1 

### REVISED

United States Court of Appeals,

Fifth Circuit.

No. 96-11582.

DATA SPECIALTIES, INC., Plaintiff-Appellee,

v.

TRANSCONTINENTAL INSURANCE COMPANY, Defendant-Appellant.

Oct. 27, 1997.

Appeal from the United States District Court for the Northern

District of Texas.

Before KING, DUHÉ and WIENER, Circuit Judges.

DUHÉ, Circuit Judge:

Defendant-Appellant Transcontinental Insurance Company

("Transcontinental") appeals the district court's grant of summary

judgment for Plaintiff-Appellee Data Specialities, Inc. ("DSI").

The district court concluded that Transcontinental was obligated to

provide coverage to and reimburse its insured DSI for construction

expenses under its stan dard commercial general liability policy

("CGL"). This case requires us to determine how a Texas court

w ould construe the scope of coverage of a CGL polic y when the

insured is not at fault but seeks to recover expenses incurred in

completing its contractual obligations, an apparent res nova issue

in that state. We conclude that there is no coverage under a CGL

policy when the insured is not at fault and thus reverse the

district court.

I.2

DSI is an electrical contractor. Transcontinental is DSI's

general liability insurer. The Haggar Clothing Company hired DSI

to reconstruct the electrical system at its damaged manufacturing

facility in Texas.

While DSI and representatives of TU Electric were testing the

electrical switchboard DSI had in stalled as part of its

subcontract, a short circuit resulted in an explosion. The

switchboard and other property in the Haggar plant we re damaged.

Investigators determined that a defective General Electric circuit

breaker caused the explosion.

Following the explosion, DSI completed its contract by hiring

a local electrical contractor, McBride Electric, to repair and

rebuild portions of the electrica l system. DSI paid McBride

Electric for its work. DSI incurred additional overhead expenses

for its supervision of the McBride work. DSI sought reimbursement

for these expenses under its CGL policy. After investigating the

explosion, Transcontinental determined there was no coverage under

the CGL policy and denied the balance of the claim.

DSI sued seeking a determination of its rights under the CGL

policy and a finding that Transcontinental breached the policy by

not reimbursing DSI the expense it incurred to complete its

contr act with Haggar. Transcontinental denied coverage on two

grounds: (1) that DSI was seeking to recover its own out-of-pocket

expenses arising from the explosion, and (2) no one claimed that

DSI was potentially at fault for the explosion. Transcontinental

also pled DSI's breach of the "no-voluntary payment" provision of1 The policy contained two condit ions to coverage: (1) "No

insureds will, except at their own cost, voluntarily make a

payment, assume any obligation or incur any expense, other than for

first aid, without out consent" and (2) "No person or organization

has a right under this Coverage Part: ... b. To sue us on this

Coverage Part unless all of its terms have been fully complied

with."

2 DSI did not appeal the partial granting of Transcontinental's

summary judgment motion that the cost of replacing the damaged

electrical switchboard itself was excluded from policy coverage.

3 the policy. 1

Both parties moved for su mmary judgment. Both motions were

granted in part and denied in part. 2 The district court concluded

that the policy covered DSI's claim. Transcontinental appealed.

DSI argues that it was contractually obligated to repair the

damage at the plant and, because there was "property damage," the

policy affords coverage. Transcontinental argues that the DSI

expenditure was made merely to preserve DSI's reputation and good

business relationship with Haggar. We need not consider these

arguments because we conclude that Transcontinental's policy

provides coverage only for damages which the insured is legally

obligated to pay as a result of its tortious conduct. Whether DSI

had a contractual obligation to complete additional work following

the explosion or breached the no-voluntary payment clause are moot

issues in light of the lack of coverage.

II.

We review the district court's grant of summary ju dgment d e

novo. Davis v. Illinois Cent. R.R., 92 1 F.2d 616, 617-18 (5th

Cir.1991). Summary judgment is appropriate if the record discloses

"that there is no genuine issue of material fact and that the4

moving party is entitled to a judgment as a matter of law."

Fed.R.Civ.P. 56(c). The underlying facts of this action are not

disputed. Therefore we are left with determining whether the

district court erred, as a matter of law, in interpreting the terms

of the insurance policy. S ee Guaranty Nat. Ins. Co. v. North River

Ins. Co., 909 F.2d 133, 135 (5th Cir.1990) (holding that the

"[i]nterpretation of an insurance policy is a question of law.").

