IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 09-20634

DPC INDUSTRIES, INC.

Plaintiff-Appellant,

v.

AMERICAN INTERNATIONAL SPECIALTY LINES INSURANCE CO.,

Defendant-Appellee.

Appeal from the United States District Court

for the Southern District of Texas

Before DAVIS, SMITH and HAYNES, Circuit Judges.

W. EUGENE DAVIS, Circuit Judge:

Plaintiff DPC Industries, Inc. appeals the summary judgment rendered

against it and the dismissal of its claim for additional insurance coverage

against its liability insurer, American International Specialty Lines Insurance

Co. We affirm.

I.

This case involves an insurance coverage dispute relating to a release of

a toxic chemical from a plant operated by an affiliate of the plaintiff which is one

of the insureds under the disputed policy. American International Specialty

Lines Insurance Co. (“AISLIC”) issued a combined Primary and Umbrella

comprehensive general liability policy to the named insured DX Holding

United States Court of Appeals

Fifth Circuit

F I L E D

August 24, 2010

Lyle W. Cayce

Clerk

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Company, Inc.(“DX Holding”). The primary policy provides a limit of $1 million

per occurrence and a general aggregate limit of $2 million under both Coverage

A for general liability for bodily injury and property damage and Coverage D

(parts 1 and 2) for pollution coverage. The umbrella policy provides a second

layer of coverage with a policy limit of $10 million under Coverage A and $4

million under Coverage D. The higher limit under Coverage A was a major

reason for this litigation.

Endorsement No. 2 to the policy adds a Broad Form Named Insured

definition which includes as a named insured any subsidiary or subsidiary

thereof of the named insured. DPC Industries, Inc. (“Industries”), the appellant

in this case, is a subsidiary of DX Holding, the named insured. DPC

Enterprises, Inc. is a subsidiary of Industries. DPC Enterprises is general

partner of DPC Enterprises, L.P. (collectively “Enterprises”). DX Holding and

its subsidiaries will be collectively referred to as the DX entities or DX

subsidiaries. Because the limit under coverage A is $10,000,000 and the limit

for pollution damage under Coverage D is only $4,000,000, Industries sought to

get as much coverage as possible under coverage A as opposed to Coverage D.

Two other provisions of the insurance policy are relevant to this case. The

policy contains a “Separation of Insureds” provision. That provision reads -

Except with respect to the Limits of Insurance, and any rights or

duties specifically assigned to the first Named Insured, this

insurance applies:

a. As if each named Insured were the only Named Insured; and

b. Separately to each insured against whom claim is made or

suit is brought.

The effect of this provision is that each insured is treated individually as far as

determination of available coverage, except that one insurance limit applies to

all insureds collectively.

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The policy also includes an exclusion to Coverage A referred to as the

“covered by other coverages exclusion” or “exclusion u.”

2. Exclusions

This insurance does not apply to:

. . . .

u. Covered by Other Coverages

Any claim or part thereof which may be alleged as

covered under this Coverage of this Policy, if we have

accepted coverage or coverage has been held to apply

for such claims or part thereof under any other

Coverage in this Policy. This exclusion does not apply

to any claim for medical expenses under Coverage C

caused by bodily injury which is covered under

Coverage A.

A similar exclusion applies to coverage under Coverage D-2. These exclusions

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prevent stacking of insurance coverages provided in the policy and make it clear

that the coverage under Coverage A and the coverage under Coverage D-2 for

pollution are mutually exclusive for each insured.

Enterprises owns and operates a plant described as a chlorine repackaging

facility in Festus, Missouri. Industries provides technical support and training

to the Festus facility. The accident giving rise to the personal injuries and

property damage in this case occurred on August 14, 2002, when chlorine gas

was released from the Festus facility. AISLIC was notified of the accident by

Jack Holcomb of DX Service Company. On August 26, 2002, AISLIC accepted

coverage for the claim under the above described policy’s Coverage D, subject to

Exclusion a. to Coverage D-1 and D-2 states that this insurance coverage under D

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does not apply to claims or loss:

a. Which may be alleged as covered in whole or in part under this Coverage

of this Policy, if we have accepted coverage or if coverage has been held

to apply for such claim under any other Coverage of this Policy.

