Lead Opinion
This appeal involves a claim for coverage brought by Snug Harbor, Ltd. (Snug Harbor) under a comprehensive general liability (CGL) insurance policy issued by Zurich Insurance Company (Zurich). Snug Harbor alleges that (1) Zurich’s insured — First South Savings Corporation (First South)— mishandled a petition and citation which was to be served on Snug Harbor, thereby causing a default judgment to be entered against Snug Harbor in Texas state court, and (2) the mishandling of this citation and petition constitutes “property damage” for purposes of the CGL policy. Following trial, the district court entered judgment in favor of Snug Harbor in the amount of $2,230,000. We reverse and render judgment in favor of Zurich.
I
On October 15,1985, while at his home in a condominium project owned by Snug Harbor, Stephen Campbell was stabbed by a Snug Harbor employee. Seeking remedy for his injuries, Campbell brought suit in Texas state court in January 1986 against Snug Harbor, its general partner Claude Williams, and others connected with the property.
On the same day notice of Campbell’s suit was allegedly
In August 1987, Snug Harbor brought suit in Texas state court against (1) Zurich,
During these proceedings, First South was placed in conservatorship; the Federal Savings and Loan Insurance Corporation (FSLIC) was appointed conservator and the Federal Deposit Insurance Corporation (FDIC) was appointed manager. The
Following trial, the district court instructed the jury that Zurich had a duty to defend First South and asked the jury to determine whether Zurich’s failure to defend was a bad faith breach of that duty. Finding that Zurich had acted in bad faith and with reckless disregard in failing to defend First South, the jury returned a verdict against Zurich and awarded First South $30,000 in attorney’s fees and $1,500,000 in punitive damages.
II
Zurich raises the following contentions:
(a) the district court erred in submitting the issue of coverage to the jury;
(b) the district court erred in holding that Zurich had a duty to defend First South;
(c) the district court erred in failing to conclude that, as a matter of law, Zurich did not breach its duty of good faith and fair dealing; and
(d) the district court erred in awarding damages.
A
Zurich contends that, as a matter of law, Snug Harbor’s claim against First South was not covered by the Zurich-issued policy because (1) the only loss Snug Harbor could have suffered was loss of notice of the Campbell suit — a loss that does not constitute “property damage” for purposes of the Zurich policy, and, (2) even if this alleged misplacement of the Campbell citаtion and petition is construed as “property damage,” it did not occur during the policy period. Therefore, Zurich asserts, the district court erred by submitting this question to the jury.
The question before us is one of contract interpretation. We review such questions de novo unless they arise from ambiguity in the language of the contract. See Carpenters Amended & Restated Health Benefit Fund v. Holleman,
1
The Zurich-issued policy provides CGL insurance coverage for property damage,
(1) physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or (2) loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period.10
Snug Harbor asserts that its loss of the use of the Campbell citation and petition constitutes such property damage. We disagree.
Whether the mishandling of a legal document leading to the entry of a default judgment constitutes “property damage” for CGL insurance purposes is a question of first impression.
The Campbell petition and citation had no intrinsic value or use beyond notifying Snug Harbor that legal action had commenced against it. The substantive loss resulting from the alleged mishandling of this documentation is loss of that notice, which resulted in a default judgment.
Zurich also asserts that there was no occurrence
Texas courts have concluded that the time of an occurrence is when a claimant sustains actual damage — not necessarily when the act or omission causing that damage is committed. See, e.g., Dorchester Dev. Corp. v. Safeco Ins.,
3
We have found that (1) the alleged misplacement of the Campbell petition does not constitute a property loss for the purposes of the Zurich-issued CGL policy and, (2) even if we were to construe it as such, it does not constitute an occurrence during the policy period.
B
Zurich also contends that the district court erred in holding that it had a duty to defend First South. We agree.
An insurer’s duty to defend is expansive — that is, “[i]f any allegation in the complaint is even potentially covered by the policy[,] then the insurer has a duty to defend its insured.” Enserch Corp. v. Shand Morahan & Co.,
In determining whether an insurer had a duty to defend, we look to the face of the pleadings.
C
According to Zurich, the district court erred in concluding that Zurich breached a duty of good faith and fair dealing by refusing to defend First South. We agree.
