### IN THE UNI TED STATES COURT OFAPPEALS FOR THE FIF TH CIRCUIT

No. 11-20355

COLONY NATIONAL INSURANCE COMPANY, Plaintiff–Appellee
v. UNIQUE INDUSTRIAL PRODUCT COMPANY, Defendant–Appellant

Appeal from the United States District Court for the Southern District of Texas No. 4:10-CV-1234

Before STEWART, CLEMENT, and GRAVES, Circuit Judges. PER CURIAM: * This declaratory judgment suit was filed by Plaintiff-Appellee Colony National Insurance Company (“Colony”) seeking a declaration that it had no duty to either defend or indemnify its insured, Defendant-Appellant U nique Industrial Product Company, L.P. (“Uniqu e” ) , for claims in two underlying lawsuits against Unique. After considering extrinsic evidence in the form of an affidavit and the insurance application discussed ther e i n , the district court U n i te d S ta te s C o u rt o f A p p ea l s

F i ft h C i rc u i t 

### F I L E D August 24, 20 12 Lyle W . Cayce Clerk

Pursua nt to 5 T H C IR

. R. 47.5 , the court hasd ete rm inedthat this op inion s houldnot * be publ ish ed and is not pr ece dent excep t unde r the lim ite d cir cum st ance s se t forth in 5 T H C IR

. R. 47.5 .4. Case: 11-20355 Document: 00511968924 Page: 1 Date Filed: 08/24/2012No. 11-20355

granted summary judgment for Colony based on the insurance policy’s knownloss exclusion. For the following reasons, we REVERSE and REMAND. FACTUAL BACKGROUND Colony insured Unique under two co n s ecutive co m m erci al ge neral liability (“CGL”) policies running from October 16, 2005 through O c t ob e r 16, 2007. 1 Under the terms of the CGL policies, Colony w ill p ay those sums that Unique becomes legally obligated to pay as damages because of “bodily injury” or “property damage” only if, inter alia , the “bodily injury” or “property da m a g e”

occurs during the policy period and was not, prior to the policy period, known to have occurred by the insured. Since 2002, Unique supplied brass fittings a n d swivel nuts as plumbing products to Uponor, Inc. (“U p o n o r”), a company engaged in the business of supplying or distributing plumbing products to other entities for installation in residential plumbing systems. Purchasers of the brass fittings and swivel nuts Unique supplied to Uponor began complaining of damages to their residences because of failures of Unique’ s plumbing products. As a result, Unique was named in two lawsuits, specific ally, Uponor, Inc. v. Unique Industrial Product Co . , Case No. 4:07-cv-02986 (S.D. Tex. September 16, 2007) (the “Texa s Lawsuit”) and McGregor v. Uponor, Inc. , Case No. 0:09-cv-01136-ADM-JJK (D. Minn. May 15, 2009) (the “Minnesota Lawsuit”), a class action in which Uponor made claims against Unique by way of a third-party complaint. Up o nor’ s all e gatio n s a gainst Unique in the Texas and Minnesota Lawsuits

are substantially similar. Specifically, Uponor alleges that it purchased swivel nuts and bra s s f

itti n gs from Unique at various times since 2002. However, during or before June 2004, Uponor placed Unique on notice regarding reports

Aft er the rene wal at the end of the fir st year of cover age, Colony exerc ise d its right 1 to pr em atur ely ter mi nate its ins uranc e cont rac t with Uniqu e beca u s e o f nu m ero us adver se deve lop me nts sin ce the rene wa l. The ter min atio n wasmadeeff ect ive on Februa ry 10, 2007. 2 Case: 11-20355 Document: 00511968924 Page: 2 Date Filed: 08/24/2012No. 11-20355

