Court Opinion

ID: 177735
Source: CourtListenerOpinion
Date Created: 2010-10-22 17:18:56+00
Date Added: 2024-06-11T17:25:42.897624
License: Public Domain

Case: 09-11075     Document: 00511271440          Page: 1    Date Filed: 10/22/2010

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

                                                  FILED
                                                                          October 22, 2010

                                       No. 09-11075                         Lyle W. Cayce
                                                                                 Clerk

ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES INC.,

                                                   Plaintiff - Appellant
v.

AMERICAN INTERNATIONAL SPECIALTY LINES INSURANCE CO.,

                                                   Defendant - Appellee

                   Appeal from the United States District Court
                        for the Northern District of Texas
                              USDC No. 3:08-CV-837

Before CLEMENT, SOUTHWICK, and HAYNES, Circuit Judges.
PER CURIAM:*
        Advanced Environmental Recycling Technologies Inc. (AERT) appeals the
district court’s grant of summary judgment to AERT’s insurer, American
International Specialty Lines Insurance Co. (AISLIC). We AFFIRM.
                                I. Facts and Background
        AERT manufactures recycled wood composite building products, including
decking and other exterior products. AERT was named as a defendant in two
separate class action lawsuits, consolidated in the United States District Court

        *
         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 R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR .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: 09-11075   Document: 00511271440      Page: 2   Date Filed: 10/22/2010

                                    No. 09-11075

for the Western District of Washington (“the Mold Lawsuits”). In the Mold
Lawsuits, AERT customers sought damages based on allegations that AERT’s
ChoiceDek products were vulnerable to mold, mildew, and fungal growth. The
claims were based upon allegations that AERT’s products were defectively
designed and manufactured, not suitable for their intended use, and not suitable
for use as they were warranted and represented. The customers further alleged
that AERT had knowledge of those defects. Significantly, the only damage
alleged in the Mold Lawsuits is to the AERT products themselves and not to any
additional property or to people.
      AISLIC issued to AERT consecutive policies providing umbrella general
liability coverage insuring operations in Arkansas, Texas, and Louisiana
(“Umbrella Policies”) in addition to policies providing underlying commercial
general liability insurance (“Primary Policies”). AERT tendered its defense in
the Mold Lawsuits to AISLIC, which declined to defend.
      The Umbrella Policies provided two kinds of coverage to AERT in addition
to the Primary Policies: “Coverage A,” excess follow-form liability coverage from
the Primary Policies for property damage, and “Coverage B,” coverage against
damages that AERT was obligated to pay because of bodily injury or property
damage caused by an “occurrence” not covered by the Primary Policies. The
Umbrella Policies define “occurrence” as “an accident, including continuous or
repeated exposure to substantially the same generally harmful conditions.” The
Umbrella Policies also provided for a variety of express exclusions from coverage.
      AERT filed this lawsuit asking for a declaratory judgment that AISLIC
must defend the Mold Lawsuits under Coverage B of the Umbrella Policies and
seeking damages under a Texas statute mandating prompt payments of certain
insurance claims, T EX. I NS. C ODE §§ 542.051–.061 (“Texas Prompt Pay Statute”).
The parties filed cross-motions for summary judgment. AISLIC’s motion also
included a request for summary judgment on the issue of whether AISLIC had

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a duty to indemnify AERT. While the motions were pending, the Mold Lawsuits
settled, and AERT amended its complaint to include a request for indemnity for
the amounts paid in settlement. The district court granted AISLIC’s motion for
summary judgment and simultaneously entered a final judgment in AISLIC’s
favor, dismissing all of AERT’s claims with prejudice. AERT timely appealed.
                              II. Standard of Review
      We review a district court’s grant of summary judgment de novo and apply
the same standard as the district court. Hill v. Carroll County, Miss., 587 F.3d
230, 233 (5th Cir. 2009). We “view all disputed facts and inferences in the light
most favorable to the non-movant.” Id. Summary judgment is properly granted
if the record shows “that there is no genuine issue as to any material fact and
that the movant is entitled to judgment as a matter of law.” F ED. R. C IV. P. 56(c).
We will accordingly affirm summary judgment where the non-movant “fail[ed]
to make a showing sufficient to establish the existence of an element essential
to that party’s case, and on which that party will bear the burden of proof at
trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
                                  III. Discussion
      On appeal, AERT contends that the district court erred in holding that
AISLIC had no duty to defend because (1) AERT alleged an “occurrence” under
the Umbrella Policies, (2) the court improperly concluded that the “product
recall” exclusion was relevant, and (3) no other exclusions precluded the duty to
defend. AERT also suggests error in the district court’s choice of law. Finally,
AERT contends that summary judgment should not have been granted on its
claim for indemnity. As a result of these arguments, AERT also seeks revival of
its Texas Prompt Pay Statute claims.
      A. Choice of Law
      In a footnote, AERT suggests that the district court erred in applying
Arkansas law rather than Texas law to its claims. AERT first asserts that Texas

