In a declaratory judgment action, the Fifth Circuit affirmed in part and reversed in part the district court's rulings regarding Scottsdale Insurance Co. and Landmark Insurance Company. The district court had granted Landmark’s motions for summary judgment, concluding that Landmark had no duty to defend or cover breach of warranty claims against Shade Tree Electric, Inc., which was insured by both Scottsdale and Landmark. Knox Park Construction Inc. sued Shade Tree for construction defects, asserting various claims, including negligence and breach of warranty. Scottsdale, as Shade Tree’s primary insurer, sought a declaratory judgment about its obligations in the dispute, later adding Landmark as a defendant.
The court found that Landmark, not Scottsdale, was responsible for defending Shade Tree. Following a settlement of the state court action where Scottsdale paid $535,000 to Knox Park, the district court reopened the federal case. Landmark filed a second summary judgment motion, arguing Scottsdale failed to demonstrate an 'ultimate defined loss' exceeding its policy limit, did not meet conditions precedent for coverage, and did not prove Shade Tree was insured under Landmark’s policy. The court determined Scottsdale did not show an 'ultimate net loss' above its policy limit, thereby granting summary judgment in favor of Landmark. Knox Park's appeal was dismissed, and the court’s decisions were partially affirmed.
Standing to appeal is assessed de novo, as is the district court’s summary judgment. Summary judgment is appropriate when there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. The case applies Texas law under diversity jurisdiction.
Three primary issues are presented: (1) Landmark contests Knox Park's standing to appeal; (2) Scottsdale and Knox Park argue the district court erred in granting summary judgment regarding coverage; (3) Scottsdale alone claims the court erred in its ruling on the duty to defend.
For standing, it must be determined if there is a "case or controversy" under Article III, requiring a real and immediate injury, not merely conjectural. Knox Park lacks standing to appeal as it has not filed a cross-claim against Landmark and only joined Scottsdale’s motion concerning indemnity. Without a direct claim, Knox Park's interest is merely an indirect financial stake, insufficient for standing. The court found that a favorable ruling on coverage would not guarantee Knox Park recovery from Landmark, as it is neither the insured nor an insurer in the matter. Knox Park's arguments for standing are deemed meritless, including concerns over conflicting judgments should it be dismissed without a proper claim.
Standing in federal court requires a plaintiff to demonstrate a direct, real, and immediate injury, rather than merely a potential for conflicting outcomes. A plaintiff must show a personal stake in the controversy, as established in Warth v. Seldin and Baker v. Carr, rather than relying on hypothetical future lawsuits. Knox Park asserts that its lack of a claim against Landmark does not impede its standing due to the permissive nature of cross-claims. While cross-claims can be pursued in subsequent litigation, they do not grant standing in the absence of a filed claim. Furthermore, a declaratory judgment cannot be utilized to resolve rights between co-defendants who have not sought such declarations. The Declaratory Judgment Act allows courts to declare rights based on appropriate pleadings, while summary judgment is only accessible to parties who have filed claims. Knox Park and Landmark did not formally request a determination of their rights, leading to the dismissal of Knox Park’s appeal.
Regarding coverage, the district court ruled in favor of Landmark on the issue of policy coverage for Knox Park's claims against Shade Tree, finding no evidence of a loss triggering the Landmark policy's coverage for damages exceeding $1,000,000. Scottsdale contends that breach of warranty damages should be covered by Landmark, necessitating indemnification for the $535,000 paid to Knox Park. Landmark counters that Scottsdale's right to indemnification relies on contractual subrogation rights, which were released through a settlement agreement with Shade Tree. However, even without contractual subrogation rights, Scottsdale retains the ability to pursue equitable subrogation to enforce the Landmark policy.
The doctrine of subrogation allows a party that has paid a debt on behalf of another, who is primarily liable, to seek recovery from the liable party, provided the payment was not voluntary and equity supports such recovery. In the context of insurance, if two insurers settle a claim and one insurer overpays, that insurer can recover the excess from the other. The case involves two insurance policies: the primary Scottsdale policy and the umbrella Landmark policy. The Landmark policy may cover claims not addressed by the primary policy, even if its limits are not fully used.
The Landmark policy specifies that it will cover amounts the insured is legally obligated to pay that exceed a "retained limit" for specified injuries or damages. The "retained limit" includes amounts from both underlying and other collectible primary insurances. The Landmark policy's definition of "ultimate net loss" encompasses total damages for which the insured is liable.