of failures of Unique’s swivel nuts and that the failures were causing damages to residences and to Uponor’s business. As a result, af t e r June 2004, Unique began supplying different swivel nuts to Uponor, but Uponor alleges that as with the previous swivel nuts, Unique did not monitor, supervise, test, or examine the post-June 2004 swivel nuts for deficiencies. I n a d dition, Uponor alleges that it began receiving notices of failures o f certain brass fittings supplied by Unique, which had been incorporated into plumbing systems in various residential properties and had caused water damage. As a result, in Au gust 2006, Uponor had the defective fittings and swivel nuts removed from the inventory of it s p u r chasers and returned to Uponor. Then, on August 24, 2006, representative s f r o m U ponor and Unique met to discuss the fitting and swivel nut failures. During the meeting, Uponor alleges that Unique agreed to take responsibility for existing and future claims from the defective products if Uponor purchased Unique’s remaining inventory. Uponor alleges that af ter the meeting, however, Unique failed to take any responsibility for the damages or to reimburse U p o n o r for claims that Uponor had already paid. Furthermore, Uponor alleges that not only were Unique’s swivel nuts and fittings defective but that Unique also “knew of problems” with their fittings and yet failed to notify Uponor or make necessary modifications to the fittings supplied to Uponor. Sometime after the initiation of the Texas and M i n n e s o ta Lawsuits, Unique tendered the cases to Colony for defense and indemnification but Colony declined to provide coverage or a defense with respect to both actions. Instead, Colony filed this declaratory judgment action in federal court. After considering

an affidavit from an underwriter for Colony and the insur a n c e application discussed therein, th e district court granted summary judgment in favor of Colony on the grounds that Unique had known of the losses alleged in the Texas

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and Minnesota Lawsuits prior to purchasing the CGL policy from Colony. This appeal ensued. DISCUSSION We have jurisdiction over this appeal from a final order of the district court under 28 U.S.C. § 1291. We review a distri c t c o u rt ’s award of summary judgment de no v o , applying the same standard as the district court. Trinity Universal Ins. Co. v. Emp’rs Mut. Cas. Co. , 592 F.3d 687, 690-91 (5th Cir. 2010); Wilshire Ins. Co. v. RJT Constr., LLC, 581 F.3d 222, 224 (5th Cir. 2 0 09) (“We review legal determinations in a district court’s decision to grant summary judgment de novo , applying the same legal standards as the district court to deter mine whether summary judgment was approp ri ate . ”) ; Oo i da R isk Re te n t io n Grp., Inc. v. Williams , 579 F.3d 469, 471-72 (5th Cir. 2009). Summary judgment is appropria t e if the record reflects that “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” F E D

. R. C IV

. P. 56(a). Likewise, the insurer’s duty to defend is a question of law that we review de novo . Ooida , 579 F.3d at 471-72. “Because we sit in diversity, we must apply Texas law, mindful that in making an Erie guess, ‘[w]e are emphatically not permitted to do merely what we think best; we must do that which we think the [Texas] Supreme Court would deem best.’” Nautilus Ins. Co. v. Zamora , 114 F.3d 536, 538 (5th Cir. 1997) (quoting Jackson v. Johns-Manville Sales Corp. , 781 F.2d 394, 397 (5th Cir

. 1986) (en banc)). Under Texas law, we are required to apply the “eight-corners rule,” also known as the “complaint-allegation rule” in determining wheth er the duty to defend exists. Zurich Am. Ins. Co. v. Nokia, Inc. , 268 S.W.3d 487, 491 (Tex. 2008). “Under the eight-co r ners or complaintallegation rule, an i n s u r er’s duty to defend is determined by the third-party plaintiff’s pleadings, considered in light of the policy provisions, without regard to the truth or falsity of those allegations.” GuideOne Elite Ins. Co. v. Fielder

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Rd. Baptist Church , 197 S.W.3d 305, 308 (Tex. 2006) (citing Argonaut Sw. Ins. Co. v. Maupin , 500 S.W.2d 633, 635 (Tex. 197 3); Heyden Newport Chem. Corp.

