MEMORANDUM OPINION AND ORDER DENYING MOTION FOR NEW TRIAL AND MOTION TO ALTER OR AMEND THE JUDGMENT
Pending before the Court is the Defendant Puget Plastics Corporation (“Puget”) and Intervenor Microtherm’s Motion for a New Trial or to Alter or Amend the Judgment (Docket No. 339). 1 For the reasons set forth below, that motion will be denied.
I. BACKGROUND
This Court has previously outlined the facts of this case in great detail.
See Nat’l Union Fire Ins. Co. v. Puget Plastics Corp. (“Puget II
”),
From July 1, 1999 to July 1, 2002, Puget was covered by an umbrella policy (the “Policy” or the “National Union Policy”) issued by National Union to Arctic Slope, Puget’s parent company. Id. at 618. Puget was an additional insured under the Policy. Four days after the jury verdict in favor of Microtherm in Texas state court, National Union filed the present action in this Court seeking a declaration that it had no duty to defend or indemnify Puget for the conduct giving rise to the state court action. Id. at 616-17. Meanwhile, Microtherm and Puget entered into a settlement agreement through which Microtherm assumed Puget’s rights as an insured party under the National Union Policy. Id. at 619. After this Court granted a partial summary judgment and an interim appeal which clarified certain issues, and after holding a trial to determine National Union’s duty to defend and duty to indemnify, and a trial in which Microtherm intervened, this Court held that National Union did not have a duty to defend or indemnify Puget. Id. at 656. Puget/Microtherm timely filed a motion for new trial or, in the alternative, to alter or amend the judgment (Docket No. 339).
II. APPLICABLE LAW
Following a bench trial, a court may grant a new trial “for any reason for which a rehearing has heretofore been granted in a suit in equity in federal court.” Fed. R. Civ. P. 59(a)(1)(B). “Courts do not grant new trials unless it is reasonably clear that prejudicial error has crept into the record or that substantial justice has not been done, and the burden of showing harmful error rests on the party seeking the new trial.”
Sibley v. Lemaire,
Under Federal Rule of Civil Procedure 59(e), a party may file a motion to alter or amend a judgment. Fed.R.Civ.P. 59(e). Such a motion, in order to be granted, “ ‘must clearly establish either a manifest error of law or fact or must present newly discovered evidence’ and ‘cannot be used to raise arguments which could, and should, have been made before the judgement issued.’ ”
Rosenzweig v. Azurix Corp.,
III. THERE WAS NO OCCURRENCE UNDER THE NATIONAL UNION POLICY.
Puget raises several arguments to support its motion for new trial, the first of which asserts that this Court erroneously concluded that Puget’s conduct and the resulting damage did not constitute an accident, and thus was not an occurrence, under the Policy. See Puget’s Motion, at 4. In relevant part, the Policy provides that National Union will pay sums in excess of the retained limit that Puget became legally obligated to pay arising from property damage caused by an occurrence. See Notice of Filing of Petition For Permission to Appeal, Ex. 1C (hereinafter “The Policy”). “Occurrence” is defined in the Policy as “an accident, including continuous or repeated exposure to conditions, which results in Bodily Injury or Property Damage neither expected nor intended from the standpoint of the insured.” The Policy at 5. The word accident is not defined in the Policy.
A Reconsidering the Fifth Circuit’s Interlocutory Opinion in this Case, this Court Concludes that it Did Not Err in Holding that No Accident Occurred Under the Policy.
Early on, one of the central issues in this case was whether a Texas jury’s finding of a knowing violation of the Texas Deceptive Trade Practices Act (“DTPA”) could ever constitute an “accident” under Texas insurance law. In response to the parties’ motions for summary judgment, this Court issued an opinion holding that a knowing violation of the DTPA could constitute an “accident” and certified that holding, among others, to the Fifth Circuit Court of Appeals for immediate review (Docket No. 131). The Fifth Circuit affirmed this Court’s conclusion in
National Union Fire Insurance Co. v. Puget Plastics (“Puget I”),
deliberate acts may constitute an accident unless: (1) the resulting damage was “highly probable” because it was “the natural and expected result of the insured’s actions,” (2) “the insured intended the injury,” or (3) the insured’s acts constitute an intentional tort, in which case, the insured is presumed to have intended the injury. In sum, [Puget] cannot recover under the Policy if: (1) the injury to Microtherm was highly probable, (2) Puget intended or expected the injury inflicted on Microtherm, or (3) Puget committed an intentional tort.
Id.
at 401-02 (quoting
Lamar Homes, Inc. v. Mid-Continent Cas. Co.,
1. Whether the Damage Microtherm Suffered was “Highly Probable” is to be Determined Using an Objective Standard.
Applying the three-part test articulated by the Fifth Circuit in
Puget I,
which it was bound to do, this Court found that Puget’s conduct did not constitute an occurrence under the Policy because there was no accident.
Puget II,
Puget raises several objections to that decision. According to Puget, the use of the phrase, “from the standpoint of the insured,” in the Policy’s definition of “occurrence,” mandates the use of a subjective standard in determining whether an accident occurred, and thus whether the injury to Microtherm was highly probable. Puget’s Motion at 6-14. This argument is misguided.
The Policy defines “Occurrence” as “an accident, including continuous or repeated exposure to conditions, which results in Bodily Injury or Property Damage neither expected nor intended from the standpoint of the insured.” The Policy at 5. The phrase, “from the standpoint of the insured,” is used separately and in addition to the term “accident.”
Id.
The structure of this definition does not imply that “from the standpoint of the insured” was placed where it was in order to modify the term “accident.” Rather, it modifies “expected” or “intended.” It was placed in such a way that (1) whether an accident occurred, and (2) whether the Bodily Injury or Property damage was expected or intended “from the viewpoint of the insured,” are two separate inquiries under the Policy.
See Puget I,
Assuming
arguendo
that the phrase “from the viewpoint of the insured” was intended to be part of the “accident” inquiry, there is nothing inconsistent or erroneous about this Court applying an objective standard to that phrase as Puget suggests. In addressing coverage issues, Texas courts have often looked to what the insured knew at the time of the conduct in question, then asked whether a reasonable person, in similar circumstances and knowing what the insured knew, would have expected the damage or injury that resulted from the conduct.
