UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

In Re: UNITED INDUSTRIAL SERVICES,

INCORPORATED,

Debtor.

CERTAIN LONDON MARKET INSURERS,

Plaintiffs-Appellants, No. 95-2481

v.

UNITED INDUSTRIAL SERVICES,

INCORPORATED; WESTINGHOUSE

ELECTRIC CORPORATION,

Defendants-Appellees.

Appeal from the United States District Court

for the District of Maryland, at Greenbelt.

Peter J. Messitte, District Judge.

(CA-95-693-PJM, BK-92-13516)

Argued: March 6, 1996

Decided: April 17, 1996

Before HALL, HAMILTON, and LUTTIG, Circuit Judges.

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Affirmed by unpublished per curiam opinion.

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COUNSEL

COUNSEL: Michael Joseph McManus, JACKSON & CAMPBELL,

P.C., Washington, D.C., for Appellant. Richard Osgood Duvall,
HOLLAND & KNIGHT, Washington, D.C., for Appellees. ON

BRIEF: Richard S. Kuhl, Jonathan R. Clark, JACKSON & CAMPBELL, P.C., Washington, D.C., for Appellant. John Thorpe Richards, Jr., HOLLAND & KNIGHT, Washington, D.C., for Appellee

Westinghouse; Robert F. Condon, Washington, D.C., for Appellee

United Industrial.

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Unpublished opinions are not binding precedent in this circuit. See

Local Rule 36(c).

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OPINION

PER CURIAM:

Certain London Market Insurers (the Insurers) brought this declaratory judgment action in United States Bankruptcy Court for the District of Maryland against the debtor, United Industrial Services, Inc.

(United), seeking a declaration that two liability insurance policies

issued to United excluded coverage for damages resulting from United's spill of hazardous material. The bankruptcy court held that coverage existed under one of the policies, but not under the other policy.

Both sides appealed to the district court, which held that coverage

existed under both policies. The Insurers now appeal the district

court's order. For the reasons stated below, we affirm.

I.

Westinghouse Electric Corporation (Westinghouse) was hired to

replace old electrical transformers at the United States Capitol. United

was a subcontractor for Westinghouse. The subcontract required

United to remove from an underground vault drums containing polychlorinated biphenyls (PCBs), a hazardous substance that had been

drained from electrical transformers at the Capitol. On August 3,

1992, while United employees were using a crane to lift a PCB drum,

the PCB drum fell from the crane, hit the ground, and ruptured, spilling approximately fifty-five gallons of PCBs. Following the PCB

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spill, Westinghouse conducted an extensive clean-up operation that

included deconstructing and reconstructing part of a concrete tunnel

that had become contaminated with PCBs. Westinghouse spent over

$1,900,000 on the clean-up operation. On December 28, 1992, Westinghouse filed a suit against United, seeking indemnification from

United under the subcontract, and alleging that the PCB spill was

caused by United's negligence.

At the time of the PCB spill, United had liability insurance under

two policies issued by the Insurers. United had a Primary Policy with

a $1,000,000 limit and an Umbrella Policy with a $4,000,000 limit.

Both policies gave the Insurers the right to control the defense of any

claim within the policies' coverage. The Insurers notified United, by

a letter dated January 7, 1993, that a law firm had been retained to

represent United in the suit brought by Westinghouse.

On February 4, 1993, the law firm retained by the Insurers to represent United filed an answer on behalf of United. This answer did not

request a jury trial. On February 25, 1993, the Insurers notified United

that an exclusion contained in both the Primary Policy and the

Umbrella Policy might preclude coverage for the PCB spill and that

the Insurers were proceeding with United's defense under a complete

reservation of rights. On February 26, 1993, the law firm hired by the

Insurers to represent United filed an amended answer that included a

demand for a jury trial. Because the jury trial demand was untimely,

the district court struck it from the answer. The district court then

referred the case to a magistrate, who conducted a bench trial and rendered judgment in favor of Westinghouse.

