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Lyda Swinerton Builders, Inc. v. Oklahoma Surety Co.

United States Court of Appeals, Fifth Circuit

December 12, 2017

LYDA SWINERTON BUILDERS, INCORPORATED, Plaintiff-Appellee/Cross-Appellant
v.
OKLAHOMA SURETY COMPANY, Defendant-Appellant/Cross-Appellee

         Appeals from the United States District Court for the Southern District of Texas

          Before DAVIS, GRAVES, and COSTA, Circuit Judges.

          JAMES E. GRAVES, JR., Circuit Judge:

         This case involves several issues of Texas law relating to an insurer's duty to defend and the damages that an insured may recover when an insurer breaches that duty. The district court, after disposing of much of the case through a series of partial summary judgment rulings and conducting a bench trial on one remaining claim, issued a final judgment that largely (though not entirely) favored the insured. The insurer and the insured now cross-appeal from that judgment. We AFFIRM in part and REVERSE in part.

          I. BACKGROUND

         A. The Project and the Subcontract

         Lyda Swinerton Builders, Inc. ("LSB") is a Texas-based general contractor. In November 2003, LSB was hired to build a ten-story office building in College Station, Texas. LSB, in turn, hired numerous subcontractors, among them A.D. Willis Company, Inc. ("Willis"). The subcontract agreement between LSB and Willis, which dates to April 2005, defined the scope of Willis' work as "ROOFING, ORNAMENTAL METAL, METAL WALL PANELS, and ROUGH CARPENTRY." The subcontract required Willis to maintain a general liability insurance policy designating LSB as an additional insured with respect to liabilities arising out of Willis' work under the subcontract. The subcontract also contained an indemnification provision, which read:

TO THE FULLEST EXTENT PERMITTED BY LAW, SUBCONTRACTOR AGREES TO DEFEND, HOLD HARMLESS AND UNCONDITIONALLY INDEMNIFY CONTRACTOR AND OWNER . . . AND ALL PARTIES WHOM CONTRACTOR IS REQUIRED TO INDEMNIFY PURSUANT TO THE TERMS OF THE CONTRACT DOCUMENTS, AGAINST AND FOR ALL LIABILITY, COSTS, EXPENSES, CLAIMS, LIENS, CITATIONS, PENALTIES, FINES, ATTORNEYS' FEES, LOSSES, AND DAMAGES WHICH CONTRACTOR MAY AT ANY TIME SUFFER OR SUSTAIN OR BECOME LIABLE FOR BY REASON OF ANY ACCIDENTS, DAMAGES, OR INJURIES EITHER TO THE PERSONS OR PROPERTY OR BOTH OF CONTRACTOR, OWNER OR SUBCONTRACTOR, OR OF THE WORKERS OF SUCH PARTIES, OR OF ANY OTHER PARTIES, OR TO THE PROPERTY OF ANY PARTY, IN ANY MANNER ARISING OUT OF OR RESULTING FROM SUBCONTRACTOR'S PERFORMANCE OR FAILURE TO PERFORM HEREUNDER, OR FAILURE OR DEFECTS IN MATERIALS OR GOODS SUPPLIED BY OR ON BEHALF OF SUBCONTRACTOR, INCLUDING, BUT NOT LIMITED TO, ANY NEGLIGENT ACT OR OMISSION OR CLAIM INVOLVING STRICT LIABILITY OR NEGLIGENCE PER SE OF CONTRACTOR OR OWNER, THEIR OFFICERS, DIRECTORS, SHAREHOLDERS, EMPLOYEES, AGENTS, CONTRACTOR'S SURETY AND ALL PARTIES WHOM CONTRACTOR IS REQUIRED TO INDEMNIFY PURSUANT TO THE TERMS OF THE CONTRACT DOCUMENTS.
THE COVERAGE OF ANY INSURANCE POLICY REQUIRED HEREIN OR ACTUALLY CARRIED BY SUBCONTRACTOR SHALL NOT LIMIT THE EXTENT OF SUBCONTRACTOR'S LIABILITY UNDER THE FOREGOING INDEMNITY.

