Court Opinion

ID: 2875613
Source: CourtListenerOpinion
Date Created: 2015-09-06 06:37:01.574303+00
Date Added: 2024-06-11T09:34:30.967499
License: Public Domain

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

                              ON MOTION FOR REHEARING

                                     NO. 03-05-00493-CV

                            Munters Euroform GmbH, Appellant

                                                v.

     American National Power, Inc. and Hays Energy Limited Partnership, Appellees

      FROM THE DISTRICT COURT OF HAYS COUNTY, 22ND JUDICIAL DISTRICT
          NO. 02-1232, HONORABLE RONALD G. CARR, JUDGE PRESIDING

                           MEMORANDUM OPINION

               We withdraw the opinion and judgment issued August 31, 2009, and substitute the

following opinion and judgment in their place. We deny appellant’s motion for rehearing.

               Munters Euroform GmbH appeals from a judgment in favor of appellees

American National Power, Inc. and Hays Energy Limited Partnership for damage to a construction

project. Euroform contends that the judgment is erroneous because the appellees’ claims are within

the waiver of subrogation included in the underlying construction contract. Euroform also contends

that the judgment is erroneous because Hays’s claims were barred by the economic loss doctrine.

We affirm.
               Appellees1 hired Alstom Power, Inc. to build a gas-fired power plant. Each turbine

is installed inside of an air filter house which also contains air filters and an evaporative cooling

system. Although the parties agreed in paragraph 26.2 of the Construction Contract that Alstom

would buy builder’s risk insurance that named appellees as the loss payee, the parties also agreed

in paragraph 26.5 that appellees retained the right to purchase insurance. For insurance purchased

under paragraph 26.2, the parties agreed that, “[a]s respects the Builder’s Risk, Marine and Delayed

Opening insurance, subrogation is waived in favor of the Contractor, all Subcontractors, the Owner

and their respective officers, agents and employees.” Paragraph 26.5 provided in part as follows:

       The Owner retains the right to arrange for the insurance described in Sections 26.2(a)
       and 26.2(b) covering the interests of all interested parties (the Owner, Contractor,
       the independent engineer and Subcontractors); provided that Contractor has the right
       to approve the wording in such insurance policies. If the Owner arranges such
       insurance, costs and premiums on insured claims shall be paid by the Owner, and the
       insurance coverage must contain the following: . . . (c) additional insured status and
       waiver of subrogation to all parties . . .

The parties agreed in paragraph 9.5 that subcontractors were not third-party beneficiaries of the

construction contract “except to the extent expressly provided for in this Contract.”

               Appellees purchased insurance from Factory Mutual Insurance Company.                In

addition to appellees, the policy expressly lists among the insured “Vend[o]rs and/or suppliers and/or

engineering consultants and/or subcontractors of any tier and/or other parties to the extent required

       1
           Although the construction contract and the insurance contract name only Hays as
the owner of the property and as the insured, appellees refer to themselves in the singular as
American National Power. Because Euroform does not challenge this nomenclature, we will treat
appellees together as the owners of the damaged property, as the entity that entered the contract with
Euroform, and as the insured.

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by contract” for “loss or damage arising out of their site activities only . . . for their respective rights

and interests as described in their contracts or agreements.” The insurance policy contains the

following language under the heading “Subrogation Waiver”:

        Upon the payment of any claim under this Policy, the Insurers shall be subrogated to
        all the rights and remedies of the Insured arising out of such claim against any person
        or corporation whatsoever except that the Insurers hereby waive all rights which
        they may have acquired by a payment of a claim under this Policy to recover the
        amount so paid from any person or corporation with whom the Insured, prior to the
        occurrence of the loss or damage, shall have agreed to waive their rights to recovery
        in respect of any loss or damage which may be caused by such person or corporation.

        The Insurers hereby agree to waive all rights of subrogation or action which they
        may have or acquire against any of the parties included in the Insured or otherwise
        indemnified by this Policy, arising out of one loss or event in respect of which a
        claim is made thereunder.