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law should apply “[f]or the reasons briefed to the district court.” We do not
consider arguments on appeal by incorporation. Turner v. Quarterman, 481 F.3d
292, 295 n.1 (5th Cir. 2007); Summers v. Dretke, 431 F.3d 861, 881 n.12 (5th Cir.
2005).
       In addition to its “incorporation” argument, AERT argues in the footnote
that AISLIC underwrote the policies in Dallas and that AERT defended the
policies with Dallas counsel. AERT cites to two cases but does not address the
relevant choice of law factors in any meaningful way. We conclude that AERT’s
footnote does not constitute sufficient briefing to preserve the issue on appeal.
See F ED. R. A PP. P. 28(a)(9)(A) (requiring appellant’s brief to include “appellant’s
contentions and the reasons for them, with citations to the authorities and parts
of the record on which the appellant relies”); see also Bridas SAPIC v. Gov’t of
Turkm., 345 F.3d 347, 356 n.7 (5th Cir. 2003).1                   We will analyze AERT’s
remaining contentions under Arkansas law.
       B. Duty to Defend
       Under Arkansas law, an insurer’s duty to defend arises when there is a
“possibility” that the injury or damage may fall within the policy coverage.
Murphy Oil USA, Inc. v. Unigard Sec. Ins. Co., 61 S.W.3d 807, 813 (Ark. 2001).
Generally, the allegations of the complaint determine whether the duty to defend

       1
          Even if we were to consider the merits of the choice of law argument, we do not find
error in the district court’s selection of Arkansas law. In this diversity case, we apply the
choice of law rules of the forum state, Texas. Cantu v. Jackson Nat’l Life Ins. Co., 579 F.3d
434, 437 (5th Cir. 2009). Under Texas law, where there is no contract designating a choice of
law, we are to examine the factors from section 188 of the Restatement (Second) of Conflict of
Laws to determine which state’s law applies. Sonat Exploration Co. v. Cudd Pressure Control,
Inc., 271 S.W.3d 228, 231 (Tex. 2008). The five factors to be considered are: (1) the place of
contracting, (2) the place of contract negotiation, (3) the place of performance, (4) subject
matter location, and (5) the parties’ domicile, place of incorporation, and place of business. Id.
at 233; RESTATEM EN T (SECOND ) OF CONFLICT OF LAW S § 188(2) (1971). While no state
overwhelmingly meets all of these factors, Arkansas, where AERT has its principal place of
business, is an appropriate choice particularly in light of the fact that the Umbrella Policies
were tailored to Arkansas law, thus showing that the parties anticipated that Arkansas law
would apply.

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is triggered, and a court should resolve any doubt in favor of the insured. Id. at
812, 814.
       “[O]nce the insured establishes a prima facie case for recovery under the
insurance policies, the burden shifts to the insurer to prove that the damages
claimed were not covered under the policy.” Farm Bureau Mut. Ins. Co. of Ark.,
Inc. v. Foote, 14 S.W.3d 512, 517 (Ark. 2000). “[W]here terms of the policy are
clear and unambiguous, the policy language controls, and absent statutory
strictures to the contrary, exclusionary clauses are generally enforced according
to their terms.” Essex Ins. Co. v. Holder, 261 S.W.3d 456, 458 (Ark. 2007). We
construe insurance policy language “in its plain, ordinary, and popular sense”
and will only resort to the rules of construction if the language is ambiguous.
McGrew v. Farm Bureau Mut. Ins. Co. of Ark., 268 S.W.3d 890, 894–95 (Ark.
2007).
       The parties disagree about whether the events alleged in the Mold
Lawsuits constitute an “occurrence” under the Umbrella Policies. If the events
alleged in the Mold Lawsuits were an “occurrence,” they dispute whether any
exclusions apply. We conclude that we need not reach the question of the
exclusions2 because AERT has failed to establish that the Mold Lawsuits allege
an “occurrence” under the Umbrella Policies.
       Whatever the merits of AERT’s arguments would be if we were writing on
a blank slate, we are not. The Arkansas Supreme Court has addressed this
issue squarely, and we are bound by its determinations of Arkansas law. The
Umbrella Policies define “occurrence” as “an accident, including continuous or

