* U.S. District Judge, Eastern District of Louisiana, sitting by designation. United States Court of Appeals

Fifth Circuit



## FILED

June 17, 2003

Charles R. Fulbruge III

Clerk REVISED JUNE 19, 2003

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 02-60414

ACS CONSTRUCTION COMPANY, INC.

OF MISSISSIPPI,

Plaintiff-Appellant,

versus

CGU, FORMERLY KNOWN AS

GENERAL ACCIDENT INSURANCE COMPANY,

Defendant-Appellee.

Appeal from the United States District Court

for the Northern District of Mississippi

Before DeMOSS and STEWART, Circuit Judges and FALLON * , District Judge.

CARL E. STEWART, Circuit Judge:

In this civil action based on diversity jurisdiction, we determine whether on the specific facts

of this case, the terms of a commercial general liability insurance policy ent it le the Appellant, the

insured, to coverage for an incident relating to faulty construction. The Appellee, the insurer, denied

coverage for losses asserting that the incident did not consti t ut e an “occurrence” as defined in the2

policy. The Appellant, filed suit against the insurer in Mississippi which was removed to the district

court. The parties filed cross summary judgment motions in the district court on the issue of contract

liabilit y. The district court granted summary judgment to the Appellee. For the reasons that follow

we affirm.

Factual and Procedural Background

In May 1996, ACS contracted with the U.S. Army Corps of Engineers to construct munitions

bunkers at the Pope Air Force Base (the “project”) in North Carolina. In July 1996, ACS

subcontracted with Chamberlin Co., Inc. to instal l a waterproofing membrane to the roofs.

Chamberlin merged with Southern Commercial Waterproofing Co. of Ala., Inc. (co llect ively,

“Chamberlin/Southern”) who accepted all responsibility for the work required under the subcontract.

Subsequent to the installation of the waterproofing membrane, leaks developed in the roofs of some

of the bunkers. ACS unsuccessfully sought for Chamberlin/Southern to correct the leaks. As ACS

was still responsible for the project, it was forced to make th e repairs thereby suffering a loss in

excess of $190,000.

ACS had a valid commercial general liabilit y (CGL) insurance policy with CGU at all relevant

times. The relevant portions of the policy at issue read:

1. Insuring Agreement

a. We will pay those sums that the insured becomes legally obligated to pay as damages

because of “bodily injury” or “property damage” to which this insurance applies...

b. The insurance applies to “bodily injury” or “property damage” only if:

i. The “bodily injury” or “property damage” is caused by an “occurrence” that take

place in the “coverage territory”...

In the definitions section, the policy explains that “occurren ce” means “ a n accident

, including

continuous or repeated exposure to substantially the same harmful conditions.” (emphasis added).3

According to the contract, the insurance policy does not apply to : “ ‘Bo dily injury’ or ‘property

damage’ expected or intended from the standpoint of the insured.” Thus, under the plain terms of the

contract, “property damage” must be caused by an “occurrence” which is defined as an “accident”

in order to trigger coverage.

Consistent with the policy, ACS sought from CGU the loss incurred. CGU determined that no

coverage existed under the p o licy because no “property damage” caused by an “occurrence” took

place and therefore, denied ACS’s claim. ACS filed suit in Mississippi State Court. CGU removed

it to federal court based on diversity jurisdiction pursuant to 28 U.S.C. § 1332. The parties filed cross

motions for summary judgment on the issue of contract liability. The district court granted CGU’s

motion for summary judgment finding that there was no “occurrence” such that ACS was entitled

to recovery under the policy.

Analysis

I. Standard of Review

We review the district court’s order granting summary judgment de novo

, applying the same

standards that the district court applied. Provident Life and Accident Ins. Co. v. Goel

, 274 F.3d 984,

990 (5th Cir. 2001). Summary judgment is appropriate only when the “pleadings, d epositi ons,

answers to interrogatories, and admissions on file, together with the affidavits, if any, show that here

is no genuine issue as to any material fact.” F ED

. R. C IV

. P. 56(c). As we review, “[f]irst, we consult

the applicable law to ascertain the material factual issues.” F.D.I.C. v. Firemen’s Ins. Co. of Newark,

NJ

, 10 9 F.3d 1084, 1087 (5th Cir. 1997). “We look to state law for rules governing contract

interpretation.” Id

. Under Mississippi law, an insurance policy is a contract subject to the general4

rules of contract interpretation. Clark v. State Farm Mut. Auto. Ins. Co.