v. S. Gen. Ins. Co. , 387 S.W.2d 22, 24 (Tex. 1965)). Furthermore, a liberal interpretation of the allegations in favor of the insured is to be indulged so that th e court must resolve all doubts regarding the duty to defend in favor of th e duty. Nokia , 268 S.W.3d at 491 (citing King v. Dallas Fire Ins. Co. , 85 S.W.3d 185, 187 (Tex. 2002); Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Merchs. Fast Motor Lines, Inc. , 939 S.W.2d 139, 141 (Tex. 199 7)). To obligate the insurer to defend, the insured must first successfully meet his burden of showing that the facts as alleged in the plaintiff’s pleadings state

a c l aim against him potentially within the coverage of the insurance policy. Canutillo Indep. Sch. Dist. v. Nat’l Union Fire Ins. Co. of Pittsburgh , Pa. , 99 F.3d 695, 701 (5th Cir. 1996). Specifically, an insurer’s duty to defend arises only if the facts alleged in the plaintiff’s pleadings, if taken as true, allege a case within the policy’s coverage; thus, a petition that does not allege facts within the scope 2 of co v e r a g e w il l not suffice legally to require an insurer to defend the suit against its insured. Merchs. Fast Motor Lines, Inc. , 939 S.W.2d at 141; Fid. & Guar. Ins. Underwriters, Inc. v. McManus , 6 3 3 S .W.2d 787, 788 (Tex. 1982). However, the duty to defend the lawsuit applies “if there is a possibility that any of the claims” alleged in the lawsuit might be covered. Nokia , 268 S.W.3d at 491, 495-96 (“The duty to defend is not negated by the inclusion of claims that are not covered; rather, it is triggered by the inclusion of claims that might be covered.”).

“The duty to def

end is det erm in e d b y e xamining the late st ame nded ple adin g upon 2 wh ich the ins u r e r b a s ed its ref usal to def

end the act ion. ” Canuti llo , 99 F.3d at 701 (c itin g Rhode s v. Chic ago Ins. Co. , 719 F.2d 116, 120 (5th Cir. 1983) ). Acco rdingly, altho ugh we note tha t o n O c t ober 31, 2011, Up onor fil ed a Sec ond Ame nded Com plai nt in the Texas Law suit agains t Uniqu e, we need not cons ide r the allegat ions cont ained ther ein in cond ucting our duty to def end analys is beca use Colony ref use d to def

end Uniqu e bas ed on Up onor ’s Firs t Ame nded Com plai nt. 5 Case: 11-20355 Document: 00511968924 Page: 5 Date Filed: 08/24/2012No. 11-20355

In other words, as long as there is “potentially” a cause of a c tion in the case within the policy’s coverage, the insurer is obligated to defend the entire case: ‘Where the complaint does not state facts sufficient to clearly bring the case within or without the coverage, the general rule is that the insurer is obligated to defend if there is, potentially, a case under the complaint within the coverage of the policy. Stated differently, in case of doubt as to whether or not the allegations of a complaint against the insured state a cause of action within the coverage of a liability policy sufficient to compel the insurer to defend the action, such doubt will be resolved in [the] insured’s favor.’ Heyden Newport , 387 S.W.2d at 26 (ci t ati o n omitted); see also Gore Design Co m p le t i o ns Ltd. v. Hartford Fire Ins. Co. , 538 F.3d 365, 369 (5th Cir. 2008) (“When in doubt, defend.”). If the insured carries his burden, the insurer, also within the confines of the eight-corners rule, must establish that an exclusion in the policy constitutes

an avoidance of or affirmative defense to coverage of all claims in order to defeat the duty to defend. Northfield Ins. Co. v. Loving Home Care, Inc. , 363 F.3d 523, 528 (5th Cir . 2 0 0 4) (citations omitted). In determining whether an exclusion applies, Texas courts “examine the factual allegations showing the origin of the damages rather than the legal theories asserted by the plaintiff.” Canutillo , 99 F.3d at 703-04 (citations omitted). Furthermore, in the event of ambiguity, any exceptions and limitations contained in a policy are strictly construed against the insurer. Northfield , 363 F.3d at 529 (citing Canutillo , 99 F.3d at 701). In addition, under the eight-corners rule , it is inappropriate when conducting the duty to defend analysis to consider “facts ascertained before the suit, developed in the process of l iti g ation, or by the ultimate outcome of the suit.” Primrose Operating Co. v. Nat’l Am. Ins. Co. , 382 F.3d 546, 552 (5th Cir. 2004) (citing Potomac Ins. Co. of Ill. v. Jayhawk Med. Acceptance Corp. , 198 F.3d 548, 551 (5th Cir. 2000)). Indeed, extrinsic evidence such as “facts outside the pleadings, even those easily ascertain e d , are not ordinarily material to the

