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American Interstate Insurance Company v. Coastal Transport Co., Inc.
June 10, 2008
Unpublished Opinion

American Interstate Insurance Company v. Coastal Transport Co., Inc.

United States District Court, W.D. Texas, San Antonio Division.




Cause No. SA–07–CA–770–OG


Signed 06/10/2008


Filed 06/27/2008

Attorneys & Firms

Edward J. Hennessy, Hennessy, Gardner & Barth, Houston, TX, for Plaintiff.

Laura Denise Tubbs, Hanna & Plaut, LLP, Sean E. Breen, Howry Breen, LLP, Austin, TX, for Defendant.



*1 This is a declaratory judgment action in which plaintiff American Interstate Insurance Company (American) seeks a declaration that it has no duty to defend and indemnify defendant Coastal Transport Co., Inc. (Coastal) in a state court lawsuit. The parties have filed cross-motions for summary judgment. (Docket nos. 6, 8.)

In the state court suit, plaintiff Margarita DeLeon seeks to recover for injuries she sustained as a result of the injuries suffered by her husband while operating a tractor-trailer truck during the course and scope of his employment with Coastal. Ms. DeLeon alleges that Coastal’s negligent hiring, training, supervision, and operation of its trucking operation were the cause of her husband’s injuries. She contends that Coastal’s negligent acts and omissions led to a working environment such that the incident in question was substantially certain to occur from the standpoint of a reasonably prudent company in the manner and fashion which it did occur. Ms. DeLeon alleges that these acts and omissions include negligently or knowingly requiring Mr. DeLeon to work hours of unconscionable length, providing Mr. DeLeon a trailer with brakes that were either defective or not working, failing to instruct Mr. DeLeon in compliance with federal regulations, and in negligently or intentionally failing to provide a safe place to work that included reasonable and prudent training of Mr. DeLeon and his supervisors. Ms. DeLeon claims that Coastal’s actions and inactions caused the injuries and damages she sustained, which arise directly out of the injuries to her husband.

Ms. DeLeon contends alternatively that Coastal committed negligence per se. She claims that as a direct and proximate result of Coastal’s tortious conduct she suffered consequential bodily injury as the result of Mr. DeLeon’s injuries. Ms. DeLeon also seeks damages for mental anguish in the past and future, care and loss of services and loss of consortium, damages to the marital relationship, and all consequential damages that she has suffered as a direct consequence of the bodily injury that arose out of Mr. DeLeon’s employment by Coastal. In addition, Ms. DeLeon seeks exemplary damages, pre-judgment and post-judgment interest.

Coastal is the named insured under a policy of Worker’s Compensation and Employer’s Liability Insurance issued by American. The Policy provides at Part Two - Employers Liability Insurance:

A. How This Insurance Applies

This employer’s liability insurance applies to bodily injury by accident or bodily injury by disease. Bodily injury includes resulting death.

1. The bodily injury must arise out of and in the course of the injured employee’s employment by you.

* * *

B. We Will Pay

We will pay all sums you legally must pay as damages because of bodily injury to your employees provided the bodily injury is covered by this Employer’s Liability Insurance.

The damages we will pay, where recovery is permitted by law, include damages:

1. for which you are liable to pay a third party by reason of a claim or suit against you by that third party to recover the damages claimed against such third party as a result of injury to your employee;

*2 2. for care and loss of services; and

3. for consequential bodily injury to a spouse, child, parent, brother or sister of the injured employee;

provided that these damages are the direct consequence of bodily injury that arises out of and in the course of the injured employee’s employment by you;

* * *

D. We have the right and duty to defend, at our expense, any claim, proceeding or suit against you for damages payable by this insurance.

Coastal put American on notice of Ms. DeLeon’s claim. American initially denied Coastal’s request for a defense but later advised Coastal that it would provide a defense for the DeLeon lawsuit subject to a reservation of rights. American then initiated the present action.

A court resolves duty-to-defend issues in accordance with the “eight corners rule.” Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523, 528 (5th Cir.2004). This limits review to the four corners of the underlying claimant’s complaint and the four corners of the insurance policy. “[T]he duty to defend arises only when the facts alleged in the complaint, if taken as true, would potentially state a cause of action falling within the terms of the policy.” Id. (emphasis in original). The complaint’s allegations are given a liberal interpretation, and all doubts are resolved in favor of the duty to defend. Id.

