Opinion
Civil Action No: SA-04-CA-192-XR.
April 21, 2005
ORDER
On this date, the Court considered TRC Condominiums, Ltd.'s (TRC) motion for summary judgment (docket no. 13), Mid-Continent Casualty Company's motion for default judgment (docket no. 19), and Mid-Continent's Motion for Summary Judgment (docket no. 24).
BACKGROUND
Mid-Continent Casualty Company issued a commercial general liability policy to JHP Development, Inc. (JHP). TRC and JHP entered into a construction agreement on or about January 27, 1999, whereby JHP was to construct five condominiums. In the summer or fall of 2001 and during July 2002, it was noticed that water had penetrated the condominiums. At some point thereafter, JHP was terminated from the project. On December 12, 2002, Charlton Sons General Contractors was retained by TRC to work on the condominiums. JHP notified Mid-Continent Casualty of the problems and complaints.
On May 1, 2003, Mid-Continent Casualty denied coverage claiming that there was no "occurrence" or "property damage" as defined under the insurance policy. In addition, Mid-Continent Casualty claimed various exclusions were applicable. In October 2003, TRC sued JHP in a lawsuit styled TRC Condominiums, Ltd. v. JHP Development, Inc. JHP timely submitted the petition to Mid-Continent Casualty. In that lawsuit, TRC alleged that JHP was negligent in its construction activities. Mid-Continent Casualty again denied JHP's request for coverage and also refused to provide a defense. On December 22, 2003, a default judgment in excess of $1.5 million was entered against JHP.
That lawsuit alleging breach of contract, breach of warranty, and negligence was filed as 2003-CI-17102 in the 45th Judicial District Court of Bexar County, Texas.
Mid-Continent Casualty filed this declaratory judgment action seeking a declaration that: (1) JHP was not entitled to coverage, (2) it had no duty to defend or indemnify JHP; (3) TRC is not entitled to any sums as a third-party beneficiary or judgment creditor; and (4) the default judgment is not binding on Mid-Continent Casualty.
TRC has filed a counterclaim and a motion for summary judgment alleging that it was a judgment creditor and entitled to a declaration that Mid-Continent Casualty owes indemnity to TRC for the default judgment. It further argues that Mid-Continent Casualty breached its insurance agreement and that it is entitled to recovery as a judgment creditor and/or third-party beneficiary. In this lawsuit TRC has submitted an expert affidavit that states that the condominiums were damaged by water because JHP performed its work in a defective manner.
"Water intrusion was caused by improper flashing at the parapet walls, improper cap flashing at the parapet walls, improper installation of the flat roof areas, lack of flashing at exterior balconies . . ., improper flashing at all exterior doorsills, and improper flashing at the exterior windows. The water intrusion was so extensive that demolition of all drywall on the inside of the exterior walls at all levels of the building was required. Removal of the drywall further exposed warped and moldy framing studs. . . . Electrical wiring in the exterior walls was also damaged by water. . . . Wood flooring . . . was also replaced. . . ."
JHP failed to answer this lawsuit. On November 30, 2004, the Clerk of this Court entered a default. Mid-Continent Casualty has filed a motion for default judgment against JHP requesting that the Court declare that: (1) JHP is not entitled to coverage; (2) JHP was not entitled to a defense or indemnification in the Bexar County lawsuit; (3) TRC is not entitled to any sums as a third-party beneficiary or judgment creditor; and (4) the default judgment in the Bexar County lawsuit is not binding on Mid-Continent Casualty.
ANALYSIS
"Occurrence" means an accident, including continuous or repeated exposure to substantially the same general harmful conditions. Section V(13).
Mid-Continent argues that its CGL policy does not provide coverage for faulty workmanship. It argues that JHP's work was voluntary and intentional, and therefore not a covered "occurrence." Whether CGL policies cover complaints made against an insured/contractor alleging deficient and substandard construction has been the focus of a number of recent decisions.