While the suit between Westinghouse and United was pending, the

Insurers brought this action against United, seeking a declaratory

judgment that neither the Primary Policy nor the Umbrella Policy

covered the PCB spill. The action was filed in the bankruptcy court

as an adversary proceeding because United had filed for bankruptcy.

Subsequently, Westinghouse was granted permission to intervene on

the side of United.

The bankruptcy court held that the Primary Policy provided coverage for the PCB spill, but that the Umbrella Policy did not. Both sides

appealed to the district court. The district court affirmed the bank-

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ruptcy court's determination that the Primary Policy provided coverage for the PCB spill and additionally held that the Insurers were

estopped from denying coverage for the PCB spill under both the Primary Policy and the Umbrella Policy. On appeal to this court, the

Insurers argue that the PCB spill was not covered under the Primary

Policy and that they should not be estopped from denying coverage

under either policy.

II.

Because the district court sits as an appellate court in bankruptcy

cases, our review of the district court's decision is plenary. Brown v.

Pennsylvania State Employees Credit Union, 851 F.2d 81, 84 (3d Cir.

1988). We apply the same standard of review as the district court

applied to the bankruptcy court's decision. Findings of fact are

reviewed for clear error and conclusions of law are reviewed de novo.

In re Johnson, 960 F.2d 396, 399 (4th Cir. 1992).

III.

We first consider the Insurers' argument that the Primary Policy

does not provide coverage for the PCB spill. We begin by reviewing

two provisions of the Primary Policy.

The Primary Policy contains an endorsement, referred to as "Endorsement No. 1," which provides:

It is understood and agreed that Bodily Injury or Property

Damage arising out of loading and unloading of property by

means of mechanical devices, not attached to an automobile,

is hereby covered under this policy.

(J.A. 301). The Primary Policy also contains several exclusions from

coverage. Among these exclusions is the "Paramount Exclusion,"

which provides:

Notwithstanding anything to the contrary contained in this

policy, it is hereby agreed that this policy shall not apply to

any liability arising out of:

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. . .

seepage, pollution or contamination or any such similar liability in connection with any operation provided by, for or

on behalf of the Assured or any contract with the Insured,

for the sale, removal, disposal or dumping of any hazardous

waste materials.

(J.A. 299).

The parties agree that Texas law governs the interpretation of the

policies. Under Texas law, courts must interpret the meaning of the

language actually used in an insurance policy and give effect to the

intention of the parties as expressed in the writing. State Farm Lloyds,

Inc. v. Williams, 791 S.W.2d 542, 545 (Tex. Ct. App. 1990). If the

language is plain, it must be enforced as written. Id. Insurance policies should be construed so as to give effect to all parts of the policy.

See Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 133 (Tex. 1994);

see 13A John A. Appleman & Jean Appleman, Insurance Law and

Practice § 7537 (1976) ("Provisions of the policy and an endorsement

thereon are to be read together, and they should be construed, if possible, so as to give effect to all provisions."). The parties agree that

when an insurance policy contains an endorsement that conflicts with

another provision in the insurance policy, the endorsement controls.

See United States Fire Ins. Co. v. Aetna Casualty & Sur. Co., 781

S.W.2d 394, 399 (Tex. Ct. App. 1989).

The bankruptcy court and the district court concluded that Endorsement No. 1 conflicted with the Paramount Exclusion. Applying the

rule that an endorsement controls over conflicting policy provisions,

the courts held that the Primary Policy provided coverage for the PCB

spill under Endorsement No. 1, even though the Paramount Exclusion

precluded coverage for damages arising from the removal of hazardous wastes. Thus, the courts effectively read the Paramount Exclusion

out of the Primary Policy.

Because it is possible to give meaningful effect to Endorsement

No. 1 without reading the Paramount Exclusion out of the Primary

Policy, we reject the interpretation given the Primary Policy by the

bankruptcy court and the district court. See Forbau, 876 S.W.2d at

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133; see also Western Heritage Ins. Co. v. Magic Years Learning

Ctrs. & Child Care, Inc., 45 F.3d 85, 88-90 (5th Cir. 1995) (applying

Texas law) (holding that an exclusion in an insurance policy precluded coverage for a claim otherwise covered by a general grant of

coverage in an endorsement, because the endorsement and the exclusion could be read together without rendering the endorsement meaningless).