In applying the eight-corners rule, the Texas courts do not concern themselves with the validity of allegations to determine the duty to defend:

We think that in determining the duty of a liability insurance company to defend a lawsuit the allegations of the complainant should be considered in the light of the policy provisions without reference to the truth or falsity of such allegations and without reference to what the parties know or believe the true facts to be, or without reference to a legal determination thereof.

Heyden Newport Chem. Corp. v. Southern Gen. Ins. Co., 387 S.W.2d 22, 24 (Tex. 1965); accord Brooks, Tarlton, Gilbert, Douglas & Kressler v. U.S. Fire Ins. Co., 832 F.2d 1358, 1368 (5th Cir. 1987). If there is a “doubt as to whether or not the [factual] allegations of a complaint against the insured state a cause of action within the coverage of a liability policy sufficient to compel the insurer to defend the action, such doubt will be resolved in [the] insured’s favor.” National Union Fire Ins. Co. v. Merchants Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997); Harken Exploration Co. v. Sphere Drake Ins. PLC, 261 F.3d 466, 471 (5th Cir. 2001).

Northfield notes that the Texas Supreme Court has never recognized an exception to the strict eight-corners rule that would allow the examination of extrinsic evidence. 363 F.3d at 529. The court’s Erie guess was that the Texas Supreme Court would not recognize any exception to the eight-corners rule. Id. at 531. The circuit court went on to opine that:

in the unlikely situation that the Texas Supreme Court were to recognize an exception to the strict eight corners rule, we conclude any exception would only apply in very limited circumstances: when it is initially impossible to discern whether coverage is potentially implicated and when the extrinsic evidence goes solely to a fundamental issue of coverage which does not overlap with the merits of or engage the truth or falsity of any facts alleged in the underlying case.

*3 Id. (emphasis in original). The Texas Supreme Court subsequently cited Northfield’s prediction with approval. GuideOne Elite Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d 305, 308–09 (Tex. 2006).

In the event of a coverage dispute, “an insurer is obligated to defend an insured as long as the complaint alleges at least one cause of action within the policy’s coverage.” Canutillo Indep. Sch. Dist. v. National Union Fire Ins. Co., 99 F.3d 695, 701 (5th Cir. 1996). Ms. DeLeon has alleged a claim for a consequential bodily injury that she suffered as a direct consequence of the injuries to Mr. DeLeon that arose out of his employment by Coastal. She also alleges claims for loss of services and consortium arising out of the injuries to her husband. The policy covers such claims. Specifically, the policy provides “[t]he damages we will pay ... include damages ... ‘for care and loss of services; and for consequential bodily injury to a spouse, child, parent, brother or sister of the injured employee.” ’ The policy further requires American Interstate to defend “any claim or proceeding against you for damages payable by this insurance.” Since the petition in the DeLeon lawsuit alleges potentially covered claims, American has a duty to defend Coastal for the entire lawsuit.

American argues that its policy does not require it to defend legally groundless claims. The policy limits the duty to defend to “any claim, proceeding, or suit against you for damages payable by this insurance.” Policy at p. 3, Part II, Subpart D. The “damages payable by this insurance” are “all sums you legally must pay as damages because of bodily injury to your employees ... covered by this ... Insurance,” and they include, “where recovery is permitted by law,” “care and loss of services;” and “consequential bodily injury to a spouse....” Policy at p. 2, Part Two, Subpart B. “At the very least,” American argues, “in order to trigger the duty to defend this policy language requires a pleading to allege facts that if true, would establish damages that Coastal ‘legally must pay’ under applicable law.” Response at 4. American also argues that it is significant that its policy does not contain the usual promise to defend “groundless, false or fraudulent” claims found in other types of liability insurance. Because this language is missing, American argues, it is not obligated to defend a claim that lacks merit.

