Court Opinion

ID: 45043
Source: CourtListenerOpinion
Date Created: 2010-04-25 22:32:07+00
Date Added: 2024-06-11T14:57:13.839309
License: Public Domain

United States Court of Appeals
                                                                                             Fifth Circuit
                                                                                           F I L E D
                                                   In the                                   August 1, 2006
                          United States Court of Appeals                               Charles R. Fulbruge III
                                        for the Fifth Circuit                                  Clerk
                                             _______________

                                               m 05-50917
                                             _______________

                          FAIR OPERATING, INC.; RALPH E. FAIR, INC.,

                                                                 Plaintiffs-Appellees,

                                                  VERSUS

                             MID-CONTINENT CASUALTY COMPANY,

                                                                 Defendant-Appellant.

                                      _________________________

                              Appeal from the United States District Court
                                   for the Western District of Texas
                                           m 5:04-CV-418
                                ______________________________

Before SMITH and STEWART, Circuit Judges,                  Mid-Continent Casualty Company (“Mid-
  and CRANE,* District Judge.                           Continent”) brings an interlocutory appeal
                                                        from an order requiring it to defend Fair Op-
JERRY E. SMITH, Circuit Judge:**                        erating, Inc., and Ralph E. Fair, Inc. (collec-
                                                        tively “Fair”), in a pollution lawsuit in state
                                                        court. Finding no error, we affirm the order
   *
     District Judge of the United States District       and remand for further proceedings.
Court for the Southern District of Texas, sitting by
designation.
   **                                                       **
     Pursuant to 5TH CIR. R. 47.5, the court has de-         (...continued)
termined that this opinion should not be published      and is not precedent except under the limited cir-
                                      (continued...)    cumstances set forth in 5TH CIR. R. 47.5.4.
                         I.                              court initiallydenied Fair’s motion and ordered
    Fair was sued in state court for allegedly           discovery on the duty to defend.
allowing pollutants to escape from its oil and
gas facilities. The suit, styled Ayala v. Phillips          Fair moved for reconsideration, urging that
Properties, Inc. (“Ayala”), alleges, in relevant         to inquire into the manner of the accident
part, the following:                                     would be at odds with the defensive position it
                                                         wished to take in Ayala. The district court
   The (plaintiffs’) properties . . . are contam-        agreed, reversed its previous order, and grant-
   inated and continue to be contaminated                ed Fair’s request to compel Mid-Continent to
   . . . . The contaminants escaped and con-             provide a defense. Citing authority it had not
   tinue to escape from the defendants’ facili-          previously considered, the court found that
   ties and instrumentalities complained of              Texas law requires an insurer to defend where
   herein into the air, soil, and groundwater,           the facts alleged in the complaint potentially
   then migrated and continue to migrate                 state a cause of action that falls within the
   throughout the contaminated area . . . .              terms of the policy. See Northfield Ins. Co. v.
                                                         Loving Home Care, Inc., 363 F.3d 523, 528
    Fair holds a general liability policy with           (5th Cir. 2004).
Mid-Continent that covers liability for “pol-
lution incidents,” which it defines as “the sud-            The court further held that (absent excep-
den and accidental emission, discharge, re-              tional circumstances not present here) Texas
lease, or escape of pollutants into or upon land         law required it to look no further than the
or the atmosphere . . . .” The policy requires           “eight corners” of the policy and the Ayala
Mid-Continent to defend Fair against lawsuits            complaint in ruling on a duty to defend; con-
alleging covered events. Fair asked Mid-Con-             sideration of extrinsic evidence was therefore
tinent to defend it in Ayala, and Mid-Continent          inappropriate. The district court certified the
refused. Using diversity jurisdiction, Fair sued         issue for interlocutory appeal under 28 U.S.C.
Mid-Continent in federal court seeking a                 § 1292(b), and this court granted leave for
declaratoryjudgment requiring Mid-Continent              Mid-Continent to appeal.
to provide a defense. The case is governed by
Texas law.                                                  The Ayala litigation was settled before oral
                                                         argument of this case. A justiciable contro-
   Fair moved for partial summary judgment,              versy remains, however, regarding the legal
asking the court to look only to the “eight cor-         fees expended in defense of the Ayala litiga-
ners” of the insurance contract and the Ayala            tion before it was settled.
complaint in determining whether there is a
duty to defend. Mid-Continent argued that al-                                  II.
though the Ayala complaint alleged an acci-                 We turn first to whether, on the face of the
dent, it did not allege a “sudden” emission as           Ayala complaint and Fair’s insurance policy,
required under the policy. Mid-Continent fur-            Mid-Continent had a duty to defend Fair. We
ther contended that because the terms of the             review de novo the question whether an in-
documents were not specific enough to deter-             surer has a duty to defend. Guar. Nat’l Ins.
mine whether a duty to defend had arisen, the            Co. v. Vic Mfg. Co., 143 F.3d 192, 193 (5th
court should consult extrinsic evidence. The             Cir. 1998).