, 725 So.2d 779, 781 (Miss.

1998).

The rules of contract interpretation in Mississippi are well settled. Under Mississippi law, the

object of contract interpretation is to ascertain the common intent of the parties. Clark , 725 So. 2d

at 781. To do so, we must construe the policy as a whole and review the language of the policy giving

“operative effect to every provision in order to reach a reasonable overall result.” J&W Foods Corp.

v. State Farm Mutual Automobile Ins. Co.

, 723 So. 2d 550, 552 (Miss. 1998). If after we review the

policy, “the policy can be interpreted to have two or more reasonable meanings,” then the policy is

ambiguous. Id . If this Court finds ambiguity in the language of the insurance policy, then “we must

necessarily find in favor of coverage.” Id

. Moreover, “a court must refrain from altering or changing

a policy where terms are unambiguous, despite resulting hardship on the insured.” Titan Indemnity

Co. v. Estes , 825 So. 2d 651, 656 (Miss. 2002).

II. Liability coverage under the CGL insurance policy

A. Definition of “Occurrence” in the Insurance Policy under Mississippi Law

The core of this dispute is the proper test for determining whether an “occurrence” took place

under these set of facts. It is uncontested that the leaks developed because the installation of the

waterproofing membrane was faulty. The controversy stems from whether the installation of the

waterproofing membrane or whether the consequential leaks constitute an “occurrence” under the

CGL insurance policy. The CGL policy defines “occurrence” as an “accident” but does not explicitly

define “accident.” We must therefore determine whether, under Mississippi law, an “accident” refers

to the unintended consequences of inst alling the waterproofing membrane or whether an “accident”

refers to the underlying act of the installation itself.5

CGU contends that the definition of “accident” proffered under Moul ton applies; whereas,

ACS contends that the definition proffered in Southern Farm Bureau Casualty Ins. Co. v. Allard

, 611

So. 2d 966 (Miss. 1 992) applies. The M oul ton test is whether the insured intended the underlying

action

. The Allard test appears to be whether the insured intended the consequences of his actions.

In U.S. Fidelity & Guar. Co. v. Omnibank

, the Mississippi Supreme Court resolved the so-called

tension between Allard and Moul ton and reaffirmed its holding in Moul ton

. 812 So. 2d 196 (Miss

2002). For these reasons, the Moul ton test is dispositive of the dispute over the interpretation of an

“occurrence” in the CGL policy.

In Moul ton

, the Mississippi Supreme Court held that “the term accident refers to [the

insured’s] action and not whatever unintended damages flowed from that act.” 464 So. 2d at 510.

The issue was whether Allstate had a duty to defend the insured, Moulton, under the insurance policy

in an act io n for malicious prosecution. 646 So.2d at 508. Moulton filed a complaint alleging that

Ant ho ny Walls had stolen her dog. Walls was subsequently arrested and brought to trial but t he

charges were dismis sed. Walls then filed a malicious prosecution suit against Moulton. Moulton

expect ed Allstate to defend her under her comprehensive dwelling policy. The language in her

insurance policy provided coverage in the event of bodily injury or property damage resulting from

an occurrence. Under the policy, an “occurrence” was defined as:

an accident, including injuri o us exposure to conditions, which results, during the

endorsement period, in bodily injury or property damage neither expected nor

intended from the standpoint of the Insured.

Id

. Acknowledging that under the terms of the policy, an “occurrence” is defined as an accident, the

Mississippi Supreme Court defined “accident.” Id . at 509. The Mississippi Supreme Court adopted

the following meaning of an “accident” in an insurance policy:6

The only relevant consideration is whether

... a chain of events leading to the injuries

complaine d o f was set in motion and followed a course consciously devised and

controlled by

appellant without the unexpected intervention of any third person or

extrinsic force.