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determination” of the duty to defend, and the court will not read facts into the pleadings, “look outside the pleadings, or imagine factual scenarios which might trigger coverage.” Merchants Fast Motor Lines, Inc. , 939 S.W.2d at141-42. Some Texas intermediate appellate courts and our court, making an Erie guess, have carved out a narrow exception permitting the us e o f extrinsic evidence in determining the duty t o d e fend when the extrinsic evidence is “relevant to an independent and discrete coverage issue, n o t touching on the merits of the underlying third-party claim.” GuideOne, 197 S.W.3d at 308-09. Specifically, some Texas intermediate appellate courts and our court have found that extrinsic evidence may be used “when it is initially impossible t o discern whether coverage is potentially implicated and when the extrinsic evidence goes solely to a fundamental issue of coverage which does not overlap with the merits of or engage the truth or falsity of any facts alleged i n the underlying cases.” Northfield , 363 F.3d at 5 3 1 ; S tate Farm Fire & Cas. Co. v. Wade , 827 S.W.2d 448, 452 (Tex. App.—Corpus Christi 1992, writ denied) (“When the petition in the underlying lawsuit d o e s not allege facts sufficient for a determination of whether those facts, even if true, are covered by the policy, the evidence adduced at the trial in a declaratory judgment action may be considered along with the allegations in the underlying petition.” (citing Gonzales v. Am. States Ins. Co. of Tex. , 628 S.W.2d 184, 186 (Tex. App.—Corpus Christi 1982, no writ))). However, although the Texas Supreme Court has never recognized this, nor, indeed, any exception to the eight-corners rule, it has acknowledge d th at “any such exception would not extend to evidence that was relevant to both insurance coverage and the factual merits of the case as alleged by the third-party plaintiff.” Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co. , 279 S.W.3d 6 5 0 , 654 (Tex. 2009) (citing GuideOne , 197 S.W.3d at 308-09). Here, the district co u rt e rr e d in finding no duty to defend by looking to extrinsi c e vi d e nce to support its determination. According to the allegations,

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Uponor purchased fittings and swivel nuts from Unique at various times since 2002. In addition, Uponor alleges that “[s]ubsequent to UPONOR purchasing Swivel Nuts from UNIQUE, Palm Harbor and individuals informed UPONOR of multiple Swivel Nut failures, demanded reimbursement from UPONOR for the damages they claim to have sustained as a re s u l t of the defective Swivel Nuts and also demanded replacement of all UNIQUE Swivel Nuts contained in the approximately 5,000 Palm Harbor homes in which UNIQUE’s Swivel Nuts had been installed.” Furthermore, “[o]n or about November 29, 2006[,] UPONOR, both orally and in writing, put UNIQUE on notice of claims that had been made by Ryan Homes regarding the replacement of . . . Fittings supplied by UNIQUE and the demand by Palm Harbor Homes for replacement of Swivel Nuts supplied by UNIQUE.” We must liberally construe the allegations and resolve all ambiguities in favor of the insured and the duty to defend. See Nokia , 268 S.W.3d at 491. “If the third-party plaintiff’s complaint alleges any amount of property damage that occurred during the policy period and that was caused by the insured, the duty to defend arises.” Wilshire Ins. , 581 F.3d at 225 (citing Don’s Bldg. Supply, Inc.

v. OneBeacon Ins. Co

. , 2 6 7 S.W.3d 20, 31-32 (Tex. 2008)). Here, Uponor’s pleadings against Unique allege that claims arose subsequent t o Uponor’s purchasing Unique’s swivel nuts and fittings. Although Uponor alleges Unique knew of the defective swivel nuts in 2004, it also alleges that Unique agreed to

use different swivel nuts. However, it does not then allege that Unique knew those different swivel nuts were defective before the policy date of O c tober 16, 2005. Without more, the allegations do not clearly and unambiguously fall outside the scope of coverage of the CGL policies and a potentially covered claim clearly exists. See Allstate Ins. Co. v. Hallman , 159 S.W.3d 640, 643 (Tex. 2005). Thus, unless an exclusion is applicable, the f a c tual allegations lodged in the Texas and Minnesota Lawsuits trigger Colony’s duty to defend.