                There is no contract directly between appellees and Euroform. Euroform supplied the

evaporative cooling system to one subcontractor and, as a subcontractor itself of Alstom,

trained personnel of another subcontractor who installed the evaporative cooling systems. The

subcontracting agreement in which Euroform agreed to supervise the installation states that

Euroform would provide insurance coverage for its supervisory employees and that Euroform would

be liable to Alstom for all damages incurred on the basis of a “culpable” violation by Euroform of

the agreement. Euroform’s subcontract with Alstom is silent regarding subrogation.

                A fire started during installation of the evaporative cooling system, damaging

the filter house in which that system was being installed. Factory Mutual paid appellees $1,488,458

under the policy for property damage related to the fire, then filed suit in appellees’ name seeking

to recover damages from Munters Corporation, Euroform, and others on various theories. Appellees

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alleged that the fire was caused by negligence as well as manufacturing and marketing defects.

Euroform sought summary judgment contending that appellees had waived their claims

against Euroform and that, consequently, Factory Mutual had no claims to which they could be

subrogated. The trial court denied the motion for summary judgment. The jury found that the fire

was negligently caused, that appellees incurred $1,488,458 in damages as a result, and that Euroform

was responsible for twenty percent of the damages. Another subcontractor was found responsible

for the remaining share of damages. Euroform filed a motion for judgment notwithstanding the

verdict, contending that appellees and Factory Mutual waived their rights to subrogation as a matter

of law. Euroform reiterated the argument it had made in its motion for summary judgment that

the clause in the construction contract stating that “subrogation is waived” against subcontractors,

combined with the clause in the insurance contract in which Factory Mutual agrees it cannot be

subrogated to claims waived by appellees, results in a waiver by Factory Mutual of subrogation

rights against appellees’ subcontractors. The trial court denied the motion and entered judgment

based on the verdict.

               Euroform contends that the trial court erred by rendering judgment against it because

subrogation was waived under both the construction and the insurance contracts. We review the

denial of a motion for judgment notwithstanding the verdict under a no-evidence standard. Tanner

v. Nationwide Mut. Fire Ins. Co., 289 S.W.3d 828, 830 (Tex. 2009) (citing City of Keller v. Wilson,

168 S.W.3d 802, 823 (Tex. 2005)). We credit evidence favoring the jury verdict if reasonable jurors

could, and disregard contrary evidence unless reasonable jurors could not. Id. at *2 (citing Central

Ready Mix Concrete Co. v. Islas, 228 S.W.3d 649, 651 (Tex. 2007)). We will uphold a judgment

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based on the jury’s finding if more than a scintilla of competent evidence supports it. Id. (citing

Wal-Mart Stores, Inc. v. Miller, 102 S.W.3d 706, 709 (Tex. 2003) (per curiam)). We must decide

whether the evidence at trial could allow reasonable and fair-minded people to reach the verdict

under review. Id. (citing City of Keller, 168 S.W.3d at 827). Similar standards govern review of

motions for summary judgment and directed verdict. Keller, 168 S.W.3d at 823, 825.

               This case turns on contract interpretation. Subrogation rights may be waived

or altered by contract. Trinity Universal Ins. Co. v. Bill Cox Constr., Inc., 75 S.W.3d 6, 8

(Tex. App.—San Antonio 2001, no pet.). Courts must try to give effect to all contractual terms so

none will be rendered meaningless. Kelley-Coppedge, Inc. v. Highlands Ins. Co., 980 S.W.2d 462,

464 (Tex. 1998). Courts must read all provisions together and give each provision its intended

effect. Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 133 (Tex. 1994).

               Euroform contends that the clear intent of appellees and the general contractor was

to shift liability to the insurer by preventing the insurer from pursuing allegedly negligent parties.

Euroform asserts that they intended to achieve this goal by providing that subrogation was waived

in the construction contract and in the insurance policy issued pursuant to that contract. Appellees

contend that Euroform was not a third-party beneficiary of the construction contract, and that

the construction contract did not waive subrogation against a subcontractor because it did not release

the owner’s claims against the subcontractor. Appellees also claim that Euroform lacks standing

to enforce the terms of the insurance policy and that the insurance policy failed to waive subrogation

because the construction contract did not release appellees’ claims against subcontractors. They

finally contend that the “additional insured” provisions in the construction contract did not waive

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subrogation because Euroform was not an additional insured because it lacked an insurable interest

in the property and because it damaged the property of others.