A finding of bad faith cannot be premised solely on the breach of a contractual duty, such as the duty to defend. See United Servs. Auto. Ass’n v. Pennington,
D
Finally, Zurich challenges the district court’s judgment against it in the amount of $2,230,000 — a judgment consisting of $30,000 in attorney’s fees, $1,500,000 in exemplary damages, and $700,000 to fully cover the First South settlement with Snug Harbor. Because we have found that, as a matter of law, Snug Harbor’s claim against First South was not covered by the Zurich-issued insurance policy and that Zurich had no duty to defend First South, we conclude that the district court’s award against Zurich is unsupported.
Ill
For the foregoing reasons, we REVERSE the district court’s judgment in favor of Snug Harbor and RENDER JUDGMENT in favor of Zurich.
Notes
. Zurich asserts that Snug Harbor's general partner was personally served, and that a copy of the petition and citation was also left with a Snug Harbor employee.
. At the time of the stabbing, Snug Harbor owned a CGL policy issued by Zurich. This policy provided coverage for liability due to "bodily injury” and "proрerty damage” up to $500,000 per occurrence. See infra notes 9-10 and accompanying text (quoting the policy). A few weeks after First South took possession of Snug Harbor, First South added itself to the Zurich policy, effective January 25, 1986. First South canceled this policy on April 9, 1986.
. Essary is the broker responsible for selling the Zurich policy to Snug Harbor.
. See supra note 2 (summarizing how First South added itself to the Zurich policy).
. In return for this settlement with First South, Snug Harbor and Campbell released their claims against First South and agreed to never enforce a judgment against First South and in their favor.
. The jury also found that Snug Harbor’s claim was a covered claim for property damage and that the policy’s care, custody or control exclusion does not apply.
. See also Pierre v. Conn. Gen. Life Ins.,
Generally, contract interpretation is reviewed under a de novo standard; a reviewing court does not defer to the lower court’s interpretation of the contract as long [as] the interpretation looks to the four-corners of the contract. Once, however, the lower court goes beyond the boundaries of the written document to make determinations of fact, its findings are subject to a deferential standard.
. See infra notes 9-10 and accompanying text.
. The Zurich-issued policy provides, in pertinent part:
I. COVERAGE — BODILY INJURY AND PROPERTY DAMAGE LIABILITY
The Company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies, caused by an occurrence, and the Company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage, even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient, but the Company shall not be obligated to pay any claim or judgment or to defend any suit after the applicable limit of the Company's liability has been exhausted by payment of judgments or settlements.
Record Excerpts of Appellant Zurich Ins. Co. at tab 5, Snug Harbor Ltd. v. Zurich Ins. Co., No. 91-2085 (5th Cir. filed June 5, 1991) [“Record Excerpts”].
. Id.
. The only case that approaches being legally "on-point" was recently decided by a California court. See Aim Ins. v. Culcasi,
. See, e.g., Chertok v. Hotel Salisbury,
. See, e.g., Liberty Bank v. Travelers Indem.,
The following have been found tо be outside the definition of property damage: a claim for a negligent termite inspection resulting in diminution of the value of the home; a claim for the amounts paid to customers in refunds when defective tennis rackets were returned; a breach of the warranty of fitness of an automobile which resulted in a diminution of value; and misrepresentations made by the insured sellers concerning an easement on the property purchased by the claimants.
. See American Home Assur. v. Brandt,
. The record before us contains no indication that Snug Harbor ever moved to have the default judgment against it set aside. Cf. Matsushita Elec. v. McAllen Copy Data,
[a] default judgment should be set aside and a new trial ordered in any case in which the failure of defendant to answer was not intentional, or the result of conscious indifference on his part, but was due to a mistake or accident; provided a motion for new trial sets up a meritorious defense and is filed at a time when the granting thereof will occasion no delay or otherwise work an injury to the plaintiff.
. Snug Harbor’s claim against First South is similar to "errors-and-omissions” (E & O) claims of negligence. Errors and omissions policies exclude damage to tangible property but cover damages sustained as a result of an act or omission — for example, claims made against professionals and business entities where one party receives notice for another and fails to properly or timely forward that notice:
An errors-and-omissions policy is professional-liability insurance providing a specialized and limited type of coverage as compared to comprehensive insurance; it is designed to insure members of a particular professional group from the liability arising out of a special risk such as negligence, omissions, mistakes and errors inherent in the practice of the professions.
. The Zurich-issued insurance policy provides that:
"occurrence" means an accident, including continuous or repeated exposure to conditions, which results in property damage, neither expected nor intended, from the standpoint of the insured.
