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Crownover v. Mid-Continent Cas. Co.

United States Court of Appeals, Fifth Circuit

October 29, 2014

DOUG CROWNOVER and KAREN CROWNOVER, Plaintiffs - Appellants
v.
MID-CONTINENT CASUALTY COMPANY, Defendant - Appellee

Page 198

Appeals fro the United States District Court for the Northern District of Texas.

For DOUG CROWNOVER, KAREN CROWNOVER, Plaintiffs - Appellants: Gregory A. Harwell, Esq., Slates Harwell, L.L.P., Dallas, TX; Stacy R. Obenhaus, Gardere Wynne Sewell, L.L.P., Dallas, TX.

For MID-CONTINENT CASUALTY COMPANY, Defendant - Appellee: Richard Brent Cooper, Esq., Diana L. Faust, Michelle Elaine Robberson, Cooper & Scully, P.C., Dallas, TX.

For TEXAS ASSOCIATION OF BUILDERS, NATIONAL ASSOCIATION OF HOME BUILDERS, LEADING BUILDERS OF AMERICA, Amicus Curiaes: Lee Howard Shidlofsky, Esq., Douglas Paul Skelley, Esq., Shidlofsky Law Firm, P.L.L.C., Austin, TX.

For TEXAS ASSOCIATION OF BUILDERS, NATIONAL ASSOCIATION OF HOME BUILDERS, Amicus Curiaes: Lee Howard Shidlofsky, Esq., Shidlofsky Law Firm, P.L.L.C., Austin, TX.

For TEXAS BUILDING BRANCH OF THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, AMERICAN SUBCONTRACTORS ASSOCIATION, INCORPORATED, Amicus Curiaes: Patrick J. Wielinski, Esq., Cokinos, Bosien & Young, P.C., Irving, TX.

Before KING, BENAVIDES, and DENNIS, Circuit Judges.

OPINION

Page 199

ON PETITION FOR REHEARING

JAMES L. DENNIS, Circuit Judge:

The petition for panel rehearing is GRANTED. The prior opinion, Crownover v. Mid-Continent Casualty Co., 757 F.3d 200 (5th Cir. 2014), is WITHDRAWN, and the following opinion is substituted:

Doug and Karen Crownover contracted with Arrow Development, Inc. (" Arrow" ) to construct a house for them. Arrow performed defective work and then failed promptly to correct the work. The Crownovers spent a significant amount of money paying to correct the work themselves. An arbitrator found Arrow liable to the Crownovers for breaching its express warranty to repair non-conforming work and awarded them damages. Because Arrow filed for bankruptcy, however, the Crownovers were limited to recovering what they could from Arrow's insurance policies. They therefore sued Mid-Continent Casualty Co. (" Mid-Continent" ), Arrow's insurer, in federal court for the damages owed to them by Arrow, and both sides moved for summary judgment. The principal question in this diversity case is whether a contractual provision in the construction contract between the Crownovers and Arrow, which obligated Arrow to repair its work where that work failed to conform to the requirements of the construction contract, was an " assumption of liability" that exceeded Arrow's liability under general Texas law, thereby triggering a " contractual-liability exclusion" in Arrow's insurance contract with Mid-Continent. If the contractual-liability exclusion does not apply, the question becomes whether any other exclusion from coverage applies.

The district court held that the contractual-liability exclusion in Arrow's contract with Mid-Continent prevented indemnity and granted summary judgment for Mid-Continent. We conclude that, consistent with Texas law and considering the Texas Supreme Court's decisions in Gilbert Texas Construction, L.P. v. Underwriters at Lloyd's London, 327 S.W.3d 118 (Tex. 2010), and Ewing Construction Co. v. Amerisure Insurance Co., 420 S.W.3d 30 (Tex. 2014), the contractual-liability exclusion from coverage does not apply and therefore Mid-Continent was not entitled to summary judgment on that ground. We further conclude that no other exclusion from coverage forecloses the Crownovers' claim. Accordingly, we REVERSE summary judgment for Mid-Continent, RENDER summary judgment for the Crownovers, and REMAND for calculation of legal fees.

BACKGROUND

I.

In October 2001, the Crownovers entered into a construction contract with Arrow to construct a home on their land in Sunnyvale, Texas. The contract also contained a warranty-to-repair clause, which in paragraph 23.1 provided that Arrow would " promptly correct work . . . failing to conform to the requirements of the Contract Documents." The work was completed in November 2002, but by early 2003, cracks began to appear in the walls and foundation of the Crownovers' home. Additional problems with the heating, ventilation, and air conditioning (" HVAC" ) system caused leaking in exterior lines and air ducts inside the home. To compensate for defects in the HVAC system, the system's mechanical units ran almost continuously in order to heat or cool the house. As a result of being overburdened, the mechanical units ultimately had to be replaced. In all, the Crownovers paid several hundred thousand dollars to fix the

Page 200

problems with the foundation and HVAC system.

II.

The Crownovers attempted to have Arrow correct the problems and eventually sought legal relief. Their demand letters were forwarded to Mid-Continent, but to no avail. The Crownovers then initiated an arbitration proceeding against Arrow. The arbitrator found that the HVAC system " was not installed properly, did not perform as required, and exhibited numerous deficiencies as identified by the various consultants and contractors who evaluated the system," and determined that " Arrow is responsible for the costs associated with replacement of the HVAC system, less betterment." The arbitrator also found that the foundation failed and that Arrow was responsible for the costs of repairing the foundation. Accordingly, the arbitrator concluded that the Crownovers had a meritorious claim for breach of the express warranty to repair contained in paragraph 23.1 of their contract with Arrow, which was not barred by the statute of limitations. Because the arbitrator awarded damages to the Crownovers on that ground, she declined to decide whether the Crownovers' other claims were barred by a statute of limitations.