III.

Texas law clearly states that for an insurance company to be

liable for a breach of its duty to satisfy a claim presented by its

insured, the insured must prove that its claim falls within the

insuring agreement of the policy. E mployers Casualty Co. v. Block,

744 S.W.2d 940, 944 (Tex.1988)(overruled on other grounds by State

Farm Fire and Casualty v. Gandy, 925 S.W.2d 696 (Tex.1996)). The

insurer's duty to indemnify, or provide coverage, is triggered by

the actual facts establishing liability in the underly ing suit.

Heyden Newport Chem. Corp. v. Southern Gen. Ins. Co., 387 S.W.2d

22, 25 (Tex.1965). DSI must prove that the money it spent hiring

McBride and overseeing its work is reimbursable under the CGL

policy. Both parties stipulated that the explosion occurred during

the policy period, was caused by a faulty switch (circuit breaker),

and was not the result of any DSI negligence.

What is not clear under Texas law is whether a standard CGL

policy covers a contractual obligation triggered by a n event for

which the insured was not at fault. We must determine how a Texas

c ourt might answer this r es nova issue. To do so, we must3 Charter had contracted to repair a shopping center roof owned

by Weingarten Realty. A wind storm damaged the roof and Weingarten

requested payment from Charter for the damages. Charter paid the

requested sum to preserve its good business relationship with

Weingarten. There was no suit and no settlement agreement. The

5 interpret, as a Texas court would , the following language in

Transcontinental's CGL policy: "We will pay those sums that the

insured becomes legally obligated to pay as damages because of

"bodily injury' or "property dama ge' to which this insurance

applies." (emphasis supplied).

Sitting as an E rie court, we may consult a variety o f

sources: dicta in Texas court decisions, the general rule on the

issue, and the rules in other states that Texas might look to, as

well as treatises and law journals. State Farm Fire and Casualty

Co. v. Fullerton, 118 F.3d 374, 378 (5th Cir.1997), citing Hill v.

London, Stetelman, & Kirkwood, Inc., 906 F.2d 204, 207 (5th

Cir.1990). After reviewing these sources, we conclude that a Texas

court would rule that the CGL policy language "legally obligated to

pay as damages" applies only to tort-based obligations.

Although Texas courts have not directly ruled on the meaning

of the phrase in question, they have discussed the purpose of

standard liability insurance and CGL insurance. In Brightwell v.

Ra beck, 430 S.W.2d 252, 255 (Tex.Civ.App.—Fort Worth 1968, writ

ref'd n.r.e.), the court stated that the basic premise behind

liability insurance is that the insurance company acc epts "the

responsibi l ity to discharge the insured's obligation, if any,

arising through negligent tort co mmitted by the latter." In

reviewing a CGL policy in a factually similar case, 3 a Texas courtthird party, Weingarten, never filed a claim. Only Charter

demanded payment from Tri-State.

4 The duty to defend is broader than the obligation to pay or provide coverage. C olony Ins. Co. v. H.R.K., Inc. 728 S.W.2d 848,

850 (Tex.App.1987) For DSI to successfully seek repayment, it must

at least meet the same basic requirements that are required when an insured urges a duty to defend.

6 noted that a CGL policy is intended to cover claims made against

the insured by third parties. Charter Roofing Co., Inc. v. TriState Insurance Co., 841 S.W.2d 903 (Tex.App.—Houston [14th Dist.]

1992, writ denied). The Texas Supreme Court has indirectly

addressed the purpose of a CGL policy. The court pointed out that

the "insurer does not pay because (the assure d) is alleged to be

legally responsible but because (the assured) has been adjudicated

to be legally responsible." H eyden Newport Chem. Corp. v. Southern

Gen. Ins. Co., 387 S.W.2d 22, 25 (Tex.1965). It did not, however,

define "legally responsible." Most recently, the Texas high court

in National Union Fire Ins. Co. of Pittsburgh, Pa. v. Merchants

Fast Motor Lines, Inc., 939 S.W.2d 139 (Tex.1997), noted that under

a trucker's liability policy the insurer' s duty to defend 4 rests

upon allegations in the suit filed against the insured, the policy

language, and the requirement of a causal connect ion between the

accident and the insured's action. Thus, Texas courts seem to say

that an insurer is obligated under a CGL or a standard liability

policy when the insured's conduct is tortious in nature, a claim

has been made against the insured for this tortious activity, and

there has been an adjudication of the insured's liability.