                                                     2
   The policy covers only “sudden and acci-                The question is whether the Ayala com-
dental” incidents of pollution. Mid-Continent           plaint alleges a cause of action potentially cov-
argues that because the Ayala complaint does            ered by Fair’s policy. It does.
not explicitly describe the alleged emissions as
“sudden,” it does not state a covered claim,               The complaint alleges the “escape” of con-
and there is no duty to defend. Mid-Continent           taminants from Fair’s control. It does not spe-
misreads Texas law.                                     cify the manner in which the escape occurred,2
                                                        but the allegations are sufficiently broad to en-
   We have most recently explained Texas’s              compass sudden and non-sudden emissions.
law on the duty to defend in Northfield. The            An “escape” can of course be sudden or other-
duty to defend and the duty to indemnify are            wise. The facts of this case, if further devel-
distinct and separate duties. King v. Dallas            oped, might indicate that the escape was not
Fire Ins. Co., 85 S.W.3d 185, 187 (Tex.                 sudden, but that cannot be determined yet.
2002). In Texas the duty to defend is broader
than the duty to indemnify. Am. States Ins.                A sudden escape of pollutants from Fair’s
Co. v. Bailey, 133 F.3d 363, 368 (5th Cir.              control, which would be covered under the
1998). An insurer’s duty to defend is deter-            policy, is certainly a potential fact that could
mined solely by the allegations in the pleadings        arise from this case. There is at least doubt
and the language of the policy.                         whether the factual allegations in the Ayala
                                                        complaint state a cause of action covered by
    This is the “eight corners” or “complaint al-       the policy. Under Texas law, a duty to defend
legation rule.” Northfield, 363 F.3d at 528. A          arises in such a case, and the cases relied on by
duty to defend arises “when the facts alleged in        Mid-Continent do not alter this conclusion.3
the complaint, if taken as true, would poten-
tially state a cause of action falling within the
terms of the policy.” Id. (citing Canutillo                1
                                                           (...continued)
Indep. Sch. Dist. v. Nat'l Union Fire Ins. Co.,         Gen. Ins. Co., 387 S.W.2d 22, 26 (Tex. 1965)).
99 F.3d 695, 701 (5th Cir. 1996)). “The in-
surer is obligated to defend the insured, pro-             2
                                                             The Ayala complaint states as follows: “The
vided that the petition or complaint alleges at         nature of the Contamination of the intervenors’
least one cause of action potentially within the        properties is inherently undiscoverable because the
policy’s coverage.” Id. “In case of doubt as            contamination is not discernable from the surface
to whether or not the allegations of a com-             without specialized training and the use of special-
plaint against the insured state a cause of ac-         ized equipment.” The complaint is intentionally
tion within the coverage of a liability policy          vague about how and when the contamination
sufficient to compel the insurer to defend the          occurred.
action, such doubt will be resolved in the in-             3
                                                             The decision in Mustang Tractor & Equip.
sured’s favor.”1                                        Co. v. Liberty Mut. Ins. Co., 76 F.3d 89, 92-93
                                                        (5th Cir. 1996), interpreting the same “sudden”
                                                        emissions clause as that found in Fair’s policy, is
   1
    Nat’l Union Fire Ins. Co. v. Merchants Fast         uninstructive. Mustang Tractor dealt with the
Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex.            insurer’s duty to indemnify rather than its duty to
1997) (citing Heyden Newport Chem. Corp. v. S.          defend. Here, the question is whether Mid-Con-
                                   (continued...)                                            (continued...)