Arrow later filed for bankruptcy. In June 2009, the bankruptcy court lifted the automatic stay but limited the Crownovers' recovery to any amount they could recover from an applicable insurance policy. (To date, Arrow has not paid the Crownovers any money.) In July 2009, the Crownovers sent a letter to Mid-Continent, demanding that the insurance company pay the arbitration award. Mid-Continent denied their demand in August 2009, citing several insurance policy defenses and exclusions.

The Crownovers then sued Mid-Continent for breach of contract. Both sides moved for summary judgment. Ultimately, the district court granted Mid-Continent's motion and denied the Crownovers' motion. In its opinion, the district court examined an " Insuring Agreement," a provision that appeared (in exactly the same form) in a series of comprehensive general liability (" CGL" ) policies, by which Mid-Continent insured Arrow, from August 2001 through 2008. The district court concluded that the Insuring Agreement covered Arrow while it constructed the Crownovers' home. The Insuring Agreement states that Mid-Continent " will pay those sums that [Arrow] becomes legally obligated to pay as damages because of . . . 'property damage' to which this insurance applies."

Several exclusions apply to this general coverage provision. The district court concluded that one of them, the contractual-liability exclusion, applied in the instant case, such that Mid-Continent was not obligated to indemnify Arrow for the damages it owed the Crownovers. This exclusion states that " [t]his insurance does not apply to[] 'property damage' for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement." There is, however, an exception to this exclusion for " liability . . . [t]hat the insured would have in the absence of the contract or agreement." The district court noted that the arbitration award to the Crownovers was based only on Arrow's breach of the express warranty to repair contained in paragraph 23.1 (the arbitrator explicitly declined to decide whether Arrow was liable to the Crownovers on any other ground). Thus, the district court held that because Arrow " became legally obligated to pay the arbitration damages on the basis of [its] contractually assumed liability," the contractual-liability exclusion

Page 201

applied with no applicable exception to the exclusion. The district court did not rule on Mid-Continent's other alleged exclusions from coverage.

The Crownovers had argued that the district court should consider whether Arrow would have been liable in the absence of the express warranty to repair. Specifically, they had contended that the " implied warranty of good workmanship" continued to apply to the contract they had with Arrow because the contract contained no express disclaimer of such a warranty. The district court declined to adopt this argument. First, it noted that under Gilbert, 327 S.W.3d 118, it was confined to the actual facts of the case and could not consider hypothetical scenarios. Second, the district court reasoned that when a contract contains an express warranty of good workmanship, that warranty supersedes any implied warranty of the same.

The Crownovers subsequently filed motions for a new trial, to amend or modify the judgment, and for relief from the judgment, arguing that the district court had erred in ruling on implied warranties, a ground that had not been raised in Mid-Continent's motion for summary judgment. They further argued that no such waiver or disclaimer exists under Texas law. The district court denied their motions, finding that the Crownovers had raised the implied warranty issue in their briefing and that Mid-Continent was thus allowed to respond to their argument in its sur-reply. The district court also adhered to its earlier reasoning that the express warranty of good workmanship superseded any implied warranty of the same. The Crownovers timely appealed.

STANDARD OF REVIEW

" [We] appl[y] a de novo standard of review when determining whether a district court erred in granting summary judgment." LaBarge Pipe & Steel Co. v. First Bank, 550 F.3d 442, 449 (5th Cir. 2008). Summary judgment should be granted " if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). " A genuine issue of material fact exists when the evidence is such that a reasonable jury could return a verdict for the non-moving party." Gates v. Tex. Dep't of Protective & Regulatory Servs., 537 F.3d 404, 417 (5th Cir. 2008). " [S]ubstantive law will identify which facts are material." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). " When, as here, jurisdiction is based on diversity, we apply the substantive law of the forum state." Holt v. State Farm Fire & Cas. Co., 627 F.3d 188, 191 (5th Cir. 2010). Thus, in this case, Texas law determines which facts are material.

DISCUSSION

In light of the Texas Supreme Court's controlling analysis in Gilbert and Ewing, we conclude that the contractual-liability exclusion to coverage does not apply to bar the Crownovers' suit. We also hold that the alternative exclusions from coverage raised by Mid-Continent are inapplicable under the facts established here. We therefore hold that the Crownovers, rather than Mid-Continent, are entitled to summary judgment.

I.

Under Texas law, " the insured has the [initial] burden of establishing coverage under the terms of the policy." Gilbert, 327 S.W.3d at 124 (citing Ulico Cas. Co. v. Allied Pilots Ass'n, 262 S.W.3d 773, 782 (Tex. 2008)). " If the insured proves coverage, then to avoid liability the insurer must prove the loss is within an exclusion."

Page 202

Id. (citing Ulico Cas. Co., 262 S.W.3d at 782). " If the insurer proves that an exclusion applies, the burden shifts back to the insured to show that an exception to the exclusion brings the claim back within coverage." Id. (citing Comsys Info. Tech. Servs., Inc. v. Twin ...


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