AMERISURE MUTUAL INSURANCE COMPANY, Plaintiff -- Appellee Cross-Appellant
ARCH SPECIALTY INSURANCE COMPANY, Defendant -- Appellant Cross-Appellee
Appeals from the United States District Court for the Southern District of Texas.
For Amerisure Mutual Insurance Company, Plaintiff - Appellee Cross-Appellant: Fred Lawrence Shuchart, Cooper & Scully, P.C., Houston, TX; Diana L. Faust, Cooper & Scully, P.C., Dallas, TX.
For Arch Specialty Insurance Company, Defendant - Appellant Cross-Appellee: Cathlynn H. Cannon, Esq., Wilson, Elser, Moskowitz, Edelman & Dicker, L.L.P., Dallas, TX.
Before JONES and HAYNES, Circuit Judges, and CRONE, District Judge.[*]
HAYNES, Circuit Judge
Arch Specialty Insurance Company (" Arch" ) appeals an adverse summary judgment in favor of Amerisure Mutual Insurance Company (" Amerisure" ) in this insurance policy dispute. Amerisure cross-appeals. Concluding that Amerisure has exhausted its policy limits, we AFFIRM the part of the judgment regarding the duty to indemnify, REVERSE the part of the judgment regarding the duty to defend, and RENDER judgment in Arch's favor.
I. Facts and Background
In 2006, Amerisure issued a Texas Commercial Package Policy to Admiral Glass & Mirror Co. (" Admiral" ). The policy afforded coverage in excess of any coverage afforded by a controlled insurance program policy. Arch issued an Owner Controlled Insurance Program (" OCIP" ) policy to Endeavor Highrise, LP (" Endeavor" ) and its contractors and subcontractors for bodily injury and property damage arising out of construction of the Endeavor Highrise. Admiral is a subcontractor insured under the OCIP policy. The OCIP policy had combined bodily injury and property damage limits of $2,000,000 per occurrence, a general aggregate limit of $2,000,000, and a products-completed operations aggregate limit of $2,000,000. The OCIP did not provide coverage for property damage during the course of construction. The OCIP policy contains a Supplementary Payments provision which provides that Arch will pay " [a]ll expenses we incur" in connection
with any covered claim, and that " [t]hese payments will not reduce the limits of insurance." Endorsement 16 to the OCIP policy expressly deletes and replaces the statement quoted above with: " [supplementary payments] will reduce the limits of insurance." The OCIP policy also provides that Arch's duty to defend ends " when we have used up the applicable limit of insurance in the payment of judgments or settlements."
Prior to the claim giving rise to this lawsuit, Arch settled three claims under the OCIP policy: a wrongful death suit arising from a worker's fatal fall (settled for $1,555,000.00; attorneys' fees and defense costs of $159,543.160); a toilet leak claim in one of the apartment units (settled for $60,000; attorneys' fees and defense costs of $62,620.18 incurred); and a fire sprinkler leak claim (settled for $880,000; attorneys' fees and defense costs of $31,671.87 incurred).
On June 7, 2010, Endeavor sued Admiral and others for faulty work. Amerisure tendered the lawsuit to Arch as the primary insurer. Prior to Arch accepting the defense, Amerisure incurred $23,879.27 in defense fees. In April 2012, Arch withdrew from defense of the Endeavor lawsuit asserting that attorneys' fees, defense costs, and settlements of $2,000,000.00 from defending Admiral and other subcontractor defendants exhausted policy limits. Amerisure took over the defense and incurred additional fees and costs of $114,957.14 before settling the claims against Admiral. In total, Arch paid a settlement of $1,555,000.00 and defense costs of $159,543.15 under the general coverage limit of the OCIP, and paid settlements totaling $1,472,032.61 and defense costs of $527,967.36 under the products-completed operations coverage of the OCIP policy.
Amerisure sued Arch in Texas state court for breach of contract, contending that Arch wrongfully refused to defend and indemnify Admiral. Arch removed the case to federal court based on diversity jurisdiction. Amerisure filed a motion for partial summary judgment seeking a declaration that: (1) Arch had not exhausted the policy because defense costs did not erode the policy limits; or (2) Arch had a continuing duty to defend after the policy was exhausted. Arch filed a cross-motion for partial summary judgment on the same issues and a second motion for partial summary judgment seeking a declaration on a third issue: that it had not " wrongfully exhausted" the policy by paying uncovered claims.
Based on three issues, the magistrate judge recommended that Arch's second partial summary judgment motion be granted and the cross-motions for summary judgment each be granted in part and denied in part. The magistrate judge determined that (1) defense costs and attorneys' fees were " expenses" under the Supplementary Payments provision and therefore eroded the policy limits; (2) though subject to the same policy limits, the duty to defend ended only when the policy limits were exhausted by judgments and settlements alone (i.e., not by defense costs); and (3) coverage existed for the toilet and sprinkler leaks and therefore Arch did not " wrongfully exhaust" the policy limits with payments on uncovered claims. The district court adopted the magistrate's recommendation over both parties' objections and held that Arch did not breach its duty to indemnify, but did breach its duty to defend Admiral.
Arch appealed the finding that it had a duty to defend Admiral that had been breached. Amerisure cross-appealed the part of the judgment holding that ...