Harbor Ins. Co. v. Urban Const. Co.

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 92-2288
HARBOR INSURANCE CO.,
Plaintiff-Appellee,
versus
URBAN CONSTRUCTION CO. AND AUGUSTA COURT
CO-OWNERS ASSOCIATION, INC.,
Defendants,
URBAN CONSTRUCTION CO.,
Defendant-Appellant.
Appeal from the United States District Court
for the Southern District of Texas
( April 22, 1993 )
Before Reynaldo G. GARZA, HIGGINBOTHAM, and Emilio M. GARZA,
Circuit Judges.
HIGGINBOTHAM, Circuit Judge:
This is a dispute between a commercial insurer and its
insured. The insured, Urban Construction Co., was held liable for
damage caused by defects in its condominium project. Harbor
Insurance Co. held an umbrella policy during construction and,
relying on their diversity of citizenship, sought a declaration
from the federal courts that it had no duty to indemnify Urban.
Urban counterclaimed for damages. The district court granted
summary judgment to Harbor.
Harbor sold twelve-month umbrella, or excess liability,
policies to Urban for three successive years.1 These policies were
sold through Harbor's agent and affiliate, Swett & Crawford. Swett
dealt with Urban's independent insurance agent, Collier Cobb &
Associates. The first of these policies contained a standard list
of exclusions, including the following:
This Policy shall not apply . . . (e) to property damage
to work performed by or on behalf of the Named Insured
arising out of the work or any portion thereof, or out of
materials, parts or equipment furnished in connection
therewith.2
For the second policy the following year, the parties
negotiated a special endorsement with a corresponding additional
premium. This endorsement modified exclusion (e) by stating:
It is understood and agreed that exclusion e [of the
policy] is amended to read as follow:
e. to property damage to the Named Insured's work
performed by the named insured arising out of the work or
any portion thereof, or out of materials, parts, or
equipment furnished in connection therewith.
This endorsement deleted exclusion (e)'s reference to work done "on
behalf of" the insured. It was effective from April 1980 to April
1981. The endorsement was intended to broaden the policy's
coverage to property in the "care custody and control" of Urban.
This modification followed a similar modification of the underlying
primary policy.
In 1981, Swett and Collier Cobb negotiated a twelve-month
renewal of the existing umbrella policy. Collier Cobb completed an
1
The policies covered 1979-80, 1980-81, and 1981-82.
2
We shall refer to this unmodified exclusion as "exclusion
(e)" or the "work performed" clause.
2
application provided by Swett. In response to the application's
inquiry about restrictions of the underlying primary coverage
policy, Collier Cobb indicated "Care Custody and Control Amendment-
Following Form Endorsement Required." Exhibits produced by Swett
and Collier Cobb indicated that the umbrella policy was to be
renewed under the same terms as the existing policy. In its
summary judgment pleadings, Harbor admitted that the parties
intended to modify exclusion (e) when they renewed the umbrella
policy for 1981-82.3
Swett signed the 1981-82 renewal policy for Harbor and
delivered it to Collier Cobb. The modifying endorsement was not
attached to the delivered renewal policy. The renewal policy did
contain a "Contractors Limitation" endorsement. This endorsement
stated:
It is understood and agreed that except insofar as
coverage is available to the Insured in the underlying
insurances as set out in the attached schedule this
insurance shall not apply:
1. to products and completed operations . . .
3. to loss of or damage to property while in the care,
custody, or control of the insured.
The schedule referred to by the contractors limitation endorsement
listed the primary general liability insurance policy provided by
Aetna Casualty and Surety. The primary policy included a "Broad
3
The brief supporting Harbor's "Additional Material in
Support of Plaintiff's Motion for Summary Judgment and Response
to Defendant's Motion for Continuance" reads: "[F]or the
purposes of its Motion for Summary Judgment only, Harbor will
admit Urban's allegations that the parties intended to modify the
work performed exclusion when they negotiated a renewal of the
1980-81 Harbor policy."
3
Form Comprehensive General Liability Endorsement" modified by
endorsement.4
Collier Cobb recognized that the renewal policy lacked a
modifying endorsement. John Irwin of Collier Cobb directed someone
to see about obtaining the endorsement from Harbor. At some point,
Collier Cobb informed Urban of the omission.