Record Excerpts at tab 5.
. Where the underlying policy contained language requiring an occurrence during the policy period essentially identical to that in the Zurich-issued policy, the Dorchester court held that “no liability exists on the part of the insurer unless the property damage manifests itself, or becomes apparent, during the policy period.” Id. at 383.
. It follows from Snug Harbor's contention that it was deprived of an opportunity to defend itself that, had misplacement of the Campbell petition and citation manifested itself during the policy period, Snug Harbor would have defended itself and there would have been no default judgment entered against it. Therefore, it is self-evident from the default judgment that the manifestation of Snug Harbor’s alleged loss did not occur during the policy period. Moreover, the record before us indicates that Snug Harbor made no effort to have the default judgment set aside. See supra note 15.
. Zurich also contends that the policy's care, custody or control exclusion bars coverage. This exclusion provides that the policy "does not apply to property damage to property in the care, custody or control of the insured оr as to which the insured is for any purpose exercising physical control.” Record Excerpts at tab 5. Because we find that Zurich's "no property” and
. Our conclusion is based upon the deeply-settled standard for determining whether there is sufficient evidence to create a jury question: “The judge must determine whether the evidence is sufficiently in conflict to permit differing views concerning disputed issues of fact and, whether, even if the evidence is not contradicted, conflicting inferences can be drawn from it.” Atchison, Topeka and Santa Fe v. Sherwin-Williams,
. The McManus court held that:
An insurer is required to defend only those cases within the policy coverage. Furthermore, the insurer is entitled to rely on the plaintiffs allegations in determining whether the facts are within the coverage. If the petition only alleges facts excluded by the policy, the insurer is not required to defend.
McManus,
. This court has held in accordance with this general principle under Louisiana law. See Selective Ins. v. J.B. Mouton & Sons,
. See Feed Store, Inc. v. Reliance Ins.,
In ascertaining the scope of a duty to defend, courts should look to the language of the policy and the allegations in the complaint against the insured.... Under this analysis we cannot consider anything outside (a) the policy and (b) the pleadings, even if there is evidence tending to show the suit is utterly specious. The effect of this "eight corners rule” is to minimize uncertainty in assessing a liability insurer’s duty, as well as to favor the insured in cases where the merits of the action may be questionable.
See also Yancey v. Floyd West & Co.,
. See also Fidelity & Guar. Ins. Underwriters v. McManus,
. Snug Harbor’s Second Amended Complaint alleges that:
Immediately after the [Campbell] petition and citation was served upon Snug Harbor, First South deprived Snug Harbor of possession and use of its tangible personal property, part of which was the citation and petition relative to the "Campbell claim."
Record Excerpts at tab 6.
. See supra Parts II.A.1-3.
. See Enserch Corp.,
. Snug Harbor asserts on appeal that Zurich’s failure to settle its claim constitutes bad faith. Snug Harbor did not properly raise this issue below, as is evidenced by the fact that it was never submitted to the jury. The only interrogatory submitted to the jury setting out the standard for a finding of bad faith concerned Zurich’s alleged failure to defend:
[0]ne of the issues that has been contested in this case is whether Zurich Insurance Company had an obligation to provide First South Savings with a defense in this case.
Based upon the evidence and my interpretation of the contract of insurance, I have determined that Zurich owed that duty to defend as a matter of law. Therefore, you will not be required to deliberate on that question. However, you are required to answer various other questions regarding the evidence in this case as follows:
Number One: Do you find that the Zurich Insurance Company failed to act in good faith and fair dealing with its insured, First South Savings Association, by refusing to defend the Snug Harbor claim?
Record on Appeal, vol. 1, at 123, 143, Snug Harbor Ltd., v. Zurich Ins., No. 91-2085 (5th Cir. filed Apr. 1, 1991).
. See supra Part II.B.
. Zurich wraps its challenge to the district court’s judgment of bad faith with a string of alleged trial errors — specifically, that (1) improper district court comments amounted to an improper directed verdict, (2) the district court improperly instructed the jury that Zurich owed a fiduciary duty to First South, and (3) the district court compounded its allegedly hаrmful instructions by allowing improper attorney/expert opinions. Having found that Zurich had no duty to defend First South and that Snug Harbor’s claim of bad faith is without merit, we do not reach these issues.
Concurrence Opinion
concurring in part and dissenting in part.