                                                    3
The district court therefore correctly deter-             stances in which a Texas court might consider
mined that, based on the “eight corners” of the           extrinsic evidence in ruling on a duty to de-
Ayala complaint and Fair’s insurance policy,              fend. We concluded that “the current Texas
Texas law obligated Mid-Continent to defend               Supreme Court would not recognize any ex-
Fair in Ayala.                                            ception to the strict eight corners rule.”
                                                          Northfield, 363 F.3d at 531. In the rare event
                      III.                                in which a Texas court would consider extrin-
    Mid-Continent contends that even if it loses          sic evidence, it would do so only if two condi-
on an “eight corners” analysis, the district              tions were met: (1) “when it is initially impos-
court erred by not going beyond the bounds of             sible to discern whether coverage is potentially
the complaint and the policy to consider ex-              implicated,” and (2) “when the extrinsic evi-
trinsic evidence relevant to the duty to defend.          dence goes solely to a fundamental issue of
Mid-Continent urges this court to remand the              coverage which does not overlap with the mer-
case for development of such evidence.                    its of or engage the truth or falsity of any facts
                                                          alleged in the underlying case.” Id.4
  We turn, once more, to Northfield, in
which we described the very limited circum-                  As to the first element, it is not impossible
                                                          to determine whether the Ayala allegations po-
                                                          tentially implicate coverage. As explained
   3
    (...continued)                                        above, the allegations fall potentiallywithin the
tinent has a duty to defend Fair in Ayala, not            policy’s coverage, and a duty to defend there-
whether Mid-Continent will ultimately have to in-         fore arises. Consequently, Texas courts would
demnify Fair for the settlement amount. Under
                                                          not allow for the development of extrinsic
Texas law, these are separate legal duties that
                                                          evidence in this case, and the district court
courts approach using distinct legal and factual
inquiries.                                                correctly denied Mid-Continent’s request to
                                                          do so.5
    Mid-Continent also cites Guaranty Nat’l Ins.
Co. v. Vic Mfg. Co., 143 F.3d 192 (5th Cir. 1998),                             IV.
in which we held that no duty to defend existed              Mid-Continent’s remaining issues on appeal
under Texas law because policy language requiring         are without merit. It has provided this court
a sudden emission was not satisfied by the allega-
tions in the complaint. In Guaranty National,
however, the allegations were of knowing and in-             4
                                                               The Texas Supreme Court recently confirmed
tentional discharge of pollutants over an extended        this court’s Erie guess by explicitly relying on
period of time. We held that the facts as alleged         Northfield’s two-part test in rejecting an insurer’s
could not support a finding that the pollution in         request for an exception to the “eight corners” rule.
that case was a sudden accident.                          See GuideOne Elite Ins. Co. v. Fielder Road Bap-
                                                          tist Church, No. 04-0692, 2006 Tex. LEXIS 608,
    The Ayala complaint does not allege intentional       at *5-*17 (Tex. June 30, 2006).
misconduct by Fair. There is no dispute that Fair’s
                                                             5
pollution was accidental; the only question is                 Because the first element of the test is not met,
whether it was sudden. Because the facts alleged          we need not consider whether the development of
in the complaint could support a finding of sudden        extrinsic evidence would go to the merits of the
or non-sudden emission, a duty to defend arises           underlying litigation, a question that is complicated
under Texas law.                                          by the fact that Ayala has now settled.

                                                      4
with no reason to doubt the district court’s
factual finding that Ralph E. Fair, Inc., is an
unnamed insured on the policy as a co-owner
or co-venturer. Furthermore, its contention
that much of the Ayala complaint states un-
covered claims is irrelevant. For a duty to
defend to arise under Texas law, only one
claim must be covered. See Canutillo, 99 F.3d
at 701.

   In summary, the district court correctly de-
termined that Mid-Continent had a duty to de-
fend Fair in the Ayala litigation. The order ap-
pealed from, accordingly, is AFFIRMED, and
this matter is REMANDED for any necessary
further proceedings.

                                                   5