District Court awarded LSB $655,600.27 in damages, $296,209.69 in PPCA interest accrued through Aug. 20, 2015, plus $323.32 per day after Aug. 20, 2015, until the date of payment of the judgment.  Moreover, the District Court rendered judgment in favor of OSC on LSB’s claim for Chapter 541 violation.

After receiving post-judgment motions from both parties, the District Court, on Feb. 23, 2016, amended the final judgment to award LSB $84,881.10 in prejudgment interest and denied OSC’s motion to alter or amend the amended final judgment.

Each party then appealed the ruling to the Fifth Circuit, and OSC filed an appellant brief on Sept. 21.

(Appellant brief available.  Document #50-170209-012B.)

In its brief, OSC contends that the District Court erred in granting LSB’s motions for partial summary judgment on the duty to defend LSB in the underlying lawsuit, breach of the duty to defend and based on those rulings in violation of the PPCA.

Eight-Corners Rule

“Applying the eight-corners rule for determining the duty to defend, the allegations contained within the OP [original petition], FAP [first amended petition] and SAP [second amended petition] filed by ADP in the Underlying Lawsuit, considered in light of OSC’s policy, failed to trigger a duty to defend LSB in the Underlying Lawsuit.  Neither the OP nor FAP alleged ‘property damage’ required to trigger a duty to defend.  Further, neither the OP, FAP nor SAP alleged that property damage occurred during the policy term.  And, neither the OP nor FAP alleged property damage caused by OSC’s insured, Willis.  Instead, those petitions alleged that LSB’s deficient work under the Project caused ADP’s damages.  As a result of the petitions’ lack of factual allegations triggering a duty to defend, the District Court erroneously accepted LSB’s arguments to consider improper extrinsic evidence, including LSB’s own Third-Party Petition filed in the Underlying Lawsuit to fill in the petitions’ missing factual allegations,” OSC says.

“In doing so, the District Court erroneously applied a ‘12-corners rule’ analysis to trigger OSC’s duty to defend under the Original and First Amended Petitions and to determine that OSC’s breached the duty to defend.  Likewise, the District Court improperly considered other extrinsic evidence, including Willis’ Subcontract with LSB to perform certain work on the Project, to determine that OSC owed a duty to defend and breached that duty.

“Further, LSB failed to conclusively establish its status as an ‘additional insured’ where it failed to conclusively establish the existence of an ‘insured contract’ between LSB and Willis where LSB failed to countersign the Subcontract and the Subcontract’s indemnification language was insufficient to make it an ‘insured contract’ under OSC’s Policy’s definition.”

Anti-Stacking Rule

OSC also avers that the District Court erred in granting LSB’s motion and denying OSC’s motion on LSB’s breach of the duty to defend claim “where Texas’ anti-stacking or vertical exhaustion rule (providing that consecutive policies covering distinct policy periods cannot be stacked to multiply coverage for a single claim involving indivisible injury) applied here to preclude LSB’s claims for unreimbursed defense fees and costs LSB allegedly incurred as a result of OSC’s breach of its duty to defend.”

“Because OSC conclusively established that LSB selected the non-overlapping Willis policy under which it was afforded its complete defense and indemnity . . . the anti-stacking rule precluded LSB from attempting to stack Willis’ other non-overlapping policy — the OSC Policy — to collect unreimbursed defense fees and costs,” OSC states.

Moreover, OSC asserts that because LSB failed to show that OSC breach its duty to defend, it failed to show that there was a violation of the PPCA.  OSC also argues that, “even if the District Court properly determined OSC owed a duty to defend LSB in the Underlying Lawsuit and breached that duty, which is not conceded, the District Court erroneously granted LSB’s summary judgment for breach of the duty to defend damages and awarded $655,600.27 as actual damages for breach of the duty to defend.”

“Among others, LSB failed to conclusively establish entitlement to the deductible it paid to its carrier and unreimbursed attorney’s fees expended on LSB’s independent counsel.  Having failed to establish entitlement to the full amount of the award, PPCA interest assessed on these amounts was also erroneous,” OSC explains.

Manifest Error

OSC further contends that “if OSC’s liability for breach of contract and violation of the PPCA is affirmed, the District Court abused its discretion in denying OSC’s motion to alter or amend the Final Judgment and Amended Final Judgment.  OSC established a manifest error of law in the District Court’s determination of the accrual period for PPCA statutory interest to end only at the time the judgment is paid, rather than at the date of the judgment, as the Texas Supreme Court and this Court have determined is the proper accrual period.”

