Lyda Swinerton Builders, Inc. v. Oklahoma Surety Co.
877 F.3d 600
5th Cir.2017Background
- LSB (general contractor) subcontracted roofing work to Willis; subcontract required Willis to indemnify LSB and to name LSB as additional insured; Willis made handwritten changes but LSB did not object or countersign.
- Willis had a CGL policy from OSC (Feb 1, 2006–Feb 1, 2007) with an endorsement making LSB an additional insured "only with respect to liability directly attributable to [Willis'] performance of [its] work" and only when Willis agreed by written "insured contract" to add LSB.
- ADP (owner) sued LSB in state court alleging widespread construction defects (including roof-related defects), negligent supervision of subcontractors, breach of contract, and resulting property damage; petitions were amended twice to add factual detail and specifically identify third-party defendants including Willis.
- LSB requested defense from OSC (as an additional insured) multiple times; OSC denied the requests. LSB sued OSC in federal court for declaratory relief, breach of contract (failure to defend), PPCA violations, and Texas Insurance Code (Chapter 541) claims; most other insurers settled.
- The district court granted summary judgment that OSC owed a duty to defend LSB (and breached it) and violated the PPCA, awarded defense costs, statutory PPCA penalties, and fees; it denied LSB’s Chapter 541 extra‑contractual damages claim for lack of independent injury. Parties cross‑appealed.
Issues
| Issue | Plaintiff's Argument (LSB) | Defendant's Argument (OSC) | Held |
|---|---|---|---|
| Whether LSB is an "additional insured" under OSC policy | Subcontract constitutes a written "insured contract" and Willis assumed tort liability to LSB | Subcontract is not a valid written insured contract (LSB didn’t countersign; Willis altered indemnity) | LSB is an additional insured; subcontract satisfied the policy definition despite Willis' edits |
| Whether OSC had a duty to defend under the eight‑corners rule (property damage alleged; timing) | ADP’s petitions alleged property damage and subcontractor/roofing defects that could be attributable to Willis during OSC policy period | Petitions didn’t specifically name Willis or sufficiently allege property damage during policy period | Duty to defend existed for original and amended petitions under the eight‑corners rule; potential coverage and timing not negated |
| Anti‑stacking rule (prevent recovery because overlapping CNA policies existed) | N/A (LSB sought defense; later obtained other insurers’ participation only after OSC denied defense) | Applying Garcia anti‑stacking would bar OSC liability because injury spans multiple policies and CNA provided defense | Anti‑stacking inapplicable here; no record of LSB selecting CNA before OSC’s denial, and applying rule would reward wrongful denials |
| Extra‑contractual damages under Tex. Ins. Code Ch. 541 (independent‑injury requirement) | OSC’s misrepresentations caused loss of defense benefit; LSB entitled to recover defense costs as actual damages under Ch. 541 | Circuit precedent requires independent injury beyond loss of policy benefits to recover extra‑contractual damages | Reversed district court: under Menchaca/Vail, LSB can recover defense costs as actual damages if entitled to the benefit; remanded to reconsider Chapter 541 claim consistent with Menchaca |
| Damages: scope of defense costs and PPCA 18% penalty accrual period | LSB sought full defense costs incurred (including escrow deductible paid to other insurer) and PPCA penalty until payment | OSC challenged reasonableness/necessity of many fees and argued statutory penalty should accrue only until date of judgment, not payment | Award of defense costs (including deductible escrow and independent counsel fees) affirmed; PPCA 18% penalty accrual beyond date of judgment reversed (panel bound by prior Fifth Circuit rule that penalty accrues only until judgment date) |
Key Cases Cited
- Heyden Newport Chemical Corp. v. Southern General Insurance Co., 387 S.W.2d 22 (Tex. 1965) (insurer’s duty to defend protects insured against expense of suits seeking covered damages)
- Vail v. Texas Farm Bureau Mut. Ins. Co., 754 S.W.2d 129 (Tex. 1988) (insured who is entitled to policy benefits may recover those benefits as actual damages under the Insurance Code)
- American Physicians Ins. Exchange v. Garcia, 876 S.W.2d 842 (Tex. 1994) (anti‑stacking rule for indivisible injuries spanning multiple policy periods)
- Zurich American Ins. Co. v. Nokia, 268 S.W.3d 487 (Tex. 2008) (eight‑corners rule; duty to defend measured by petition vs policy)
- Great American Ins. Co. v. AFS/IBEX Financial Services, Inc., 612 F.3d 800 (5th Cir. 2010) (Fifth Circuit requiring independent injury for extra‑contractual recovery—discussed and limited by later Texas law)
- Rhodes v. Chicago Ins. Co., 719 F.2d 116 (5th Cir. 1983) (once insurer breaches duty to defend, insured may retain independent counsel and proceed at its option)