Court Opinion

ID: 34538
Source: CourtListenerOpinion
Date Created: 2010-04-25 19:17:30+00
Date Added: 2024-06-11T16:57:56.630537
License: Public Domain

United States Court of Appeals
                                                                     Fifth Circuit
                                                                  F I L E D
                    UNITED STATES COURT OF APPEALS               February 17, 2004
                         FOR THE FIFTH CIRCUIT
                                                              Charles R. Fulbruge III
                                                                      Clerk

                              No. 03-20542

        NATIONAL UNION FIRE INSURANCE CO. OF PITTSBURGH, PA,

                                Plaintiff-Counter Defendant-Appellee,

                                    versus

U.S. LIQUIDS, INC.; MICHAEL P. LAWLOR; W. GREGORY ORR; EARL J.
BLACKWELL; GARY J. VAN ROOYAN; WILLIAM A. ROTHROCK, IV; ALFRED
TYLER, II; JAMES E. McENEANEY, JR.; JOHN N. HATSOPOLOS; ROGER A
RAMSEY,

                             Defendants-Counter Claimants-Appellants.

             Appeal from the United States District Court
                  For the Southern District of Texas
                             (H-01-CV-1980)
Before JOLLY, HIGGINBOTHAM, and DeMOSS, Circuit Judges.

PER CURIAM:*

      Defendants-Counter Claimants-Appellants U.S. Liquids, Inc., et

al. (collectively, “USL”) seek reversal of the district court’s

grant   of     summary   judgment    that    declared   Plaintiff-Counter

Defendant-Appellee National Union Fire Insurance Co. (“National

Union”) had no obligation both (1) to indemnify USL under a

  *
    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opinion should not be published and is not precedent except under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.
Directors, Officers, and Corporate Liability insurance policy (the

“Policy”) for securities and shareholder derivative claims and

(2) to advance USL defense costs for such claims under the Policy.

Because we find the pollution exclusion is unambiguous and clearly

barred both coverage of and defense costs for the claims, we AFFIRM

the decision of the district court.

                                  BACKGROUND

     This appeal concerns a dispute over insurance coverage under

the Policy entered into by the insurer National Union and the

insured    USL.    USL   is   a   provider   of   integrated   liquid   waste

management services, including collection, processing, recovery,

and disposal.     In February 1999 USL negotiated and purchased the

Policy from National Union. The Policy included a “Securities Plus

II” endorsement to cover securities claims, including those “based

upon or attributable to, in part or in whole, the purchase or sale,

or offer or solicitation of an offer to purchase or sell, any

securities of [USL]” and class or derivative claims “alleging any

Wrongful Act of an Insured.”          The Policy also included several

exclusions, including the pollution exclusion at issue, which

denied coverage for any loss in connection with a claim:

     (l)    alleging, arising out of, based upon, attributable
            to, or in any way involving, directly or indirectly:

            (1)   the   actual,  alleged   or   threatened
                  discharge, dispersal, release or escape
                  of pollutants; or

            (2)   any direction or request to test for,

                                      2
                monitor, clean up, remove, contain,
                treat, detoxify or neutralize pollutants,

          including but not limited to a Claim alleging
          damage to the Company or its securities
          holders.

          Pollutants include (but are not limited to)
          any solid, liquid, gaseous or thermal irritant
          or contaminant, including smoke, vapor, soot,
          fumes, acids, alkalis, chemicals and waste.
          Waste includes (but is not limited to)
          materials to be recycled, reconditioned or
          reclaimed.

The pollution exclusion applied to any “Loss in connection with a

Claim.”   The Policy clearly stated that “[t]he term ‘Claim’ shall

include a Securities Claim.”    The Policy also provided for the

advancement of defense costs, according to the terms of the Policy,

prior to the final disposition of any claim.       But the Policy

specifically provided that “the Insurer does not . . . assume any

duty to defend.”