         Before returning the signed subcontract to LSB, Willis' president made several handwritten changes to the document, including striking out the portion of the indemnification provision indicated above. LSB did not countersign the subcontract, and there is no evidence in the record that LSB noticed or objected to Willis' alterations.

         B. The OSC Policy

         Willis subsequently obtained a commercial general liability insurance policy from Oklahoma Surety Company ("OSC") with a policy period of February 1, 2006 to February 1, 2007. The OSC Policy identified Willis as the "Named Insured" and as a "COMMERCIAL ROOFING CONTRACTOR." The policy provided that:

[OSC] will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies. [OSC] will have the right and duty to defend the insured against any "suit" seeking those damages. However, [OSC] will have no duty to defend the insured against any "suit" seeking damages for "bodily injury" or "property damage" to which this insurance does not apply. [OSC] may, at [its] discretion, investigate any "occurrence" and settle any claim or "suit" that may result.

         The policy contained an endorsement naming "Lyda Builders & its parent & affiliated companies" as additional insureds, "but only with respect to liability directly attributable to [Willis'] performance of '[Willis'] work' for [LSB and LSB's parent and affiliates]." Elsewhere, the policy defined Willis' "work" as "[w]ork or operations performed by [Willis] or on [its] behalf and "[m]aterials, parts or equipment furnished in connection with such work or operations." The endorsement also stated that it applied "only when [Willis] ha[s] agreed by written 'insured contract' to designate [LSB and its parents and affiliates] as an additional insured subject to all provisions and limitations of this policy." The term "insured contract" was defined to include "[t]hat part of any other contract or agreement pertaining to [Willis'] business . . . under which [Willis] assume[s] the tort liability of another party to pay for 'bodily injury' or 'property damage' to a third person or organization. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement." The term "property damage" was defined as:

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.

         C. The Underlying State-Court Lawsuit

         In January 2005, the owner of the College Station project assigned its interest in the contract with LSB to Adam Development Properties, L.P. ("ADP"). On February 12, 2008, ADP filed an original petition in Texas state court against LSB and LSB's parent company. That petition sought damages against LSB for breach of contract and alleged, in pertinent part, that:

■ LSB entered into the contract for the project on or about November 17, 2003; the date of commencement of the project was December 1, 2003; and the projected deadline for substantial completion was January 28, 2005.
■ "It has now been well over four years since commencement of the project, and approximately three years since the contractual deadline for substantial completion expired, and the project is still far from being substantially complete. Throughout the course of the project, LSB's performance of the Work under the contract documents has been marked by numerous material deficiencies. Without limitation, the portions of the Work affected by such deficiencies include the exterior granite façade, the curtain wall systems, the punch window systems, the precast panel connections, the roof, the dormers, the rotunda, the joint sealant, the drywall, the fire protection systems, the HVAC systems, and the electrical systems."
■ "In addition, LSB has consistently failed to comply with its contractual obligations to adequately supervise work performed by subcontractors; to supply sufficient skilled workers and suitable materials necessary to complete the Work in accordance with the contract documents; to take adequate protective measures to prevent damage to the Work resulting from exposure to the elements; to timely provide monthly project reports and project schedules; to promptly pay monies owed to subcontractors; and to resolve, remove or discharge liens filed against the project by subcontractors."
■ "In the months prior to February 1, 2008, many of LSB's subcontractors had already removed their crews, heavy equipment, machinery, and tools from the project jobsite. Since that date, LSB and the few remaining subcontractors still at the jobsite removed most of their heavy equipment, machinery, and tools . . . ."
■ For these and other reasons, "on February 13, 2008, pursuant to the terms of the contract documents, ADP terminated the contract."