The following recent cases have concluded that allegations of faulty construction are not accidents nor occurrences, and therefore there is no CGL coverage. See Courtland Custom Homes, Inc. v. Mid-Continent Casualty Co., Civ. No. H-04-1089 (S.D. Tex. 2005) ("The Court agrees that `the better reasoned authorities hold that claims such as the [Turmans] are making against the plaintiff are not claims of accidental damage to property,' but rather are allegations that the contractor has failed to perform its work in a good and workmanlike manner."); Lamar Homes, Inc. v. Mid-Continent Cas. Co., 335 F. Supp.2d 754, 760 (W.D. Tex. 2004) ("the Texas Supreme Court intended that the underlying petition be examined to determine if the cause of action sounds in contract or tort. If contract, there is no occurrence or accident. Here, in spite of broad negligence allegations by the underlying plaintiffs, the gravamen of the complaint is breach of warranty: Lamar Homes did not build the DiMares' home in the fashion and to the standard to which Lamar Homes represented to the DiMares that it would."); Mid-Arc, Inc. v. Mid-Continent Casualty Co., No. A-03-CA-242-SS, 2004 WL 1125588 (W.D. Tex. 2004) (builder's failure to properly grade and landscape property causing flooding not an occurrence); Tealwood Construction, Inc. v. Scottsdale Ins. Co., No. A.3:02-CV-2159-L, 2003 WL 22790856 (N.D. Tex. 2003) ("Parkway plaintiff has recast its claims of breach of contract and breach of express and implied warranties as negligence claims. Stated another way, the Parkway plaintiff contends that Tealwood did not live up to its contractual obligation and paint the siding as it agreed to do so. The use of legal legerdemain or mere characterization of an act as negligence does not overcome the basic facts underlying the claims and thus compel coverage."); Jim Johnson Homes, Inc. v. Mid-Continent Casualty Co., 244 F. Supp. 2d 706, 715 (N.D. Tex. 2003) ("In effect, plaintiff is asking the court to give the insurance policy in question attributes of a contractor's performance bond, guaranteeing to the owner that the contractor will perform the construction agreement between the parties in a workmanlike manner and in accordance with the terms of the contract. None of the language of the insurance policy suggests that the policy was intended to serve as a performance bond as well as a typical liability insurance contract. . . . Furthermore, the better reasoned authorities hold that claims such as the Jeters are making against plaintiff are not claims of accidental damage to property, with the consequence that the statement of such a claim does not allege an "occurrence" within the meaning of the insurance policy."); Hartrick v. Great American Lloyds Ins. Co., 62 S.W.3d 270 (Tex.App.-Hous. [1st Dist.] 2001, no pet.) (homeowners brought action against builder's CGL insurer to recover on judgment against builder for breach of warranty in preparing the soil and constructing a foundation. Court of Appeals held that the builder's breach of implied warranty was not an "accident" and, therefore, was not an "occurrence."); Devoe v. Great American Ins., 50 S.W.3d 567, 572 (Tex.App.-Austin 2001, no pet.) ("The Devoes' home was constructed over a period of time as a voluntary and intentional act by the insured, and the alleged deficient and substandard construction did not constitute an accident or an occurrence under the plain-meaning rule even if the resulting, poorly constructed home was unexpected, unforeseen, or unintended by the insured."); Malone v. Scottsdale Ins. Co., 147 F. Supp. 2d 623 (S.D. Tex. 2001) (faulty workmanship and thus does not constitute an accident).
The following recent cases, which all addressed whether the insurer had a duty to defend, concluded that allegations of defective workmanship constituted an "occurrence." See Gehan Homes, Ltd. v. Employers Mutual Casualty Co., 146 S.W.3d 833 (Tex.App.-Dallas 2004, pet filed) (claim that Gehan was negligent in failing to obtain an accurate soil analysis upon which to base a foundation design); Luxury Living, Inc. v. Mid-Continent Casualty Co., H-02-3166, 2003 WL 22116202 (S.D. Tex. 2003) (water penetration around doors and windows); Great American Ins. Co. v. Calli Homes, Inc., 236 F. Supp. 2d 693 (S.D. Tex. 2002) (improper installation of exterior veneer); Acceptance Ins. Co. v. Newport Classic Homes, Inc., 3:99-CV-2010BC, 2001 WL 1478791 (N.D. Tex. 2001) (failure to construct home in a good and workmanlike manner and in compliance with local building code); First Texas Homes, Inc. v. Mid-Continent Casualty Co., 3-00-CV-1048-BD, 2001 WL 238112 (N.D. Tex. 2001) (home not designed or constructed in a good and workmanlike manner due to foundation problems).