The Court does not agree. If that were the case, an insurance company could avoid the reach of the eight-corners rule simply by writing the “groundless, false or fraudulent” clause out of its policies and demanding proof of a claim’s validity before its obligation to defend is invoked. In addition, Northfield mandates that insurers must defend claims that state potential causes of action falling within policy coverage. American’s argument would overrule Northfield, requiring an insured to establish that the claim states not merely a potential cause of action, but a viable one. Of course, the only way an insured could meet such a burden would be by extrinsic evidence, resulting in a system of pre-trial trials to determine coverage. All this, the eight-corners rule is designed to avoid.

*4 The original purpose of the eight-corners rule was to preclude an insurance company from refusing to defend an insured based on the lack of merit of the plaintiff’s case. Because a liability policy is a contract under which an insurance company agrees to assume both the defense of the suit and the liability if the insured was found responsible, the eight corners rule prevents the insurance company from refusing to defend based on the merits of the suit.

Tri–Coastal Contractors, Inc. v. Hartford Underwriters Ins. Co., 981 S.W.2d 861, 863 (Tex.App.--Houston [1 Dist.] 1998, pet. denied).

American has cited no authority compelling the result it seeks. It cites GuideOne, but nothing in that case limits the applicability of the eight-corners rule to insurance policies containing the “groundless, false or fraudulent” language. American also cites Heyden Newport Chem. Corp. v. Southern Gen. Ins. Co., 387 S.W.2d 22 (Tex. 1965) and Maryland Cas. Co. v. Moritz, 138 S.W.2d 1095 (Tex. Civ. App.—Austin 1940, writ ref’d). While the policies at issue in those cases contain the “groundless, false or fraudulent” language, as many such policies do, those cases do not turn on the inclusion or exclusion of the quoted phrase.

Moreover, as cases cited by Coastal illustrate, both federal and state courts have no problem applying the eight-corners rule to policies with language substantially similar to the policy at issue here. See, e.g., BJB Const. v. Atlanta Cas. Ins. Co., No. H–07–0157, 2008 WL 1836690 (S.D. Tex. April 23, 2008); Fairfield Ins. Co. v. Stephens Martin Paving, No. 1:03–CV–037–C, 2003 WL 22005877 (N.D. Tex. Aug. 25, 2003); Tri–Coastal Contractors, Inc. v. Hartford Underwriters Ins. Co., 981 S.W.2d 861 (Tex. App.—Houston [1st Dist.] 1998, pet. denied).

American argues that extrinsic evidence that Mr. DeLeon has received workers’ compensation benefits from American bars Ms. DeLeon’s suit. Whether Mr. DeLeon has received worker’s compensation benefits requires a consideration of extrinsic evidence, which is impermissible in a duty-to-defend analysis. Tri–Coastal Contractors, 981 S.W.2d at 864.

American also argues that Ms. DeLeon’s claims for her derivative injuries, including loss of consortium, loss of services, and mental anguish, are barred by the exclusive remedy provision of the Texas Workers’ Compensation Act. See, e.g. Reed Tool Co. v. Copelin, 610 S.W.2d 736, 738–39 (Tex.1980) (workers’ compensation act bars claim for negligent impairment of consortium). In general, recovery of workers’ compensation benefits is the exclusive remedy of an employee covered by workers’ compensation insurance against an employer for a work-related injury sustained by the employee. TEX. LAB. CODE § 408.001(a).

Coastal, however, bargained for a defense of both meritorious and meritless suits when it purchased the policy from American. American assumed the duty to defend Coastal against Ms. DeLeon’s suit whether it is ultimately determined to have merit or not. Tri–Coastal Contractors, 981 S.W.2d at 864. American cannot opt out of its duty to defend Coastal based on its estimation of the merits of Ms. DeLeon’s suit. As it stands, Ms. DeLeon has alleged causes of action potentially within the coverage of the policy. Northfield Ins. Co., 363 F.3d at 528. While it may ultimately prove to be true that Ms. DeLeon’s claims cannot stand, that is not an issue to be determined at the duty-to-defend stage. Coastal has satisfied the eight-corners rule. American must defend Coastal.