     The two underlying, pending federal lawsuits filed against USL

include a consolidated securities class action brought by the

shareholders of USL and a shareholder derivative suit filed on

behalf of USL against certain directors and officers of USL.   The

plaintiff class in the securities action consists of shareholders

who allege that they either purchased USL common stock between May

1998 and August 1999 or acquired USL common stock in a March 1999

secondary public offering at artificially inflated prices and in

reliance on materially false and misleading statements presented in

press releases issued by USL and documents USL filed with the SEC

                                 3
between May 1998 and August 1999.               The derivative suit accuses

USL’s directors and officers of intentional and negligent breach of

their    fiduciary    duties   in   causing        USL    to   violate   federal

environmental and securities laws, to falsify compliance with state

and federal law, and to inflate earnings by knowingly engaging in

illegal toxic waste disposal.

        As part of an expansion plan announced in 1997, USL acquired

numerous smaller waste management businesses between November 1996

and October 1999. The shareholders contend that USL’s rapid growth

campaign took place without regard to or disclosure of these

companies’ improper waste disposal practices.                  Both complaints

filed by the shareholders present a similar factual account of

USL’s illegal activities.       Allegations regarding USL’s polluting

activities initially stemmed from an FBI investigation into one

specific company USL acquired – City Environmental, Inc. (“City

Environmental”). This investigation was based on information about

City    Environmental’s   USL-owned          Detroit,    Michigan,   plant.      A

confidential source alleged that USL was knowingly discharging

liquid hazardous waste into Detroit’s sewer system and illegally

transporting    and   disposing     of       hazardous   waste.      After    five

witnesses cooperated with the government and agents searched the

Detroit plant, EPA authorities shut down part of the plant.

       These events signaled the start of a cleanup process at the

Detroit plant, a criminal investigation of USL, and a revelation of

illegal practices that USL had actively concealed from investors

                                         4
and the public.      In August 1999 trading of USL’s stock was

suspended for six days.     Analysts downgraded USL’s stock rating,

and the stock value dramatically fell $10.75 per share.                In a

January 31, 2000, press release, USL announced its 1999 earnings

would be substantially reduced due to the closing and cleanup costs

at the Detroit plant.1

      After the underlying suits were filed, USL made demand on

National Union to defend, contending the claims raised in the suits

were covered by the Policy.      National Union denied that the claims

were covered, citing the Policy’s pollution exclusion, and filed

suit based on diversity jurisdiction in district court, seeking a

declaratory    judgment   that   it   is   not   obligated   to   defend   or

indemnify USL in the two underlying federal suits filed against USL

and its directors and officers – the consolidated securities class

action and the shareholder derivative action.          USL counterclaimed

for declaratory judgment and breach of contract.              The district

court granted summary judgment in favor of National Union, and USL

now appeals.

                                 DISCUSSION

      We review a district court’s summary judgment rulings de novo,

and apply the same standard as the district court.           Travelers Cas.

  1
    The consolidated securities complaint also alleged that USL and
its directors and officers knew about and did not disclose that
similar illegal practices regarding dumping of solid and liquid
wastes were knowingly taking place at several other USL-owned
facilities.

                                      5
& Sur. Co. of Am. v. Baptist Health Sys., 313 F.3d 295, 297 (5th

Cir. 2002) (citing Potomac Ins. Co. v. Jayhawk Med. Acceptance

Corp., 198 F.3d 548, 550 (5th Cir. 2000)).    Under Fed. R. Civ. P.

56(c), district courts properly grant summary judgment if, viewing

the facts in the light most favorable to the nonmovant, the movant

shows there is no genuine issue of material fact such that the

movant is entitled to judgment as a matter of law.    Id.; see also

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986).   The

district court’s interpretation of an insurance contract is a

question of law also subject to de novo review.    Canutillo Indep.

Sch. Dist. v. Nat’l Union Fire Ins. Co., 99 F.3d 695, 700 (5th Cir.

1996) (citations omitted).