The parties agree that the Scottsdale policy is the only underlying insurance. The dispute centers on whether "coverage(s) afforded" refers to the insurance provided by the Scottsdale policy for specific liabilities or the total coverage limit of the Scottsdale policy. Scottsdale argues that the district court failed to consider that "coverage(s) afforded" means insurance provided, not excluded, by the Scottsdale policy, allowing the Landmark policy to provide coverage when the Scottsdale policy does not cover a claim. Conversely, the interpretation that "coverage(s) afforded" means the total coverage limit implies the Landmark policy activates only when total damages exceed the Scottsdale policy limit of $1,000,000. The latter interpretation conflates liability limits with coverage limits, which are distinct concepts.
Insurance policies are interpreted in favor of coverage to prevent exclusion by the insurer, as established in Texas case law. The Landmark policy excludes coverage when the primary insurance is uncollectible, defining 'retained limit' with regard to 'underlying insurance,' regardless of its collectibility. The district court erroneously granted summary judgment favoring Landmark concerning coverage for breach of warranty damages by interpreting 'retained limit' as 'coverage(s) afforded' by 'underlying insurance.' This raises the question of whether the Scottsdale policy provides coverage for breach of warranty claims; if it does not, the Landmark policy would cover them.
Under Texas law, ambiguous policies must be interpreted to favor coverage. Scottsdale argues that the Scottsdale policy's broader 'property damage' exclusion, which includes warranties related to 'your work,' contrasts with the Landmark policy's exclusion, which does not account for warranties. Landmark has not contested this point and thus concedes that the Scottsdale policy excludes warranty-related damages. Consequently, since the damages in question are breach of warranty damages, the Landmark policy applies.
Additionally, Landmark asserts that the 'ultimate net loss' must be determined through a trial or a consent agreement, which it claims was not fulfilled since there was no trial and Scottsdale did not obtain consent for the settlement.
Landmark waived its right to deny coverage based on the Consent Clause, following the precedent established in Gulf Insurance Co. v. Parker Products, Inc., which states that an insurer cannot insist on compliance with a consent clause after having the opportunity to defend or settle a suit and erroneously claiming no responsibility under the policy. The rationale for this waiver is that an insured should not need to seek consent to settle when the insurer has already indicated a lack of concern for the matter. Denial of liability by the insurer constitutes a breach of contract, relieving the insured of obligations under the consent provisions. Landmark's refusal to provide coverage stemmed from a misunderstanding that coverage only applied to liabilities exceeding $1,000,000, despite demanding a settlement within the limits of the Scottsdale policy.
In the related summary judgment, the court ruled that Scottsdale had a duty to defend Shade Tree because some claims by Knox Park were not excluded under the Scottsdale policy. Conversely, it concluded that the Landmark policy did not impose a duty to defend, as it only considered situations where the "underlying insurance" was exhausted. Scottsdale disputes this ruling, arguing that it is entitled to a pro rata share of attorneys' fees for defending Shade Tree under the Landmark policy, specifically contending that the policy's provision for defense applies when underlying insurance does not cover certain claims, as outlined in subsection (a). Scottsdale does not challenge the court's conclusion regarding subsection (b).
Scottsdale's argument is deemed flawed as some claims in the state court suit are covered by its policy, obligating it to defend the entire suit. Under established case law, an insurer must defend if any allegations fall within the policy's coverage. The Landmark policy explicitly states it has no duty to defend when another policy, such as Scottsdale's, covers the suit. Consequently, Landmark is not required to defend Shade Tree, even though it covers breach of warranty claims excluded by Scottsdale's policy. This determination is based on the per-suit, rather than per-claim, evaluation of the duty to defend.
The conclusion dismisses Knox Park's appeal due to lack of standing and affirms that Landmark had no duty to defend Shade Tree, while reversing the judgment regarding coverage for breach of warranty damages. The cases cited by Scottsdale regarding attorneys' fees are not applicable since those insurers had concurrent duties to defend, unlike the current situation where coverage differs between policies.
Judge Garwood concurs partially but dissents on the issue of Landmark's refusal to settle within Scottsdale's limits, arguing that it did not imply a denial of coverage. He asserts that Landmark had a duty to defend against Knox Park's breach of warranty claims, which only its policy covered. He believes that the Landmark policy should be interpreted favorably towards the insured, aligning with Texas law that requires a duty to defend precedes any duty to indemnify. Landmark's failure to defend Shade Tree constitutes a waiver of its rights under its policy's settlement clause.
