Venture Encoding Service, Inc. v. Atlantic Mutual Insurance Company

Citation: Not availableDocket: 02-02-00020-CV

Court: Court of Appeals of Texas; May 1, 2003; Texas; State Appellate Court

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Atlantic Mutual Insurance Company filed a motion for rehearing, which was denied by the court. The court withdrew its prior opinion from October 10, 2002, and issued a new opinion addressing issues raised by the appellee and dissenters. Venture Encoding Service, Inc. appealed the trial court’s summary judgment favoring Atlantic Mutual regarding an insurance claim under its printing errors and omissions coverage. The appellate court reversed and rendered part of the judgment while remanding other aspects.

The factual background reveals that Venture, a Fort Worth-based printing company, misprinted the lock box payment return address on 328,799 customer coupon payment books for Sallie Mae Servicing Corporation. After reprinting and remailing the corrected books at a cost of $122,888, Venture filed a claim under its commercial general liability (CGL) policy with a Printers Errors and Omissions (E.O.) rider. Atlantic Mutual denied the claim, stating that an exclusion clause applied because the costs were related to correcting property damage to Venture's product, leading to this litigation.

Venture raised two main issues on appeal: whether the exclusion for property damage applied to economic damages under the Printers E.O. Policy, and whether the costs incurred to correct the printing error were covered as sums the insured was "legally obligated to pay." The court outlined the standard of review for summary judgments and clarified that if a trial court does not specify grounds for its judgment, the appellate court must affirm if any grounds are valid. Additionally, under Article 21.58(b) of the Texas Insurance Code, the insurer bears the burden of proof for any defenses in an insurance recovery suit.

Language of exclusion within an insurance policy and any claimed exceptions to coverage by the insurer serve as an affirmative defense under Tex. Ins. Code Ann. art. 21.58(b). According to Rule 94 of the Texas Rules of Civil Procedure, in cases involving insurance contracts that cover specific general hazards but include limitations on liability, the insured is not required to assert that the loss did not result from a policy exclusion. The insurer must explicitly allege that the loss falls under a specific exclusion to raise this issue. Generally, the insured must initially demonstrate coverage, while the insurer must prove the validity of any exclusion to deny coverage. If the insurer establishes an exclusion's applicability, the burden shifts back to the insured to show coverage under an exception to that exclusion.

The construction of insurance policies, akin to other contracts, is a legal question for the court. Policies are deemed unambiguous if they possess a definite legal meaning, and if unambiguous, the contract's terms are given their ordinary meanings. A policy is considered ambiguous if it allows for more than one reasonable interpretation, in which case the interpretation favoring the insured prevails. In the case at hand, both parties have raised valid arguments regarding coverage and exclusions. The appellee cited Exclusion “I” as a basis for denial, while the appellant contended that the exclusion was inapplicable and that an exception to this exclusion was relevant. The court finds the policy unambiguous, intending to ascertain its plain meaning by analyzing the relevant policy language. The Printers E. O Policy outlines that it will cover damages for negligent acts, errors, or omissions related to "printing services" occurring during the policy period.

Exclusions in the insurance policy specify that claims for damages related to "bodily injury" or "property damage" are not covered, particularly costs for correcting or replacing "property damage" linked to "your product" or work performed by the insured. However, an exception exists for damages incurred due to the withdrawal or inspection of products or work with known or suspected defects. The policy defines "printing services" as activities specific to the printing and graphic arts industries and outlines "property damage" as physical injury to tangible property or loss of use of such property. "Your product" encompasses any goods or products handled or sold by the insured, including warranties related to their quality.

The parties agree that the payment books qualify as "your product," and there is acknowledgment of the involvement of printing services. However, they dispute whether the loss constitutes "property damage" as per the exclusion clause and if the exception applies. The appellant argues that its claim does not fall under "property damage" as defined in the main policy or exclusion clause. Even if it did, the appellant believes the exception applies due to the nature of the damages, which arise from fulfilling contractual obligations to Sallie Mae, thus making them legally obligated costs. The appellant's primary issue is whether its economic damages are covered under the Printers E. O Policy, particularly regarding the distinction between economic damages and property damage as defined in the policy. The appellant emphasizes that its losses are purely economic, contrasting the coverage distinctions between CGL policies and Printers E. O policies.