               Although the construction contract contains language that declares that “subrogation

is waived” as to various parties,2 the right to subrogation belongs to the insurer and is not

the owner’s or the contractor’s to waive. Owners and contractors can waive their claims against

each other. See Temple Eastex, Inc. v. Old Orchard Creek Partners, Ltd., 848 S.W.2d 724, 730-31

(Tex. App.—Dallas 1992, writ denied); see also Trinity Universal Ins. Co., 75 S.W.3d at 13-15.

Because a subrogee insurer stands in the shoes of the subrogor insured with the insurer’s

claims limited to those the subrogor could bring and subject to the same defenses, the subrogor’s

waiver of its claims extinguishes the subrogee’s right to bring those claims in the subrogor’s name.

Mid-Continent Ins. Co. v. Liberty Mut. Ins. Co., 236 S.W.3d 765, 774 (Tex. 2007). However,

the right to subrogation belongs to the insurer. Austin Indep. Sch. Dist. v. H.C. Beck Partners,

No. 03-07-00228-CV, 2009 Tex. App. LEXIS 1756, at *7, n.3 (Tex. App.—Austin Mar. 13, 2009,

pet. denied) (mem. op.). Although the subrogor can waive a claim and thereby prevent a subrogee

from pursuing it, the subrogee’s right to pursue otherwise vital claims cannot be waived by the

subrogor. See id.

               The parties to the construction contract did not waive their right to pursue

claims against each other, but declared that “subrogation is waived in favor of the Contractor, all

Subcontractors, the Owner and their respective officers, agents and employees.” Appellees did not

       2
         The contract states in relevant part that “subrogation is waived in favor of . . . all
Subcontractors.”

                                                 6
thereby or elsewhere waive their right to pursue claims against Alstom (or, by extension, Euroform).

Thus, cases holding that owners’ waivers of their right to pursue claims against contractors prevent

the owners’ insurers from pursuing claims against the contractors and subcontractors (as third-party

beneficiaries of the main contract) do not control this case. See, e.g., Trinity Universal, 75 S.W.3d

at 9, 11-12; Temple Eastex, 848 S.W.2d at 729-31. The parties to the construction contract did not

have the power to directly waive Factory Mutual’s subrogation rights. Although we must try to give

effect to all terms of a contract, we cannot interpret contracts in ways that allow parties to exercise

powers they do not possess, particularly when that exercise purports to deprive another party of its

rights. The subrogation waiver clause may have some meaning, but it does not mean either that

appellees waived their right to sue subcontractors or that appellees waived Factory Mutual’s right

to subrogation. The right to subrogation is waived in this case only if Factory Mutual waived its

subrogation rights.

               We find no evidence that Factory Mutual waived its subrogation rights. The

insurance contract demonstrates the contrary. The parties agreed as follows:

       Upon the payment of any claim under this Policy, the Insurers shall be subrogated
       to all the rights and remedies of the Insured arising out of such claim against any
       person or corporation whatsoever except that the Insurers hereby waive all rights
       which they may have acquired by a payment of a claim under this Policy to recover
       the amount so paid from any person or corporation with whom the Insured, prior
       to the occurrence of the loss or damage, shall have agreed to waive their rights to
       recovery in respect of any loss or damage which may be caused by such person
       or corporation.

This is not a waiver by Factory Mutual of its right to subrogation, but merely an acknowledgment

that a waiver of the claimant’s claims would bar the insurer from pursuing the claims waived by the

                                                  7
claimant. As discussed, there is no waiver by appellees of any of their claims in evidence. Appellees

declared that “subrogation is waived,” but that does not constitute a waiver of appellees’ claims, and

appellees lacked the power to waive Factory Mutual’s right. At most, the construction contract

appears to contain a commitment by appellees to obtain a waiver of subrogation from their insurer.

That is not, in itself, either a waiver of appellees’ claims or a waiver of the insurer’s subrogation

rights. See H.C. Beck, 2009 Tex. App. LEXIS 1756, at *5-6, *9-10.

