     Case: 11-20219     Document: 00511829674         Page: 1     Date Filed: 04/20/2012




            IN THE UNITED STATES COURT OF APPEALS
                     FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                     Fifth Circuit

                                                                            FILED
                                                                           April 20, 2012
                                       No. 11-20219
                                                                           Lyle W. Cayce
                                                                                Clerk
MID-CONTINENT CASUALTY COMPANY,

                                                  Plaintiff - Appellant
v.

ACADEMY DEVELOPMENT, INCORPORATED; CHELSEA HARBOUR,
LIMITED; LEGEND CLASSIC HOMES, LIMITED; LEGEND HOME
CORPORATION,

                                                  Defendants - Appellees


                   Appeal from the United States District Court
                        for the Southern District of Texas
                                USDC 4:08-CV-21


Before JOLLY, DAVIS, and BARKSDALE, Circuit Judges.
PER CURIAM:*
        In this insurance, duty-to-defend dispute, Mid-Continent Casualty
Company challenges a summary judgment holding it had that duty for a state-
court action against its insureds, Academy Development, Inc., Chelsea Harbour,
Ltd., Legend Classic Homes, Ltd., and Legend Home Corp. (defendants).
AFFIRMED.




        *
         Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.
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                                    No. 11-20219

                                          I.
         Defendants are related entities; they developed and built the Chelsea
Harbour residential subdivision in Fort Bend County, Texas. Chelsea Harbour
was developed as a lake-front community, and a key component was
constructing lakes in order to have lake-side homes.
         In 2005, defendants were sued in Texas state court by purchasers of
homes in the subdivision (underlying-action plaintiffs). Among other claims, they
raised negligent misrepresentation and violations of the Texas Deceptive Trade
Practices Act. Underlying-action plaintiffs alleged, inter alia, that defendants
knew when they sold the homes that the lake walls were failing and that water
was leaking from the lakes onto adjacent home sites. They sought, inter alia,
damages for diminution in the value of their homes resulting from the defective
lakes.     The action was tried in 2008, with a jury returning a verdict for
defendants.
         Legend Classic Homes, Ltd. is a named insured under five consecutive,
non-overlapping, commercial general liability (CGL) policies issued by Mid-
Continent. The other defendants are named insureds for each policy. The
policies cover the period August 2000 to August 2005 and provide in relevant
part:

         We [Mid-Continent] will pay those sums that the insured becomes
         legally obligated to pay as damages because of . . . “property
         damage” to which this insurance applies. We will have the right and
         duty to defend the insured against any “suit” seeking those damages.

(Emphasis added.) The policies further provide:

         This insurance applies to . . . “property damage” only if: (1) The
         . . . “property damage” is caused by an “occurrence” that takes place
         in the “coverage territory”; (2) The . . . “property damage” occurs
         during the policy period . . . .



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                                  No. 11-20219

And, they contain the following definition of “property damage”:

      “Property damage” means: (a) Physical injury to tangible property,
      including all resulting loss of use of that property. All such loss of
      use shall be deemed to occur at the time of the physical injury that
      caused it; or (b) Loss of use of tangible property that is not
      physically injured. All such loss of use shall be deemed to occur at
      the time of the “occurrence” that caused it.

      The policies varied in deductible amount and in the deductible’s applying
to defense costs. The last three policies contained a higher deductible and it also
applied to defense costs. In all other respects, the policies are identical.
      Mid-Continent initially provided a defense for defendants in the
underlying state-court action under a reservation of rights. But, after the
underlying-action plaintiffs filed their ninth amended petition, Mid-Continent
informed defendants it would not pay for defense costs incurred after that filing.
The basis for that decision was Mid-Continent’s maintaining that, in the ninth
amended petition, underlying-action plaintiffs no longer alleged “property
damage” as defined in the policies. (Prior petitions had included allegations such
as: “Plaintiffs’ homes are experiencing an unreasonable amount of drywall
cracks, joint separations in trim and windows, tiles breaking, mortar cracks, and
windows cracking without impact”.)
      In January 2008, Mid-Continent filed this diversity action, seeking a
declaration that it owed no duty to defend or indemnify defendants upon the
filing of the ninth amended petition. (The duty to indemnify became moot when
the verdict was returned for defendants in the underlying state-court action.)
The parties filed cross motions for summary judgment regarding two issues: (1)
whether Mid-Continent had a duty to defend after the ninth amended petition
was filed; and (2) how defendants’ defense costs should be apportioned among
the policies, i.e., whether defendants were entitled to choose a single triggered