          In April 2011, LSB filed third-party petitions against various companies, including Willis. On November 17, 2011, ADP filed its first amended petition, the factual allegations of which were essentially the same as those in the original petition. In addition to the breach of contract claim, the first amended petition added claims against LSB for negligence and misrepresentation. The negligence claim asserted that LSB breached its duty to "exercise ordinary care in connection with the project, including but not limited to the duty to exercise ordinary care in the supervision of its subcontractors, " thereby "caus[ing] property damage separate and apart from its scope of work under the contract documents." The first amended petition referred to Willis as a third-party defendant, but did not expressly identify it as a subcontractor.

         On October 31, 2012, ADP filed a second amended petition. That petition was very similar to the previous petitions. This time, however, ADP identified Willis (and others) as "Third-Party Defendants" and incorporated specific references to them throughout the pleading. In particular, the second amended petition alleged:

■ "Throughout the course of the project, [LSB]'s performance of the work under the contract documents (and the work of the Third-Party . . . Defendants, for which [LSB] is responsible) was marked by numerous material deficiencies. These deficiencies were a product of [LSB]'s (and the Third-Party . . . Defendants', for which [LSB] is responsible) negligence. This negligence caused loss of use of the building and property damage separate and apart from [LSB]'s scope of work under the contract documents. Without limitation, the portions of the work damaged and affected by such deficiencies include the exterior granite façade, the curtain wall systems, the punch window systems, the precast panel connections, the roof, the dormers, the rotunda, the joint sealant, the drywall, the fire protection systems, the HVAC systems, and the electrical systems."
■ With respect to the negligence claim against LSB, the second amended petition again alleged that LSB breached its "duty to exercise ordinary care in the supervision of its subcontractors" and added that LSB's "negligence (and the negligence of the Third-Party . . . Defendants, for which [LSB] is responsible) proximately caused property damage separate and apart from [LSB]'s scope of work under the contract documents."

         D. LSB's Requests for Defense

         In a letter dated August 18, 2011, LSB requested that OSC provide it with "defense and indemnification as an additional insured" under the OSC Policy in connection with ADP's original petition. OSC denied that request in October 2011. LSB requested that OSC provide it with a defense against the first amended petition on July 6, 2012 and against the second amended petition on November 21, 2012. OSC denied both of those requests as well. LSB also requested defense and indemnification from various other insurance companies, some of which had issued policies directly to LSB and others of which had issued policies to LSB's subcontractors. Like OSC, many of these insurers denied LSB's requests.

         E. The Federal Suit

         In June 2012, one of the insurers that had denied LSB's request for defense filed a declaratory judgment action in federal district court, naming ADP, LSB, and another party as defendants. LSB thereafter filed a third-party complaint in the same action against OSC and seven other insurers. In its second amended third-party complaint, LSB sought damages and declaratory relief against OSC and the other insurers for: breach of contract based on their failure to defend LSB in the state court lawsuit; violations of Chapter 541 of the Texas Insurance Code; and violations of Texas' Prompt Payment of Claims Act ("PPCA").

         The state and federal lawsuits proceeded simultaneously for a time, but by some point in 2013, all the claims had been settled, save for those between LSB and OSC. In June 2014, the district court granted partial summary judgment in LSB's favor, finding that OSC owed a duty to defend LSB against ADP's second amended petition. In June 2015, the district court decided several additional motions for partial summary judgment, ruling that: OSC owed a duty to defend LSB under ADP's original petition; OSC breached its duty to defend LSB and was therefore liable to LSB for damages, including defense fees and costs; and OSC violated the PPCA by breaching its duty to defend, thereby entitling LSB to recover damages for that violation as well. The court denied OSC's motion for partial summary judgment, which asserted, among other things, that OSC did not have a duty to defend LSB due to an insurance law concept known as the "anti-stacking rule." After conducting a bench trial on LSB's claim for violations of Chapter 541 of the Texas Insurance Code, the district court ruled that LSB had not met its burden of proving that it had "suffered injury separate and ...


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