The $2,800 additional premium paid would be rendered ineffective if it excluded coverage for the insured's economic losses from printing errors. While the appellee acknowledges that the Printers E. O Policy offers liability coverage for economic damages, it argues that this is limited to damages experienced by third parties. The appellant counters that Exclusion “l” of the policy requires a definition of “property damage” as either physical injury to tangible property or loss of use of tangible property not physically injured. The appellant maintains that the issue here pertains to incorrect information rather than tangible property, which the court agrees constitutes intangible property and thus represents economic loss rather than property damage. Consequently, Exclusion “l” does not apply, leading to a favorable ruling for the appellant on this issue.

The court does not address sub-issues “b” and “c” of the appellant's first issue due to the resolution of sub-issue “a.” The dissent's and appellee's arguments regarding the “sistership exclusion” are also discussed. This exclusion, identified in Gulf Insurance Co. v. Parker Products, denies coverage for claims tied to the costs of withdrawing or replacing products due to similar product issues. The dissent claims that this exclusion negates coverage for damages related to replacing defective work, a view the court disputes. The court clarifies that the cited cases relate to CGL policies, which cover bodily injury and property damage, whereas the Printers E. O Policy is specifically tailored to address printer-related mistakes. Furthermore, the alleged “sistership exclusion” is actually an exception to Exclusion “l,” which allows coverage for damages resulting from product withdrawal or inspection due to known defects. The court refutes the dissent's interpretation, asserting that it would undermine the purpose of the Printers E. O Policy.

Interpreting a contract requires giving effect to all its provisions. The exception to Exclusion “l” functions as the opposite of a "sistership exclusion," reinstating coverage that might be absent otherwise. The appellant questioned whether costs incurred to correct a printing error fell under sums the insured is "legally obligated to pay." The Printers E.O. Policy limits coverage to damages resulting from negligent acts during printing services. The appellant's agreement with Sallie Mae mandated quality control standards, including prompt replacement of defective products at the appellant's expense, with the obligation to cover costs for negligent performance. Given these contractual obligations, the appellant's expenses for correcting printing errors are deemed sums incurred for covered services. The appellant was legally required to pay for remedying the misprinted books, establishing that the appellee breached its contract by denying the claim. Consequently, the trial court's decision to grant summary judgment for the appellee was erroneous, while the appellant's motion for summary judgment regarding coverage should have been granted. The appellant is entitled to reasonable attorneys' fees under section 38.001 of the civil practices and remedies code, but any claims for additional damages under article 21.55 of the insurance code were waived. The appellate court reversed the trial court's summary judgment for the appellee, granted summary judgment for the appellant on the coverage claim (excluding the article 21.55 claim), and awarded attorneys' fees and costs. The case is remanded for calculation of damages and further proceedings related to attorneys' fees and costs. A dissenting opinion was filed by Chief Justice Cayce.

The dissenting opinion asserts that the court should have granted Atlantic Mutual Insurance Company's motion for rehearing and upheld the trial court's summary judgment. Exclusion "l" of the relevant insurance policy explicitly disallows coverage for replacement costs resulting from Venture Encoding Service, Inc.’s faulty workmanship, reflecting a common "business risk" exclusion in liability policies. This exclusion aims to protect the insured against personal injury or property damage caused by completed work, but not against costs to repair or replace defective work. 

The opinion references established case law, including T.C. Bateson Constr. Co. v. Lumbermens Mut. Cas. Co. and others, to illustrate that such exclusions are meant to prevent contractors from recovering costs for deficiencies stemming from their own performance. It emphasizes that a contractor can only recover for damages unrelated to their defective work. The dissent criticizes the majority's interpretation of the policy's exception, arguing it misrepresents coverage and undermines the exclusion's purpose, potentially expanding coverage beyond the policy’s explicit terms. Chief Justice Cayce concludes the dissent by reiterating that the majority's approach renders Exclusion "l" ineffective.