Opinion
Civil Action No. 3:02-CV-0751-K.
February 2, 2004
MEMORANDUM OPINION AND ORDER
Before the Court are Plaintiff Dal-Tile Corporation's Motion for Partial Summary Judgment, filed March 10, 2003, Defendant's Motion for Summary Judgment, filed March 10, 2003, Plaintiff Dal-Tile Corporation's Motion for Leave to submit additional summary judgment evidence, filed April 15, 2003, and Defendant's Motion for Leave to File Sur-Reply to Plaintiff's Reply to Response to Motion for Partial Summary Judgment, filed May 5, 2003. After consideration of the motions, responses, replies, evidence and the applicable law, the Court rules upon these motions as follows:
I. Factual Background
This insurance coverage action arises out of Plaintiff Dal-Tile Corporation ("Dal-Tile")'s request for coverage for three lawsuits brought against it after Dal-Tile supplied floor tiles and other flooring materials to a subcontractor involved in the construction of a shopping mall located in Norfolk, Virginia. Taubman MacArthur Associates Limited Partnership ("Taubman") contracted with Sordoni Skanska Construction Company ("Sordoni") to construct the shopping mall. As general contractor on the project, Sordoni then entered into a series of subcontracts with Metro Panel Systems, Inc. ("Metro") for Metro to supply labor, equipment and materials in connection with certain marble floor tile, ceramic wall tile, and other materials for the project. Metro then ordered materials from Dal-Tile that were used in the construction of the project. Allegedly, the materials and tile supplied by Dal-Tile failed and cracked, and eventually the various parties involved in the project ended up in litigation.
A. The Virginia Lawsuit
The first of three lawsuits brought against Dal-Tile in connection with the project was brought in Virginia state court. Dal-Tile was joined as a defendant in that case on or around February 21, 2000. In that case, Metro sought indemnification from Dal-Tile for claims brought against Metro by Sordoni. Metro alleged that Sordoni was seeking damages from Metro for breach of contract related to the repair and correction of problems with the floor installed by Metro. With respect to Dal-Tile, Metro alleged that Dal-Tile supplied materials that were defective and failed to meet project specifications, and that by doing so Dal-Tile breached its contract and express and implied warranties. Sordoni also brought a cross-claim against Dal-Tile in the Virginia lawsuit, alleging negligence, breach of contract, and breach of express and implied warranties. This lawsuit ultimately settled, and Dal-Tile was non-suited from the case in September 2001.
B. The First Michigan Lawsuit
On November 26, 2001, Sordoni sued Dal-Tile in Michigan state court, bringing claims for breach of contract and breach of express and implied warranties. Sordoni also specifically alleged in the first Michigan lawsuit that Dal-Tile provided defective tile for the project and breached the subcontract between Dal-Tile and Metro. The claims against Dal-Tile in this lawsuit were dismissed by order dated February 6, 2002.
C. The Second Michigan Lawsuit
Dal-Tile was sued again by Taubman and Sordoni in federal district court in Michigan on March 22, 2002. In the second Michigan lawsuit, Taubman and Sordoni alleged that Dal-Tile provided tile for the project that began cracking and showing other signs of failure. Taubman and Sordoni further alleged that Dal-Tile had known the tile was inappropriate for the project, but made material misrepresentations to Taubman to induce it to use the tile, and brought claims against Dal-Tile that included fraud/negligent misrepresentation, silent fraud, breach of warranties, breach of contract, unjust enrichment, and negligence in designing, manufacturing, selecting, and selling the tile. Collectively, the Virginia lawsuit and the two Michigan lawsuits will be referred to herein as the "Underlying Litigation."