See, e.g., Republic Nat’l Life Ins. Co. v. Heyward,
Puget next argues that
Lamar Homes
rejected an objective standard.
See
Puget’s Motion at 8. There are several problems with this assertion. First,
Lamar Homes
did not reject any standard; instead it merely stated that
Mid-Century Insurance Co. v. Lindsey
“did not adopt foreseeability as the boundary between accidental and intentional conduct.”
Lamar Homes,
Puget also argues that
Tanner v. Nationwide Mutual Fire Insurance Co.,
This Court can see why Puget cites to certain language in this case, but its overall reliance upon it is misplaced. Tanner involved a high-speed police chase through central Texas which ultimately resulted in the escapee ramming the Tanner family’s car that was being operated safely. Id. at 829-30. Gibbons, the putative escapee, was caught, jailed, released on bond, and he ultimately fled the jurisdiction avoiding both the upcoming criminal prosecution and a civil lawsuit. The Tanners consequently received a default judgment against Gibbons and then in turn sued Gibbons’ auto policy insurer. Id. at 830. The carrier pinned its defense on policy language which excluded “property damage or bodily injury caused intentionally by or at the direction of an insured, including willful acts the result of which the insured knows or ought to know will follow from the insured’s conduct.” Id. at 831. A jury found for the Tanners and the trial court granted a judgment notwithstanding the verdict. Id. at 830. It was in this context the Supreme Court addressed the issue.
The court merely held that Nationwide, the insurer, failed in its burden to prove the applicability of the exclusion and that the jury had evidence before it that would support a verdict that Gibbons did not intend the damage. 2 Id. at 832-33. Not unexpectedly, Puget seizes upon certain statements by the Supreme Court to the effect that the insured: (1) had to intend the damage and/or (2) had to know or ought to know the damage will follow in order for the exclusion to apply and that the Supreme Court in discussing same said that the policy language “reinforces the view that the dispositive inquiry is whether the insured intended to inflict damage or injury.” Id. at 833.
Puget is correct that the court, in parsing the language of the Nationwide intentional injury exclusion, went no further than to acknowledge that “ought to know” could announce an objective standard, but Puget’s argument is misleading. The Tanner court did not hold that the phrase “ought to know” was not an objective standard, as Puget suggests. In fact, it refers to it as an objective standard. Instead, it simply held that the policy’s use of the phrase “will follow,” a phrase which indicates inevitability, served to modify the phrase “ought to know” in such a way that the “accident” inquiry under that policy became a subjective one. Id. The Tanner court, itself, made the point that if instead of the phrase “will follow,” the policy had used a phrase such as “might follow” or “will likely follow,” the phrase “ought to know” would indicate an objective standard. Id. This holding can hardly be represented as announcing that an objective standard has no place in a court’s analysis of whether an accident occurred, plus its ultimate holding was keyed to a positive jury finding for the insured and specific policy language, neither of which is present herein.
Finally, Puget asserts that the holding in
King v. Dallas Fire Insurance Co.,
Having considered Puget’s arguments concerning the implementation of a subjective “highly probable” standard, the Court reaffirms its holding that the Fifth Circuit’s opinion in Puget I mandated an objective “highly probable” standard.
2. Using the Objective “Highly Probable” Standard Articulated by the Fifth Circuit, Puget’s Conduct Does Not Constitute an Accident Under the Policy.
The state-court jury in this case found that Puget’s deliberate acts in lowering the melt temperatures when making the chambers resulted in the damage Microtherm suffered. As this Court previously held, a reasonable molder under the same or similar circumstances, i.e., from the standpoint of the insured, would know that lowering the melt temperatures in making the chambers would make it “highly probable” that damage would result to Microtherm’s final product.
Puget II,
B. Review of Texas and Fifth Circuit Cases Concerning “Accident” Under Texas law.
As stated above, the Fifth Circuit entered an interlocutory opinion in this case addressing what constitutes an accident under Texas law and holding that if the damage to Microtherm was “highly probable” given Puget’s conduct, there is no coverage under the Policy. The Fifth Circuit’s opinion notwithstanding, the parties in this case have offered differing opinions concerning the status of “accident” case law in Texas. Given these contentions, the complexity of the law concerning the definition of “accident,” and its overriding importance to this case, this Court feels compelled to offer a review of Texas and Fifth Circuit Court of Appeals cases, many of which have been cited by Nation Union and/or Puget, discussing what constitutes an “accident” under Texas law. This
While perhaps not the first case that mentions the issue, the first Fifth Circuit Court of Appeals case that provides relevant guidance is
Maryland Casualty Co. v. Mitchell,
In
Massachusetts Bonding and Insurance Co. v. Orkin Exterminating Co.,
In 1973, the Supreme Court of Texas decided
Argonaut Southwest Insurance Co. v. Maupin,
In
Republic National Life Insurance Co. v. Heyward,
In 1993, the Supreme Court of Texas reiterated (although it distinguished) its holdings in
Maupin
and
Heyward
in the case of
State Farm Fire & Casualty Co. v. S.S. & G.W.,
Next, in
Trinity Universal Insurance Co. v. Cowan,
In 1999, the Supreme Court of Texas considered the case
of Mid-Century Insurance Co. v. Lindsey,
In two separate cases in 2000 and
2001
—Federated
Mutual Insurance Co. v. Grapevine Excavation, Inc.,
The court in
Harken
held that an accident had occurred when a company undertook to drill for oil on a landowner’s property, but did so negligently resulting in property damage, water contamination, and the killing of livestock.
Harken,
Two recent cases, frequently cited by Puget, confirm that the holding in
Harken
exemplifies the current status of Texas law concerning the definition of “accident” when negligence leads to the accident or injury in question. Those eases are
Lennar Corp. v. Great American Insurance Co.,
In
Lamar,
a series of questions was certified to the Supreme Court of Texas by the Fifth Circuit.
