United States Court of Appeals

Fifth Circuit

FILED

October 21, 2005

Charles R. Fulbruge III

Clerk

In the United States Court of Appeals

For the Fifth Circuit

 

No. 04-41473

 

FEDERAL INSURANCE CO.

Plaintiff-Appellant,

v.

ACE PROPERTY & CASUALTY CO.

Defendant-Appellee.

Appeal from the United States District Court

for the Eastern District of Texas

Before JOLLY, DENNIS, and OWEN, Circuit Judges. 

OWEN, Circuit Judge:

In this coverage dispute between two insurance companies, Federal Insurance Company

appealsthe district court’ssummary judgment in favor of Ace Property and CasualtyCompany. The

issue is whether Ace had a duty to defend or to indemnify its insured, Electronic Data Systems

Corporation (“EDS”), in a lawsuit for damages arising from negligent misrepresentations allegedly

made by EDS. Because there was no “occurrence” within the meaning of Ace’s policies, we affirm.
2

I

EDS, a global technology services company that regularly provided computer and electronic

services for the North Atlantic Treaty Organization (NATO), commenced doing business with

someone who identified himself as “Colonel West.” West told EDS that he was in charge of a covert

NATO procurement project that would involve the purchase of sophisticated electronic equipment

with expenditures of eighty to one hundred billion dollars, and West engaged EDS to become general

contractor of that endeavor. EDS in turn invited Akai Musical Instrument Corporation and Pioneer

New Media Technologies, Inc. to bid on the project. EDS represented to Akai and Pioneer that the

bidding process required them to ship sample products to NATO representatives, who would have

the right to destroy the products as part of their testing procedures. Relying on EDS’s

representations and hoping that theywould be chosen as providers and consequently reap substantial

profits, perhaps billions of dollars, from the NATO project, Akai and Pioneer signed Test to

Destruction Authorization Agreements and shipped property worth millions of dollars, supposedly

to NATO representatives.

Aftershipments had occurred over the course of three years, EDS, Akai, and Pioneer learned

that the NATO o peration was a fraud perpetrated by “Colonel West” who was neither a military

officer nor affiliated with NATO. The equipment shipped by Akai and Pioneer was not received or

used by NATO personnel, but was used or sold by West for commercial purposes or his private gain.

Subsequently, Akai sued EDS for, inter alia, negligent misrepresentations regarding the fraudulent

scheme. Pioneer intervened. 

Ace, as a successor insurer, insured EDS under two commercial general liability policies,

which together spanned the time that products had been shipped by Akai and Pioneer. EDS called
1Boudreaux v. Swift Transp. Co., 402 F.3d 536, 540 (5th Cir. 2005). 

2Pluet v. Frasier, 355 F.3d 381, 383 (5th Cir. 2004); FED. R. CIV. P. 56(c). 

3

See Guaranty Nat’l Ins. Co. v. Azrock Indus. Inc., 211 F.3d 239, 243 (5th Cir. 2000).

3

on Ace to provide a defense to the claims asserted against it by Akai and Pioneer. Ace refused,

claiming that the alleged negligent misrepresentations were not “occurrences” under the commercial

generalliabilitypolicies. EDS eventually settled the suit, and its excess professional liability insurance

carrier, Federal, paid the defense and indemnity costs in excess of EDS’s deductible.

Asserting subrogation rights, Federal brought this suit against Ace seeking declaratory relief

and damages of more than five million dollars because of Ace’srefusal to defend or cover the claims

against EDS. The parties filed cross-motions for summary judgment. The district court ruled in

Ace’sfavor, concluding that property lossresulting fromEDS’s alleged negligent misrepresentations

did not constitute an “accident” and therefore was not an “occurrence” under the policies. Federal

pursued this appeal.

II

We review a grant of summary judgment de novo, applying the same legal standards as the

district court.1 “Summary judgment is proper when the pleadings and evidence demonstrate that no

genuine issue of materialfact exists and the movant is entitled to judgment as a matter of law.”2 The

material facts are undisputed. The only questions before us concern the proper construction of the

Ace policies, which the parties agree is determined under Texas law.3 Because our resolution of

whether there was an “occurrence” is dispositive of both the duty to defend and the duty to

indemnify, we do not reach the issue of whether the losses suffered by Akai and Pioneer were

“property damage” within the meaning of the Ace policies.

The commercial general liability policies at issue provide that the insurer “will pay those sums
4

967 F. Supp. 217 (S.D. Tex. 1996).

5

Id. at 224.