In a diversity case such as this insurance dispute, this Court must apply the substantive law of Texas. Cleere Drilling Co. v. Dominion Exploration Prod., Inc., 351 F.3d 642, 646 (5th Cir. 2003). As indicated above, the Texas courts of appeals (and the federal district courts) have reached differing conclusions as to whether defective workmanship constitutes an occurrence. A petition for review has been filed in the Texas Supreme Court in Gehan Homes regarding this issue. As of the date of this Order, the petition remains pending in that Court.
Because the Texas Supreme Court has not resolved the question and the Texas appellate courts have not articulated a consistent answer to this question, this Court has looked for the most recent decision from the Fifth Circuit. In Federated Mutual Ins. Co. v. Grapevine Excavation Inc., 197 F.3d 720 (5th Cir. 1999), TS, a general contractor, was hired by Wal-Mart to construct a parking lot at its store in Burleson, Texas. TS subcontracted with GEI to perform excavation, backfilling, and compacting work in connection with TS's construction of the lot. Approximately six months after GEI completed work on the project, Wal-Mart discovered that the select fill materials provided and installed by GEI failed to meet specifications and, as a result, had caused damage to the work of TS's paving subcontractor, Moore Construction, Inc. Thereafter, TS filed suit in state court against GEI. On being named a defendant in the TS litigation, GEI called on its CGL carrier, Federated Mutual Insurance Company, to provide a defense. Federated acquiesced in the demand, subject to a reservation of its rights, and filed a declaratory judgment action in federal district court seeking a determination of its obligations under its policy. The federal district court concluded there was no coverage based on a determination that GEI's performance under its subcontract was an intentional act and, therefore, did not constitute an "occurrence" as that term is defined in the CGL policies.
Relying upon the Texas Supreme Court's decision in Massachusetts Bonding Ins. Co. v. Orkin Exterminating Co., 416 S.W.2d 396 (Tex. 1967), the Fifth Circuit concluded that the terms "accident" and "occurrence" included damage that is the "unexpected, unforeseen or undesigned happening or consequence" of an insured's negligent behavior, including claims for damage caused by an insured's defective performance or faulty workmanship. Federated Mutual Ins. Co., 197 F.3d at 724-25.
Tealwood and Jim Johnson Homes attempt to distinguish Federated Mut. Ins. Co. v. Grapevine Excavation Inc. by noting that the property damage in that case was "damage done to property other than the work the insured had contracted to do." 2003 WL 22790856 at *6; 244 F. Supp. 2d at 718. However, a review of Massachusetts Bonding Ins. Co. v. Orkin Exterminating Co. compels this Court to conclude that such a distinction is without foundation. In Massachusetts Bonding Ins. Co. v. Orkin Exterminating Co., Orkin was retained by Gulf Coast Rice Mills to perform certain pest control acts. Orkin negligently applied Lindane, a pesticide, to the rice mill's facilities and damaged the rice. The Texas Supreme Court "construed the term `accident' as used in the policy to include negligent acts of the insured causing damage which is undesigned and unexpected" and held "that the damage for which Orkin was held liable was caused by an `accident' within the meaning of the policy." Id. at 400. Although Orkin contracted to perform pest control services and did not construct the premises, its unintentional negligence damaged the rice crop. It is difficult for this Court to see how these facts significantly distinguish the present situation. JHP did not intentionally seek to damage the condominiums at issue. Apparently, it is Mid-Continent's position that if there were other builders on site at the property and JHP unintentionally damaged their work, there would be coverage. However, that is not how the term "occurrence" has been defined in the agreement.
