BALFOUR BEATTY CONSTRUCTION, L.L.C.; MILESTONE METALS, INCORPORATED v. LIBERTY MUTUAL FIRE INSURANCE COMPANY
No. 19-20216
United States Court of Appeals for the Fifth Circuit
August 3, 2020
Lyle W. Cayce, Clerk
USDC No. 4:17-CV-2477
Before BARKSDALE, HIGGINSON, and DUNCAN, Circuit Judges.
STEPHEN A. HIGGINSON, Circuit Judge
This case involves a dispute between an insurer and insured about whether an insurance policy provides coverage for damage to the exterior glass of a Houston skyscraper. Plaintiffs Balfour Beatty Construction, L.L.C. (“Balfour“) and Milestone Metals, Inc. (“Milestone“) (collectively, “Appellants“) sued defendant Liberty Mutual Fire Insurance Company (“Liberty“) in Texas state court claiming breach of contract and violations of Sections 541 and 542 of the Texas Insurance Code. Liberty removed the case to federal court and the parties cross-moved for summary judgment.
Because the insurance policy does not provide coverage for Appellants’ claim, we agree that summary judgment in Liberty‘s favor is appropriate. Therefore, we AFFIRM.
I. BACKGROUND
A. Factual Background
TCH Energy Corridor Venture, LLC (“Trammell Crow“) was the developer of a commercial office building located in Houston, Texas, known as Energy Center 5 (the “Project“). Trammell Crow selected Balfour as the Project‘s general contractor. Balfour, in turn, subcontracted with Milestone for the erection of structural steel, stairs, and ornamental steel on the Project. Under Trammell Crow‘s contract with Balfour, Trammell Crow was required to procure builder‘s risk insurance for the Project. Accordingly, Trammell Crow obtained an insurance policy from Liberty (the “Policy“), effective from July 10, 2014, to August 10, 2016. The Policy is titled a “Commercial Inland Marine” policy that contains “Builders’ Risk Coverage.” An “Additional Insured Endorsement” added Appellants as insureds to the “extent required and as their respective interests may appear.”1
With insurance coverage in place, the Project proceeded. In October 2015, Milestone welded a 2-inch metal plate to external tubing on the eighteenth floor of Energy Center 5. In his affidavit, Milestone‘s Safety
Milestone implemented measures to protect the building and the glass from slag3 burns and fires. Because the location of the weld protruded from the vertical face of the building, Milestone draped extra fire blankets beneath the area where its operations occurred. Due to the location of the weld, it was impossible to place a person in a safe position to watch for falling slag. . . . However, at the time of the operations, the winds were very high, a factor that Milestone could not control.
Several months later, on July 12, 2016, Milestone learned that welding slag from the October 2015 welding project had fallen down the side of the building and damaged the exterior of certain glass windows on lower floors. Trammell Crow, Balfour, and Milestone then tendered a claim to Liberty under the Policy. Liberty denied coverage and explained that the loss was excluded. Milestone and Balfour ultimately replaced the windows for Trammell Crow at a cost of approximately $686,976.88.4
The Policy contains the following relevant provisions:
PROPERTY COVERED
“We”5 cover the following property unless the property is excluded or subject to limitations.
***
PERILS COVERED
“We” cover risks of direct physical loss or damage unless the loss is limited or caused by a peril that is excluded.
***
PERILS EXCLUDED
2. “We” do not pay for loss or damage that is caused by or results from one or more of the following:
c. Defects, Errors, And Omissions –
(1) “We” do not pay for loss or damage consisting of, caused by, or resulting from an act, defect, error, or omission (negligent or not) relating to:
a) design, specifications, construction, materials, or workmanship; . . .
c) maintenance, installation, renovation, remodeling, or repair.
But if an act, defect, error, or omission as described above results in a covered peril, “we” do cover the loss or damage caused by that covered peril.
(2) This exclusion applies regardless of whether or not the act, defect, error or omission:
a) originated at a covered “building or structure“; or
b) was being performed at “your” request or for “your” benefit.
Liberty concedes that the window damage was a “direct physical loss or damage” that falls under the general insuring clause. Moreover, the parties agree that, absent the Exception, the Exclusion would bar Appellants’ recovery because the window damage resulted from Milestone‘s construction or installation activity. Therefore, the interpretative dilemma is whether the Exception applies to reinstate coverage for Appellants’ claim. Put differently, the question is whether the “an act, defect, error, or omission” “result[ed] in a covered peril.”
C. Procedural History
When Liberty denied coverage, Appellants sued Liberty in Harris County, Texas, for breach of contract and violations of Sections 541 and 542 of the Texas Insurance Code.