                Euroform also contends that appellees waived their right to subrogation by agreeing

to include subcontractors as additional insureds. To preserve a complaint for our review, a party

must have presented to the trial court a timely request, objection, or motion that states the specific

grounds for the desired ruling if they are not apparent from the context of the request, objection,

or motion. Tex. R. App. P. 33.1(a); see also Plano Lincoln Mercury, Inc. v. Roberts, 167 S.W.3d
616, 620 (Tex. App.—Dallas 2005, no pet.). Appellees contend that Euroform did not own any

property on site, so it could not be an additional insured under a property insurance policy.

Appellees also argue that Euroform’s negligent damage of other insured’s property prevents

Euroform from claiming protection under any subrogation waiver. The trial record does not reveal

that this argument was raised at trial. Euroform did not raise this argument in its motion for partial

summary judgment, its motion for directed verdict, or its motion for judgment notwithstanding the

verdict. It is not the type of argument on which we can reverse when raised for the first time on

appeal. Euroform has not shown error by the trial court in failing to grant relief on an argument not

presented to the trial court.

                                                  8
                Euroform also appeals the denial of its motion for directed verdict premised on

the ground that appellees’ claims were barred by the economic loss doctrine. The economic loss

doctrine bars recovery in negligence or strict liability when a product fails, the damage or loss is the

subject of a contract, and the damage or loss is limited to the product itself. Equistar Chems., L.P.

v. Dresser-Rand Co., 240 S.W.3d 864, 867 (Tex. 2007); Pugh v. General Terrazzo, 243 S.W.3d 84,

91 (Tex. App.—Houston [1st Dist.] 2007, pet. denied). It does not preclude recovery in negligence

or strict liability if the defective product also causes physical harm to the ultimate user or consumer

or to other property of the user or consumer. Equistar, 240 S.W.3d at 867; Pugh, 243 S.W.3d at 91.

Euroform argues that the scope of the prohibitive effect of the economic loss doctrine is determined

by the general contract between Alstom and appellees rather than any subcontract involving

Euroform. See Pugh, 243 S.W.3d at 92 (homebuyer could not recover in tort from exterior veneer

supplier even though product caused damage to remainder of house; homebuyer had recourse

through contract with general contractor). The Pugh case and authorities cited therein stand for the

proposition that the manufacturer of a component that is integrated into a larger product and that fails

and damages the larger product cannot be liable in negligence and strict liability to the purchaser of

the larger product. Id. (citing Murray v. Ford Motor Co., 97 S.W.3d 888, 891 (Tex. App.—Dallas

2003, no pet.) (truck owner could not sue maker of wire harness that failed, causing truck fire,

for damage to truck; could sue for personal property lost); American Eagle Ins. Co. v. United Techs.

Corp., 48 F.3d 142, 145 (5th Cir. 1995) (airplane owner had no tort claim against engine

manufacturer for damage to hull of plane after failure of engine caused crash); Hininger v. Case

Corp., 23 F.3d 124, 126-27 (5th Cir.1994) (economic loss doctrine protected manufacturer of drive

wheels installed on combine)).

                                                   9
               We note initially that this case is factually distinct from the cases Euroform cites.

Unlike in those cases, the damage in this case was not caused by the malfunction of a product fully

integrated into a larger product. The fire in this case was sparked by the installation process, not

the function or malfunction of the evaporative cooler. Although appellees argued that the fire was

caused in part by the design of the product, the jury found that there was not a manufacturing defect,

a design defect, or a marketing defect in the evaporative cooler. This case is thus factually distinct

from cases in which the courts tie the preclusive effect of the economic loss doctrine to the “failure

of a product” causing harm. This case is closer to Pugh, in which the trial court allowed plaintiffs

to allege that the damages to their house resulted from the veneer supplier’s negligent instructions

on how to install its veneer. See Pugh, 243 S.W.3d at 86-87. However, in Pugh, the installation was

alleged to have impaired the veneer from protecting the house as designed, see id. at 87, whereas

in this case the installation process damaged the cooler and associated structures before the cooler

was used as designed. The damages in this case were not caused by the failure or malfunction of

the product (the evaporative cooler)—a condition repeatedly invoked in the description of the

conditions giving rise to the economic loss doctrine’s prohibition of extra-contractual remedies. See

Equistar, 240 S.W.3d at 867; Pugh, 243 S.W.3d at 90; Murray, 97 S.W.3d at 891-93; see also

American Eagle, 48 F.3d at 145-46.