Id

. (quoting Winkler v. Ohio Casualty Ins. Co ., 441 A.2d 1129, 1132 (Md. Ct. Spec. App. 1982)).

The Mississippi Court then explicitly rejected the theory that an accident “refers to the unintended

consequences of the act.” Id . at 510.

Applying M oul ton to the present case, the faulty workmanship of the waterproofing

memb rane resulting in the leaks does not constitute an “occurrence” under the policy. Just as

Moul ton intended to file a complaint against Wall but may not have intended to cause him

embarrassment, ACS intended to hire Chamberlin/Southern to install the membrane but did not intend

for the work to be faulty or result in a leak. Although neither the policy, nor the policy language in

Moul ton were identical to the language in the po licy at issue here, M oul ton defined the term

“occurrence” as it relates to coverage under an insurance policy. See 464 So.2d at 510; Omnibank

,

812 So. 2d at 200-01 (applying the Moul ton test to determine whether an act was an “occurrence”

in a CGL insurance policy).

Although ACS concedes that Moul ton “remains the Mississippi Supreme Court’s, seemingly

complete analysis, of [the ] insurance Policy dispute herein,” ACS’s brief at 40, ACS, nevertheless

argues that the law changed when the Mississip pi Supreme Court deci ded S outhern Farm Bureau

Casualty Ins. Co. v. Allard

, 611 So. 2d 966 (Miss. 1992). ACS asserts that the Mississippi Supreme

Court, in Allard

, suggested that such an “acci dent” refers to the unintended consequences of the

init ial act. We are not persuaded that Allard has changed the law. In Allard

, the Mississippi Supreme

Court relied on the holding of Coleman v. Sanford

, 521 So. 2d 876, 878 (Miss. 1988) which stated7

that “an act is intentional if the actor desires to cause the consequences of his act, or believes that the

consequences are substantially certain to result from it.” Allard

, 611 So. 2d at 968. The Mississippi

Supreme Court focused on the language requirin g int ent from the standpoint of the insured and

d et ermined t hat the facts of the case created a question for the jury on intent. Because the jury in

Allard found that the insured’s actions were unintentional, the Mississippi Supreme Court affirmed

that the insurance policy provided coverage to the insured. Because the l anguage of the insurance

policy in Allard is similar to the language of the CGL policy in the present case, ACS asserts that

under this theory, from the standpoint of the insured, ACS’s actions were not intentional because it

did not desire to cause the consequent leaking.

Notwithstanding the apparent conflict that Allard created when it was decided, the Mississippi

Supreme Court very recently reaffirmed it s ho lding in M oul ton and resolved the tension between

Allard and Moul

ton

. U.S. Fidelity & Gy Co. v. Omniban k , 812 So. 2d 196 (Mi ss 2002). In

Omnibank , the Fifth Circuit certified the following issue to the Mississippi Court:

[W]hether, under Mississi ppi law, an insurer’s duty to defend under a general

commercial liabilit

y policy for injuries caused by accidents extends t o injuries

unintended by the insured but which resulted from intentional actions of the insured

if those actions were negligent but not intentionally tortious.

812 So. 2d at 197; S ee Ramsay v. Omnibank

, 215 F.3d 502, 504 (5th Cir. 2000) (certif ying the

question to the Mi ssissippi Supreme Court in part, to resolve the tension between A llard and

Moul ton ). The Mississippi Supreme Court answered by restating the test it promulgated in Moul ton

and further clarifying it.2 See 812 So. 2d at 199. The CGL insurance policy language at issu e in O mnibank provided in

relevant part as follows:

b. This insurance applies to “bodily injury” and “property damage” only if:

(1) The “bodily injury” or “property damage” is caused by an occurrence that takes place in

the “coverage territory”; ...

12. “Occurrence” means an accident, including continuous or repeated exposure to

substantially the same general harmful conditions.