The Texas Supreme Court's decision in King v. Dallas Fire Ins. Co., 85 S.W.3d 185 (Tex. 2002) also leads this Court to conclude that the allegations of defective workmanship in this case constitute an "occurrence." In King, the Texas Supreme Court concluded that it is "the insured's standpoint [that] controls in determining whether there has been an `occurrence'. . . ." Id. at 188. Nowhere in the underlying litigation did TRC allege that JHP intentionally caused the water damage to the condominiums at issue.
After examining the policy's definition of "occurrence" and the lack of allegations that JHP intentionally caused the damage, the Court concludes that there was an "occurrence" under the CGL policy.
B. Was there "property damage"?
"Property damage" means: 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. Section V(17).
Mid-Continent argues that TRC has not established that there was any "property damage" as that term is defined in the insurance policy. It argues that TRC improperly attempts to recover for breach of contract damages and economic losses, damages not recoverable under the policy.
In the underlying lawsuit TRC alleged that "significant damage to contiguous building materials and interior finishes has resulted as a direct consequence of [JHP's] improper, defective and incomplete work. Defendant JHP further failed to properly water-seal exterior finishes and retaining walls. Allowing water to penetrate through building materials and destroying the materials and finishes." In addition to alleging breach of contract and breach of warranty, TRC alleged negligence.
The court in Gehan Homes also rejected the claim that there was no "property damage" under the policy. The court noted that the Larsons alleged both a "loss of use" claim and a claim that they suffered physical injury to tangible property. 146 S.W.3d at 844. In this case, as noted above, TRC alleged it suffered physical injury to tangible property. Mid-Continent relies upon State Farm Lloyds v. Kessler, 932 S.W.2d 732 (Tex.App.-Fort Worth 1996, writ denied) for the proposition that a CGL policy does not cover damages for economic losses. However, its reliance upon Kessler is misplaced. In Kessler, the Fannings sued the Kesslers for breach of contract, breach of warranty, and DTPA violations. They alleged that the Kesslers made oral and written misrepresentations about their home in Bedford, Texas to induce the Fannings to buy it. Specifically, the Fannings allege that the Kesslers told them the property had no drainage or foundation problems when in reality it had severe drainage and foundation problems. The Fannings further allege that the Kesslers knew these statements were false when made and that they knew the statements would induce the Fannings to buy a property they would not have bought had they known the truth about its condition. The Kesslers turned to State Farm for a defense and indemnification. In the declaratory action that followed, State Farm argued that the trial court erred in granting the declaratory judgment because State Farm had no duty to defend, given that the Fannings' petition alleged no claim for "property damage." The Fort Worth court of appeals agreed. However, a careful examination of the Fannings pleading indicates the following: "The Fannings' petition, as the Kesslers point out, does describe drainage and foundation problems. But those problems are not "property damage" for which the Kesslers are legally liable because the Fannings do not assert that the Kesslers injured the property, destroyed the property, or caused the resulting loss of use. Instead, the Fannings allege that the Kesslers misrepresented the problems. The Kesslers' alleged misrepresentations did not cause the drainage and foundation problems; those problems existed before negotiations began." The allegations in TRC's lawsuit are vastly different. TRC clearly alleges that JHP injured and destroyed the property.
C. Are any policy exclusions applicable?
1. "Damage to your work" exclusion (exclusion I)
"`Property damage' to `your work' arising out of it or any part of it and included in the `products-completed operations hazard'" are excluded from coverage. Section I(2)(1). TRC argues that this exclusion is not applicable because JHP's work on the condominiums had not yet been completed. The Court agrees. Mid-Continent has not tendered summary judgment evidence on this issue to meet its burden of establishing that the exclusion is applicable. Venture Encoding Service, Inc. v. Atlantic Mut. Ins. Co., 107 S.W.3d 729, 733 (Tex.App.-Fort Worth 2003, pet. denied) (insurer bears the burden of proving the applicability of an exclusion that permits it to deny coverage). TRC's new contractor (Charlton) states in his affidavit that he was "hired to complete the construction" of the condominiums, "the construction of which had originally been commenced by [JHP]. JHP was terminated by [TRC]. . . ." TRC App. 1. Mid-Continent's Claim Adjustor [Dorrance] states that Unit B was "finished out completely", but that the other units had some items left "to do," namely "painting, flooring, plumbing and electrical fixtures set and HVAC system energized." TRC App. 26.