Pursuant to the parties’ stipulation, the district court dismissed the Texas Insurance Code claims without prejudice. Appellants then timely appealed to this court on April 5, 2019. While the appeal was pending, Appellants filed an unopposed motion for entry of a
D. The District Court Opinion
In relevant part, the district court determined that the Exception to the Exclusion does not reinstate coverage under the circumstances of the loss here and, therefore, granted summary judgment in favor of Liberty. The district court reasoned that (i) Appellants’ interpretation of the Exception would render the Exclusion meaningless; and (ii) the Exception‘s language “suggests” that there must be two loss events that are different in kind in order to reinstate coverage—one initial loss event (an excluded peril) followed by a separate covered peril, with only the latter peril subject to coverage.
II. PRELIMINARY ISSUES
A. Jurisdiction
This court has appellate jurisdiction under
B. Standard of Review
“This court reviews a district court‘s grant of summary judgment de novo, applying the same legal standards as the district court.” Tradewinds Envtl. Restoration, Inc. v. St. Tammany Park, LLC, 578 F.3d 255, 258 (5th Cir. 2009) (quoting Condrey v. SunTrust Bank of Ga., 429 F.3d 556, 562 (5th Cir. 2005)). “Summary judgment is appropriate when ‘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.‘” United States v. Nature‘s Way Marine, L.L.C., 904 F.3d 416, 419 (5th Cir. 2018) (quoting
C. Texas Contract Interpretation Principles
When construing an insurance policy, Texas courts “ascertain the true intentions of the parties as expressed in the instrument.” Am. Tobacco Co., 463 F.3d at 407; Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 133 (Tex. 1994). “When parties disagree over the meaning of an unambiguous contract, ‘the intent of the parties must be taken from the agreement itself, not from the parties’ present interpretation, and the agreement must be enforced as it is written.‘” Am. Tobacco Co., 463 F.3d at 407 (alteration omitted) (quoting
The insured bears the initial burden of showing that its loss is covered, while the insurer bears the burden of establishing that a policy exclusion applies. VRV Dev. L.P. v. Mid-Continent Cas. Co., 630 F.3d 451, 455 (5th Cir. 2011); Gilbert, 327 S.W.3d at 124; see also
III. DISCUSSION
The parties agree that the claim involves “direct physical loss or damage” that falls within the Exclusion because it resulted from an act of construction, workmanship, or installation.7 Therefore, absent the Exception to the Exclusion, the parties would agree that Appellants are not entitled to coverage. However, the parties dispute whether the Exception to the Exclusion applies. Appellants argue that the Exception reinstates coverage for their claim or, in the alternative, that the Exclusion and the Exception are
A. Issue One: Whether the Claim Falls Within the Exception
Appellants contend that the Exception to the Exclusion reinstates coverage. Appellants acknowledge that they carry the burden of proof on this issue. Gilbert, 327 S.W.3d at 124; Federated Mut. Ins. Co., 197 F.3d at 723. Appellants argue that (i) the Policy, as an “all-risks” policy, should be given a capacious reading; (ii) a plain reading of the Exception shows that it applies; (iii) Appellants’ interpretation does not render the Exclusion meaningless; and (iv) if the Exception does not apply under the circumstances here, the Policy is illusory because it largely denies coverage. Liberty responds that (i) the Exception does not apply under its plain language; (ii) Appellants’ interpretation of the Exception negates the Exclusion8; and (iii) Liberty‘s interpretation does not render the Policy illusory.
i. All-Risks Policy
As an initial matter, the parties dispute whether the Policy is an “all-risks” policy and, if so, whether that matters. An all-risks policy “creates a special type of coverage in which the insurer undertakes the risk for all losses of a fortuitous nature that, in the absence of the insured‘s fraud or other intentional misconduct, is not expressly excluded in the agreement.” JAW The Pointe, L.L.C. v. Lexington Ins. Co., 460 S.W.3d 597, 604 (Tex. 2015) (quoting SMI Realty Mgmt. Corp. v. Underwriters at Lloyd‘s, London, 179 S.W.3d 619, 627 n.3 (Tex. App. – Houston 2005, pet. denied)). We need not determine whether this Policy is an “all-risks” policy because we construe
ii. Ensuing Loss Provisions
The Exception states that: “[I]f an act, defect, error, or omission as described above resulted in a covered peril, ‘we’ do cover the loss or damage caused by that covered peril.” This clause is often described as an “ensuing loss” provision.9 See, e.g., Viking Constr., Inc. v. 777 Residential, LLC, 210 A.3d 654, 664–65 & n.9 (Conn. App. Ct. 2019). Such provisions “act as exceptions to property insurance exclusions and operate to provide coverage when, as a result of an excluded peril, a covered peril arises and causes damage.” OSTRANGER AND NEWMAN, HANDBOOK ON INSURANCE COVERAGE DISPUTES § 21.04(g) (16th ed. 2013); see also Fiess, 202 S.W.3d at 752. Although the Exception does not use the word “ensuing,” the Exception parallels the structure of ensuing loss clauses.10 See Fiess, 202
The Supreme Court of Washington has offered the useful illustration below to explain how ensuing loss clauses operate:
An example helps illustrate how the ensuing loss clause works. Suppose a contractor miswires a home‘s electrical system, resulting in a fire and significant damage to the home. And suppose the homeowner‘s policy excludes losses caused by faulty workmanship, but the exclusion contains an ensuing loss clause. In this situation, the ensuing loss clause would preserve coverage for damages caused by the fire. But it would not cover losses caused by the miswiring that the policy otherwise excludes. Nor would the ensuing loss clause provide coverage for the cost of correcting the faulty wiring.