D. The Zurich Policy
Defendant Zurich American Insurance Company ("Zurich") issued a Commercial General Liability Policy (the "Policy") to Dal-Tile. Under Coverage A of the Policy, Dal-Tile (the insured) is covered for sums it becomes "legally obligated to pay" because of "bodily injury" or "property damage" caused by an "occurrence." Coverage B of the Policy provides coverage for "personal injury" caused by an offense arising out of Dal-Tile's business and "advertising injury" caused by an offense committed in the course of Dal-Tile's advertising its goods, products or services.
E. The Business Risk Exclusions
The Policy held by Dal-Tile also contains several coverage exclusions that are at issue here, commonly known as business risk exclusions. These exclusions potentially exclude coverage for certain claims.
1. Exclusion k — Damage to Your Product
Exclusion k of the Policy excludes coverage for "property damage" to "your product" arising out of it or any part of it. In pertinent part, the Policy defines "your product" as "any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by you; others trading under your name; or a person or organization whose business or assets you have acquired". "Your product" includes "warranties or representations made at any time with respect to the fitness, quality, durability, or performance or use of "your product"; and the providing of or failure to provide warnings or instructions."
2. Exclusion l — Damage to Your Work
The Policy also includes an exclusion for "`[p]roperty damage' to `your work' arising out of it or any party of it and included in the `products-completed operations hazard'". "Your work" is defined in the Policy as "work or operations performed by you or on your behalf; and materials, parts or equipment furnished in connection with such work or operations." "Your work" also includes "warranties or representations made at any time with respect to the fitness, quality, durability, performance, or use of `your work'; and the providing or failure to provide warnings or instructions." In relevant part, the Policy defines "products-completed operations hazard" as "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."
3. Exclusion m — Damage to Impaired Property or Property Not Physically Injured
The Policy also includes an exclusion from coverage for "`property damage' to `impaired property' or property that has not been physically injured, arising out of: 1) a defect, deficiency, inadequacy or dangerous condition in `your product' or `your work'; or 2) a delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms." The "impaired property" exclusion does not apply to "the loss of use of other property arising out of sudden and accidental physical injury to `your product' or `your work' after it has been put to its intended use. . . ."
4. Exclusion n — Recall of Products, Work or Impaired Property
Finally, the Policy also includes a business risk exclusion for "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.
F. The Expected or Intended Injury Exclusion
In addition to the business risk exclusions described above, the Policy has a coverage exclusion for "`bodily injury' or `property damage' expected or intended from the standpoint of the insured", excluding "`bodily injury' resulting from the use of reasonable force to protect persons or property."
G. Dal-Tile's Request for and Zurich's Denial of Coverage
Dal-Tile sought coverage from Zurich for the Virginia lawsuit on June 28, 2001, requesting a defense and indemnity under the terms of the Policy. Similarly, Dal-Tile also requested coverage for the two Michigan lawsuits. Zurich denied coverage for all three underlying cases, and the instant insurance coverage lawsuit followed.
II. Zurich's Motion for Summary Judgment
Zurich now moves for summary judgment, contending that as a matter of law, Dal-Tile's claims of coverage for the Underlying Litigation must fail. Specifically, Zurich argues that the above policy exclusions preclude coverage. Zurich further argues that the allegations against Dal-Tile in the Underlying Litigation are not covered by the Policy because they do not allege "bodily injury" or "property damage" arising from an "occurrence" under Coverage A, or "advertising injury" or "personal injury" under Coverage B. Additionally, Zurich asserts that the pleadings filed in the Underlying Litigation primarily allege contractual claims that are not covered by commercial general liability policies. Finally, Zurich maintains that because its decision to deny coverage was proper, Dal-Tile's claims under Tex. Ins. Code § 21.21 and 21.55 must also be dismissed on summary judgment.
