Court Opinion

ID: 854258
Source: CourtListenerOpinion
Date Created: 2013-03-05 01:00:22.029738+00
Date Added: 2024-06-11T10:05:19.616632
License: Public Domain

Case: 12-40189       Document: 00512161191         Page: 1     Date Filed: 03/01/2013

           IN THE UNITED STATES COURT OF APPEALS
                    FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                    Fifth Circuit

                                                                            FILED
                                                                           March 1, 2013

                                       No. 12-40189                        Lyle W. Cayce
                                                                                Clerk

PPI TECHNOLOGY SERVICES, L.P.,

                                                  Plaintiff–Appellant
v.

LIBERTY MUTUAL INSURANCE CO.

                                                  Defendant–Appellee

                   Appeal from the United States District Court
                        for the Southern District of Texas
                              USDC No. 2:11-CV-47

                    ON PETITION FOR PANEL REHEARING

Before WIENER, CLEMENT, and PRADO, Circuit Judges.
EDWARD C. PRADO, Circuit Judge:*
       The petition for panel rehearing is GRANTED. We withdraw our prior
opinion, and substitute the following. Defendant–Appellee, Liberty Mutual
Insurance Co., (“Liberty Mutual”), insured Plaintiff–Appellant, PPI Technology
Services, L.P., (“PPI”). PPI was retained by several third parties to assist in
planning well-drilling operations. After a well was drilled in the wrong area,

       *
         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 R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.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.
     Case: 12-40189    Document: 00512161191      Page: 2   Date Filed: 03/01/2013

                                  No. 12-40189

PPI was sued by the third parties. PPI then sought defense and indemnification
from its insurance company, Liberty Mutual. When Liberty Mutual refused, PPI
brought suit claiming breach of contract, violation of the Texas Prompt Payment
Statute, and breach of the duty of good faith and fair dealing. On Cross Motions
for Summary Judgment, the district court found for Liberty Mutual, holding that
it did not have a duty to defend PPI against two underlying lawsuits. PPI
appeals the district court’s judgment, arguing that the district court erred in
refusing to consider some allegations in the underlying lawsuits as “factual
allegations,” and in its determination that, of the “factual allegations,” none
alleged “property damage” from an “occurrence” as required by PPI’s insurance
policy with Liberty Mutual. We AFFIRM the district court’s dismissal.
           I. FACTUAL AND PROCEDURAL BACKGROUND
A.    The Insurance Policy
      Liberty Mutual issued a commercial general liability policy to PPI (the
“Policy”). The Policy provided that Liberty Mutual would defend and indemnify
PPI for claims arising out of PPI’s exploration and production business
operations. The Policy provides “Bodily Injury and Property Damage Liability”
coverage (Coverage A) for “property damage” caused by an “occurrence.” The
Policy defines “property damage” as follows:
      a. Physical injury to tangible property, including all resulting loss
      of use of that property. All such loss of use shall be deemed to occur
      at the time of the physical injury that caused it; or

      b. Loss of use of tangible property that is not physically injured. All
      such loss of use shall be deemed to occur at the time of the
      “occurrence” that caused it.

      The Policy also provides coverage for “property damage” within the
“underground resources and equipment hazard” endorsement to the Policy. The

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Policy defines the term “underground resources and equipment hazard” to
include:
      ‘Property damage’ to any of the following:
      a. Oil, gas, water or other mineral substances which have not been
      reduced to physical possession above the surface of the earth or
      above the surface of any body of water;

      b. Any well, hole, formation, strata or area in or through which
      exploration for or production of any substance is carried on;
      c. Any casing, pipe, bit, tool, pump or other drilling or well servicing
      machinery or equipment located beneath the surface of the earth in
      any such well or hole or beneath the surface of any body of water.
B.    Underlying Lawsuits
      Royal Production Company, Inc. (“Royal”) is the lessor and operator of
three leases located in Lake Boudreaux, Louisiana. Royal retained PPI as the
representative of the working interest owners, including Blue Moon Exploration
Company, L.L.C. (“Blue Moon”). PPI was allegedly to assist in well-planning
and oversee the drilling of wells on the leases.
      A well was dug on the wrong lease, plugged, and abandoned. Royal and
the non-operator working interest owners filed suit against PPI and sought to
compel arbitration.     Both the Royal and the Blue Moon petitions were
consolidated and referred to arbitration. We refer to the consolidated claims
collectively as the “underlying lawsuits.”
      The relevant allegations are as follows: Royal contends that “PPI caused
the drilling rig to be towed to [] and placed upon [] the wrong location.”
Subsequently, towing the rig to the wrong lease resulted in “the well being
drilled in the wrong location” and a “dry hole.” Drilling in the wrong location
caused Royal and the nonoperating working interest owners to “expend[] in
excess of $4,200,000.00 for the drilling of the Well in the wrong location.” The
Blue Moon Plaintiffs seek $737,752.40 in delay rentals to maintain the lease
where the well was ultimately drilled. Additionally, Royal alleges that PPI