       2
          AERT contends that Coverage B applies to property damage “not covered under
Coverage A,” arguing that this provision broadens the coverage provided. Nonetheless, AERT
does not dispute that the duty to defend is triggered only if there is “property damage” caused
by an “occurrence.” We conclude that the Mold Lawsuits did not so allege an occurrence.
Accordingly, we need not reach the question of whether Coverage B is subject to the exclusions
upon which AISLIC also relied.

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                                       No. 09-11075

repeated exposure to substantially the same generally harmful conditions.” In
Essex, that court was faced with a definition of “occurrence” very similar to the
one here, and the court held that “accident” is unambiguous under Arkansas
law. 261 S.W.3d at 460. “Accident” means “an event that takes place without
one’s foresight or expectation – an event that proceeds from an unknown cause,
or is an unusual effect of a known cause, and therefore not expected.” Id.
       Essex involved a suit brought against a home builder for breach of
contract, breach of an express warranty, breach of implied warranties, and
negligence.     Id. at 457.     The court concluded unequivocally that “[f]aulty
workmanship is not an accident.” Id. at 460. AERT seeks to distinguish Essex
because it involved workmanship rather than product manufacturing,3 however,
it does not explain why that distinction makes a difference. Essex stands for the
proposition that shoddy work (whether in manufacturing a product or working
at a construction site) which then fails without collateral damage to a person or
other property is not an “accident” from the standpoint of the insured. In this
case, the only damages AERT’s customers alleged were to AERT’s products. We
hold that the events alleged in the Mold Lawsuits were not “accidents” under the
Umbrella Policies.
       We conclude that the Mold Lawsuits do not allege an “occurrence” and
therefore hold that AISLIC did not have a duty to defend the Mold Lawsuits.
For this same reason, AISLIC cannot be liable under the Texas Prompt Pay Act
Statute, even if it applies here, for failing to pay for a defense it did not owe.

       3
          AERT also attempts to distinguish Essex based on the fact that a performance bond
was implicated in that case. However, whether or not AERT can obtain insurance, indemnity,
or a performance bond for its putative warranty and contract obligations for defective products
makes no difference to the question of whether the Mold Lawsuits allege an “occurrence.”

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       C. Indemnity
       AERT also contends that the district court should not have entered a final
judgment because the issue of indemnity was still to be decided. AERT argues
that, even if AISLIC did not owe AERT a duty to defend, AERT might still be
entitled to indemnity. A duty to defend is determined based on the “allegations
of the complaint,” whereas a duty to indemnify depends on “facts established at
trial.” Madden v. Cont’l Cas. Co., 922 S.W.2d 731, 734 (Ark. Ct. App. 1996). We
need not address whether, in theory, a duty to indemnify can exist under
Arkansas law where no duty to defend exists4 because we conclude that the
district court did not reversibly err in this case regardless.
       In its original motion for summary judgment and accompanying brief,
AISLIC stated several times that it had no “duty to defend or indemnify” AERT,
resting its argument as to both duties on the same policy language: no
“occurrence” and the applicability of certain exclusions. At the time AISLIC’s
motion was filed, AERT had not yet pled a claim for indemnity; nonetheless, it
never contended to the district court that AISLIC’s motion was premature.
AERT never contended to the district court that it lacked notice of the grounds
for AISLIC’s motion on indemnity. In its pre-argument briefing to this court,
AERT similarly never challenged the district court’s ruling on the grounds of no
notice or inadequate notice. Instead, AERT only contended to this court that
AISLIC was required to put on “facts” to defeat a claim of indemnity.5 Only after