The parties stipulated that DSI was not negligent. Haggar7

made no claim against DSI as a result of the explosion. The only

claim presented wa s DSI's demand for reimbursement from

Transcontinental for the costs DSI incurred in completing its

construction contract following the a ccident. No suit was filed

nor did Haggar and DSI en ter a settlement agreement. Under the

Texas cases discussing liability insurance, DSI's claim for

coverage under its CGL policy would fail.

For this Court to determine how a T exas court would rule on

this issue, we must also look to other sources to glean the meaning

of "legally obligated to pay as damages." Other states have more

clearly described the purpose of a CGL policy and the context in

which the phrase "legally obliga ted to pay as damages" is to be

read. The Ninth Circuit, in reviewing California law on this

point, noted that state courts uniformly interpret such language to

cover tort but no t contract liability. C hamberlain v. Allstate

Ins. Co., 931 F.2d 1361 (9th Cir.1991). In International Surplus

Lines Ins. Co. v. Devonshire Coverage Corp., 93 Cal.App.3d 601, 155

Ca l.Rptr. 870 (Cal.App. 2 Dist.1979), the state appellate court

stated that "legally obligated to pay a s damages" is synonymous

with "damages for a liability imposed by law." It recognized that

the latter phrase has been uniformly interpreted as referring to a

liability arising ex delicto as distinguished from e x contractu.

Citing Ritchie v. Anchor Casualty Co., 135 Cal.App.2d 245, 286 P.2d

1000.

The Wyoming Supreme Court held that CGL's policy coverage

encompassed only liability for tortious conduct and did not extend8

to liability arising from a breach of contract. Action Ads, Inc.

v. Great Am. Ins. Co., 685 P. 2d 42 (Wyo.1984). When an employee

was injured and discovered he had no medical insurance coverage, he

sued his employer for breach of contract. His employment contract

required the employer to provide medical insurance. The employer,

Action Ads, contacted its liability insurer, Great American, and

requested that the insurer defend the action and pay any resulting

judgment in favor of the employee. The court concluded that the

coverage clause, identica l to the one at issue here, encompassed

liability that the law imposes on all insureds for their tortious

conduct and not liability that a particular insured may choose to

assume pursuant to contract. Id. 685 P.2d at 45.

The Alaska Supreme Court specifically addressed the meaning of

the phrase in quest i on in a CGL policy in Olympic, Inc. v.

Providence Wash. Ins. Co. of Alaska, 648 P.2d 1008, 1012 (Alaska

1982). The court held that "legally obligated to pay as damages

..." refers t o liability imposed by law for torts and not to

da mages for breach of contract, except contracts for indemnity.

The only exception to this general rule, the court noted, arises

when the contract breach itself results in injury to persons or

property. Id.

Illinois law, as interpreted by the Federal district court for

the Northern District of Illinois, emphasizes the difference

between coverage for tort liability and contract liab ility, with

only the former being covered in a CGL policy. In A etna Cas. &

S ur. v. Spancrete of Ill., Inc., 726 F.Supp. 204 (N.D.Ill.198 9),5 A LLAN D. W INDT

, 2 I NSURANCE C LAIMS & D ISPUTE at 244(3d ed.1995).

9 the insurer sought a declaratory judgment that it was not required

to defend or indemnify a gene ral contractor's breach of contract

a ction when its insured subcontractor failed to name the general

contractor as an additional insured under its CGL policies. The

court agreed, noting that Aetna had to indemnify Spancrete for

damages that it b ecame legally obligated to pay as a result of

bodily injury or property damage. It found that the CGL policy did

not provide coverage for damages resulting from a breach of

contract. Id. at 206.

If Texas courts look to the law of other states, we conclude

they would find that the insured must be liable for damages arising

from its own tortious conduct to trigger liability in surance

covera ge. A breach of contract action does not fall within CGL

coverage.