Thus, a claim does not involve an accident or occurrence when either direct allegations purport that the insured intended the injury (which is presumed in cases of intentional tort) or circumstances confirm that the resulting damage was the natural and expected result of the insured’s actions, that is, was highly probable whether the insured was negligent or not.
Id. at 9 (citation omitted). 13
The
Lamar Homes
test, while answering the questions posed by the Fifth Cir
The following chart provides a summary of the facts, damages, results and tests applied in the cases discussed above.
Style of Case Untoward Act Damages Result/Test Applied by the Court
Md Cas. Co. v. Mitchell,322 F.2d 37 (5th Cir. 1963).
Tenant injured landlord’s agent when he “negligently” made the agent fall onto a concrete patio
Landlord’s agent suffered injuries from the fall
Court found an accident had occurred because injury was neither intended nor so substantially certain to result that it could not have been an accident
Argonaut Sw. Ins. Co. v. Maupin,500 S.W.2d 633 (Tex. 1973).
Insured mistakenly contracted with tenant-in-common to remove fill dirt (Trespass)
Insured removed fill dirt from property without owner’s permission
No coverage “[wjhere acts are voluntary ... and the injury is the natural result of the act____”
Republic Nat'l Life Ins. Co. v. Heyward,536 S.W.2d 549 (Tex. 1976).
The insured was shot intentionally by an unknown assailant
The insured died as a result of the gunshot wounds
The court held there could be coverage because the insured’s death was not the natural and probable consequence of the insured’s actions
State Farm Fire & Cas. Co. v. S.S. & G.W.,858 S.W.2d 374 (Tex. 1993).
An insured with herpes intentionally had intercourse with the plaintiff, but not during an outbreak
The plaintiff contracted herpes from the insured
An accident had occurred because infecting his partner was not the natural result of the insured’s intentional act of intercourse
Trinity Universal Ins. Co. v. Cowan,945 S.W.2d 819 (Tex. 1997).
Store clerk intentionally showed revealing photos of a customer to friends
Customer suffered mental anguish from the photos being shared
There was no accident because the mental anguish could have been reasonably anticipated by the insured, who acted intentionally in sharing the photos
Mid-Century Ins. Co. v. Lindsey,997 S.W.2d 153 (Tex. 1999).
Boy intentionally climbed through a pick-up window and, in doing so, unintentionally discharged a
Passenger in a nearby ear was struck by the shotgun fire
There was an accident because although the boy had intentionally crawled through the window, the
shotgun
injury to the passenger of the adjacent car was not reasonably foreseeable from the boy’s viewpoint
Federated Mut. Ins. Co. v. Grapevine Excavation, Inc.,197 F.3d 720 (5th Cir.2000).
A company intentionally prepared land for a parking lot but inadvertently used inferior fill materials
Damage to the work of the paving contractor resulted
The court found a duty to defend because the damage was the “unexpected, unforeseen, and undesigned” result of negligent behavior
Harken Exploration Co. v. Sphere Drake Ins. PLC,261 F.3d 466 (5th Cir. 2001).
Company drilled oil wells, and did so haphazardly
Property damage, water contamination, and the killing of livestock resulted from the negligence
An accident had occurred because the act performed was performed intentionally, but negligently, and the damage was not the intended or expected result had the deliberate act been performed properly
Lennar Corp. v. Great Am. Ins. Co.,200 S.W.3d 651 (Tex.App.-Houston [14th Dist.] 2006, pet. denied).
Homebuilder intentionally constructed but used, unbeknownst to the builder, a defective product
Wood rot, mold, and termite infestation resulted
An accident had occurred because the unintentional use of defective materials resulted in damages neither intended nor expected by the insured.
Lamar Homes v. MidContinent Cas. Co.,242 S.W.3d 1 (Tex. 2007).
Homes were intentionally, but poorly, constructed by a homebuilder
The homes suffered damage as a result of the poor workmanship
The court concluded that an accident has occurred when property damage results from the unexpected, unforeseen, or undesigned happening or consequence of the insured’s negligent behavior.
C. An Alternative Process by Which to Determine Whether an Intentional Act Can Ever be an Accident for Insurance Purposes
Puget has objected not only to this Court’s implementation of the Fifth Circuit standard, but has also argued that the Circuit was wrong in its analysis of Texas case law. While this Court does not agree with either position, the Court in this opinion uses the above analysis to develop an alternative process by which one can judge whether an intentional act can ever be an accident for insurance purposes under Texas law. Put another way, since Puget does not think the Fifth Circuit test is accurate, the Court has derived the following test for determining whether an “occurrence,” as that term is defined in insuranee policies, has occurred in connection with an intentional act.
A court must first look to the chain of events leading up to the injury or property damage in question and identify the final deliberate or intentional act by the insured that took place prior to the injury or damage. If that intentional act caused the injury or property damage, the court must ask: (1) was this act an intentional tort committed by the insured, (2) did the insured intend the resulting injury, or (3) was the resulting injury reasonably foreseeable/did it naturally follow from the viewpoint of the insured? If the answer to any part of that question is ‘Yes,” then no accident has occurred. If the answer is “No” to all three parts of that question, then an accident may have occurred. 15
If, on the other hand, after identifying the last intentional act of the insured in the chain of events, a court determines that some subsequent careless intervening act or the poor execution of the intentional act or defective product actually caused, in whole or in part, the injury, then the court must ask itself whether the injury or property damage was highly probable had the careless intervening act not occurred or the intentional act not been executed poorly. 17 If the answer to that question is “Yes,” i.e., the injury or damage would have occurred regardless of the carelessness or poor performance of the insured, then there was no “accident.” The injury or damage would have resulted regardless of whether there were flaws in the insured’s conduct. If, however, the answer to the court’s question is “No,” then an “accident” may have occurred under the policy because the injury or damage would not have occurred absent the insured’s negligence or substandard conduct. 18
This reasoning was applied in
Orkin
(the last deliberate act was applying pesticides, and the poor execution of that job caused the injury that would not have been highly probable had the insured performed the job non-negligently),
Harken
(operating an oil well was the last deliberate act taken, but it was performed poorly, and the damage would not have been highly probable had the insured performed the job flawlessly),
Grapevine
(the last intentional act was preparing the land for a parking lot, but that act was performed haphazardly, and the resulting damage would not have been highly probable had the insured performed properly), and
Lennar Corp.