8 In Omnibank

, the Mississippi Supreme Court analyzed the identical policy language at issue

in this case and addressed the identical arguments proffered by ACS. 2 The Mississippi Supreme Court

answered that “according to the policy language, even if an insured acts in a negligent manner, that

action must still be accidental and unintended in order to implicate policy language.” Id

. Under similar

circumstances in the present case, even though the installation of the membrane was done negligently,

the action of inst alling the membrane was not accidental nor unintended to implicate coverage under

the policy.

The Mississippi Supreme Court reconciled its decisions in Allard and Moul ton concluding that

the cases “are consistent in that they both address the nature of the insured party’s conduct, not the

resulting damages of that conduct.” 812 So. 2d at 201. The Mississippi Supreme Court, however,

was explicit that “ A llard does not constitute a change in the law” and reaffirmed its holding in

Moul ton

. Id

.

Nonetheless, ACS further contends that in construing “occurrence” in the CGL policy, the

district court overlooked that the exclusions language in the policy renders the coverage language

ambiguous. We disagree. Like ACS, the insured in Omnibank contended “that the policy language

which implicates coverage for ‘occurrences’ or ‘incidents’ is rendered ambiguous by exculpatory

language which exempts from coverage for ‘bodily injury’ or ‘property damage’ ‘expected’ or

‘intended’ from the standpoint of the insured.” 812 So. 2d at 198. The Mississippi Supreme Court9

specifically rejected this argument and categorically determined that the exception language in the

policy does not create ambiguity so as to liberally construe coverage in favor of the insured. Id . at

200. Thus, the district court did not err by not creating ambiguity through the exclusion language of

the contract.

This Court construed Moul ton for the first time in Berry v. McLemore

, 795 F.2d 452 (5th Cir.

1986). In Berry

, the insured was injured by a third-party, McLemore. McLemore was a police officer

who made a

cust o dial arrest of Berry. When Berry resisted the arrest a fight ensued resulting in

McLemore shooting Berry. Berry filed suit and a jury returned a verdict against McLemore awarding

punitive and compensatory damages to Berry. When McLemore failed to pay the judgment against

him, Berry filed suit against the Town’s liabilit y insurer for breaching its duty to defend and for failing

to indemnify McLemore against the judgment.

This Court was faced with substantially similar language as the insurance policy in dispute in

Moul ton

. The insurance policy in Berry defined an “occurrence” as “an accident, including continuous

and repeated exposu re to conditions, which results in bodily injury or property damage neither

expected nor intended from the standpoint of the insured.” 795 F.2d at 456. This Court reli e d on

Moul ton to determine that the incident was no t an occurrence under the policy by construing the

definition of an “occurrence” as follows:

[A]n act fell outside of the terms of the policy if ‘whether prompted by negligence

or malice, (1) defendant’s acts were committed consciously and deliberately, without

the unexpected intervention of any third force, and (2) the likely (and actual) effect

of those acts was well within the defendant’s foresight and anticipation.

795 F.2d at 457 (quoting Moul ton

, 464 So. 2d at 509). Applying this definition to the facts of the

Berry-McLemore incident, this Court found that McLemore intended to fire his gun and therefore,3 WM. C. Vick Construction Co. v. Penn. Nat’l Mutual Casualty Ins. Co. , 52 F.Supp.2d 569

(E.D.N.C. 1999) involved Chamberlin providing a faulty waterproofing system as a subcontractor

to Vick, the general contract o r. Although the case arises under North Carolina law, the law is

substantially similar to the law in Mississippi and involves Chamberlin’s faulty workmanship as a

subcontractor. The district court defined the term “ac cident” as “unforseen, unexpected, unusual,

undesigned, the effect of an unknown cause or an unprecedented consequence” and determined that

no occurrence (defined as an “accident”) took place to trigger coverage under the insurance policy.

10 it “was not an accident as referred to in the policy’s definition of an ‘occurrence.’ ” 795 F.2d at 458.