     Both parties agree that the Policy should be interpreted under

Texas law.   In Texas, courts employ general rules of contract

construction to insurance policies.   Balandran v. Safeco Ins. Co.

of Am., 972 S.W.2d 738, 740-41 (Tex. 1998).        The terms of an

insurance policy are unambiguous as a matter of law if they can be

given definite or certain legal meaning.   Nat’l Union Fire Ins. Co.

v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex. 1995) (citing Coker

v. Coker, 650 S.W.2d 391, 393 (Tex. 1983)).   If the court finds no

ambiguity, the court’s duty is to enforce the policy according to

its plain meaning.   Puckett v. United States Fire Ins. Co., 678
S.W.2d 936, 938 (Tex. 1984) (citation omitted). “The fact that the

parties disagree as to coverage does not create an ambiguity, nor

                                6
may extrinsic evidence be admitted for the purpose of creating an

ambiguity.”    Sharp v. State Farm Fire & Cas. Ins. Co., 115 F.3d
1258, 1261 (5th Cir. 1997) (applying Texas law); see also CBI

Indus., 907 S.W.2d at 520.    Courts may determine the lack of a duty

to indemnify under a policy where an exclusion clearly applies to

all claims in a pending, underlying suit.          See Am. States Ins. Co.

v. Bailey, 133 F.3d 363, 368 (5th Cir. 1998) (applying Texas law).

“A claim need only bear an incidental relationship to the described

conduct for the exclusion to apply.”        Scottsdale Ins. Co. v. Texas

Sec. Concepts & Investigation, 173 F.3d 941, 943 (5th Cir. 1999)

(applying Texas law) (citation omitted).

     The Texas Supreme Court has found that “[i]f, however, the

language of a policy or contract is subject to two or                        more

reasonable interpretations, it is ambiguous.”              CBI Indus., 907
S.W.2d   at    520.      Courts     can   only    consider     the     parties’

interpretation of a contract if the court first determines a

contract to be ambiguous.         Id. (citing Sun Oil Co. (Delaware) v.

Madeley, 626 S.W.2d 726, 732 (Tex. 1981)).          There are two types of

ambiguities:    patent ambiguities are evident from the face of the

contract and    latent   ambiguities      arise   when   the   terms    of   the

contract are applied to the subject with which the contract deals.

CBI Indus., 907 F.2d at 520.         If the court finds an ambiguity in

the contract provisions, particularly in an exclusion clause, the

court should construe the policy strictly against the insurer.

                                      7
Bailey, 133 F.3d at 369; Balandran, 972 S.W.2d at 741 (noting that,

where an ambiguity is found, courts should adopt the insured’s

interpretation    as   long    as   it   is   reasonable,     even      where   the

insurer’s interpretation is a more reasonable interpretation).

      Here,   the      district     court     adopted       the   magistrate’s

recommendation,     which     interpreted     the   terms    of   the    parties’

insurance policy under Texas law and concluded National Union had

shown that the unambiguous pollution exclusion of the Policy barred

coverage for the underlying suits against USL and its directors and

officers.

Whether the district court erred in finding National Union had no
duty to indemnify USL under the Policy.

      On appeal, USL argues that the Policy provides coverage for

the underlying securities and derivative claims, notwithstanding

the pollution exclusion.        USL contends that the explicit grant of

coverage in the Securities Plus II endorsement for securities

claims would be rendered meaningless by reading the pollution

exclusion to apply.2        USL also stresses that even if the Policy

does not provide outright for coverage of the underlying suits,

  2
    The district court discounted this argument because even though
USL is in the business of waste disposal, the pollution exclusion
does not eliminate coverage for any securities claim that does not
stem from the discharge of pollution, e.g., self-dealing,
embezzlement, or ultra vires acts.     We agree and note that the
Securities Plus II also functioned to permit both USL and National
Union to elect arbitration or judicial proceedings to settle
disputes in connection with the Policy, as opposed to the main
policy, which required both parties to submit to AAA-binding
arbitration.

                                         8
there is an ambiguity about whether the Policy provides such

coverage that should be construed in favor of the insured USL’s

reasonable interpretation of the Policy’s coverage.

     USL next maintains that because many of the claims in the

securities and derivative suits are unrelated to pollution and

require proof of unrelated facts, National Union is obligated to

defend and indemnify.   USL is correct that Texas recognizes a rule

where if a loss “is caused by a covered peril and an excluded peril

that are independent causes of the loss, the insurer is liable.”

Guar. Nat’l Ins. Co. v. N. River Ins. Co., 909 F.2d 133, 137 (5th

Cir. 1990) (applying Texas law).      USL thus contends that the

physical causes of the losses in the underlying suits – alleged

omissions and misrepresentations, and inadequate due diligence –

are independent and unrelated to pollution, and therefore are

distinct covered events.