(the last deliberate act was constructing the
The Court concedes that the above-described analysis is more cumbersome, but it is also more inclusive and comprehensive while still being consistent with what the Supreme Court of Texas articulated in Lamar Homes. It encompasses those situations in which an insured intended the injury or committed an intentional tort, and it addresses those situations in which a negligent act or an improperly performed intentional act led to the injury or property damage in question. In those cases, the Supreme Court of Texas has instructed courts to ask whether the injury or damage would have occurred, whether the insured acted negligently or not. This analysis accounts for these inquiries.
In addition to addressing the scenarios articulated by
Lamar Homes,
this Court’s alternative analysis also covers those scenarios not addressed, such as those situations in which an intentional act led to the injury, and the injury naturally followed or was reasonably foreseeable from the viewpoint of the insured.
See, e.g., Cowan,
D. Applying the Court’s Test to the Facts of this Case, Puget’s Conduct Does Not Constitute an Accident Under Texas Law.
Having reviewed the relevant case law and having constructed an alternate test or process by which one can analyze all of the pertinent Texas and Fifth Circuit cases, this Court stands by its original opinion that Puget’s conduct did not constitute an accident. Examining the chain of events, this Court recognizes that Puget’s lowering the melt temperatures while manufacturing the chambers was an intentional act. This intentional act, while perhaps ill-advised, was neither performed negligently/poorly nor was it followed by any intervening negligence. It was the cause of the damage Microtherm suffered. Thus, this case falls into the Heyward, S.S. & G.W., and Cowan line of cases, the line of cases which discusses intentional acts that were neither performed negligently nor followed by negligent intervening acts. 20
Given its finding that the facts of this case fall into the
Heyward, S.S. & G.W.,
and
Cowan
line of cases, and given that it was not an intentional tort, this Court must ask itself whether the damage was either (1) intended by Puget or (2) reasonably foreseeable from the viewpoint of Puget. With respect to whether Puget intended the damage, this Court has previously held there was no intent on the part of Puget to cause damage and declines to re-evaluate that decision here.
See Puget
E. Puget’s Concerns About the Fifth Circuit’s Interlocutory Opinion in This Case Have No Impact on This Court’s Decision in this Case.
In retrospect, the Fifth Circuit’s three-pronged, non-occurrence test in Puget I, which was discussed more thoroughly in Part III.A of this opinion, may have left some aspects of Texas law concerning accidents unaddressed, perhaps because the Lamar Homes opinion did as well. 21 By not distinguishing between damage resulting from intentional or deliberate acts and damage resulting from negligence, one could argue that the Fifth Circuit test seems to superimpose the two scenarios upon each other, meshing the two tests into one test that cannot adequately address all possible scenarios. 22
Under the Fifth Circuit’s test, for example, if damage results from negligence, a court must only ask whether the damage was highly probable. However, the real question under Texas case law, as expressed in
Lamar Homes,
is whether the damage was highly probable
had the insured party performed the intentional act flawlessly. See Lamar Homes,
In addition to omitting the language from
Lamar Homes
that requires a court to consider whether the resulting injury or damage would have resulted even if the
Finally, the Fifth Circuit’s test does not explicitly account for the “reasonably foreseeable” and “naturally follows” language, which appears to be the standard that, according to some opinions, should be applied when intentional conduct leads to damage.
See Lindsey,
As stated before, this Court only mentions these issues because Puget has argued that the Fifth Circuit opinion is flawed and that these flaws led to this Court’s inaccurate conclusions regarding “accident” case law in Texas. See, e.g., Transcript of Hearing on Mot. for New Trial, at 10. In reality, as explained supra, whether this Court applies its own analysis of Texas case law or the three-part test the Fifth Circuit articulated in Puget I, the result is the same. Either the damage to Microtherm resulting from Puget’s intentional conduct was “reasonably foreseeable” or “naturally followed” from the viewpoint of Puget using the language found in some Texas cases, or the damage to Microtherm was “highly probable” from the viewpoint of Puget under the Fifth Circuit’s non-occurrence test articulated in Puget I. Under either analysis, there was no accident and thus no occurrence under the Policy.
F. Conclusion Concerning Whether an Accident or Occurrence is Present Given the Facts of this Case.
Since Puget has failed to make it “reasonably clear that prejudicial error has crept into the record or that substantial justice has not been done,”
Sibley,
IV. PUGET DID NOT ALLOCATE DAMAGES DURING THE UNDERLYING TRIAL OR DURING THE COVERAGE TRIAL.
Puget’s second principal argument in its Motion for New Trial is that this Court
A. Texas Law Requires an Insured Party to Allocate Between Covered Damages and Non-Covered Damages.
Texas recognizes the doctrine of concurrent causes, so that when “covered and non-covered perils combine to create a loss, the insured is entitled to recover only that portion of the damage caused solely by the covered peril(s).”
Wallis v. United Services Auto Ass’n,
Puget has directed this Court to
United Services Automobile Ass’n v. Lambert,
No. 03-97-00811-CV,
The Court agrees to some extent with Puget’s assessment of Lambert, but fails to see its applicability to the instant case. First, the Lambert court’s holding was a narrow holding applying only to recovery of mental anguish damages and not intended to loosen the rigidity of Lyons and McKillip in the context of all damages in all insurance coverage cases. The court twice referred to the “exception” to the general rule of allocation applied in the context of attorneys’ fees, and held that the “exception should be applied” in Lambert. Id. at *11-12, 1999 Tex.App. LEXIS 6337 at *32-33. Use of the word “exception” does not imply to this Court that the Lambert court intended more than a limited carve-out to the allocation rule in the context of mental anguish damages, a category of damages where allocation would, for reasons stated in Lambert, be much more difficult than in the present controversy.