In an Erie analysis, courts also rely on treatises to elicit

a general rule on the issue. Various insurance commentators

provide a uniform reading of the phrase "legally obligated to pay

as damages." For example, Windt notes that many courts have held

t hat the phrase refers to liability imposed by law for torts and

not to damages for breach of contract. 5 Another commentator, Long,

further describes the phrase in question in a gene ral liability

insurance policy as one that "does not recompense the insured for

his own loss." He states that "liability insurance protects the

insured against damages which he may be liable to pay by virtue of6 R OWLAND N. L ONG

, T HE L AW O F L IABILITY I NSURANCE § 1.01[1], AT 1-3

(1992).

7 7A John Alan Appleman, Insurance Law and Practice § 4493 at

56 (1979).

8 D EUTSCH

, K ERRIGAN & S TILES

, C ONSTRUCTION I NDUSTRY I NSURANCE H ANDBOOK , §

11.1 (1991).

10 his ow n actions." 6 In discussing liability insurance, an

authoritative publication explains that coverage exists when "the

insured's liability is attributable to his own negligence...." 7

Commentators in a more specialized liability insurance area,

the CGL policy, clearly r ecognize that there must be underlying

tortious conduct by the insured for coverage to exist. In

describing the scope of a CGL policy , the C onstruction Industry

Handbook notes that to cover most of the liability risks arising

out of its operations, a contractor purchases commercial general

liability insurance ( known before 1986 as comprehensive general

liability). It states that the CGL policy is essentially designed

to co ver the contractor for its tort liability. It protects the

contractor primarily against its own negligence, usually limiting

liability coverage only to the construction period. 8 Section 11.3

of the Handbook notes that an insurer is not obligated to pay the

sums the insured becomes legally liable to pay as damages unless

the underlying requirement is met: the damages must be caused by

the insured's negligence.

Others analyzing the phrase at issue in a CGL policy find it

has the same meaning as a "liability imposed by law." This phrase,

according to the commentators, refers to the liabilit y of an9 Barry R. Ostrager and Thomas R. Newman, Handbook on Insurance

Coverage Disputes § 7.01 (8th ed.1995).

1 0 D EUTSCH

, K ERRIGAN & S TILES

, C ONSTRUCTION I NDUSTRY I NSURANCE H ANDBOOK

, §

9.6.

11 insured arising from a breach of a duty that exists independent of

any contractual relationship between the insured and the injured

party. They emphasize that the breach of a duty imposed by law

gives rise to an action sounding in tort. 9

In light of the interpreta tion of the phrase "legally

obligated to pay as damages" given by courts of other states and by

insurance treatises, the necessary requirement for coverage is that

the insured's tortious conduct must have caused the damages. We

conclude that Texas courts would look first for the existence of

this requirement in determining c overage. The answer to the

coverage question under Transcontinental's CGL policy is

simple—there is no coverage. Both parties stipulated that DSI was

not at fault. The damages DSI claims it has suffered in additional

expenditures to complete its contract with Haggar are not those

suffered by a third party. Haggar made no third party claims

against DSI. The CGL policy does not afford coverage in this

situation.

IV.

What DSI seeks to do is to convert the Transcontinental CGL

policy into a builder's risk policy. The C onstruction Industry

Insurance Handbook distinguishes between liability and builders'

risk insurance. 10 Normally a party will have two primary insurance

needs: insurance against loss of his property and insurance11 Id. at § 11.1.

12 Id. at § 9.4.

13 Id. at § 9.3.

1 4 Brunswick G. Deutsch and Ralph L. Kaskell, Jr., Builde rs'

Risk Insurance, C ONSTRUCTION L AWYER , April 1989, at 8.

12 against his liability for the claims of others. When a contractor

negligently causes an accident damaging his own property and that

of others, he needs two separate policies to collect for his lost

property and to be protected against claims of others whose

property he damaged. The CGL policy covers the contractor for its

tort liability. 11 Builders' risk insurance, however, provides

property insurance for a project under construction. 1 2 This

coverage reimburses the owner, or any party with an insurable

interest such as a mortgage holder, for the accidenta l loss,

damage, or destruction of the property, regar dless of fault. 1 3

"Builders' risk is not permanent insurance. It is usually issued

to insure a building "only during the course of the construction'

" period and perhaps for a short additional period after the

construction is completed. 14

Given our resolut ion of the foregoing issues we need not

consider whether there was a contractual obligation for DSI to

repair the da mage nor whether DSI breached the "no voluntary

payment" provision of the CGL policy.

Accordingly, we reverse the decision of the district court and

render judgment in favor of Transcontinental.

REVERSED and RENDERED.13