*5 Next, American argues that intentional injuries are excluded by the policy. When relying on an exclusion to deny coverage, the initial burden is on the insurer to prove that the exclusion applies. Harken Exploration Co. v. Sphere Drake Ins., 261 F.3d 466, 471 (5th Cir. 2001). American has not, and cannot satisfy its burden. First, there is a question whether Ms. DeLeon has even alleged an intentional injury, and any doubts in that regard must be resolved in favor of coverage. Northfield, 363 F.3d at 528. Second, even if intentional claims are alleged, Texas courts have considered allegations similar to those raised by Ms. DeLeon and determined that they do not qualify as intentional acts and do not fall within the intentional acts exclusion of the policy. In Reed Tool Co. v. Copelin, 689 S.W.2d 404, 407 (Tex. 1985), the Texas Supreme Court held that “the intentional failure to furnish a safe place to work does not rise to the level of intentional injury except when the employer believes his conduct is substantially certain to cause the injury.” The court cited with approval other courts that have held that the intentional violation of a safety regulation does not qualify as an intentional injury and that the intentional failure to train an employee to perform a dangerous task does not constitute an intentional injury. Id. These are exactly the allegations made by Ms. DeLeon.

Coastal argues that American violated the prompt-payment statute. TEX. INS. CODE §§ 542.051, et seq. The statute provides that an insurer who is liable for a claim under an insurance policy and who does not promptly respond to, or pay, the claim as the statute requires, is liable to the policyholder or beneficiary not only for the amount of the claim, but also for interest on the amount of the claim at the rate of eighteen percent a year as damages, together with reasonable attorneys’ fees. Id. at 542.060. The Texas Supreme Court has recently extended application of the prompt payment statute to claims for a defense. Lamar Homes, Inc. v. Mid–Continent Cas. Co., 242 S.W.3d 1, 19 (Tex. 2007).

American offers various reasons for why the statute should not apply or, at least, why fact issues remain. What neither side has considered is that the prompt-payment statute does not apply to workers’ compensation insurance. The statute states plainly that “[t]his subchapter does not apply to: workers’ compensation insurance ....” TEX. INS. CODE § 542.053(a)(1). Ms. DeLeon is seeking recovery under the workers’ compensation policy issued by American to Coastal, and Coastal’s request for a defense and indemnification is also pursuant to that policy. Because Coastal has not offered a reason why the prompt-payment statute applies in the present case in light of § 542.053(a)(1), the Court must conclude that it has no application.

Texas law generally prohibits the determination of the duty to indemnify before the conclusion of the underlying action against the insured. Northfield, 363 F.3d at 536; Westport Ins. Corp. v. Atchley, Russell, Waldrop & Hlavinka, L.L.P., 267 F.Supp.2d 601, 625 (E.D. Tex. 2003). The duty to indemnify is justiciable prior to the conclusion of the underlying action only when the duty to defend analysis, which looks exclusively at the eight corners of the state court petition and the policy, indicates that no set of alleged facts would provide coverage, and because of the very same reasons, no duty to indemnify could arise. Id. at 626. Because Coastal has a duty to defend and because the underlying lawsuit is still pending, the indemnification issue is not justiciable at this time.

Likewise, the Court does not believe the amount of Coastal’s attorney’s fees and costs incurred in the underlying suit can be determined at this time. American states that it needs more time to review Coastal’s submissions and conduct discovery. As of the filing of its response, American had not been able to inspect relevant files at Coastal’s office. The Court will direct the parties to confer to attempt reach agreement on the amount of these fees.

Coastal’s motion for summary judgment (docket no. 6) is GRANTED IN PART. Coastal’s request for penalties under the Texas prompt-payment statute is DENIED, and its request for a judgment on its defense costs in the DeLeon lawsuit is DENIED without prejudice. In all other respects, its motion for summary judgment is GRANTED. American’s counter-motion for summary judgment (docket no. 8) is DENIED.

*6 The parties are directed to confer concerning the amount of reasonable and necessary attorney’s fees and litigation costs in the DeLeon lawsuit. If an agreement cannot be reached, Coastal may re-submit its motion with accompanying evidence and American will have eleven days to respond. The matter of Coastal’s request for indemnification also remains pending.

End of Document