"Your work" means: a. Work or operations performed by you or on your behalf; and b. Materials, parts or equipment furnished in connection with such work or operations. Section V(21).
"Products-completed operations hazard" includes all "bodily injury" and "property damage" occurring away from premises you own or rent and arising out of "your product" or "your work" except: (1) Products that are still in your physical possession; or (2) Work that has not yet been completed or abandoned. . . . Work that may need service, maintenance, correction, repair or replacement, but which is otherwise complete, will be treated as completed. Section V(16).
2. Exclusion j(1)
"`Property damage' to Property you own, rent, or occupy" is excluded from coverage. Section 1(2)(j)(1). Arguing as an apparent alternative to the "Damage to your work" exclusion, Mid-Continent argues that a general contractor who has not completed his contract is still "occupying" the property for purposes of exclusion j(1). TRC argues that JHP did not "occupy" the condominiums. Both sides rely upon Kelley-Coppedge, Inc. v. Highlands Ins. Co., 980 S.W. 2d 462 (Tex. 1988). In that case the Texas Supreme Court considered whether Kelley-Coppedge, Inc. (KCI), an independent contractor, "occupied" the easement on which it was performing operations. While laying pipe along an easement, KCI inadvertently struck a Mobil Oil pipeline causing the release of crude oil. The spill damaged a third party's land upon which the easement was located. At the time, Highlands Insurance Co. covered KCI under a commercial general liability policy. After the spill, KCI notified Highlands, however, Highlands denied the claim asserting that the insurance contract's pollution exclusion clause applied. KCI's policy excluded coverage for the release of pollutants from premises it "owned or occupied." Reviewing the insurance agreement in its entirety, the Texas Supreme Court stated:
Subparagraph (a) applies to releases at or from premises owned or controlled by the contractor. Subparagraph (d) broadens the scope of the exclusion to include releases at or from premises owned by a third party at which the contractor is performing operations, but only if the contractor brings the pollutants onto the site. By negating coverage for a contractor's entire operations at a job site, the court of appeals' interpretation leaves section f.(1)(d) nothing to exclude. Under the court of appeals' interpretation, there would be absolutely no reason to include (d) since (a) already excludes all of the contractor's operations, whether or not the contractor owns or controls the premises on which it is performing operations. Under that reading, a contractor's off-premises coverage is completely eliminated.
A reading that does give meaning to both provisions is that section f. (1)(a) refers to operations on premises owned or controlled by the contractor, while section f.(1)(d) refers to operations taking place on a third-party's premises. This reading is consistent with the plain, ordinary, and generally accepted meaning of "occupied" when read in context with the other terms in the clause, "owned," "rented," and "loaned." In short, we agree with Gregory that to "occupy" means "to hold or keep for use," and we conclude that KCI's interpretation of the word "occupy" in section f.(1)(a) is the only reasonable interpretation. We therefore hold that section f.(1)(a) unambiguously does not apply to exclude coverage for KCI's cleanup costs.Id. at 467. Likewise, in the insuring agreement here, exclusion j(6) excludes property damage to "property that must be restored, repaired or replaced because "your work" was incorrectly performed on it." If Mid-Continent's position were correct there would be no need for j(6).
3. Exclusion j(5)
Exclusion j(5) excludes "`Property damage' to: That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the `property damage' arises out of those operations."
TRC argues that this exclusion is narrow. TRC argues that JHP was not performing operations at the time the water intrusion occurred through the roof, parapet walls, exterior doors, balconies and windows. Since JHP was not performing operations on those portions of the work at the time of the occurrence of the property damages, TRC argues the exclusion does not apply. Moreover, TRC argues that the exclusion only applies to the "particular part" out of which the property damage arises. Accordingly, TRC argues that damage to other finishes and drywall (such damages totaling $438,466.77) are covered.