Second and much more importantly, the Lambert court, shortly after suggesting that an exception to the allocation requirement might be appropriate, went on to hold that at trial Lambert had been asked only about his mental anguish damages that resulted from the covered plumbing leaks. Id. at *12-13, 1999 Tex.App. LEXIS 6337 at *34-35. From this testimony, “the jury could reasonably have inferred that the mental anguish to which Lambert testified was attributable in toto to the plumbing claim.” Id. This observation deems the Lambert court’s carve-out dictum. 24 If Lambert limited his trial testimony to those mental anguish damages resulting from covered risks, there is no need for an exception to the allocation requirement. His testimony was the proof needed for allocation. This further supports this Court’s view that the Lambert court’s carve-out has little, if any, impact on the current status of Texas law concerning concurrent causes and allocation or its adjudication of the instant case. Accordingly, this Court stands by its previous holding, based upon an unending line of cases, that Puget had a duty to allocate between those damages resulting from covered property loss and those resulting from non-covered property loss.
B. The Court Reaffirms its Holding that the Underlying Jury Verdict was for Covered and N<m-Covered Damages.
As stated above, Microtherm sued Puget in state court, at least in part, because the plastic water chambers Puget manufactured to go in the Seisco water heater began to leak in 2001. In its judgment following the coverage trial of this case, this Court held that only those instances in which a Puget-manufactured chamber leaked and caused damage to either a water heater’s circuit board or a third party’s property are instances covered under the Policy. 25 Puget objects to this finding, asserting that although the impaired property exclusion may apply at first blush, the exception to that exclusion for sudden and accidental physical injury to the insured’s product is also applicable. If Puget were correct, which this Court holds it is not, all instances of leaky chambers would result in covered property damage, and allocation of damages between covered and non-covered damages would not be necessary.
The Policy covered property damage, defined in the Policy as
1. 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
2. Loss of use of tangible property that is not physically injured. All such loss shall be deemed to occur at the time of the Occurrence that caused it.
The Policy, at 6. From this definition of “property damage,” the Policy excluded 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 [Puget’s] Product or [Puget’s] Work; or
2. A delay or failure by [Puget] or anyone acting on [Puget’s] behalf to perform a contract or agreement in accordance with its terms.
The Policy, at 7.
26
Impaired Property, as defined in the Policy is tangible property,
1. It incorporates [Puget’s] Product or [Puget’s] Work that is known or thought to be defective, deficient, inadequate or dangerous ... if such property can be restored to use by;
2. The repair, replacement adjustment or removal of [Puget’s] Product or [Puget’s] Work ....
The Policy at 3. In other words, the Policy does not cover property damage to tangible property when that tangible property is not usable because it incorporates the insured’s product but can be made usable again by simply replacing the insured’s product. An exception to the exclusion applies when the property damage in question involved “the loss of use of other property arising out of sudden and accidental physical injury to [Puget’s] Product or [Puget’s] Work after it has been put to its intended use.”
Id.
Based on these provisions in the Policy, and based on its review of the testimony, the Court held in its final judgment that National Union had satisfied its burden of proving the impaired property exclusion applied and that the exception for “sudden and accidental physical injury” was not applicable.
See Puget II,
1. The Impaired Property Exclusion Applies.
Having reviewed the relevant testimony from the underlying trial and the coverage trial, the Court reaffirms its decision that the impaired property exclusion applies to at least a portion of Microtherm’s losses that resulted from Puget chamber leaks. The testimony showed that, at least sometimes, when Puget-manufactured chambers leaked, they were simply replaced with new Puget-manufactured chambers, and the Seisco water heaters were restored to full capacity. See, e.g., Transcript of Depo. of Michael Carr at 137; Seitz, 2 C.T. 448; 27 Seitz, 3 C.T. 546; Seitz, 7 C.T. 1318; Transcript of Depo. of William Uecker, III at 46. Thus, in many instances, when a chamber leaked in a Seisco water heater, the water heater was, by definition, (1) tangible property, (2) other than Puget’s product, (3) that could not be used because it incorporated a Puget chamber that was known to be defective, (4) but could be restored to use by the replacement of the Puget chamber. See The Policy. In these instances, the impaired property exclusion applies and, assuming no exception applies, there is no coverage.
Puget contests this conclusion, arguing that because the Seisco water heaters could not in fact be “restored to use” by the simple replacement of the Puget chambers, the impaired property exclusion does not apply. According to Puget, the chambers were altered by Microtherm after they left the Puget factory and, therefore, were no longer Puget’s product when they
Puget bases its argument that the chambers were not Puget’s products on
Fireman’s Insurance Co. v. Bauer Dental Studio, Inc.,
Perhaps the facts of Bauer were such that the holding was appropriate in that ease, but the Court declines to apply the same reasoning here. Additionally, it seems that Puget’s decision to argue that Bauer should apply forces Puget to argue that the chambers, as they were installed in the Seisco water heater, were no longer Puget’s product. This argument is contrary to the facts adduced both in this Court and in the state-court trial. Further, this position is at odds with, and has never been argued during, the last eight years of litigation in this case. Microtherm has consistently argued that the chambers were Puget’s and has never claimed that it modified them so radically as to change the nature of the product. Puget has not disclaimed responsibility for the chambers it manufactured, but instead asserted that the chambers were either not faulty or, in the alternative, that any damage they caused was property damage covered under the National Union Policy. For Puget to now argue that the chambers were not actually Puget’s product, but a composite product, is disingenuous and therefore an argument this Court declines to seriously address. Indeed, if this were true, Puget might not be liable at all, and its insurer would positively be free from liability. The Court reaffirms its decision that the impaired property exclusion applies to at least a portion of the damages recovered in the underlying trial.
2. The “Sudden and Accidental Physical Injury Exception” Does Not Apply.
In addition to arguing that the impaired property exclusion does not apply at all, Puget argues in the alternative that an exception to that exclusion applies. As cited above, the Policy excepted from the impaired property exclusion “the loss of use of other property arising out of sudden and accidental physical injury to [Puget’s] product or [Puget’s] Work after it has been put to its intended use.”