This Court rejected the theory that although McLemore intended to fire his gun, he did not intend to

cause injury to Berry so as to fall within the terms of coverage under the policy. Instead, as this Court

explained “[t]he focus is ... not on the harm caused, but upon the act that caused the harm. The act

was the firing of the gun. The gunshot wound was the resulting harm.” Id . at 458.

Applying Berry to t he fact s of this case, no “occurrence” took place. The negligence in

inst alling the waterproofing membrane i n t he ro o fs was the foreseeable cause of the leaks that

developed. The act of inst alling the waterproofing membrane fell outside of the terms of the policy

because regardless of whether prompted by negligence (1) ACS’s acts were committed deliberately

and the intervention of Chamberlin/Southern to complete the work was expected; and (2) the likely

(and actual) leaking that developed as a result of faulty workmanship was within ACS’s foresight. 3

The faulty workmanship of Chamberlin/Southern unfortunately amounts to negligence. Hi ring the

subcontractors and inst alling the waterproofing membranes were not accidents under the terms of the

policy.

Applying the foregoing Mississippi law, the installation of the waterproofing membrane is the

underlying act referenced in “occurrence” which does not trigger coverage under the policy.

B. The definition of “property damage” under the policy11

In the alternative, CGU contends that t he resulting damage did not constitute “property

damage” under the policy to trigger coverage. Because we have found that no “occurrence” has taken

place, we need not reach this issue. Moreover, the Mississippi Courts have not yet defined “property

damage” in a CGL insurance policy as it definit ively defined “occurrence” in Omnibank

. This Court

is Erie-bound to apply Mississippi law to the issue, and becaus e o ur decision on “occurrence” is

dispositive of the breach of contract claim, we do not reach this issue.

III. The Exclusionary language in the CGL insurance policy

ACS alternatively argues that the district court did not adequately consider the exclusionary

language in the insurance policy in order to create coverage. The relevant portions of the policy are

as follows:

2. Exclusions

This insurance does not apply to:

j . Dam age to Property

“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.

l

. “Property damage” to “your work” arising out of it or any part of it and

included in the “Products-Completed Operations ha z ard.” This exclusion does

not apply if the damaged work or the work out of which the damage arises

was performed on your behalf by a subcontractor.

“Your work” means

(a) Work or operations performed by you on or on your behalf; and

(b) materials, parts or equipment furnished in connection with such work or

operations.

ACS argue s t hat t he exception to the exclusion in part 2. l

. means that the faulty work of a

subcontractor is an “occurrence” covered by the insurance policy. Ov e rall, ACS contends that the

exclusionary language means that the work undertaken by the subcontractors and the fact that the12

leaks were discovered before the project was completed constituted “property damage ” under the

po licy. As the district court aptly explained, “what ACS seeks from its insurer is a performance

bond.” Consequently, the district court declined to convert the liabilit y policy into a surety agreement.

Moreover, the Mississippi Supreme Court recently explained that the exclusionary language in the

policy cannot be used to cr eate coverage where none exi sts. O mnibank

, 812 So.2d at 200. The

exclusionary language in the contract cannot be used to create coverage where none exists.

Conclusion

ACS urges this Court to apply Allard or to look to other jurisdictions arguing that Omnibank

f ailed to reconcile Allard and Moul ton and therefore, Allard

, the more recent case should take

precedence. We cannot agree. Federal jurisdiction arises from diversity in this case. This Court is,

therefore, Erie-bound to apply Mississippi law to the issue at dispute. Under Mississippi law, Moul ton

and Omnibank make clear that in a CGL insurance policy wh ich defines an “occurrence” as an

“accident,” coverage is triggered if the underlying act was intentional and deliberate. These cases also

make clear that an “occurrence” defined as an “accident” in a CGL insurance policy does not refer

to the unintended con sequences of the act. Thus, the district court did not err when it applied

Moul ton and Omnibank and concluded that ACS’s intent to subcontract with Chamberlin/Southern

and its intent to install the waterproofing membrane to the bunker roofs did not constitute an

“occurrence” und er it s CGL insurance policy with CGU to trigger coverage. For the foregoing

reasons we AFFIRM the judgment of the district court.

AFFIRM.