This exclusion was addressed in CU Lloyd's of Texas v. Main Street Homes, Inc., 79 S.W.3d 687 (Tex.App.-Austin 2002, no pet.). The underlying petition in Main Street Homes alleged that the homeowners purchased the home after Main Street completed construction. The homeowners suffered damages they believed were caused by the builders' foundation defects. Main Street argued that the above exclusion should not apply, because it was not presently "performing operations." The Austin court of appeals, giving the exclusion its plain meaning, found that the use of the present tense indicates that the exclusion applies to circumstances where the contractor or subcontractors are currently working on the project. "Words such as "working," "are," "performing," and "arising" are not used to extend the policy exclusion to a home purchased after construction is complete." Id. at 696. There is no evidence that JHP was working or performing operations at the time the damage occurred.
The Court recognizes that a different result was reached in Malone v. Scottsdale Ins. Co., 147 F. Supp. 2d 623 (S.D. Tex. 2001). The facts in Malone, however, are not fully recited in the order, and it is uncertain whether the contractor in that case was working or performing operations at the time the damage occurred.
4. Exclusion j(6)
Exclusion j(6) excludes "`Property damage' to: That particular part of real property that must be restored, repaired or replaced because `your work' was incorrectly performed on it." However, the policy also states: "Paragraph (6) of this exclusion does not apply to `property damage' included in the `products-completed operations hazard.'" As stated above, the "products-completed operations hazard" is not applicable because JHP's work on the condominiums had not yet been completed. Therefore, we will solely determine what is meant by "[t]hat particular part of real property that must be restored, repaired or replaced because `your work' was incorrectly performed on it."
"Products-completed operations hazard" includes all "bodily injury" and "property damage" occurring away from premises you own or rent and arising out of "your product" or "your work" except: (1) Products that are still in your physical possession; or (2) Work that has not yet been completed or abandoned. . . . Work that may need service, maintenance, correction, repair or replacement, but which is otherwise complete, will be treated as completed. Section V(16).
Mid-Continent, relying upon Houston Bldg. Service, Inc. v. American General Fire and Cas. Co., 799 S.W.2d 308 (Tex.App.-Hous.[1 Dist.] 1990, writ denied), argues that the exclusion means that the policy does not cover any damages to the condominiums caused by the faulty workmanship of its insured, JHP. TRC argues that the exclusion only narrows liability and only excludes the restoration, repair and replacement costs associated with JHP's defective work. TRC argues it is not seeking any recovery for those damages, but only seeks recovery "for the resulting water damage to other non-defective components and finishes of the work that were damaged as a result of it."
The Court agrees with TRC's argument that "if defective work is performed by or on behalf of the insured, and such defective work causes damage to other work of the insured that was not defective, then there would be coverage for repair, replacement, or restoration of the work which was not defective." Gar-Tex Const. Co. v. Employers Cas. Co., 771 S.W.2d 639, 643 (Tex.App.-Dallas 1989, writ denied); Mid-United Contractors, Inc. v. Providence Lloyds Ins. Co., 754 S.W.2d 824, 827 (Tex.App.-Fort Worth 1988, writ denied).
5. Exclusion n
Exclusion n states:
Damages claimed for any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of: (1) `Your product'; (2) `Your work'; or (3) `Impaired property'; if such product, work, or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it.
TRC argues that the above exclusion is meant to apply to a product recall situation, not to a defective construction case. Mid-Continent argues that TRC withdrew JHP from further work on the project because of its deficient work. The Court agrees with the Ft. Worth court of appeal's conclusion that exclusion n is not applicable in contractor cases such as this one. "We hold that exclusion (n), applicable to the insured's products, does not apply to the construction of the building because in ordinary language buildings are constructed or erected, not manufactured, and because any ambiguity in the policy language must be construed against the insurer and in favor of the insured." Mid-United Contractors, Inc., 754 S.W. 2d at 826.
