Travelers Lloyds Insurance v. Pacific Employers Insurance

Citations: 602 F.3d 677; 602 F. Supp. 3d 677; 2010 U.S. App. LEXIS 7113; 2010 WL 1290722Docket: 07-20157

Court: Court of Appeals for the Fifth Circuit; April 6, 2010; Federal Appellate Court

Original Court Document: View Document

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Pacific Employers Insurance Company (Pacific) is appealing the decision of the district court, which denied its motion for summary judgment and granted summary judgment in favor of Travelers Lloyds Insurance Company (Travelers). The appeal arises from a lease agreement between The Centre at Bunker Hill, Ltd. (landlord) and Best Buy Stores, Inc. (tenant), specifically focusing on the lease's "Insurance and Indemnity" provisions. Best Buy was required to maintain commercial general liability insurance, naming both itself and The Centre as insured parties. Best Buy obtained an Excess Commercial General Liability Policy from Pacific, which had specific limits and conditions for additional insured coverage.

A claim was made when Scott Schneider, while exiting the Best Buy store, was injured due to alleged negligence related to the store's premises. Schneider and his family sued multiple parties, including The Centre and Best Buy, asserting that their negligence contributed to his injuries. Travelers, which insured The Centre, requested that Best Buy and Pacific defend and indemnify The Centre since it was considered an additional insured under Pacific's policy. Pacific and Best Buy refused this demand, leading to Travelers settling the lawsuit for $250,000 and accruing approximately $273,000 in legal fees. The Fifth Circuit reversed the district court's decision and remanded the case for further proceedings.

Travelers initiated a lawsuit against Pacific and Best Buy in federal district court under diversity jurisdiction, seeking a declaration that Pacific must defend and indemnify The Centre in an underlying action, as well as reimbursement for defense costs. The district court granted Travelers’ motion for summary judgment but denied Pacific’s, ruling that: (1) The Centre qualifies as an additional insured under the Pacific Policy; (2) the Pacific Policy is primary, allowing Travelers, as subrogee, to recover settlement costs from Pacific; and (3) Travelers can recover attorneys' fees and expenses incurred while defending The Centre. Pacific appealed the decision.

The appellate review is de novo, applying the same legal standards as the district court. Summary judgment is appropriate when there are no genuine material facts in dispute and the movant is entitled to judgment as a matter of law. The interpretation of insurance contracts is also a legal question reviewed de novo. The relevant contracts are governed by Texas law, where insurance policies are treated as contracts, and clear policy terms must be enforced as written. Disagreements over coverage do not create ambiguity.

Pacific contends that The Centre is not an additional insured under its policy with Best Buy, arguing that the "Additional Insured Endorsement" only applies if Best Buy was required to provide such coverage by written contract before the loss. The lease between Best Buy and The Centre mandated that Best Buy obtain insurance naming The Centre as an additional insured unless Best Buy could self-insure due to its substantial net worth.

Texas law’s express negligence rule stipulates that contractual indemnity for negligence requires meeting fair notice requirements, which include the express negligence doctrine and conspicuousness. The indemnity provision in the lease, which would require Best Buy to indemnify The Centre from its own negligence, is void under Texas law for not meeting these requirements. Pacific argues that the insurance provision for The Centre as an additional insured is invalid as it solely supports the indemnity provision. However, the Texas Supreme Court has clarified that additional insured provisions are considered independent of indemnity provisions, and the express negligence doctrine applies only to indemnity agreements, not to insurance procurement provisions unless they directly support indemnity agreements.

In Evanston Insurance Co. v. ATOFINA Petrochemicals, Inc., the Texas court upheld a service contract requiring Triple S to procure insurance that included ATOFINA as an additional insured for its own negligence, interpreting this requirement as clear and enforceable. Similarly, a lease between Best Buy and The Centre mandated that Best Buy name The Centre as an additional insured. The Texas Supreme Court criticized a lower court's decision in Emery Air Freight Corp. v. General Transport Systems, Inc., which had refused to enforce a similar additional insured provision, reinforcing the enforceability of such provisions even in the presence of void indemnity clauses. In LeBlanc v. Global Marine Drilling Co., the court clarified that an additional insured clause was independent of a void indemnification clause, indicating both obligations were required. The Best Buy lease contained distinct paragraphs for indemnity and additional insured requirements, affirming their independent nature. The district court concluded that Best Buy's obligation to include The Centre as an additional insured was enforceable.

Regarding coverage priority, both the Pacific and Travelers insurance policies included "Other Insurance" clauses. The Pacific policy stated that its coverage is excess unless specifically stated otherwise, while the Travelers policy established primary coverage except in specific circumstances. Notably, Pacific argued that its coverage for The Centre should be considered a pure excess policy, akin to an umbrella policy, due to Best Buy's ability to self-insure and its actual self-insurance of $200,000.

Texas law does not support Pacific's claims regarding "other insurance" clauses in insurance policies. Texas courts have established that self-insurers do not count as providing "other insurance" or "valid and collectible insurance." Best Buy’s retention of the first $200,000 under the Pacific policy does not qualify as "other valid and collectible insurance" for The Centre under the Travelers policy. The key issue is how to apply the "other insurance" clauses in both policies. If either policy were the sole coverage for The Centre, it would provide coverage. The district court found that the "other insurance" clauses in the Travelers and Pacific policies were harmonious, determining that the Pacific policy is excess only if the other insurance specifically applies in excess of its limits. The Travelers policy meets this criterion, being specifically designed to apply in excess of any valid and collectible insurance, including the Pacific policy, under which The Centre is an additional insured. Thus, the Pacific Employers Policy is primary, offering up to $1,000,000 coverage for both Best Buy and The Centre, while the Travelers policy serves as excess coverage. Travelers, as subrogee, can recover from Pacific Employers for costs related to claims against The Centre. However, this conclusion contradicts Texas law, which indicates that various forms of insurance policies can lead to conflicts that courts have historically struggled to resolve. The Texas Supreme Court highlighted issues with approaches that prioritize specific clauses over general ones, rejecting methodologies that create a cycle of increasingly specific policy drafts, indicating that such practices do not effectively resolve liability determinations.

The Texas Supreme Court established a rule regarding conflicting insurance policy provisions when an insured holds two policies providing coverage. The court recognized that both the Travelers and Pacific policies contain "other insurance" clauses that can be reasonably construed to conflict. The Travelers policy claims to be excess over any other insurance, while the Pacific policy also states it is excess unless the other insurance is specifically written to apply in excess of its declared limits of $1,000,000 per occurrence and $2,000,000 in aggregate.

The court determined that the clauses create ambiguity, leading to a reasonable interpretation that the Travelers policy is excess to the Pacific policy, and vice versa, given that neither policy specifically references the other or provides definitive thresholds for excess coverage. The court referenced a prior decision to support its conclusion that the conflicting clauses must be construed broadly rather than narrowly.

Consequently, both policies provide coverage for the insured, The Centre, and the insurers are required to share the costs of litigation proportionally. Since both policies offer equal coverage, the court ruled that the costs for defense and settlement should be divided equally between Travelers and Pacific. The district court's prior summary judgment favoring Travelers was reversed, and the case was remanded for further proceedings to determine the apportionment of costs, acknowledging that Best Buy had met its retention conditions.