6

Id. at 223–24.

4

that the insured becomes legally obligated to pay as damages because of . . . ‘property damage’ to

which this insurance applies.” “[P]roperty damage” caused by an “occurrence” during the policy

period is covered. “Property damage” is defined 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.” An “[o]ccurrence” is defined as “an accident, including continuous or repeated exposure

to substantially the same general harmful conditions.” The term “accident” is not otherwise defined

in the policies.

Federal contends that a negligent misrepresentation constitutes an “occurrence,” citing a

federal district court’s opinion, Aetna Casualty & Surety Co. v. Metropolitan Baptist Church.

4

 In

Metropolitan, a company negligently misrepresented to an applicant for employment that its health

insurance policy would provide the same benefits as his existing employer’s policy. The applicant

relied on the misrepresentations in accepting a position. The district court held that the employer’s

negligent misrepresentations were an “occurrence.”5 That court concluded that Texas courts had not

addressed whether a negligent misrepresentation could be an occurrence, but it considered decisions

of the Supreme Court of Texas that had decided whether other events did or did not constitute an

“accident” and therefore were or were not an “occurrence.”6

We need not resolve today whether Metropolitan was correctly decided or whether, under

Texaslaw, negligent misrepresentations can ever constitute an “occurrence” because, under the facts

of the case before us, none of EDS’s conduct nor any of its alleged omissions was an “accident”

within the meaning of the policy. Perhaps the most analogous Texas case is Argonaut Southwest
7

500 S.W.2d 633 (Tex. 1973).

8

Id. at 635.

9

Id.

10Id.

11Id.

12Id.

13King v. Dallas Fire Ins. Co., 85 S.W.3d 185, 187 (Tex. 2002).

5

Insurance Co. v. Maupin.

7

 There, Maupin contracted to remove “borrow material” from a tract of

land for use in a highway construction project. After removing considerable material from the land,

Maupin learned that the person with whom he had contracted was not the owner but instead was

merely a tenant. The true owners of the property that Maupin had damaged by excavations

subsequently sued him, and his insurance carrier refused to defend the suit or indemnify him for the

judgment rendered against him. The Supreme Court of Texas held that the removal of material from

the property was intentional and deliberate even though Maupin had no intent to injure the true

owners.8 Nor did the mistake in dealing with someone other than the true owners render the action

an accident.9 “The fact that they [sic] did not deal originally with the owners of the property was the

mistake or error. There was no insurance against liability for damages caused by mistake or error.”10

The Texas court reasoned, “The fact that they [sic] were unaware of the true owner of the property

has no bearing upon whether the trespass was caused by accident. The respondent’s acts were

voluntary and intentional, even though the result or injurymayhave been unexpected, unforeseen and

unintended.”11 The court therefore held that “there was no coverage under the policy for damages

caused by mistake or error as to the ownership of the property in question. The damage was not an

accident or occurrence within the meaning ofthis policy.”12 Although the duty to defend and the duty

to indemnify are separate duties,13 the Supreme Court ofTexas also concluded that there was no duty
14Maupin, 500 S.W.2d at 636.

15King, 85 S.W.3d at 187.

16Id. at 191–92 (holding that under a policy with virtually identical provisions, whether there

was an accident is determined from the viewpoint of the insured); Mid-Century Ins. Co. of Tex. v.

Lindsey, 997 S.W.2d 153, 155 (Tex. 1999) (“[W]e have held that an injury is accidental if ‘from the

viewpoint of the insured, [it is] not the natural and probable consequence of the action or occurrence

which produced the injury.’” (quoting RepublicNat’l Life Ins. Co. v. Heyward, 536 S.W.2d 549, 557

(Tex. 1976))).

17997 S.W.2d 153 (Tex. 1999).

6

to defend since all that was alleged by the owners of the property against Maupin wastrespass, which

was an intentional tort.14 The duty to defend in Texas is determined solely by an examination of the

pleadings and the insurance policy, which is known as the “eight corners” rule.15

Other decisions of the Supreme Court of Texas also lead us to conclude that there was no

accident under the facts presented here. Whether there has been an accident, and thus an occurrence,

is judged from the viewpoint of the insured under the provisions of this commercial general liability

policy.16 EDS fully intended and expected that the property shipped by Akai and Pioneer would never

be returned to them. The fact that EDS was mistaken about the true use to which the property would

be put and was unaware of the scam being perpetrated upon it when it made representations to Akai

and Pioneer does not render EDS’s conduct an accident.