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caused “property damage to Royal as an owner in the property where the well
was being drilled” including “physical injury to tangible property, including all
resulting loss of use of the property.” Finally, Royal alleges that PPI’s “acts and
omissions constitut[e] negligence and negligence per se.”
C.    The Present Case
      PPI tendered the underlying lawsuits to Liberty Mutual for defense and
indemnification. Liberty Mutual denied that it owed PPI either. In a complaint
filed in Texas state court, and timely removed to federal district court, PPI
brought three claims against Liberty Mutual: (1) breach of insurance contract;
(2) breach of section 541.060 of the Texas Insurance Code; and (3) breach of the
duty of good faith and fair dealing.
      PPI filed a Motion for Partial Summary Judgment seeking a judicial
declaration that Liberty Mutual had a duty to defend PPI based upon the
allegations in the underlying lawsuits. Liberty Mutual responded by filing a
Motion for Summary Judgment, arguing it had no duty to defend or indemnify
PPI because the underlying lawsuits did not contain factual allegations of
“property damage” caused by an “occurrence” as required by the Policy, and that,
in the alternative, policy exclusions precluded coverage.
      The district court denied PPI’s Motion for Partial Summary Judgment and
granted Liberty Mutual’s Motion for Summary Judgment, dismissing all of PPI’s
claims against Liberty Mutual. First, the district court declined to consider the
allegations of “property damage,” concluding that they were legal, rather than
factual, allegations. The district court concluded that the “property damage”
allegations were legal in nature because they “concern the definition and
categorization of certain conduct and objects, rather than the ‘facts giving rise
to the alleged actionable conduct.’” PPI Tech. Servs., LP, v. Liberty Mut. Ins. Co.,
2012 WL 130380, at *11 (S.D. Tex. 2012) (citing Merchs. Fast, 939 S.W.2d at 141
(quoting Adamo, 853 S.W.2d at 676)).          “As mere legal assertions, these

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statements do not qualify as ‘allegations’ for purpose of the eight-corners rule.”
Id. PPI timely appealed, invoking our jurisdiction pursuant to 28 U.S.C. § 1291.
                         II. STANDARD OF REVIEW
      This Court reviews a grant of summary judgment de novo. Gore Design
Completions, Ltd. v. Hartford Fire Ins. Co., 538 F.3d 365, 368 (5th Cir. 2008).
Summary judgment is appropriate when the pleadings and the record show
“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); see Gore Design
Completions, Ltd., 538 F.3d at 368 (quoting Celotex v. Catrett, 477 U.S. 317, 322
(1986)). Because federal jurisdiction is based on diversity of citizenship, the
federal court looks to the substantive law of the forum state, here, Texas. See
Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938); Tex. Indus., Inc. v. Factory
Mut. Ins. Co., 486 F.3d 844, 846 (5th Cir. 2007).
                                III. DISCUSSION
      On appeal, PPI challenges the district court’s determinations that the
underlying lawsuits did not include factual allegations of “property damage” and
that they did not allege an “occurrence” as required under the Policy. Because
the underlying complaints did not include factual allegations of property
damage, we affirm the district court’s dismissal. Our holding is limited to the
facts of the case presented.1
A.     Breach of Contract
      PPI argues, in its first count, that Liberty Mutual breached its contract by
neglecting its duties to defend and indemnify PPI against the underlying
lawsuits filed by Royal and Blue Moon. We conclude that Liberty Mutual has

      1
          Our holding is not intended to alter Texas pleading standards.

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                                       No. 12-40189

not breached its contract because it has no duty to defend.2 The allegations in
the underlying lawsuits are either for economic damages, and thus not covered,
or are legal conclusions, rather than factual allegations as required.
       1. Duty to Defend
       a. Standards for Duty to Defend
       Texas follows the eight-corners rule. Colony Ins. Co v. Peachtree Constr.,
Ltd., 647 F.3d 248, 253 (5th Cir. 2011) (citing Pine Oak Builders, Inc. v. Great
Am. Lloyds Ins. Co., 279 S.W.3d 650, 654 (Tex. 2009)). The insurance company’s
duty to defend the insured party is determined solely on the facts alleged in the
underlying lawsuit and the terms of the policy. Id. “Thus, the duty to defend
arises only when the facts alleged in the [underlying lawsuit], if taken as true,
would potentially state a cause of action falling within the terms of the policy.”
Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523, 528 (5th Cir. 2004)
(first emphasis added).
       If there is a “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.” Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v.
Merchs. Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997) (citation
omitted). The insured bears the initial burden of showing that the claim against
it is potentially within the policy’s coverage. Sentry Ins. v. R.J. Weber Co., 2 F.3d
554, 556 (5th Cir. 1993).
       The eight-corners rule requires courts to focus on the factual allegations
contained in the underlying suits. “If a petition does not allege facts within the

