IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH 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 Unique

Industrial Product Company, L.P. (“Unique”), for claims in two underlying

lawsuits against Unique. After considering extrinsic evidence in the form of an

affidavit and the insurance application discussed therein, the district court

United States Court of Appeals

Fifth Circuit

F I L E D

August 24, 2012

Lyle W. Cayce

Clerk

 Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not *

be published and is not precedent except under the limited circumstances set forth in 5TH CIR.

R. 47.5.4.

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No. 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 consecutive commercial general liability

(“CGL”) policies running from October 16, 2005 through October 16, 2007.1

Under the terms of the CGL policies, Colony will pay 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 damage”

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 and swivel nuts as plumbing

products to Uponor, Inc. (“Uponor”), 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, specifically, Uponor, Inc. v. Unique Industrial Product

Co., Case No. 4:07-cv-02986 (S.D. Tex. September 16, 2007) (the “Texas

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. 

Uponor’s allegations against Unique in the Texas and Minnesota Lawsuits

are substantially similar. Specifically, Uponor alleges that it purchased swivel

nuts and brass fittings from Unique at various times since 2002. However,

during or before June 2004, Uponor placed Unique on notice regarding reports

After the renewal at the end of the first year of coverage, Colony exercised its right 1

to prematurely terminate its insurance contract with Unique because of numerous adverse

developments since the renewal. The termination was made effective on February 10, 2007.

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of failures of Unique’s swivel nuts and that the failures were causing damages

to residences and to Uponor’s business. As a result, after 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. 

In addition, Uponor alleges that it began receiving notices of failures of

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 August 2006, Uponor had the defective fittings and

swivel nuts removed from the inventory of its purchasers and returned to

Uponor. Then, on August 24, 2006, representatives from Uponor 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 after the meeting, however, Unique failed to take any

responsibility for the damages or to reimburse Uponor 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 Minnesota 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 insurance application

discussed therein, the 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 district court’s award of summary

judgment de novo, 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. 2009) (“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

determine whether summary judgment was appropriate.”); Ooida Risk Retention

Grp., Inc. v. Williams, 579 F.3d 469, 471-72 (5th Cir. 2009). Summary judgment

is appropriate 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.” FED.

R. CIV. 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 whether the duty to defend exists. Zurich Am. Ins. Co. v. Nokia,

Inc., 268 S.W.3d 487, 491 (Tex. 2008). “Under the eight-corners or complaintallegation rule, an insurer’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. 1973); 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

the court must resolve all doubts regarding the duty to defend in favor of the

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. 1997)). 

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 claim 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 coverage will 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, 633 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 defend is determined by examining the latest amended pleading upon 2

which the insurer based its refusal to defend the action.” Canutillo, 99 F.3d at 701 (citing

Rhodes v. Chicago Ins. Co., 719 F.2d 116, 120 (5th Cir. 1983)). Accordingly, although we note

that on October 31, 2011, Uponor filed a Second Amended Complaint in the Texas Lawsuit

against Unique, we need not consider the allegations contained therein in conducting our duty

to defend analysis because Colony refused to defend Unique based on Uponor’s First Amended

Complaint.

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In other words, as long as there is “potentially” a cause of action 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 (citation omitted); see also Gore Design

Completions 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. 2004) (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 litigation, 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 ascertained, 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 use of extrinsic

evidence in determining the duty to defend when the extrinsic evidence is

“relevant to an independent and discrete coverage issue, not 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 to 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 in the underlying cases.” 

Northfield, 363 F.3d at 531; State 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 does 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 acknowledged that“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 650, 654 (Tex. 2009)

(citing GuideOne, 197 S.W.3d at 308-09). 

Here, the district court erred in finding no duty to defend by looking to

extrinsic evidence 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 result 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., 267 S.W.3d 20, 31-32 (Tex. 2008)). Here, Uponor’s

pleadings against Unique allege that claims arose subsequent to 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 October 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 factual 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 deny coverage. After considering extrinsic

evidence in the form of an affidavit and Unique’s insurance application discussed

therein, the district court found that Unique knew of the losses before buying

insurance from Colony because Unique had reported in its insurance application

that it had “sold a batch of T-fittings from one manufacturer which was

defective.” In Texas, under the fortuity doctrine, 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

rule. 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 impermissible even under the narrow exception recognized by the Texas

intermediate appellate 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 its

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. 

Considering the affidavit and insurance application obligates accepting that

Unique’s products were defective and that Unique 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-loss 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 future 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,

assume any obligation, or incur any expense, other than for first aid, without

[Colony’s] consent.” 

First, it is not at all 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 (5th Cir. 2006) for the

proposition that any settlement without insurance company involvement voids

coverage as a matter of law. Id. at 385-87. We conclude that Colony reads

Motiva too broadly. In Motiva, we stated: “An insurer’s right to participate in

the settlement process is an essential prerequisite to its obligation to pay a

settlement.” Id. at 386 (emphasis added). Here, we cannot discern that 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

Ins. 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 notice-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 condition 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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Thus, from the record before us, under the current state of the law, we cannot

conclude that the “breach of consent to settle” argument provides a separate

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 court’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 years 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.

Markel Int’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

existence or proof of the other. . . . Where disputed facts are proven in the

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 on 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 extrinsic evidence. However,

because Unique breached the consent-to-settle provision of the insurance

contract, summary judgment was proper. 

The insurance contract between Unique and Colony included a consent-tosettle provision which limited Colony’s liability if Unique entered a settlement

without Colony’s consent. Such a provision 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 would affirm because Unique breached the consent-to-settle provision of the

insurance contract.

Unbeknownst to Colony, Unique engaged in settlement negotiations and

reached a settlement agreement with Uponor for at least some of the underlying

claims. The 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 total claim 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 breached 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 settlement agreement without consulting the insurer,

tendering the settlement to the insurer, or permitting the insurer to participate

in the settlement decision. 445 F.3d 381, 386 (5th Cir. 2006). The logic of

Motiva applies to Unique’s settlement. Unique neither informed Colony of the

settlement negotiations, nor did Unique invite Colony to participate in the

settlement. Unique, in an effort to protect its business relationship with Uponor,

agreed to accept liability for future claims and settled the past claims for a

specific sum. Colony’s exclusion triggered 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-to-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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