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a reservation of rights. The only insured referenced in the August 26 letter is

DX Holding - the parent of Industries and Enterprises. DX’s response on August

27, 2002 only mentions coverage for DPC Enterprises, L.P.

Numerous claimants filed claims for bodily injury and property damage

resulting from the release. Lawsuits were brought against Enterprises and

other subsidiaries of DX Holding. Unsettled claims were consolidated and

certified as a class action in a lawsuit styled Jeanette Adams, et al, v. DPC

Enterprises, Del. Inc. et al, in Missouri state court. Goodwin Brothers

Construction Company filed a separate lawsuit against Enterprises, Industries

and Jason Wisdom, manager of the Festus facility, in April 2004. The Goodwin

suit specifically named Industries as a defendant.

Starting in October 2005, Holcomb of DX Service Company began efforts

to obtain coverage under Coverage A and thereby obtain the benefit of the higher

liability policy limit for subsidiaries of DX Holding who were not owners of the

Festus facility. Numerous letters were sent to and responses received from

AISLIC. Holcomb notified AISLIC that the claims asserted against DX entities

which did not own and operate the Festus plant, including Industries, were

entitled to the benefit of coverage A in the policy. Mr. Holcomb noted that those

entities do not own and operate the Festus facility and that the allegations

involved claims of negligent training, supervision and maintenance of the

facility. Accordingly, DX Holding put AISLIC on notice that they were making

a claim for coverage under Coverage A of the policy. AISLIC denied coverage

under Coverage A on the basis of the pollution exclusion in exclusion g., the

professional services exclusion in exclusion I.2.b. and exclusion u. Every letter

sent by AISLIC contains a reservation of rights to assert a defense to coverage.

AISLIC entered into multiple settlement agreements with plaintiffs on

behalf of the DX entities. Every settlement obtained releases for all DX entities

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including Industries. AISLIC also settled the Goodwin litigation by paying

$450,000 to settle the suit. AISLIC obtained releases for all defendants,

including Industries, which is a released party in the Goodwin Settlement

Agreement. AISLIC also paid defense costs for all the DX entities, including

Industries. The Adams suit against DX entities including Industries was not

settled at this point. Upon exhausting its policy limits under Coverage D-2,

AISLIC withdrew its defense.

Industries and its affiliates settled the Adams litigation with their own

funds in May 2007 for $9,400,000. Industries filed suit against AISLIC in Texas

state court for breach of contract, damages and attorneys’ fees based on AISLIC’s

wrongful denial of coverage under Coverage A of the general liability policy and

sought reimbursement of its settlement costs from the $6 million differential

between the policy limits of Coverage A and the policy limits of Coverage D of

the umbrella policy. AISLIC timely removed the case to federal court based on

diversity of citizenship. AISLIC filed a motion for summary judgment claiming

that exclusion u., the other coverages exclusion, exclusion g., the pollution

exclusion, and exclusion I.2.b., the professional services exclusion, preclude

coverage under Coverage A. Industries filed a cross-motion for summary

judgment.

The district court granted summary judgment in favor of AISLIC, finding

primarily that AISLIC provided coverage to Industries under Coverage D-2 and

therefore that exclusion u. precludes coverage under Coverage A. This appeal

followed.

II.

The issue presented to us is whether Industries is entitled to the benefit

of the additional limit of liability under coverage A of the defendant’s policy. As

an initial matter not specifically addressed by the parties, we note that the

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pollution coverage provided in Coverage D-2 applies to the chlorine release and

the injuries and damages resulting therefrom. Coverage D-2 states:

We will pay those sums that the insured becomes legally obligated

to pay as loss because of claims in the coverage territory for bodily

injury, property damage or clean-up costs beyond the boundaries of

the insured property [within the specified time frame of the policy.]