Vision One, LLC v. Philadelphia Indem. Ins. Co., 276 P.3d 300, 307 (Wash. 2012).
iii. By Its Terms, The Policy Does Not Provide Coverage
A plain reading of the Exception shows that it does not reinstate coverage over Appellants’ claim. As the cases below demonstrate, an ensuing loss provision like the one presented here is only triggered when one (excluded) peril results in a distinct (covered) peril, meaning there must be two separate events for the Exception to trigger. See, e.g., Viking Constr., 210 A.3d at 664–65. Put simply, Appellants’ welding operation involved falling slag, which damaged the exterior glass of Energy Center 5. The welding operation is inseparable from the falling slag; they are not two separate
The Supreme Court of Texas in Fiess, discussed by both parties, reached a similar conclusion. In Fiess, an insurance policy contained an exclusion stating “[w]e do not cover loss caused by . . . mold,” but also contained an exception stating “[w]e do cover ensuing loss caused by . . . water damage.” 202 S.W.3d at 746. Policyholders had argued that the policy covered mold damage and contamination resulting from a flood and pre-flood leaks, and we certified that issue to the Supreme Court of Texas. See Fiess v. State Farm Lloyds, 392 F.3d 802, 804 (5th Cir. 2004). The Supreme Court of Texas rejected the policyholders’ argument, holding that the ensuing loss provision could not reinstate coverage over a claim explicitly excluded by the exclusion. Fiess, 202 S.W.3d at 749–51. “Instead, the ensuing-loss clause provides coverage only if . . . relatively common and usually minor risks lead to a relatively uncommon and perhaps major loss: building collapse, glass breakage, or water damage.” Id. at 750. Finally, the Court noted that the policy at issue contained a clause clarifying that it would cover ensuing losses caused by water damage “if the loss would otherwise be covered under” the policy. Id. at 751–53. The Court concluded that this clause limited the ensuing loss clause “whenever it conflicts with anything else in the policy.” Id. at 751. Therefore, the only reasonable interpretation of the policy was that the ensuing loss clause must yield to the mold exclusion. Id.
Similar to the policyholders in Fiess, Appellants ask us to disregard the Exclusion in favor of the Exception. Id. at 748 (“The Fiess‘s argue that we must disregard how this policy provision starts . . . because of how it ends.“).
Appellants’ proposed reading is unpersuasive. The Exception is triggered if an excluded peril “results in a covered peril.” Put differently, to trigger this provision, there must be some distinct peril that arises as a result of the excluded peril, and that subsequent peril must be a covered peril. See id. at 750; cf. Alton Ochsner Med. Found. v. Allendale Mut. Ins. Co., 219 F.3d 501, 505–06 (5th Cir. 2000) (resulting damage exception not triggered unless the excluded peril results in “damage that is different in kind” from the excluded peril). Here, the damage to the exterior glass was caused by Appellants’ construction and installation activities, specifically, the falling slag occurring during Appellants’ welding project. Therefore, the associated damage is excluded from coverage unless the welding project “result[ed] in a covered peril.” But damage caused by an act of construction is not a “covered peril” because it falls within the Exclusion. Indeed, the Policy excludes coverage for “loss or damage . . . caused by . . . or resulting from an act . . . relating to” construction or installation. Even if the damage caused by the falling slag were a “covered peril,” the welding project did not “result in” a separate covered peril; the welding project and attendant falling slag was itself the peril. See Alton Ochsner Med. Found., 219 F.3d at 505–06.