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                                  No. 11-20219

policy to defend the underlying state-court action or were required to apportion
the defense costs pro rata among all five triggered policies.
      The district court granted summary judgment to defendants, ruling Mid-
Continent owed a duty to defend. Mid-Continent Cas. Co. v. Academy Dev., Inc.,
No. H-08-21, 2010 WL 3489355 (S.D. Tex. 24 Aug. 2010). The court concluded
the policies were triggered by the ninth amended petition because, by alleging
diminution in the value of their homes caused by defective lakes, underlying-
action plaintiffs alleged “damages because of . . . ‘property damage’”. Id. at *4-7.
The court also rejected Mid-Continent’s contention that defense costs be
apportioned across the policies, ruling defendants were instead entitled to select
the policy under which they would demand a defense. Id. at *7-8.
                                        II.
      Mid-Continent challenges both rulings. The summary judgment, including
the court’s interpretation of the policies, is reviewed de novo. Admiral Ins. Co.
v. Ford, 607 F.3d 420, 422 (5th Cir. 2010). For this diversity action, Texas law
controls.
                                        A.
      To determine whether an insurer is obligated to defend against an action,
Texas law applies the familiar “eight corners” rule: the duty to defend is
determined exclusively by the allegations in the complaint and the language of
the insurance policy. Nat’l Union Fire Ins. Co. v. Merchs. Fast Motor Lines, Inc.,
939 S.W.2d 139, 141 (Tex. 1997). In that regard, the allegations in the complaint
are read liberally in favor of coverage. Evanston Ins. Co. v. Legacy of Life, Inc.,
645 F.3d 739, 745 (5th Cir. 2011) (Texas law). “If any allegation in the complaint
is even potentially covered by the policy then the insurer has a duty to defend its
insured.” Primrose Operating Co. v. Nat’l Am. Ins. Co., 382 F.3d 546, 552 (5th
Cir. 2004) (internal quotation marks omitted) (emphasis in original) (Texas law);
Nautilus Ins. Co. v. Country Oaks Apartments Ltd., 566 F.3d 452, 455 (5th Cir.

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                                  No. 11-20219

2009) (Texas law) (“[A]ll reasonable inferences must be drawn in the insured’s
favor”.). In reviewing the underlying complaint, “[i]t is the factual allegations
instead of the legal theories alleged which determine the existence of a duty to
defend”. Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487, 495 (Tex. 2008)
(internal quotation marks omitted); see also Jim Walter Homes, Inc. v. Reed, 711
S.W.2d 617, 617-18 (Tex. 1986) (“[W]e must look to the substance of the cause
of action and not necessarily the manner in which it was pleaded”.).
      It is undisputed that the underlying-action plaintiffs sought damages for,
inter alia, diminution in the value of their homes. And, the “damages because
of . . . ‘property damage’” provision in a CGL policy includes recovery sought for
economic losses, such as diminution in value, that are “attributable” to property
damage. Nat’l Union Fire Ins. Co. v. Puget Plastics Corp., 532 F.3d 398, 403 (5th
Cir. 2008) (Texas law). Accordingly, the question at hand is whether the ninth
amended petition alleged diminution in value attributable to “property damage”.
For the following reasons, we conclude that it did, and, consequently, hold the
duty to defend was triggered.
                                       1.
      First, the ninth amended petition alleged diminution in the value of
underlying-action plaintiffs’ homes attributable to damage to their property, as
distinct from damage to their homes. It alleged:

      [T]he walls of the Lakes were breaking apart and . . . water was
      leaking from the Lakes into the adjacent properties upon which
      Plaintiffs’ homes were located.