“The District Court’s interpretation improperly punishes OSC for any PPCA violation and violates OSC’s due process and right to appeal.  As a result, for this additional reason, the Amended Final Judgment should be reversed, and the case remanded for further proceedings or a modified judgment,” OSC says.

In its Nov. 8 appellee/cross-appellant brief, LSB argues that the OP, FAP and SAP each triggered OSC’s duty to defend and that OSC’s argument that the anti-stacking rule applies is erroneous because “the anti-stacking rule applies only to indemnify to be paid under the Policy.  The rule does not apply to the duty to defend when the Policy, as is the case here, had defense outside of limits.”

(Appellee/cross-appellant brief available.  Document #50-170209-011B.)

“In both the Final Judgment and Amended Final Judgment, the Court found the 18% penalty interest assessed against OSC would run until the date OSC actually pays the judgment.  The wording under the PPCA does not provide the 18% interest penalty ceases to accrue upon the entry of judgment.  OSC asks this Court to substitute its own judgment over the legislature which could have added a date of termination of the accrual of the interest had it intended to do so.  In the absence of legislative direction, authority, or intent to impose the limitation asserted by OSC, this Court should refrain from such judicial activism,” LSB says.

“In addition, no Texas court has substantively addressed or ruled in favor of OSC’s construction of the PPCA.  As such, the District Court was correct to construe the provision in accordance with the statute’s plain and ordinary meaning.  To rule otherwise would reward a recalcitrant carrier for its delay on paying the judgment for an indefinite future.”

Independent Injury

LSB also avers that the District Court erred in ruling that LSB was required to show an independent injury in order to trigger its right to extracontractual damages and that LSB failed to show a separate injury because the District Court’s reliance on the Fifth Circuit’s ruling in Great American Insurance Co. v. AFS/IBEX Financial Services Inc., 612 F.3d 800 (5th Cir. 2010), “is not followed by the Texas Supreme Court nor Texas state appellate decisions.”

“The Supreme Court of Texas has repeatedly confirmed LSB’s entitlement to pursue extracontractual damages without an ‘independent injury,’” LSB states.

Citing the Texas Supreme Court’s ruling in Republic Insurance Co. v. Stoker, 903 S.W.2d 338, 341 (Tex. 1995), LSB further claims that “[c]ontrary to the District Court’s ruling, a showing of extra-contractual damages is only required when an insurer engaged in questionable practices in handling uncovered claims under the terms of the policy.”

Legal Damages

“The standard in Stoker is inapplicable here as there was a duty to defend as the District Court conclusively adjudicated in LSB’s favor.  Therefore, LSB already demonstrated it sustained legal damages so as to be entitled to extracontractual damages for OSC’s violations of the Insurance Code and the DTPA.  As such, the District Court committed error in applying Federal law contrary to Texas state law regarding the entitlement of an insured to extracontractual damages,” LSB explains.

Moreover, LSB asserts, “Nevertheless, if the Fifth Circuit were to impose the additional requirement of an ‘independent injury’, LSB did introduce evidence of sustaining a separate injury.”

“First, separate injury was established by LSB having to pay a $500,000 deductible on its own direct policy.  Had OSC defended immediately from the date of tender as required on its policy, LSB would have avoided the $500,000 deductible.  Second, as a result of OSC’s breach of the duty to defend, LSB was forced to incur attorneys’ fees in this coverage litigation.  These two elements of damage are independent injuries separate and distinct from the OSC policy benefits awarded, which consisted of defense fees and costs incurred in the Underlying Action,” LSB says.

Trebled Damages

In its reply/cross-appellant response brief filed Dec. 22, OSC claims that “LSB failed to appeal (and has, thus, waived) the District Court’s failure to find all predicates for recovery of trebled damages under Chapter 541 of the Texas Insurance Code (knowing misrepresentation as defined within Subchapter B of Chapter 541).”

(Appellant reply/cross-appellee brief available.  Document #50-170209-014B.)

“But, to the extent the issue has not been waived, the District Court correctly concluded that independent injury is a predicate to recovery of treble damages under Chapter 541 of the Texas Insurance Code.  This Court should overrule LSB’s cross-appeal and should affirm the District Court’s take-nothing judgment on LSB’s Chapter 541 claims in its entirety,” OSC says.

LSB filed an appellee/cross-appellant reply brief on Jan. 20.

Counsel

OSC is represented by R. Brent Cooper, Diana L. Faust and Timothy M. Dortch of Cooper & Scully in Dallas.

LSB is represented by Joseph L. Oliva and Charles L. Fanning IV of Oliva & Fanning in San Diego and John L. Grayson of Cokino Bosien & Young in Houston.