28
The Policy at 7. Dr. Maureen Reitmann testified,
Although Puget challenges Reitmann’s testimony as “pure speculation and contrary to all other evidence,” Puget Mot. at 27, the Court declines to agree. Having viewed her testimony originally and having reviewed the testimony concerning the “sudden and accidental” nature of the chamber leaks, the Court reaffirms its decision that the “sudden and accidental” exception to the impaired property exclusion does not apply. This finding, in conjunction with the finding that at least some of the damage was caused by instances that fall into the impaired property exclusion, requires Puget to allocate the damages recovered in the underlying trial.
C. Puget Failed to Allocate Between the Property Damage Covered Under the Policy and the Property Damage Not Covered Under the Policy.
Having reviewed Texas case law requiring an insured party to allocate between covered and non-covered damages, and having concluded that the state-court verdict in this case was based on both covered and non-covered damages, the Court finds that Puget failed to satisfy its duty of allocation. Puget was required to (1) distinguish which portion of damages assessed against Puget were the result of covered property damage, 29 and (2) distinguish the damages assessed against Puget from those assessed against the other defendants. Puget failed to do either.
With respect to how much of Microtherm’s damages resulted from chamber failures which are covered under the Policy, Puget argues that this Court, in holding that there was no reliable evidence of allocation, erred in not picking “a percentage number with which it is most comfortable” within the range of testimony provided at either the underlying trial or the coverage trial. Puget Mot. at 32 (citing
State Farm Fire and Cas. Co. v. Rodriguez,
David Seitz, the President of Microtherm, testified at different times that when a Puget chamber leaked (1) it shorted the circuit board
ninety percent
of the time,
see
Transcript of Depo. of David Seitz (2009), at 45 (emphasis added); (2) it
Contrary to the semi-consistent testimony of these three witnesses is the testimony of Michael Carr, a customer service employee of Microtherm. This Court previously noted that Carr testified that seventy-five percent or more of the chamber leaks did not damage a circuit board.
See Puget II,
The portion of Carr’s testimony at issue is the following:
Q. All right. Now, out of the hundred field trips that you made, I think you testified earlier that at least 20 of those trips were made for bad thermistors?
A. Yes.
Q. Out of the — the remaining 80, how many of those were attributed to failures of the plastic in one way or another?
A. Percentage-wise, or number-wise? I don’t know the actual number. But it was the majority of them. Probably in the 60s, the 70s range.
Q. What other types of failures for the balance of the — the field trips that you had?
A. Sometimes they were just to change out a circuit board because of a previous leak or because of a — you know, possibly a plumbing leak or a lightening strike. But changing out the circuit boards would be the secondmost one. Sometimes they were damaged by the installer. I had a couple of those where I’d have to go out and basically correct an installer’s mistake.
Id. at 139-40. From this testimony, the Court concluded that of 100 “field trips” that Carr took to service Seisco water heaters, 20 were related to faulty thermistors. Id. When asked how many of the remaining 80 trips had to do with faulty chambers, Carr responded, “Percentage-wise or number-wise? I don’t know the actual number. But it was the majority of them. Probably in the 60s, the 70s range.” Id. It is unclear whether Carr intended for “the 60s, the 70s range” to be interpreted as percentages or as raw numbers. Finally, when asked ‘What other types of failures for the balance of — the field trips that you had?”, Carr responded that the majority were to change out circuit boards that had been damaged by a previous leak, a plumbing leak, a lightening strike, or an installation error. Id.
The Court’s reading of this testimony, that 75% of the leaky chambers did not
Setting aside whatever interpretation is placed on Carr’s testimony, the Court finds it difficult to rely on the testimony of Seitz, Uecker, Drabczyk. Seitz testified that his estimations, cited above, were based roughly on the warranty records produced by Puget at the coverage trial. See Seitz, 3 C.T. 473 (Seitz). Uecker testified as well that he would rely on these records for information. See Transcript of Depo. of William Uecker, III at 45 (responding ‘Yes” to the question, “... [Wjould you rely upon the warranty records made by Microtherm of these phone calls if they still exist?”). Michael Carr was one of the Microtherm employees who actually collected and documented the information from customer phone calls that eventually became the warranty records. See Transcript of Depo. of Michael Carr at 13.
Testimony concerning the accuracy of the warranty records called into question any projections that might be made based upon those records. For instance, during cross-examination, Seitz testified that he would not rely on the “user-defined” section of the records except for the most basic of information that does not pertain to customer complaints. See Seitz, 6 C.T. 1217, 1224. He further testified to the likelihood of errors occurring in the “notes” section of the records, Seitz, 6 C.T. 1225, the portion of the records from which most of the customers’ complaints could be gathered.
In addition to the possibility that errors occurred in creating these records, Michael Carr testified that these records were created based in large part on customer diagnosis, not the diagnosis of a Microtherm technician.
See, e.g.,
Transcript of Depo. of Michael Carr at 50 (testifying that on at least one occasion, no Microtherm employee verified the diagnosis of a Microtherm customer). Carr also testified that it would be possible for a customer to complain of leaky chambers when the leak in question was actually
With the testimony of Seitz, Uecker, and Carr tied to the warranty records, the Court conducted its own independent review of the warranty records and was unable to reach the same conclusions as those key witnesses. Making every assumption in favor of Puget, the Court concluded from the warranty records that the number of leaky chambers which also damaged circuit boards or other property was somewhere between 55% and 85%, a range which is inconsistent with the testimony of Seitz, Uecker, or Drabczyk. 31
Puget contends that, given this range of testimony and evidence, this Court is required to “choose a percentage with which it is most comfortable” and erred in not doing so. Puget cites
Lyons v. Millers Casualty Insurance Co.,
D. Puget Failed to Connect the Property Damage to the Verdict in the State-Court Trial.
Even assuming Puget had presented this Court with credible, reliable evidence
Upon review of the state-court record, this Court was unable to find any evidence apportioning the damages among the various defendants, or any evidence connecting the damages awarded to any covered losses. In fact, Dennis Arnie, Microtherm’s lost profit expert, testified during the underlying trial that any attempt at allocation would be speculative based on the records and information he had available to him. Arnie, 34 T.T. 31 (“[B]ased on what I was hearing, I made a professional determination that there was not an adequate basis to do that.”). When asked if he had been able to attribute any of Microtherm’s damages to the chambers alone, he replied, “[n]ot separate and distinct.” Id. at 35; see also id. at 60. Based on this evidence, this Court concluded in its judgment, and now reaffirms, that there was no reliable, non-speculative evidence upon which to allocate damages in the state-court trial among the various defendants.