Endorsement No. 1 generally provides coverage for damages "arising out of loading and unloading of property by means of mechanical

devices, not attached to an automobile." (J.A. 301). But the Paramount Exclusion modifies this general provision of coverage by stating that "[n]otwithstanding anything to the contrary contained in this

policy," coverage is precluded for damages resulting from "pollution

. . . in connection with any . . . removal . . . of any hazardous waste

materials." (J.A. 299). Thus, under a plain reading of both policy provisions, loading and unloading activities are covered by Endorsement

No. 1, except when the loading or unloading results in pollution in

connection with removal of any hazardous waste materials. Because

the PCB spill occurred in connection with the removal of hazardous

waste materials, the Primary Policy excludes coverage for the PCB

spill.

IV.

Having concluded that the terms of the Primary Policy excluded

coverage for the PCB spill, we now consider whether the Insurers are

estopped from denying coverage under the Primary Policy and the

Umbrella Policy for the PCB spill, regardless of the terms of the

policies.1

In Texas, "[i]t is well established that, whereas the doctrines of

waiver and estoppel may operate to avoid conditions that would cause

a forfeiture of an insurance policy, they will not operate to change,

re-write or enlarge the risks covered by the policy." Farmers Texas

County Mut. Ins. Co. v. Wilkinson, 601 S.W.2d 520, 521 (Tex. Civ.

App. 1980). However, if an insurer assumes an insured's defense

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1 It is undisputed on appeal that the terms of the Umbrella Policy

excluded coverage for the PCB spill.

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without obtaining a reservation of rights, the insurer may be estopped

from denying coverage. Id. at 521-22. This coverage by estoppel

applies if three elements are established: (1) the insurer had sufficient

knowledge of the facts or circumstances indicating noncoverage; (2)

in spite of this knowledge, the insurer assumed the defense of the

insured without obtaining an effective reservation of rights; and (3)

the insured suffered harm as a result of the insurer's assumption of

the insured's defense. See Williams, 791 S.W.2d at 552; see also

Pennsylvania Nat'l Mut. Casualty Ins. Co. v. Kitty Hawk Airways,

Inc., 964 F.2d 478, 481 (5th Cir. 1992) (applying Texas law).

It is undisputed that the first two elements exist here. Although the

Insurers had sufficient knowledge of facts indicating noncoverage,

they assumed United's defense on January 7, 1993, and they did not

obtain an effective reservation of rights until February 25, 1993.

The dispute in this case centers on the third element. United argues

that it suffered harm as a result of the Insurers' assumption of its

defense because the law firm hired by the Insurers to represent United

negligently waived United's right to a jury trial. The Insurers argue,

however, that United's loss of its right to a jury trial is not the type

of harm required to establish coverage by estoppel. 2

The bankruptcy court agreed with the Insurers that United's loss of

its right to a jury trial did not satisfy the third element. The district

court reversed the bankruptcy court on this issue and held that the

Insurers were estopped to deny coverage for the PCB spill under both

the Primary Policy and the Umbrella Policy. We agree with the district court that United has established the third element of coverage

by estoppel.

When an insurer has knowledge of facts indicating noncoverage

and nevertheless provides a defense to an insured without obtaining

a reservation of rights, there are two potential sources of harm to the

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2 The Insurers also argue that under the law of agency they cannot be

held responsible for the law firm's defense of United because the law

firm was an independent contractor. This argument is without merit,

because the liability at issue here is based on principles of estoppel,

rather than principles of agency.

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insured. First, harm can result from the conflict of interests that exists

when a lawyer represents the insured while simultaneously formulating a defense of noncoverage against the insured. See Williams, 791

S.W.2d at 551. Second, harm can result from the insured's relinquishment of control of the defense to the insurer. See id. The doctrine of

coverage by estoppel protects an insured from both these sources of

harm. See id. at 552. But "unless a conflict of interests or other harm

is clear and unmistakable, . . . the insured must show how he was

harmed." Id. at 553.