Appellants point out that the ensuing loss clause in Fiess only reinstated coverage to the extent “the loss would otherwise be covered under” the policy. 202 S.W.3d at 751. Although this language differs from the language in the instant Policy, it accomplishes the same goal as the
More broadly, Appellants argue that any case involving an “ensuing loss” provision is inapplicable because the Policy does not use the word “ensue.” As noted above, supra Section III.A.ii., we disagree. We cannot find, and Appellants do not identify, any significant difference applicable here between resulting loss provisions and ensuing loss provisions. See Viking Constr., 210 A.3d at 665 & n.9 (“A resulting loss clause [is] also known as an ensuing loss clause.“).
Beyond Fiess, another case, Viking Construction, Inc. v. 777 Residential, LLC, is persuasive because it interpreted an identical provision to that presented in this case. Id. at 658; see also RSUI Indem. Co. v. The Lynd Co., 466 S.W.3d 113, 118 (Tex. 2015) (noting that Texas courts “are mindful of other courts’ interpretations of policy language that is identical or very similar to the policy language at issue“). In Viking Construction, the Appellate Court of Connecticut concluded that the ensuing loss clause in Liberty‘s policy did not reinstate coverage over a claim arising from damage to windows caused by the insured‘s power washing of the concrete façade of a building. Viking Constr., 210 A.3d at 657–58, 664. The court held that the “damage to the windows . . . was a direct result of” the power washing, not a separate event that would trigger the ensuing loss provision. Id. at 661. The court went on to hold that the ensuing loss clause would be triggered if a “loss caused by an act during a renovation . . . causes a covered peril, such as a fire, and that latter peril damages the building.” Id. at 665 (emphasis added). Because “there was only one cause” of the loss—the spraying of the building and its attendant damage to the windows—the ensuing loss clause did not apply. Id. The court also held that spraying of the building was not a covered peril. Id.
The parties refer to many additional cases from other jurisdictions to support their respective positions.13 In the context of this Erie guess, and in the face of a persuasive decision from the highest court in Texas and a case interpreting identical policy language, we need not parse these cases in detail.
We note that while many of these decisions align with our holding today that an ensuing loss provision is only triggered when the ensuing loss
iv. The Policy Is Not Illusory
Appellants argue that accepting Liberty‘s interpretation of the Policy renders the Policy illusory. Liberty responds that the Policy cannot be illusory because there are various circumstances under which it would provide coverage. We agree that the Policy is not illusory.
“Texas disfavors constructions of insurance contracts that render all coverage illusory.” Northfield Ins. Co. v. Herrera, 751 F. App‘x 512, 518 (5th Cir. 2018). “But when an insurance policy will provide coverage for other
Here, as the district court noted, the Policy provides coverage under numerous potential factual scenarios. Most clearly, Liberty openly admits that the Policy covers damage caused by acts of nature, a real possibility along the Gulf Coast. Further, there may be coverage in the event of a fire unrelated to construction activities, or if a vehicle backed into a pillar of the building, or even if construction-related damage weakened the building and that weakness was later exacerbated by a separate event. For example, Liberty agrees that if a construction-related act caused holes in the windows, the water damage resulting from a subsequent storm that forced water through those holes would be a covered peril, even though the holes in the windows would not themselves be covered under the Policy. See Bartram, 864 F. Supp. 2d at 1233 (ensuing loss clause triggered under similar circumstances). Because the Policy provides coverage under other factual scenarios, the Policy as written is not illusory.20
v. Conclusion
For these reasons, Appellants have not met their burden to show that the Exception to the Exclusion reinstates coverage. Therefore, the Policy does not provide coverage for Appellants’ claim.
B. Issue Two: Whether the Policy is Ambiguous
In the alternative, Appellants argue that the Policy is ambiguous and that, therefore, we should construe the Policy in favor of the insured Appellants. Under Texas law, a litigant “who wishes to argue contract ambiguity must affirmatively plead it, or else the argument is waived.” Nichols v. Enterasys Networks, Inc., 495 F.3d 185, 190 (5th Cir. 2007); see also O‘Kehie v. Harris Leasing Co., 80 S.W.3d 316, 319 (Tex. App. – Texarkana 2002, no pet.). Because Appellants’ ambiguity argument “does not appear in [Appellants‘] initial pleading,” it is forfeited. Nichols, 495 F.3d at 190. Even if the argument were not forfeited, because we have concluded that the Policy “as written can be given a clear and definite legal meaning . . . it is not ambiguous as a matter of law.” Gilbert, 327 S.W.3d at 133. Accordingly, we are not required to interpret the Policy in favor of coverage, as Appellants urge. Instead, we interpret the Policy under its terms. Nautilus Ins. Co. v. Country Oaks Apartments Ltd., 566 F.3d 452, 455 (5th Cir. 2009).
IV. CONCLUSION
We AFFIRM the district court‘s summary judgment.