I agree with the majority that the trial court erred in concluding that Zurich breached its duty of good faith and fair dealing by refusing to defend First South. Otherwise, I would affirm the trial court in all respects, and I must therefore respectfully dissent.
My departure from the majority begins with the order of consideration of the two remaining issues. The majority first concludes that Snug Harbor’s claim against First South was not covered by the policy, and then easily concludes that Zurich had no duty to defend First South. In other words, because the majority now concludes, after the fact, that Snug Harbor’s сlaim was not covered, it also concludes that Zurich’s refusal to defend was reasonable, given the information available to Zurich at the time it made this decision.
This approach begs the question. Obviously, at the time Zurich decided not to defend First South, Zurich did not have the benefit of this decision. Moreover, as the issue of whether the mishandling of a legal document constitutes “property damage” under a CGL policy is one of first impression, there was little if any case law available to guide Zurich’s decision.
Under Texas law, an insurer’s duty to defend its insured is much broader than its duty to indemnify. While the insurer is bound to pay only those claims that are in fact covered by the policy, it must defend its insured against all claims that are pоtentially covered. Enserch Corp. v. Shand Morahan & Co.,
[t]he Campbell petition and citation had no intrinsic value or use beyond notifying Snug Harbor that legal action had commenced against it. The substantive loss resulting from the alleged mishandling of this documentation is loss of that notice, which resulted in a default judgment. We find that, as a matter of law, such a loss does not constitute a “property loss” for CGL policy purposes.
While there is much to be said for this argument, I am not entirely persuaded. In my view an argument can be made that, in a particular case, the loss of a document may constitute property damage if the information contained in that document had some identifiable value to the document’s owner or intended recipient, even though the information contained in the document has no market value.
Arguably there is little difference between a person who is deprived of a document containing a trade secret or the like and a person who is deprived of a document containing information which is valuable to him given his particular circumstances, although it may be of little value to others. For example, the purchaser of a machine may receive a document that explains how to start and operate the machine. This information may be of little interest to those who do not own such machines and may not have a market value — the information may be available in library books and the manufacturer may be willing to provide a duplicate copy at no charge if the original is lost. If the machine’s owner is deprived of the document while out on a job site far from libraries and FAX machines, however,, he will certainly suffer a loss, аnd, to my mind at least, it is difficult to distinguish this loss from the loss suffered' by one who loses a document containing a trade secret or the like. Certainly a market exists for trade secrets, while one does not for the document in the hypothetical; but this is not, to my mind, a meaningful distinction. In both instances, the owner has been deprived of valuable information. The fact that no market exists for the information lost by the machine owner in no way lessens or diminishes his loss. Nor does the existence of a market for trade secrets somehow transmogrify the document containing the trade secret into property: while no market exists for the machine owner’s document, he would probably be willing to pay a great deal for its return in the circumstanсes hypothesized above.
Similarly there is arguably little difference between the petition and citation in this case and those types of documents the loss of which everyone agrees would constitute property damage under a CGL policy. Although information contained in a petition and citation may be of little value to one who is not a party to the lawsuit, it is normally quite valuable to the party that has been sued. If the party filing a lawsuit were not required by law to notify the party being sued, surely those entities that are sued repeatedly would be willing to pay some private firm to gather and disseminate this information.
All this is not to say that the majority’s conclusion that Snug Harbor’s loss was not covered by the policy is not correct. However, the question is whether, at the time Zurich declined to defend First South, First South’s claim was potentially covered by the policy. In my view, the arguments the majority uses to support its conclusions that Zurich had no duty of coverage only serve to highlight the fact that First South’s claim was at least potentially covered by the policy.
Similarly, although I find the majority’s arguments persuasive, I must also respectfully dissent from the majority’s conclusion
In my view, with the exception of the submission of the bad faith issue to the jury,
. The cases relied on by the majority concern instances where an insurer refused to defend a claim that was clearly not covered given the express terms of the policy. See, e.g., Fidelity & Guar. Ins. Underwriters v. McManus,
. See, e.g., Aranda v. Insurance Co. of N. Am.,
. This was only a minor error. While a finding of bad faith may not be based solely on the breach of a duty to defend, a jury may find that an insurer breached its duty of good faith and fair dealing by refusing to provide coverage or by failing to determine whether it was reasonable to deny coverage. State Farm Mutual Auto. Ins. Co. v. Zubiate,