As described by Industries, the claims against it in the Adams and Goodwin

cases were claims of negligent training, supervision and maintenance of the

facility. Industries’s role in the DX entities was to provide technical support and

training to the Festus facility. Accordingly, claims of bodily injury, property

damage and clean up costs arising from Industries’ alleged negligence that

contributed to the chlorine release fall within Coverage D-2.

Industries argues first that Coverage D-2 does not apply because it does

not own or operate the Festus plant. Therefore, it argues that coverage for its

liability is under Coverage A. Industries’ argument is based on Endorsement

No. 9 to the policy which states: “It is agreed that the following location(s) are

insured property(ies) under Coverage D - Pollution Legal Liability, subject to all

Policy terms, conditions and exclusions and shall be deemed listed in Item 6 of

the Declarations.” Item 6 is on the first page of the policy and titled “Insured

Property: Coverage D Pollution Legal Liability.” The Festus facility is listed on

the endorsement as an “owned or operated” location. Industries thus argues

that Coverage D-2 has no application to the claims against it because it does not

own or operate the Festus facility. We agree with the district court’s analysis of

this issue. Nothing in the policy or Endorsement No. 9 requires that an insured

property be actually owned or operated by the specific entity seeking coverage

related to that facility.

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III.

Industries makes two additional arguments that the district court erred

in granting summary judgment to AISLIC on this coverage dispute. First, it

argues that exclusion u. for prior accepted coverage does not apply because

Industries never sought and AISLIC never accepted coverage of it under any

other coverage in the policy. Industries states that it only sought coverage under

Coverage A and well-settled Texas law gives the insured the right to choose the

applicable coverage. In addition, Industries states that when AISLIC merely

agreed to defend Industries subject to a reservation of rights, this did not

amount to acceptance of coverage. Industries further submits that the

settlements paid by AISLIC were on behalf of Enterprises and do not constitute

acceptance of coverage for Industries.

Addressing Industries’s first argument, we find unhelpful the case law

cited by the parties on Texas law purporting to address whether the insurer or

insured gets to choose which coverage applies when there is more than one

option. None of the cases address the question in this case, which requires an

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application of the AISLIC insurance contract to the facts in the summary

judgment record. Texas law specifically recognizes freedom of contract,

including contracts between an insured and insurer, which must be upheld

absent strong public policy reasons for holding otherwise. Am. Intern. Specialty

Lines Ins. Co. v. Res-Care Inc., 529 F.3d 649, 662-663 (5 Cir. 2008)(internal

th

citations and quotations omitted); Fairfield Ins. Co. v. Stephens Martin Paving,

LP, 246 S.W.3d 653, 665 (Tex. 2008). Thus, assuming Texas law gives the

insured, where the contract is silent, the right to choose among a policy’s

coverage options, no public policy reason is presented to prevent the parties from

Industries relies on United States Fire Insurance Co. v. Scottsdale Insurance Co., 264 2

S.W.3d 160, 166-70 (Tex. App. - Dallas 2008, no pet.); American Physicians Insurance

Exchange v. Garcia, 876 S.W.2d 842, 855 (Tex. 1994). 

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giving this option to the insurer in a contract. We agree with the district court

that resolution of this case turns on the terms of the policy.

The relevant portions of the policy provide -

2. Exclusions

This insurance does not apply to:

. . . .

u. Covered by Other Coverages

Any claim or part thereof which may be alleged as

covered under this Coverage of this Policy, if we have

accepted coverage or coverage has been held to apply

for such claims or part thereof under any other

Coverage in this Policy. This exclusion does not apply

to any claim for medical expenses under Coverage C

caused by bodily injury which is covered under

Coverage A.

Thus, Exclusion u. states that once AISLIC accepts coverage under any other

coverage available under the policy, no coverage is available under Coverage A.

This provision plainly gives the insurer the right to accept coverage under

Coverage D to the exclusion of Coverage A.

Industries argues next that AISLIC did not “accept coverage” under any

coverage of the policy within the meaning of this exclusion because it merely

agreed to defend Industries subject to a reservation of rights. It further argues

that settlements paid by AISLIC were on behalf of Enterprises, which is a

separate entity from Industries.