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Here, the district court found that the known-loss exclusion contained in the CGL policies was applicable to de ny coverage. After considering extrinsic evidence in th e f

or m of an af

f idavit and Unique’s insurance application discussed therein, the district court found th at U nique knew of the losses before buying insurance from Colony because Unique had reported in its insurance application that it had “sold a b a tch of T-fittings from one manufacturer which was defective.” In Texas, under the fortuity doc t ri n e , an insured cannot seek insurance coverage for a loss that has already begun and which is or should be known to have begun. Two Pesos, Inc. v. Gulf Ins. Co. , 901 S.W.2d 495, 501 (Tex. App.—Houston [14th Dist.] 1995, pet

. denied). However, application of the fortuity doctrine in the duty-to-defend context is resolved by the eight-corners

ru le. Warrantech Corp. v. Steadfast Ins. Co. , 210 S.W.3d 760, 766 (Tex. App.—Fort Worth 2006, pet. denied). Furthermore, the district court’s consideration of extrinsic evidence would be imp e r m issible even under the narrow exception recognized by the Texas intermediate appell ate courts and our court since the extrinsic evidence overlaps with the merits of or engages the truth or falsity of the facts alleged in the Texas and Minnesota Lawsuits. See Northfield , 363 F.3d at 531; Pine Oak , 279 S.W.3d

at 654; Wade , 827 S.W.2d at 452. Unique’s knowledge of problems with it s products and the timing of that knowledge is relevant to its liability to Uponor and, therefore, is not wholly outside the issues in the underlying liability case. C o n sidering the affidavit and insurance application obligates accepting tha t Unique’s products were defective and that U nique had knowledge of same, a conclusion that would be highly prejudicial to Unique’s position in the Texas and Minnesota Lawsuits. Accordingly, it was inappropriate for the district court to consider the affidavit and the insurance application in order to determine whether the known-loss exclusion was applicable.

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Since the district court found that the known- l o ss exclusion was applicable, it did not address Colony’s other argument that Unique’s voluntary agreement with Uponor in August 2006 to take responsibility for existing and any fu t ur e claims breached the consent-to-settle clause in the CGL policies, vitiating coverage. The CGL policies’ consent-to-settle clause provides, that an insured will not “except at that insured’s own cost, voluntarily make a payment,

a ssume any obligation, or incur any expense, other than for first aid , w ith o u t [Colony’s] consent.” First, it is n o t a t al l clear that Unique’s August 2006 agreement constitutes the type of settlement referenced in this clause. Further, although Colony argues that any breach of the clause renders all insurance void, it cites

no case for this proposition. Colony cites our decision in Motiva Enterprises, LLC

v. St. Paul Fire & Marine Ins. Co. , 445 F.3d 381 ( 5 th C ir. 2006) for the proposition that any settlement without insurance company involvement voids

c o verage as a matter of law. Id. at 385-87. We conclude that C o l o ny r e a d s Motivatoo broadly. In Motiva , we stated: “An insurer’s right to participate in the settlement process is an essential prerequisite to its ob l igation to pay a settlement .” Id. at 386 (emphasis added). Here, we cannot disc e r n th at the entirety of Uponor’s complaints seeks to recover “payment of a settlement.” Furthermore, Colony also fails to address the effect on the Motiva analysis of the subsequent decisions of the Texas Supreme Court in PAJ, Inc. v. Hanover I ns. Co. , 243 S.W.3d 630, 633-37 (Tex. 2008) and Prodigy Commc’ns Corp. v. Agric. Excess & Surplus Ins. Co., 288 S.W.3d 374, 377-83 (Tex. 2009), discussing prejudice in the noti ce-of-suit context. Indeed, Motiva cited to the court of appeals’ decision in PAJ , which held that the analogous notice-of-suit provision

was a c o n dition precedent rather than a covenant. 445 F.3d at 386 n.5. However, the Texas Supreme Court reversed the court of appeals in PAJ, and declined to find that clause to be a “condition precedent.” 243 S.W.3d at 635-36.