     USL also claims that the district court inaccurately stated

Texas law when it accepted the magistrate’s conclusion that, based

on Scottsdale, 173 F.3d at 943, the “arising out of” language in

pollution exclusion required a broad, general, and comprehensive

interpretation of the exclusion. USL contends that such exclusions

should be read narrowly so as to favor coverage and that the Texas

Supreme Court in King v. Dallas Fire Insurance Co., 85 S.W.3d 185,

190-91 (Tex. 2002), has rejected the “but for” test to interpret

exclusions in insurance policies. USL argues even if the “but for”

                                 9
test can be applied, there must be a causal connection found

between the injury and the events excluded by the policy:         here the

alleged    misrepresentations   and    omissions   broke   the   chain   of

causation between pollution and the underlying claims.           Finally,

USL relies heavily on a Sixth Circuit case, Owens Corning v.

National Union Fire Insurance Co., No. 97-3367, 1998 WL 774109 (6th

Cir. Oct. 13, 1998) (unpublished), where the Sixth Circuit found

that an asbestos exclusion did not bar coverage for the securities

claims against the insured.

     National Union answers USL with one main contention – “All of

the claims made against USL in the underlying lawsuits have one

genesis:    pollution.”   In other words, the pollution exclusion is

unambiguous and absolutely bars coverage of the securities and

derivative claims because they allege, arise out of, are based

upon, are attributable to, or involve, directly or indirectly, “the

actual, alleged, or threatened discharge, dispersal, release or

escape of pollutants.”     National Union points out the pollution

exclusion applies to all claims, “including but not limited to a

Claim alleging damage to [USL] or its securities holders.” Because

the factual allegations in both underlying suits fall squarely

within the scope of the pollution exclusion, National Union asserts

it has no duty to indemnify USL.

     National Union contends that absolute pollution exclusions

similar to the one in the Policy have been consistently declared

                                  10
clear and unambiguous and thus are enforced by Texas courts.                        See

CBI Indus., 907 S.W.2d at 521; E&L Chipping Co. v. Hanover Ins.

Co., Inc., 962 S.W.2d 272, 277 (Tex. App.–Beaumont 1998, no pet.

h.)   (describing     a    similar    pollution       exclusion       as   “clear   and

susceptible of only one possible interpretation”).                    National Union

notes   that    no    Texas      case      has    specifically        addressed     the

applicability    of       the   pollution        exclusion    to   claims    under    a

directors, officers, and corporate liability policy but cites cases

from other district and circuit courts for the proposition that

coverage is properly denied when the wrongful acts of the company

and its directors and officers are inextricably intertwined, even

indirectly, with pollution as indicated in the plain language of

the exclusion.        See High Voltage Eng’g Corp. v. Fed. Ins. Co.,

981 F.2d 596, 602 (1st Cir. 1992); Employers Ins. of Wausau v.

Duplan Corp., 899 F. Supp. 1112, 1128 (S.D.N.Y. 1995).3

      National Union submits the language of the pollution exclusion

is broad, much broader than USL chooses to admit by focusing only

on the phrase “arising out of” – “[I]t is not possible to credibly

deny that the factual allegations in the underlying lawsuits are

based   upon,   attributable         to,   and     involve,    both    directly     and

  3
    USL argues that both these cases concerned personal injury or
property damage, rather than the type of loss at issue here.
However, what USL does not point out is that in Duplan, the
district court noted that even if there was a breach of fiduciary
claim made against the insured, such claim also would be barred by
the pollution exclusion. 899 F. Supp. at 1128.

                                           11
indirectly, the illegal polluting activities of [USL].”               (Emphasis

added).     National Union answers USL’s argument that if there are

both covered and excluded independent causes of the loss, the

insurer is liable; that doctrine does not apply here because there

is   no   independent,    intervening,      covered    cause    of    the   loss.

Polluting    activities   committed    by    USL    and   its   directors    and

officers are precisely what was misrepresented and not disclosed to

USL’s shareholders and are thus “inextricably intertwined” with the

company’s and its shareholders’ losses.            Therefore, the causes are

concurrent, which renders National Union not liable.                  N. River,
909 F.2d at 137.     National Union asserts that even if the pollution

exclusion had only contained “arising out of” language, the causal

nexus between USL’s alleged misrepresentations about pollution and

pollution under the exclusion is fulfilled.