      Upon information and belief, continuous and excessive water
      leakage from the Lakes that flow laterally and under the Plaintiffs’
      homes and properties may have caused structural damage to
      Plaintiffs’ homes and foundations. Over time, this will cause
      Plaintiffs to incur excessive repair costs to the foundations and
      structures of their homes.


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      Plaintiffs contend in this lawsuit that the failure of the Lakes
      directly affects the value of the homes in the community.

      Because it is phrased in uncertain terms, i.e., “may have caused structural
damage”, the allegation of damage to underlying-action plaintiffs’ homes, even
when read liberally, as required, is insufficient to allege “property damage”
under the policies. But, the ninth amended petition refers to their “homes and
properties” (emphasis added), which can reasonably be read to distinguish
between their houses and their other property (land under and surrounding the
house, e.g., lawn bordering lake). Re-stated, the uncertain language pertains
only to the allegation of damage to “Plaintiffs’ homes” (emphasis added). By
alleging water leakage onto their properties, as distinct from their homes, and
not being uncertain, the ninth amended petition alleged “property damage”under
the policies, and that this damage affected the value of their homes.
                                       2.
      Alternatively, the ninth amended petition also alleged diminution in the
value of the homes attributable to the defective lakes. This is also sufficient to
trigger the duty to defend under the policies. Regarding the lakes, the ninth
amended petition alleged:

      [T]he Lakes and wall were not property designed and constructed
      . . . , the walls had excessive cracks and displacements . . . , water
      was escaping under and around the sloped paving, between the
      sloped paving and the wall, at the outfall structure, perhaps
      through the clay liner at greater depths, through cracks in the wall,
      and other similar problems.

      [T]he condition of the Lakes had substantially decreased the value
      of the Chelsea Harbour subdivision; specifically, a loss of value from
      approximately $6.5 million to $2.25 million dollars for a loss in
      diminution of value in the range of $3.75 to $4.5 million dollars.

      Plaintiffs will show that the problems with the Lakes have affected
      the value of their property and their homes. Plaintiffs maintain a

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                                  No. 11-20219

      good faith belief that the condition of the Lakes has in the past, and
      continues, to cause damage to the value of their residential
      properties.

      Plaintiffs contend in this lawsuit that the failure of the Lakes
      directly affects the value of the homes in the community. . . .
      Plaintiffs’ homes and properties have suffered diminution of value
      due to the past, present and future conditions of the Lakes.

      Defendants owed multiple duties of care regarding . . . , construction
      of the Lakes, and the protection of Plaintiffs’ property interests,
      including but not limited to the repair work performed on the Lakes
      . . . . Defendants were . . . negligent in the hiring and supervision of
      the entities that both constructed and repaired the Lakes. . . .
      Plaintiffs would show that all Defendants breached the above
      described duties and that such acts . . . constitute the proximate
      cause of Plaintiffs’ damages, including cost of repair and diminution
      of value to their homes.

      Plaintiffs would also show that Defendants failed to construct
      and/or repair the Lakes in a good and workmanlike manner.