               We find other cases more applicable to the circumstances presented here. The

supreme court held that a refinery owner’s contract to purchase a machine unit does not bar the

refinery owner’s strict liability claim against a subcontractor that supplied a component of the

unit when the component part’s performance damages itself, the unit, and other property. Signal Oil

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& Gas v. Universal Oil Prods., 572 S.W.2d 320, 322-25 (Tex. 1978). The Signal Oil opinion is

consistent with the supreme court’s earlier decision that, when a misrepaired water heater caused a

fire that destroyed a house, the homeowner could sue the installer in tort for the damages to property

outside the scope of the contract. See Montgomery Ward & Co. v. Scharrenbeck, 204 S.W.2d 508,

509-10 (Tex. 1947).

                More recently, this Court considered a property owner’s tort claims against a

subcontractor who had two subcontracts on a project to build apartments. Thomson v. Espey Huston

& Assocs., Inc., 899 S.W.2d 415, 421-22 (Tex. App.—Austin 1995, no writ). The subcontracts

were with the general contractor, not directly with the property owner. Id. at 417. One subcontract

required the subcontractor to perform engineering and design services regarding drainage and on the

project. Id. The other required the subcontractor to inspect the construction site to inform the lender

whether building was proceeding according to the plan. Id. Years after construction was complete,

the property owner sued the subcontractor, alleging that the subcontractor’s negligent drainage

and water runoff designs damaged the apartments, such as by causing the walls to crack. Id. This

Court held that the alleged failure to properly inspect resulted in economic loss to the subject of

the contract itself (failure to receive the benefit of the bargain) and that tort remedies were, therefore

barred by the economic loss doctrine. Id. at 421. This Court held, however, that the allegations

relating to the design of the drainage engineering and design services concerned damages to aspects

of the project within the scope of the general contract that were beyond the scope of the subcontract.

Id. Despite the property owner’s potential remedies under the general contract, this Court permitted

the property owner to pursue tort remedies against the subcontractor for damages arising from

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the performance of the engineering subcontract that exceeded the scope of the engineering

subcontract. Id. at 421-22. This holding was followed by the Texarkana court in Goose Creek

Consol. Indep. Sch. Dist. v. Jarrar’s Plumbing, Inc., 74 S.W.3d 486, 494-95 (Tex. App.—Texarkana

2002, pet. denied).      When a plumbing subcontractor’s installations failed and damaged

elementary schools, that court held that the school district’s remedies under its contract with the

general contractor did not bar its negligence claims against the subcontractor. Id. The court held

that the scope of the subcontract—not the entire scope of the general contract—defined the scope

of the economic loss doctrine’s bar of negligence claims. Id.

               To be entitled to a directed verdict, Euroform was required to establish as a matter

of law that the scope of its subcontract included all of the property that was damaged by the fire. See

Thomson, 899 S.W.2d at 421-22; see also Jarrar’s Plumbing, 74 S.W.3d at 494-95. It did not.

Euroform supplied the evaporative cooler and instructed another subcontractor on how to install it.

The fire damaged property that exceeded the scope of both subcontracts, much like the systems

designed and installed by the subcontractor defendants in Thomson and Jarrar’s Plumbing

damaged the larger structures built under more encompassing contracts. See Thomson, 899 S.W.2d

at 421-22; see also Jarrar’s Plumbing, 74 S.W.3d at 494-95. The economic loss doctrine does

not bar the negligence claims raised in this case. The trial court properly denied the motion for

directed verdict.

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              Affirmed.

                                          G. Alan Waldrop, Justice

Before Justices Puryear, Pemberton and Waldrop

Affirmed on Motion for Rehearing

Filed: December 31, 2009

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