       2
          We do not reach the issue of whether the underlying lawsuits allege “personal and
advertising injury” under Coverage B of the Policy, as PPI asserted originally. The district
court held that the allegations did not allege “personal and advertising injury,” and PPI states
in its briefs that it “does not challenge th[is] holding at this time.”

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scope of coverage, an insurer is not legally required to defend a suit against its
insured.” Merchs. Fast, 939 S.W.2d at 141. More specifically, “the court must
focus on the factual allegations that show the origin of the damages rather than
on the legal theories alleged.” Id. “It is not the cause of action alleged that
determines coverage but the facts giving rise to the alleged actionable conduct.”
Merchs. Fast, 939 S.W.2d at 141 (quoting Adamo v. State Farm Lloyd’s Co., 853
S.W.2d 673, 676 (Tex. App.—Houston [14th Dist.] 1993, writ denied)); see also
Farmers Tex. Cnty. Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 82 (Tex. 1997) (“A
court must focus on the factual allegations rather than the legal theories
asserted in reviewing the underlying petition.”).
      b. Property Damage
      At issue is whether the underlying lawsuits against PPI raise factual
allegations that come within the coverage of the Policy. The parties dispute
whether the allegations in the underlying lawsuits include “property damage”
as covered under the Policy. As noted above, the Policy defines “property
damage” to be: “(a) physical injury to tangible property including the loss of use
of that property . . . ; or (b) loss of use of tangible property that is not physically
injured.” The Policy does not define the key phrases “physical injury,” “loss of
use,” or “tangible property.”
      Under these facts, we hold that the underlying complaints did not contain
factual allegations of property damage. See, e.g., Mid-Continent Cas. Co., v.
Camaley Energy Co., 364 F. Supp. 2d 600, 605–06 (deciding on other grounds but
finding that the underlying lawsuit, despite its inclusion of the phrase property
damage, “clearly did not allege physical injury to tangible property”). Just as
the Camaley underlying complaints included the term property damage, but did
not allege facts supporting actual damage to or loss of tangible property, here,
the underlying complaints contain no factual allegations of actual damage to or
loss of tangible property. The allegations in the underlying lawsuits are either

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for economic damages, and thus not covered, or are legal conclusions, rather
than factual allegations as required. Thus, we do not reach the issue of whether
any damage was caused by “an occurrence.”           Nor do we reach the Policy
Exclusions.
      c. Underground Resources and Equipment Hazard
      By its terms, the “underground resources” coverage is a specific type of
“property damage.” By not alleging any “property damage” generally, the
underlying lawsuits fail to allege damage to “underground resources.”
      2. Duty to Indemnify
       Both parties acknowledge that the duty-to-indemnify issue has become
moot since the time of the district court’s decision.
B.    Texas Insurance Code: Prompt Payment of Claims Act
      To prevail under the Prompt Payment of Claims Act, the plaintiff must
establish that there is a claim under the insurance policy for which the insurer
is liable. If the policy does not provide coverage for the claims in the underlying
lawsuits, the insurer is not liable under the statute. See Progressive Cnty. Mut.
Ins. Co. v. Boyd, 177 S.W.3d 919, 922 (Tex. 2005). Because we affirm the breach
of contract claim’s dismissal, we affirm the Texas Insurance Code claim’s
dismissal as well.
C.    Breach of Duty of Good Faith and Fair Dealing
      The district court dismissed PPI’s action for breach of the duty of good
faith and fair dealing. The Texas Supreme Court has stated that there “can be
no claim for bad faith when an insurer has promptly denied a claim that is in
fact not covered.” Republic Ins. Co. v. Stoker, 903 S.W.2d 338, 341 (Tex. 1995).
Therefore, because we affirm the district court’s dismissal of the breach of
contract claim, we also affirm its dismissal of the breach of duty of good faith and
fair dealing claim.

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                          IV. CONCLUSION
      For the foregoing reasons, we affirm the district court’s dismissal of PPI’s
breach of contract, breach of the Texas Insurance Code, and breach of the duty
of good faith and fair dealing claims. Thus, we deny PPI’s motion to certify
questions to the Texas Supreme Court.
      AFFIRMED.

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