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Thu s , f rom the record before us, under the current state of the law, we cannot

c o nclude that the “breach of consent to settle” argument provides a separat e basis upon which to affirm. Accordingly, we leave further consideration of this issue to the district court to address in the first instance on remand. Finally, the district c o u rt ’ s determination that Colony did not owe indemnity was based solely upon its duty to defend determination, so we reverse that determination as well. We note, however, that two y e ars ago, the Texas Supreme Court disavowed cases suggesting that negation of the duty to defend always means there will be no duty to indemnify in D.R. Horton-Texas, Ltd. v. Mark e l I

n t ’ l Ins. Co., 300 S.W.3d 740, 745 (Tex. 2009). “These duties are independent, and the existence of one does not necessarily depend on the

e xi stence or proof of the other.

. . . Where disputed facts are prove n i n th e liability case, whether none, some, or most of the material coverage facts will have been established in that underlying suit depends on the circumstances of the case and other legal and equitable principles.” Id. CONCLUSION Based o n the foregoing, we REVERSE the district court’s holding that Colony had no duty to defend or indemnify Unique and REMAND for a determination by the district court in the first instance of the merits, if any, of Colony’s remaining arguments.

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EDITH BROWN CLEMENT, Circuit Judge, dissenting:

The majority goes too far in remanding to the district court. The district court clearly erred in finding no duty to defend by looking to extrinsic evidence to support its determinations. I join the majority insofar as it reverses the ruling of the district court based on the introduction of ext ri n s ic evidence. However, because Unique breached the consent-to- s ettle provision of the insurance contract, summary judgment was proper. The insurance contract between Uni que and Colony included a consent-tosettle provision which limited Colony’s liability if Unique entered a settlement without Colony’s consent. Such a pr o vision protects insurers when insureds exclude the insurer from the settlement negotiations but still expect the insurer to foot the bill. Colony urges us to affirm the district court’s grant of summary judgment because Unique settled specific claims with Uponor without Colony’s consultation or involvement. The majority is skeptical of Colony’s claim, but is remanding to the district court to evaluate the consent-to-settle provision. I do not find it necessary to remand to the district court. We may affirm the district court’s grant of summary judgment on any grounds supported by the record. Griffin v. United Parcel Serv., Inc. , 661 F.3d 216, 221 (5th Cir. 2011). I w o u ld affirm because Unique breached the consent-to-settle provision of th e insurance contract. Unbeknownst to Colony, Unique engaged in settlement negotiations and reached a settlement agreement with Uponor for at least some of the underlying clai m s . Th e emails indicate that Unique was taking “responsib[ility] for any claims arising out of defective product,” and “agreed to issue a check for 50% of the t o t al c l ai m of $17,478.22 in full settlement of these claims” for swivel nut liability. By voluntarily assuming obligations and incurring expenses without

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Colony’s consent, Unique breac h e d the consent-to-settle provision of the insurance contract. In Motiva Enterprises, L.L.C. v. St. Paul Fire & Marine Insurance Co. , this court held that an insurer could properly deny coverage under Texas law when the insured entered a settlem ent agreement without consulting the insurer, tendering the settlement to the insurer, or permitting the insurer to participate in the settlement decisi o n . 4 4 5 F.3d 381, 386 (5th Cir. 2006). The logic of Motiva applies to Unique’s settlement. Unique neither informed Colony of the settlement negotiations, no r did Unique invite Colony to participate in the

s ettl e m ent. Unique, in an effort to protect its business relationship with Uponor , agreed to accept liability for future claims and settled the past c l ai m s f o r a specific sum. Colony’s exclusion tri g g e r e d the consent-to-settle provision. Colony was prejudiced by the settlement both because it would likely be forced to pay the settlement amount and it would be bound by any admissions made by Unique. Under Motiva , this prejudicial breach justifies denying coverage. There was sufficient evidence before this court to hold that the settlement between Unique and Uponor breached the consent

- t o-settle provision of the insurance contract, prejudicing Colony

. The consent-to-settle provision exists to prevent just this sort of behavior by insureds. When Unique violated the provision, coverage was voided. Because summary judgment could be affirmed on the basis of voided coverage, I respectfully dissent.

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