      To answer USL’s contention that the King case rejected the

“but for” test which the district court applied from Scottsdale,

National Union responds that King is inapposite here.                  National

Union is correct.     King is limited to the situation where a policy

contains an “occurrence” requirement that must be triggered before

an employer can be covered for an employee’s intentional actions.
85 S.W.3d at 190-91 (distinguishing our Circuit’s “but for” test in

these circumstances because “there would be no cause of action

against the employer but for the employee’s intentional acts and

therefore    there   is   no   ‘occurrence’    to     invoke    the   policy”).

                                      12
Instead, we found that whether an “occurrence” triggered coverage

was to be determined from the insured’s standpoint.          Id. at 188.

National Union correctly asserts the “but for” test is in all other

respects still good law; “the phrase ‘arise out of’ should be

interpreted as requiring a ‘but-for’ causal relationship.”          Waffle

House, Inc. v. Travelers Indem. Co., No. 2-01-298-CV, 2003 WL
21666438, at *4 (Tex. App.–Fort Worth, July 17, 2003, writ denied)

(citing Utica Nat’l Ins. Co. v. Am. Indem. Co., 46 Tex. Sup. Ct. J.
866, 2003 WL 21468776, at *4 (Tex. June 26, 2003)).         The “but for”

test applies here to the broadly worded pollution exclusion.          That

is, National Union argues that the underlying claims would not

exist “but for” USL’s excluded polluting activities.              Finally,

National Union discounts USL’s reliance on Owens Corning.          In that

case,    the   Sixth   Circuit   completely   discounted   the   pollution

exclusion in the policy because it was not “specific, clear, and

exact” as required by Ohio law.       Owens Corning, 1998 WL 774109, at

*6.     National Union asserts Ohio law is not analogous at all to

Texas law; Ohio law looks at whether the “chain of events [leading

to the loss] was unbroken,” id. at *4, while Texas law only

considers whether there is an “incidental relationship” between the

loss and the excluded conduct.       Scottsdale, 173 F.3d at 943.

      We find the district court here correctly determined that the

terms of the Policy’s pollution exclusion were clear and neither

patently nor latently ambiguous. Likewise, the court also properly

                                     13
found that the losses described in the factual allegations of the

securities and derivative suits bore more than an incidental

relationship to the broad polluting conduct excluded in the Policy

and that “but for” such illegal activities those underlying claims

would not exist.   Thus, the district court did not err in finding

National Union had no duty to indemnify USL.

Whether the district court erred in finding National Union had no
duty to advance defense costs to USL under the Policy.

     The Policy provided that National Union would advance defense

costs to USL “pursuant to the terms herein” and “prior to the final

disposition of a Claim.”    The Policy defined “Defense Costs” as

“reasonable and necessary fees, costs, and expenses . . . resulting

solely from the investigation, defense and appeal of a Claim

against the Insureds . . . .”   If any exclusion were to apply, the

Policy provided that “[t]he Insurer shall not be liable to make any

payment for Loss in connection with a Claim made against an

Insured.”   The definition of “Loss” included “Defense Costs.”

Thus, National Union was only obligated to advance defense costs to

USL for claims covered under the Policy.

     USL’s again argues that the pollution exclusion does not

exclude coverage and so National Union is obligated under the

Policy to advance defense costs for the securities and derivative

suits.   National Union replies that under the plain terms of the

pollution exclusion and the Policy, it has no duty to advance any

defense costs to USL.

                                 14
     Because the district court was correct in its determination

that the Policy’s clear pollution exclusion eliminated National

Union’s duty to indemnify USL for losses relating to the underlying

securities and shareholder derivative suits, we find the court did

not err in denying USL defense costs under the Policy.

                              CONCLUSION

     Having carefully reviewed the record of this case and the

parties’ respective briefing and for the reasons set forth above,

we conclude that the district court did not err in granting summary

judgment to National Union.    Therefore, we AFFIRM the decision of

the district court.

AFFIRMED.

                                  15