A. Summary Judgment Standard
Summary judgment is appropriate when the pleadings, affidavits and other summary judgment evidence show that no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law. FED.R.CIV.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2551 (1986). The moving party bears the burden of identifying those portions of the record it believes demonstrate the absence of a genuine issue of material fact. Celotex, 477 U.S. at 322-25, 106 S.Ct. at 2551-54. Once a movant makes a properly supported motion, the burden shifts to the nonmovant to show that summary judgment should not be granted; the nonmovant may not rest upon allegations in the pleadings, but must support the response to the motion with summary judgment evidence showing the existence of a genuine fact issue for trial. Id. at 321-25, 106 S.Ct. at 2551-54; Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255-57, 106 S.Ct. 2505, 2513-14 (1986). All evidence and reasonable inferences must be viewed in the light most favorable to the nonmovant. United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993 (1962).
B. Insurer's Duties to Defend and Indemnify
Under the "eight corners" or "complaint allegation" rule, the Court must determine whether an insurer has a duty to defend by examining the allegations in the underlying complaint and the insurance policy. Canutillo Indep. School Dist. v. Natl. Union Fire Ins. Co., 99 F.3d 695, 701 (5th Cir. 1996); Gulf Chem. Metallurgical Corp. v. Associated Metals Minerals Corp., 1 F.3d 365, 369 (5th Cir. 1993). A determination regarding an insurer's duty to defend is focused on the facts alleged rather than the legal theories pleaded. Saint Paul Surplus Lines Ins. Co. v. Geo Pipe Co., 25 S.W.3d 900, 903 (Tex.App.-Houston [1st Dist.] 2000, no writ); Maayeh v. Trinity Lloyds Ins. Co., 850 S.W.2d 193, 195 (Tex.App.-Dallas 1992, no writ). The duty to defend arises when the facts alleged in the petition, if taken as true, state a cause of action within the terms of the policy. Gulf Chem. Metallurgical Corp., 1 F.3d at 369. If the petition does not alleged facts within the scope of coverage, an insurer is not legally required to defend a suit against its insured. Natl. Union Fire Ins. Co. v. Merchant Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997).
An insurer's duty to indemnify is triggered by the actual facts establishing liability in the underlying suit. American States Ins. Co. v. Bailey, 133 F.3d 363, 368 (5th Cir. 1998); Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d 819, 823 (Tex. 1997). If there is no duty to defend, there is no duty to indemnify. Bailey, 133 F.3d at 368; Thom v. State Farm Lloyds, 10 F. Supp.2d 693, 700 (S.D. Tex. 1997). Even if an insurer has a duty to defend, it may not have a duty to indemnify, because the duty to indemnify turns upon the facts in the underlying lawsuit rather than the allegations of the complaint. Enserch Corp. v. Shand Morahan Co., 952 F.2d 1485, 1493 (5th Cir. 1992); Travelers Indem. Co. v. Citgo Petroleum Corp., 166 F.3d 761, 768 (5th Cir. 1999); see also Jim Johnson Homes, Inc. v. Mid-Continent Casualty Co., 244 F. Supp.2d 706, 714 (N.D. Tex. 2003), citing Farmers Tex. County Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 82 (Tex. 1997) (duty to defend and duty to indemnify are distinct and separate).
C. Business Risk Exclusions
Zurich argues on summary judgment that coverage was appropriately denied because one or more of the Policy's business risk exclusions applies. Business risk exclusions have been widely recognized as a valid limitation on coverage in general liability insurance policies. T.C. Bateson Construction Co. v. Lumbermens Mutual Casualty Co., 784 S.W.2d 692, 695 (Tex.App. — Houston [14th Dist.] 1989, writ denied). In T.C. Bateson, the court explained that
[t]he purpose of comprehensive liability insurance coverage is to provide protection to the insured for personal injury or property damage caused by the completed product but not for the replacement and repair of that product. The justification for treating these risks differently is that the insured can control the quality of the goods and services he supplies, while accidental injury to property or persons exposes him to almost limitless liability. . . . In the context of this case the exclusions are designed to protect insurers from the contractors' attempts to recover funds to correct deficiencies caused by the contractors' questionable performance. Their use demonstrates the insurers' belief that the cost of not performing well is a cost of doing business and not considered part of the risk sharing scheme for which general liability policies are written.T.C. Bateson, 784 S.W.2d at 694-95 (citations omitted) (emphasis added). There, the general contractor responsible for constructing a library at the University of Texas sought coverage for a lawsuit brought by the university when the marble that sheathed the building cracked. T.C. Bateson, 784 S.W.2d at 693-94. Summary judgment was granted for the insurer, Lumbermens, due to the policy exclusions for property damage related to the general contractor's own work and/or products, and the court of appeals affirmed. Id. at 694-99. The Court agrees with Zurich that one or more of the business risk exclusions contained in the instant Policy will preclude coverage.