      Under Texas law, allegations of unintended construction defects or
faulty-workmanship constitute allegations of “property damage” under a CGL
policy sufficient to trigger an insurer’s duty to defend. Lamar Homes, Inc. v.
Mid-Continent Cas. Co., 242 S.W.3d 1, 4 (Tex. 2007). Accordingly, the petition
alleges property damage to the lakes that resulted in diminution in the value of
underlying-action plaintiffs’ homes.
      Mid-Continent contends that, even if the ninth amended petition alleges
property damage to the lakes, these allegations do not trigger the duty to defend
because underlying-action plaintiffs did not possess an ownership interest in the
lakes. This contention is unavailing.
      Our court has previously rejected a similar attempt by Mid-Continent to
read an ownership requirement into a CGL policy’s “damages because of . . .
‘property damage’” provision. In Mid-Continent Cas. Co. v. Bay Rock Operating


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                                 No. 11-20219

Co., 614 F.3d 105 (5th Cir. 2010), working-interest owners of a Texas oil well
engaged Hollimon Oil Corporation (HOC) to operate the well, with HOC in turn
engaging Bay Rock to supervise and manage drilling the well. The well suffered
a blowout, causing property damage, and HOC incurred costs as a result. The
costs incurred by HOC were covered under a well-control policy with St. Paul
Surplus Line Insurance Company. St. Paul (as HOC’s subrogee) and the
working-interest owners filed an action in state court against Bay Rock, claiming
it negligently caused the blowout. A jury found Bay Rock negligent and awarded
damages to St. Paul and the working-interest owners.
      Bay Rock had CGL and umbrella policies with Mid-Continent, which
sought a declaration in federal court that the damages awarded against Bay
Rock were not covered under the policies. Summary judgment was awarded Bay
Rock. On appeal, Mid-Continent contended, inter alia, that the damages
awarded against Bay Rock did not constitute “damages because of . . . ‘property
damage’” under the policies, because, unlike the working-interest owners, HOC
did not have an ownership interest in the damaged property. Our court held this
contention   without    merit:   “Nothing     in   the   Policies   require   the
claimant—HOC—to have an ownership interest in the property that was
damaged for coverage to exist.” Id. at 111.
      Likewise, the policies at issue here do not require the underlying-action
plaintiffs to have an ownership interest in the property allegedly damaged in
order for Mid-Continent to have a duty to defend. And under Texas law, “we
must give the policy’s words their plain meaning, without inserting additional
provisions into the contract”. Nat’l Union Fire Ins. Co. v. Crocker, 246 S.W.3d
603, 606 (Tex. 2008). Furthermore, the only relevant inquiry here is whether,
under the eight-corners rule, there is a duty to defend, not whether the
underlying-action plaintiffs had standing to sue for damage to the lakes. See
Don’s Bldg. Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20, 31 (Tex. 2008)

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(insured has “right to a defense against both meritorious and nonmeritorious
claims for property damage”).
                                        B.
      Mid-Continent contends defense costs should be apportioned pro rata
across all five of the policies. Defendants counter they are entitled instead to
choose any one of the policies under which Mid-Continent is to provide a
complete defense. As stated, the policies for the last three years contained
higher deductible amounts, and the deductible also applied to defense costs.
      Under the policies, the event that must take place for, inter alia, the duty
to defend to be triggered is “property damage”. Underlying-action plaintiffs
alleged the lakes were defective and their property damaged throughout the five
policy periods. Texas courts have rejected the pro rata method for calculating an
insurer’s duty to defend when more than one policy is triggered by a claim. See
Tex. Prop. & Cas. Ins. Guar. Ass’n v. Sw. Aggregates, Inc., 982 S.W.2d 600, 604-
07 (Tex. App.—Austin 1998, no pet.); CNA Lloyds of Texas v. St. Paul Ins. Co.,
902 S.W.2d 657, 661 (Tex. App.—Austin 1995, writ dism’d). The reasoning
behind this rule is that, when an insurer’s policy is triggered, “the insurer’s duty
is to provide its insured with a complete defense. This is because the contract
obligates the insurer to defend its insured, not to provide a pro rata defense.”
Sw. Aggregates, 982 S.W.2d at 606 (emphasis in original). Accordingly, the
district court did not err by permitting defendants to select any one of the
triggered policies for their defense.
                                        III.
      For the foregoing reasons, the judgment is AFFIRMED.




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