Here, as a result of relinquishing control of its defense to the Insurers, United lost its right to a jury trial. Although, as the Insurers argue,

the outcome of the trial may have been the same with a jury, United's

loss of its right to a jury trial is harm in itself. Cf. Federal Deposit

Ins. Corp. v. Marine Midland Realty Credit Corp., 17 F.3d 715, 721

(4th Cir. 1994) (holding that a trial court's erroneous denial of a jury

trial is harmful unless the trial court would have ordered judgment as

a matter of law). A representative of United testified that if the law

firm had consulted with United regarding whether to seek a jury or

nonjury trial, United would have requested a jury trial. Moreover, the

law firm retained by the Insurers to represent United in the Westinghouse suit has admitted that the suit was "a jury-type case" involving

negligence, and that "[t]he nature of the factual inquiries . . . in th[e]

case [were] best suited for a jury." (J.A. 545-46). United thus has

shown that it was harmed as a result of relinquishing the control of

its defense to the Insurers.

The Insurers argue, however, that the loss of the right to a jury trial

is not the type of harm required to establish coverage by estoppel.

According to the Insurers, to satisfy the third element of coverage by

estoppel, there must be a conflict of interests between the insured and

the insurer, so that the insured's claim of coverage was prejudiced by

the insurer's assumption of the defense. We can find no support in

Texas law for this argument. Although the Williams court recognized

that harm can result from the conflict of interests that exists when a

lawyer represents the insured while simultaneously formulating a

defense of noncoverage against the insured, it also recognized that

harm can result from the insured's relinquishment of control of the

defense to the insurer. See Williams, 791 S.W.2d at 551. The Williams

court made clear that coverage by estoppel is not limited to situations

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where there is a conflict of interests related to the coverage dispute

by stating that "unless a conflict of interests or other harm is clear and

unmistakable, . . . the insured must show how he was harmed." Id. at

553 (emphasis added).

The Insurers rely principally on Kitty Hawk. In that case, the Fifth

Circuit had to determine whether an insured had established the third

element of coverage by estoppel. The court found no evidence that the

insured was harmed by a conflict of interests relating to the coverage

dispute. 964 F.2d at 482. The court also found no evidence that the

insured was harmed by relinquishing control of its defense. Id. at 483.

Indeed, the insured had conceded that it did not have any complaints

regarding the defense provided by the insurer. Id. The court thus concluded that the insured failed to establish the third element. Summing

up, the court stated:

Accordingly, we hold that, when, as in this case, the facts

do not suggest that counsel provided by an insurer to defend

its insured has acted to prejudice (or even had an opportunity to prejudice) the insured's claim of policy coverage, no

inference of harm to the insured arises.

Id.

The Insurers seize on this sentence as support for the argument that

only harm related to the coverage dispute will satisfy the third element of coverage by estoppel. But a reading of this sentence in the

context of the entire case shows that the court was merely heeding the

admonishment in Williams that "unless a conflict of interests or other

harm is clear and unmistakable, . . . the insured must show how he

was harmed." 791 S.W.2d at 553. In Kitty Hawk , the insured could

not point to any harm resulting from the insurer's control of the

defense. United, unlike the insured in Kitty Hawk, has shown that it

was harmed by the Insurers' control of its defense. Thus, the facts of

Kitty Hawk are distinguishable from this case. Because United has

shown that it was harmed as a result of relinquishing the control of

its defense to the Insurers, United has established the third element of

coverage by estoppel.3

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3 Because we conclude that United's loss of the right to a jury trial satisfies the third element of coverage by estoppel, we need not address

United's other allegations of harm resulting from the Insurers' control of

the defense.

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V.

In summary, we hold that although the terms of the Primary Policy

and the Umbrella Policy excluded coverage for the PCB spill, the

Insurers are estopped from denying coverage under either policy,

because they assumed the defense of United and waived United's

right to a jury trial before obtaining a reservation of rights. Therefore,

the order of the district court affirming in part and reversing in part

the order of the bankruptcy court is affirmed.

AFFIRMED

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