1. Coverage is Precluded by Exclusion k — Damage to Dal-Tile's Product
Under exclusion k, Dal-Tile is not covered for property damage to its own product, or arising out of its product or any part of its product. A liability policy containing an exclusion such as the Policy's exclusion k does not insure the policyholder against liability for the repair or replacement of his own defective work product, but it does provide coverage for the insured's liability for damages to other property resulting from the defective condition of the work even though the injury to the work product itself is excluded. Sarabia v. Aetna Casualty and Surety Co., 749 S.W.2d 157, 157-58 (Tex.App.-El Paso 1988, no writ); Travelers Ins. Co. v. Volentine, 578 S.W.2d 501, 503-04 (Tex.App.-Texarkana 1979, no writ).
In the Underlying Litigation, the plaintiffs allege that Dal-Tile supplied defective products, breached its warranties and representations regarding the quality and fitness of those products, and that the products supplied cracked and failed. These claims fall under exclusion k of the Policy. Accordingly, this exclusion precludes coverage for Dal-Tile's losses related to the Underlying Litigation.
2. Exclusion 1 also Precludes Coverage
Exclusion 1 excludes from coverage property damage to Dal-Tile's work, "arising out of it or any part of it and included in the `products-completed operations hazard.'" Because Dal-Tile's work was completed by the time the tile was installed, and the alleged property damage occurred away from Dal-Tile's premises, the property damage alleged falls within the "products-completed operations hazard." Additionally, like in exclusion k, "work" includes Dal-Tile's warranties and representations. Simply put, this exclusion excepts from coverage the insured's faulty products and workmanship. The claims of the plaintiffs in the Underlying Litigation center upon their allegations that Dal-Tile's products were defective, and that Dal-Tile breached its contractual obligation as well as various warranties in supplying faulty or defective products. The allegations of the plaintiffs thus are not covered due to exclusion 1.
3. Dal-Tile Also is Not Covered Due to Exclusion m
Under exclusion m, Dal-Tile is not covered for property damage to "impaired property". "Impaired property" is defined as
tangible property other than "your product" or "your work" that cannot be used or is less useful because: a) [i]t incorporates "your product" or "your work" that is known or thought to be defective, deficient, inadequate or dangerous; or b) you have failed to fulfill the terms of a contract or agreement;
if such property can be restored to use by: a) the repair, replacement, adjustment or removal of "your product" or "your work"; or b) your fulfilling the terms of the contract or agreement.
Here, the plaintiffs in the Underlying Litigation contend that any property damage could be restored by the repair or replacement of Dal-Tile's product, and that Dal-Tile wrongfully refused to replace its product. Therefore, exclusion m would apply to any claims for property damage to property other than Dal-Tile's product that are brought in the Underlying Litigation. See Geo Pipe, 25 S.W.3d at 906 (denying coverage under "impaired property" exclusion where property could be restored to use by the removal of the insured's products).