This Court’s opinion in this regard is buttressed by the recent court of appeals of Texas decision on appeal from this case’s state-court judgment.
See Dana Corp. v. Microtherm,
No. 13-05-00281-CV,
The Court’s review of the state-court testimony should not be perceived as allowing National Union to bring a collateral attack on the state-court judgment. Nevertheless, the Court is required to review the evidence of the underlying trial in order to determine whether Puget has fulfilled its burden of allocating damages per the Policy, an issue properly before this Court. Therefore, its conclusion concerning allocation, although arguably inconsistent with that reached by the state-court jury, has no impact on the validity of the state-court judgment.
Having conducted a review of the state-court trial and coverage trial records, and having considered the state-court verdict in this case, the Court reaffirms its holding that there is no reliable, non-arbitrary ba
E. Conclusion Concerning Allocation of Damages.
Having reviewed this Court’s prior holding in this case, the contentions of the parties, the evidence, and the testimony, this Court finds that, with respect to allocation of damages, it is not “reasonably clear that prejudicial error has crept into the record or that substantial justice has not been done.”
Sibley,
V. CONCLUSION
Based on this Court’s reading of the Fifth Circuit interlocutory opinion which it followed in this case and its own independent assessment of Texas insurance law concerning what constitutes an “accident” for insurance purpose, this Court reaffirms its holding that no “occurrence” took place in this case. Additionally, the Court finds that Puget needed to allocate between covered and non-covered losses and that it failed to satisfy its burden of allocation in this case, having presented no reliable evidence upon which this Court can apportion damages between covered and non-covered damages. The Court therefore denies Puget’s motion for a new trial or to alter or amend the judgment. Any point of error raised by Puget, but not expressly addressed in this opinion, is also denied.
Notes
. For ease, this Court will refer to Puget and Microtherm collectively as “Puget” and Puget and Microtherm’s motion for new trial as "Puget’s Motion.”
. There was evidence admitted at the trial that, despite his reckless conduct, Gibbons braked and attempted to avoid the collision with the Tanner car.
. For a more thorough review of why this Court held that injury to Microtherm was highly probable given Puget’s deliberate lowering of melt temperatures, see
Puget II,
. It is important to note in Maryland Casually, a case based upon the failure of an insurer to defend its insured, that, unlike the jury in the underlying case herein, the jury found the insured to be negligent.
. In Maryland Casualty and Orkin, discussed above, the courts were dealing with instances where a jury had already found the insured to have acted negligently. Sometimes, however, the use of the term "negligence” in opinions by certain courts does not necessarily mean "negligence” in the legal sense. Some courts have used "negligence” in the every day sense, analogous to committing an "error” or the making of a "mistake.” This loose use of language can be troublesome in the application of the cases to a given fact situation and is perhaps part of the reason so much confusion has arisen in "accident” case law.
. It is important to note that while these two holdings — the first being that when the injury is the natural result of an intentional act there is no accident and the second being that an intentional tort can never be an accident — are both equally applicable to the facts of Maupin, they are not necessarily interchangeable in all cases. Although a finding of intentional tort (the latter holding of the court) necessarily requires a finding of tortious conduct, the first holding announced by court paid no heed to whether the intentional act giving rise to injury or damage constituted an intentional tort. Thus, under Maupin, it is not necessary to prove a legally wrongful act in order to show that no accident has occurred; it is sufficient that intentional conduct led to injuries that were the natural result of that conduct.
.One could argue, as Puget suggests, that "objective” and "from the viewpoint of the insured” are incompatible. As stated before, this Court disagrees. The question can be an objective one, with the reasonable person being one in the same circumstances and with the same knowledge as the insured at the time of the conduct in question. In the context of Heyward, for example, a court would ask if a reasonable man, under the same or similar circumstances and with knowledge of what had occurred just prior to the insured’s death, would reasonably believe the two individuals would kill him. "From the viewpoint of the insured,” thus, only instructs a court to place the "reasonable person” into the shoes of the insured at the time of the event in dispute.
. "Although our language in
[Heyward]
referred to ‘accidents,’ the same reasoning applies in cases where the policy contains an intentional injury exclusion. An insured under a policy with an intentional injury exclusion still relies on the policy to provide indemnity against fortuitous, unexpected, or undesigned injury.” S.S.
& G.W.,
. In fact, the evidence was that Gage neither intended nor subjectively expected the resulting injury because he thought that the victim would never find out what he had done. Thus, the court in
Cowan
had to have used an objective standard. Aside from the holding, it is worth mentioning the court's rejection of
. This case may be somewhat of an anomaly given its subject matter and given that one might consider the underlying act of distributing the photographs to be an intentional tort — invasion of privacy — in which case any resulting harm would be presumed.
. The result in this case is very similar to the holding of
Grapevme
where the Fifth Circuit held that an accident had occurred when a contractor intentionally performed under a contract but inadvertently used inferior materials.
See Grapevine,
. This Court finds the legal summary contained in Lamar to be helpful as far as it goes, but the present case falls in the cracks not addressed by the Supreme Court in Lamar. Hence, this present analysis might be described not as an attempt to reinvent the wheel, but as an attempt to fill in what lines were left blank.
.The
Lamar Homes
court’s use of the phrase “highly probable” would later form the basis for one of the Fifth Circuit’s non-occurrence scenarios it articulated in the interlocutory
. One might disagree with the notion that reasonable foreseeability remains a part of any test in the context of defining an “accident.” As stated before, however,
Lamar Homes
did not outright reject any use of a foreseeability test in the accident context. It seems the court simply intended to hold that determining whether an accident occurred is not
simply
a question of foreseeability.