D. Is the default judgment against JHP binding on Mid-Continent?
Mid-Continent argues that because TRC Condominiums, Ltd. v. JHP Development, Inc. was not a fully adversarial proceeding, the resulting default judgment is not binding on it. Mid-Continent relies upon State Farm Ins. Co. v. Gandy, 925 S.W.2d 696 (Tex. 1996). In Gandy, Julie Gandy sued her stepfather, Ted Pearce, for sexually abusing her as a child. Pierce's insurer, State Farm, agreed to defend him, but reserved the right to deny coverage. After Pearce pleaded nolo contendere to criminal charges initiated by Gandy, without notice to State Farm, Pearce settled with Gandy by agreeing to a judgment in her favor of over $6 million and assigning her any claims he had against State Farm. In return, Gandy agreed never to try to collect the judgment from Pearce. Gandy, as Pearce's assignee, then sued State Farm to collect her agreed judgment under Pearce's policy and to recover damages for State Farm's alleged failure to defend Pearce properly.
The Texas Supreme Court stated:
[W]e hold that a defendant's assignment of his claims against his insurer to a plaintiff is invalid if (1) it is made prior to an adjudication of plaintiff's claim against defendant in a fully adversarial trial, (2) defendant's insurer has tendered a defense, and (3) either (a) defendant's insurer has accepted coverage, or (b) defendant's insurer has made a good faith effort to adjudicate coverage issues prior to the adjudication of plaintiff's claim. We do not address whether an assignment is also invalid if one or more of these elements is lacking. In no event, however, is a judgment for plaintiff against defendant, rendered without a fully adversarial trial, binding on defendant's insurer or admissible as evidence of damages in an action against defendant's insurer by plaintiff as defendant's assignee. Id. at 714. It is undisputed here that Mid-Continent did not tender a defense to JHP. It unequivocally refused to do so on at least two occasions. Further, there was no assignment by JHP of any claims it may have against Mid-Continent. TRC is here as a judgment creditor. Although the Court agrees that there is troubling dicta in Trinity Universal v. Cowan, 945 S.W. 2d 819 (Tex. 1997) that suggests Gandy is applicable here, this Court agrees with Scottsdale Ins. Co. v. Sessions, 331 F. Supp.2d 479 (N.D. Tex. 2003) that where "there is no hint of collusion between [the underlying parties]", there was no "agreed judgment or any other kind of agreement" between the underlying parties, "damages in the state court judgment were fixed by the state court judge as part of the default judgment proceeding", the insurer was afforded an opportunity to defend its insured in the state court suit, and the default judgment was not taken until after the insurer had refused to provide such a defense, the insurer cannot contest the award made by the state court judgment. Id. at 488. Further, a default judgment, unless it is shown to have been entered pursuant to collusion, is a judgment entered after "actual trial." Id. at 489.
E. TRC's entitlement to Attorney's Fees
Having concluded that there was coverage for the claim under Mid-Continent's policy, and Mid-Continent breached its agreement, the Court concludes that TRC is entitled to its reasonable attorney's fees pursuant to Tex. Civ. Prac. Rem. Code Chapters 37 and 38. Counsel shall adhere to Local Rule CV-7(i) in filing and opposing any such application for attorney's fees.
F. Mid-Continent Casualty's motion for default judgment against JHP
On April 8, 2004, the President of JHP requested additional time to file an answer in this case. On April 14, the Court granted the motion and extended the answer date by thirty days. No answer was ever filed. On November 29, Mid-Continent Casualty requested that the Clerk enter a default. Default was entered on November 30, 2004.
Notwithstanding JHP's default in this case, because of the Court's conclusions detailed above, Mid-Continent Casualty's motion for default judgment against JHP is DENIED.
G. Conclusion
TRC's motion for summary judgment (docket no. 13) is GRANTED. Mid-Continent's motion for default judgment and motion for summary judgment (docket nos. 19 and 24) are DENIED. Mid-Continent Casualty owes indemnity to TRC in the amount of $438,466.77. TRC is entitled to its reasonable attorney's fees pursuant to Tex. Civ. Prac. Rem. Code §§ 37.009 and 38.001. Counsel shall adhere to Local Rule CV-7(i) in filing and opposing any such application for attorney's fees.