D. The Business Risk Exclusions Preclude Coverage, Therefore Dal-Tile's Contractual Claims Must Be Dismissed
Because exclusions k, 1, and m apply as articulated above, Dal-Tile is not entitled to coverage under the Policy for any sums it is obligated to pay as a result of the Underlying Litigation. Furthermore, the Court also agrees with Zurich that even if the claims against Dal-Tile in the Underlying Litigation were not excluded as discussed above, they also are not covered by the Policy because the claims pleaded against Dal-Tile do not allege "bodily injury" or "property damage" arising from an "occurrence" under Coverage A, or "advertising injury" or "personal injury" as required by Coverage B. The Court additionally finds merit in Zurich's argument that contractual claims such as those pleaded against Dal-Tile in the Underlying Litigation are not covered by commercial general liability policies. Accordingly, for all of these reasons, these claims must be dismissed on summary judgment.
E. Dal-Tile's Extra-contractual Claims Also Fail
The Court has determined that under the above-discussed business risk exclusions, Dal-Tile cannot prevail on its claims for declaratory relief and breach of contract. Dal-Tile has also brought "bad faith" and "late payment" claims against Zurich pursuant to Tex. Ins. Code Arts. 21.21 and 21.55. An extra-contractual claim brought under Tex. Ins. Code Art. 21.21 is dependent upon a finding of coverage. South Hampton Refining Co. v. Natl. Union Fire Ins. Co., 875 F. Supp. 382, 384 (E.D. Tex. 1995); U.S. Fire Ins. Co. v. Millard, 847 S.W.2d 668, 672 (Tex.App.-Houston [1st Dist.] 1993, no writ). An insurer is not liable on a bad faith claim if there was no coverage under the pertinent policy. Liberty Natl. Fire Ins. Co. v. Akin, 927 S.W.2d 627, 629 (Tex. 1996). Therefore, Zurich is also entitled to summary judgment on Dal-Tile's Art. 21.21 claim.
Dal-Tile's claim under Tex. Ins. Code Art. 21.55 is also without merit. The relevant portion of the statute provides that
[i]f it is determined as a result of arbitration or litigation that a claim received by an insurer is invalid and therefore should not be paid by the insurer, the requirements of subsection (f) of this section shall not apply in such case.
Tex. Ins. Code Art. 21.55, § 3(g). Because the Court has determined that Dal-Tile's claim of coverage under the Policy is invalid, Zurich also is not liable to Dal-Tile under Art. 21.55. Furthermore, the Court agrees with Zurich that Dal-Tile's claim of coverage under the Policy is not a "first-party" claim, which is a threshold requirement for a "late payment" claim under Article 21.55. Because the Policy is one for third-party liability insurance, Dal-Tile cannot prevail on this claim for this additional reason.
III. Plaintiff Dal-Tile Corporation's Motion for Partial Summary Judgment
For the reasons stated above with respect to Zurich's motion for summary judgment, this motion is denied.
IV. Other Pending Motions
Also before the Court are Dal-Tile's Motion for Leave to submit additional summary judgment evidence, and Zurich's Motion for Leave to File Sur-Reply to Plaintiff's Reply to Response to Motion for Partial Summary Judgment. With respect to Dal-Tile's Motion for Leave to submit additional summary judgment evidence, the Court finds that it reaches the same conclusion whether or not the additional evidence is considered. Thus, this motion is denied as moot. Because the Court has granted Zurich's Motion for Summary Judgment, and denied Dal-Tile's Motion for Partial Summary Judgment, Defendant Zurich's Motion for Leave to File Sur-Reply to Plaintiff's Reply to Response to Motion for Partial Summary Judgment is also denied as moot.
V. Conclusion
For the foregoing reasons, Plaintiff Dal-Tile Corporation's Motion for Partial Summary Judgment is denied, and Defendant's Motion for Summary Judgment is granted. Plaintiff's claims are hereby dismissed with prejudice. Plaintiff Dal-Tile Corporation's Motion for Leave to submit additional summary judgment evidence, and Defendant's Motion for Leave to File Sur-Reply to Plaintiff's Reply to Response to Motion for Partial Summary Judgment are both denied as moot. Judgment will be entered by separate document.