See Lamar Homes,
. With the exception of the use of the "reasonably foreseeable” language, this portion of the Court’s newly derived test mirrors the analysis laid out in Puget I by the Fifth Circuit.
. This Court is mindful that Maupin and Cowan, arguably cases involving an intentional tort, need not be governed by this test.
. This Court uses terms like "poor performance” or "careless intervening act” as opposed to the term "negligence” so there will no confusion between an intentional act and a negligent act. As stated earlier, some confusion has been generated by opinions describing an intentional act with the term “negligence.” Obviously, most insurance policies of this kind are designed to cover negligent acts. Consequently, this discussion should be viewed only in the context of an intentional act.
.The Court notes that when a coverage case involves an underlying jury finding of negligence in the traditional tort sense, this inquiry is superfluous because, by definition, a common law negligence finding requires a finding of proximate cause before an award of damages.
. Perhaps Lamar Homes did not account for all possible scenarios because the Supreme Court was simply articulating a few scenarios that were applicable to the questions it was called upon to answer. It does not directly address the situation that exists here, i.e., a situation in which an intentional act, which should not have been performed, was performed adequately, and that act led to damages that were not intended by the insured, but were highly probable.
. Many of the arguments made by Puget are based upon cases where a jury found (or at least, in the duty-to-defend cases, it was alleged) the conduct in question to be negligent. Here that is not the problem. We have no negligence finding — all we have is a finding of "knowing” conduct. Given the fact that Puget intentionally under-heated the parts in question, one must follow the rules established in the intentional conduct cases.
. This Court does not view Lamar Homes as effectuating a sweeping change over the status of accident law in Texas. In fact, the Supreme Court of Texas in Lamar Homes, when it articulated what does not constitute an accident, cited its prior case law, an indication that the court intended for its holding to be in line with prior precedents of the court.
. This Court notes that it is more probable that the Fifth Circuit panel, like the Supreme Court in Lamar, was not trying to resolve all issues of Texas insurance law; it was merely trying to resolve the issues before it, and since it was an interlocutory opinion, it additionally tried to give this Court some guidance for future proceedings. This was certainly the attitude of this Court in its prior opinions in this matter. This Court’s lengthy discussion of Texas case law herein was not prompted because of its concern over the Circuit’s analysis, but rather due to issues raised in the motions for new trial and oral argument on same.
. The burden of allocation remains with the insured party, even if the allocation is being made between covered perils and
excluded
perils, perils the type of which the insurer normally has the burden of proving.
See
Tex. Ins.Code. Ann. § 554.002 (West 2009);
Wallis,
. The very wording of the opinion makes this clear. After the discussion of the attorney’s fees/damages allocation analogy, the court begins its discussion of the testimony by stating, "[i]n any event, in the present case ...."
Lambert,
. Under the Policy, the damage need only be to tangible property other than Puget's product. See The Policy, at 6 (defining "property damage”), 7 (excluding coverage for "Property Damage to [Puget's] Product arising out of it or any part of it”). The testimony established that the most prevalent property damage resulting from the leaks that falls into this category was the damage to the circuit boards or, more rarely, the damage to homeowner’s property.
. The Court acknowledges the existence of a case,
McKinney Builders v. Nationwide Mutual Insurance Co.,
No. 3:97-CV-3053-R, 1999
. Similar to its method of citation in its original opinion, the Court will cite to the coverage trial using the following format: Name, X C.T.Y, with "Name” representing the name of the witness testifying, "X” representing the volume of the coverage trial, and "Y" representing the page within that volume. The state-court trial will be cited using the following format: Name, X T.T.Y, with "Name” representing the witness testifying, "X” representing the volume of the state-court trial, and "Y” representing the page within that volume.
. Ironically, Puget’s earlier argument that the chambers, as they were installed into Seisco water heaters, were not Puget’s product would deem this exception to the impaired property exclusion inapplicable. Needless to say, Puget/Microtherm does not argue this position.
. The only jury question from the state-court trial that related to property damage concerned "parts provided or work performed by” the defendants, and this Court has been affirmed by the Fifth Circuit in holding that such damages are not covered under the Policy.
See
Pl.’s Opposition to Wausau's Mot. to Dismiss, Ex. A (State Court Judgment) (Docket No. 14);
see also Puget I,
. One could have conceivably interpreted this testimony to say that none of the plastics problems caused circuit board problems if the first 20% included only thermistors, and the last 20% were circuit board replacement problems due to problems other than chamber leaks (e.g. lightning). This would leave only the remaining 60% of service trips that were related to plastics failure, none of which, according to Carr's testimony, would have included circuit board failures. This testimony could also be interpreted to mean that all of the 60 field trips included circuit boards and therefore 100% of the chamber leaks shorted circuit boards. Finally, one could conclude that Carr's testimony has no relevance at all. In other words, Carr’s testimony could be interpreted to mean anything from 0% of chamber leaks shorted circuit boards to 100% of chamber leaks shorted circuit boards.
. The Court estimates that approximately 50% to 55% of the records clearly reflect the fact that a leaky chamber had shorted a circuit board. On the other hand, about 75% of the warranty records reflected both a leaky chamber and the fact that a circuit board had been replaced. In calculating this second category of records, the Court took no note of whether the leaky chamber was in any way related to the replaced circuit board. Finally, the Court added to this last category of records those instances in which a customer purchased an upgrade for his/her water heater which, according to testimony, would include a new circuit board. In this final category, much like the second, the Court took no notice of which upgrades seemed to be related to leaky chambers, reaching an approximate percentage of 85%.
. As seen above, depending on the interpretation, the evidence can range from 25% to 100% depending upon the witness and the interpretation put on the testimony. Thus, under this argument — setting aside any award based on additional damages, prejudgment interest, or attorneys’ fees — this Court could award a verdict as small as approximately $5.6 million or as large as approximately $22.5 million, based on actual damages alone. While courts have not required exact precision when allocating, this level of imprecision is totally unacceptable.