       4
          For an analysis of the difference between the two concepts and an explanation of one
state’s view on how a duty to indemnify might logically exist even if the duty to defend were
never triggered, see D.R. Horton - Texas, Ltd. v. Markel International Insurance Co., 300
S.W.3d 740, 743–45 (Tex. 2009) (The two duties “enjoy a degree of independence from each
other [such that] . . . the existence of one does not necessarily depend on the existence or proof
of the other.”).
       5
          The “issue presented” for this subject was phrased as follows: “Did the district court
err in dismissing AERT’s claim for indemnity in connection with the Mold Lawsuits without
examining any ‘facts’ outside of the pleadings relied upon to decide AISLIC’s duty to defend?”

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a discussion of this issue at oral argument did AERT file a supplemental brief
arguing that AISLIC’s motion did not put AERT on notice that it was seeking
summary judgment and asserting that the matter was not ripe for adjudication
when filed.
      AERT’s arguments are unavailing. First, because AERT has the initial
burden of proving coverage, it could not simply sit silent in the face of AISLIC’s
motion for summary judgment on the issue of indemnity. Instead, AERT was
required to bring forth “facts” showing an occurrence. See Hunt v. Pyramid Life
Ins. Co., 732 S.W.2d 167, 169 (Ark. 1987) (en banc) (“It is well settled that the
insured . . . has the burden of proving coverage.”); Smith v. Am. Family Life
Assurance Co. of Columbus, 584 F.3d 212, 220 (5th Cir. 2009) (“[The insured]
bore the burden of establishing coverage under her policy. . . . She failed to
produce any evidence that she could satisfy this requirement. Therefore, the
district court erred in denying [the insurer’s] motion for summary judgment and
in granting her cross-motion.” (internal citations omitted)). Second, with respect
to ripeness, before the court ruled on AISLIC’s motion, the Mold Lawsuits
settled, and AERT amended its complaint to seek indemnity for those
settlements. Thus, regardless of whether ripeness is evaluated at the time of the
filing of the active complaint or at the time of the entry of judgment, the question
of indemnity was ripe for decision here. Finally, AISLIC did request summary
judgment on indemnity in several places, thus putting AERT on notice.
      Further, even if we were to conclude that AISLIC should have been more
specific—and, indeed, even if we were to conclude that AISLIC did not move for
summary judgment on indemnity or put AERT on adequate notice—AERT has
failed to show harmful error here. The settlement of the Mold Lawsuits, cited
by AERT in its supplemental brief, is a matter of public record and indicates a
large class joined in the issue of whether there was a “defect in ChoiceDek
decking and railing products . . . result[ing] in fungal, mold, or mildew growth

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that causes extensive permanent discoloration.” Pelletz v. Weyerhaeuser Co., 255
F.R.D. 537, 539 (W.D. Wash. 2009); see also Pelletz v. Weyerhauser Co., 592 F.
Supp. 2d 1322, 1325 (W.D. Wash. 2009). The court’s orders regarding the
settlement evince no “facts” that are different from those alleged in the Mold
Lawsuits, and, indeed, individual variations among the claimants would have
been inconsistent with the court’s finding of commonality and conclusion that
class action treatment was proper.           See Pelletz, 255 F.R.D. at 540
(“[C]ommonality exists because all Class members allegedly share the same
problem: a defect in their ChoiceDek product causing significant recurring
molding problems on their decks.       Common questions include whether the
product is defective, whether Defendants knew or should have known of the
defect, and whether Defendants made material misrepresentations in ChoiceDek
marketing materials.”). AERT has not pointed to any “facts” different from those
alleged in the Mold Lawsuit complaints. Thus, a remand for consideration of the
“facts” would be an exercise in futility because the district court already had the
necessary facts when it decided the indemnity issue. See Love v. Nat’l Med.
Enters., 230 F.3d 765, 770–71 (5th Cir. 2000) (finding harmless error where
district court granted summary judgment without proper notice on claims first
made in amended complaint filed after motion for summary judgment because
(1) the non-movant waived any procedural error by failing to object in the
district court and (2) the non-movant pointed to no facts showing that summary
judgment outcome was erroneous).
                                 IV. Conclusion
      For the foregoing reasons, the judgment of the district court is
AFFIRMED.

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