Federal asserts that EDS’s negligent misrepresentations caused Akai and Pioneer to sign the

Test to Destruction Authorization Agreements and that those agreements led to the loss of Akai’s

and Pioneer’s property. But here again, although EDS may have innocently induced Akai and

Pioneer to sign the agreements, EDS intended that they relinquish their property without recourse.

The losses Akai and Pioneer suffered were not the result of an “accident”.

The Texas Supreme Court’s decision in Mid-Century Insurance Co. of Texas v. Lindsey is

also instructive.17 A child climbed into the bed of his father’s locked pickup truck and entered
18Id. at 155 (internal citations omitted); see also Trinity Universal Ins. Co. v. Cowan, 945

S.W.2d 819, 827–28 (Tex. 1997) (holding that a photo lab clerk’s intentional acts of replicating

photographs of a woman and showing them to friends was not an “accident” although he never

intended for the woman to know what he had done).

19Mid-Century Ins. Co., 997 S.W.2d at 155.

7

through the sliding rear window. He brushed against a loaded shotgun resting in a gunrack mounted

over the window, the gun discharged, and a person sitting in a car parked next to the pickup was

injured. The Texas court held that this was an accident because although the child intended to enter

the pickup, the child, an insured, could not reasonably have anticipated the injury:

[A]n injury is accidental if from the viewpoint of the insured, it is not the natural and

probable consequence of the action or occurrence which produced the injury; or in

other words, if the injury could not reasonably be anticipated by insured [sic], or

would not ordinarily follow from the action or occurrence which caused the injury.

An injury caused by voluntary and intentional conduct is not an accident just because

the result or injury may have been unexpected, unforeseen and unintended. On the

other hand, the mere fact that an actor intended to engage in the conduct that gave

rise to the injury does not mean that the injury was not accidental. Rather, both the

actor’s intent and the reasonably foreseeable effect of his conduct bear on the

determination of whether an occurrence is accidental. An effect that cannot be

reasonably anticipated from the use of the meansthat produced it, an effect which the

actor did not intend to produce and which he cannot be charged with the design of

producing, is produced by accidental means.18

The boy “did not intend to cause the shotgun to discharge or [the person] to be injured, nor was it

reasonablyforeseeable that either consequence would result fromthe boy’strying to enter the pickup

through the rear window.”19 In the present case, however, EDS did intend for Akai and Pioneer to

permanently part with their property and that the property might even be destroyed. The loss of

Akai’s and Pioneer’s property “ordinarily follow[ed]” from EDS’s misrepresentations and the Test

to Destruction Authorization Agreements. 

With respect to the duty to defend, Akai and Pioneer alleged that EDS (1) voluntarily made

statements regarding the NATO project, (2) failed to exercise reasonable care in researching and
20Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Merchants Fast Motor Lines, Inc., 939

S.W.2d 139, 141 (Tex. 1997) (quoting the lower court’s opinion, Merchants Fast Motor Lines, Inc.

v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 919 S.W.2d 903, 905 (Tex. App.—Eastland 1996),

which was reversed on appeal); see also Farmers Tex. County Mut. Ins. Co. v. Griffin, 955 S.W.2d

81, 82 (Tex. 1997). 

8

validating the legitimacy of the NATO project, and (3) required Akai and Pioneer to execute Test to

Destruction Authorization Agreements, under which Akai and Pioneer would provide sample

products to be tested and destroyed by NATO. According to the pleadings, EDS may not have

known that the NATO project was a hoax, but EDS did expect that Akai’s and Pioneer’s products

would never be returned. Because EDS intended Akai and Pioneer to ship sample products to NATO

representatives, expecting that the products would never be returned, the loss of those products was

the natural and probable consequence of EDS’s representations. The allegation that EDS was

negligent in failing to research or validate the legitimacy of the NATO project does not alter the

analysis. The Texas Supreme Court has held that “‘[i]n reviewing the underlying pleadings, the court

must focus on the factual allegations that show the origin of the damages rather than on the legal

theories alleged.’”20 The cause of the alleged property damage was EDS’s intent and its plan that

Akai and Pioneer would permanently part with their property. The losses were an effect EDS did

“intend to produce” and that EDS could “be charged with the design of producing.” Therefore, they

were not caused by an “accident.”

Ace had no duty to defend or indemnify EDS, and the district court’s grant of summary

judgment in favor of Ace is AFFIRMED.