The facts in this case about coverage of the various DX entities are blurred

because neither side did a good job early on to clarify what entities were

requesting coverage or what entities were being defended or indemnified by

AISLIC. After the accident was reported by Holcomb, who is listed as

representing DX Service Company, AISLIC responded and referred to the

insured as DX Holding Company. Neither Industries nor Enterprises, the actual

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owner of the facility, was mentioned. This pattern continued even when events

in the Adams litigation and claims in the Goodwin case led Holcomb to request

coverage under Coverage A in October 2005. In that letter Holcomb did not

mention the individual entities requesting coverage under Coverage A by name,

referring only to “numerous other entities” who were “additional named

insureds.” Industries was not mentioned by name until January 2006.

Industries is correct that every correspondence from AISLIC contained

language reserving its right to contest coverage so as to avoid waiver of that

right. However, it is undisputed that AISLIC paid to defend Industries from

claims arising out of the chlorine gas leak. AISLIC argues that payment of

defense costs means that it “accepted coverage . . . for such claims” because the

policy defines the term “claim” as a demand alleging liability for a “loss under

Coverage D-1 or D-2.” Further under the policy, “Loss, as used in Coverages D-2

and D-2, means: . . . b. Costs, charges and expenses incurred in the defense,

investigation or adjustment of claims.” (emphasis added). Thus payment of

defense costs is payment of a claim under the terms of the policy. The district

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court accepted this argument.

However, we need not decide whether providing a defense under a

reservation of rights under an eroding policy is equivalent to “accepting

coverage” to trigger exclusion u., because the record contains uncontradicted

evidence that AISLIC provided indemnity coverage to Industries. Industries

Coverage D under the primary policy (which was followed in form by the 3

umbrella policy) contained this provision: “Defense costs, . . . reduce the applicable

limit of insurance.” Thus, unlike the typical comprehensive general liability policy

where defense costs are excluded from the calculation of the policy limits, Coverage D

was an eroding policy under which defense costs “count” against and “erode” the policy

limits. See North American Specialty Lines Ins. Co. v. Royal Surplus Lines Ins. Co.,

541 F.3d 552, 559 (5th Cir. 2008)(“In many liability policies, the policy limits refer only

to the indemnity obligation . . ., and the obligation to defend a liability suit is not

capped by the policy limits. In an eroding policy . . the insurer’s payments to defense

counsel to defend the liability suit count against policy limits.”). 

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was named as a defendant in the Goodwin case as early as April 2004. The

record contains a Settlement Agreement and Release of Claims, dated

September 2006, to which Industries is a released party. AISLIC paid $450,000

for this settlement. Industries argues that because the payments to claimants

under this agreement were made by Enterprises and reimbursement from

AISLIC went to Enterprises, this does not constitute acceptance of coverage of

Industries as a separate entity. Industries cites no case law for this proposition.

Qualification for “acceptance of coverage” does not depend on whether or how the

settlement was apportioned between Enterprises and Industries and the other

named defendants covered by the Settlement Agreement. Industries was a

named defendant in the case and a released party to the Settlement Agreement

obtained as a result of the insurer’s payment. Industries clearly benefitted from

the releases obtained in that agreement. Accordingly, the district court did not

err in finding that AISLIC accepted coverage of Industries under Coverage D-2

of the policy and thus Industries was precluded from coverage under any other

provision of the policy because of the anti-stacking provision in exclusion u.

CONCLUSION

For the reasons stated above, we agree with the district court that AISLIC

accepted coverage under Coverage D of the policy which triggered exclusion “u”

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precluding coverage under Coverage A. We therefore affirm the district court’s

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judgment.

AFFIRMED.

Having contracted for and paid a premium based upon both a lower total limit 4

for Coverage D and an eroding policy, the insured cannot now rewrite the policy. See

541 F.3d at 559 (“[I]f the insured wanted a policy that had an unlimited defense

obligation, rather than an eroding one, it should have contracted for such a policy.”) 

As a result, we need not decide whether the pollution exclusion or professional 5

services exclusion of Coverage A would bar coverage under that section.

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