During the renewal policy's coverage period, Urban was the
general contractor for a condominium project. Urban contracted
with Augusta Court Associates, Ltd. in 1979 to construct the
project. Urban subcontracted most of the work on the project. The
project's certificate of substantial completion was dated March 22,
1982. An architect, however, discovered water leakage problems
causing corrosion. Urban then performed corrective roofing work.
When more leakage complaints arose in 1983, Urban denied that any
remaining problems were due to its work.
On February 14, 1985, Augusta sued Urban alleging negligence
and breach of contract. Augusta sought damages caused by
construction defects. Urban advised both Aetna and Harbor of this
lawsuit in July 1985. By letter of April 19, 1989, Harbor reserved
its rights under the umbrella policy pending an investigation of
4
The governing endorsement thus read:
VI. Broad form property damage liability coverage
(including completed operations) The insurance for
property damage liability applies, subject to the
following additional provisions:
(A) Exclusions (K) and (O) are replaced by the
following:
. . . (O) to property damage to that part of work
performed by the named insured out of which the
occurrence arises.
4
Augusta's claims. On June 28, 1989, Urban made demand upon all of
its primary and excess carriers, including Aetna and Harbor, to
settle the lawsuit prior to binding arbitration.5 Aetna and
another primary insurer each tendered $100,000, the limits of their
property damage liabilities, to Augusta.
Urban advised Harbor that Augusta had made a settlement offer
within the limits of the umbrella policy, and advised Harbor of
Urban's willingness to pursue legal action against Harbor if Harbor
failed to comply with its obligations.
Harbor continued to reserve its rights and investigate.
Meanwhile, the arbitration proceeding awarded Augusta $1,261,450.00
on August 14, 1989. Urban promptly demanded indemnification by
Harbor for this award. On September 1, 1989, Harbor denied
coverage of the claim. This suit followed.
Harbor sued on September 6, 1989, seeking a declaration that
it had no liability or duty to indemnify Urban or pay Augusta.
Harbor asserted that Urban's claim for coverage was excluded by the
work performed provision. Urban counterclaimed alleging breach of
contract, negligence, and violations of Texas's Insurance Code and
Deceptive Trade Practices Act.
Harbor moved for partial summary judgment on the coverage
issue, contending that the work performed clause excluded coverage
for the arbitration award. Urban responded by submitting evidence
to establish mutual mistake in the formation of the renewal policy
5
Urban moved to stay the state court action pending
arbitration pursuant to an arbitration clause in the construction
contract.
5
contract. According to Urban's evidence, the policy should have
been renewed on the same terms as the previous policy, including an
endorsement modifying the work performed clause.
Harbor did not contradict the evidence of mutual mistake.
Harbor admitted that the parties intended to modify the work
performed clause. Harbor maintained, however, that Urban's
reliance on mutual mistake was an effort to reform the contract.
Relying upon the statute of limitations for reformation actions,
Harbor claimed that this effort was time barred.
The district court granted Harbor's motion for partial summary
judgment on July 8, 1991. The court did not reach the statute of
limitations issue. Instead, the court held that it could not
consider any extrinsic evidence--even that offered to prove mutual
mistake. Confining its inquiry to the terms of the renewal policy
as delivered, the court held that the work performed clause denied
coverage. Finding that the exclusion of coverage gave Harbor a
reasonable basis for denying Urban's claim, the court also granted
judgment in Harbor's favor on Urban's claims for negligence and
breaches of the duties of good faith and fair dealing.
Harbor then sought summary judgment on Urban's remaining
statutory claims. Harbor asserted that those claims were time
barred, because the applicable statute of limitations began to run
when Urban became aware of the omission of the endorsement
modifying the work performed clause. Urban responded that the
limitations period did not begin to run until Harbor denied
coverage in 1989. Agreeing with Harbor, the district court held
6
the statutory claims were time barred. The court found that Urban
should have discovered that the renewal policy lacked the desired
endorsement when delivered, or at latest when Augusta sued Urban in
1985. The court granted Harbor's supplemental motion and entered
its final judgment, disposing of the entire case, on February 28,
1992. Urban filed a timely notice of appeal.
We review the granting of summary judgment de novo, applying
the same criteria as the district court. Hanks v. Transcontinental
Gas Pipe Line Corp., 953 F.2d 996, 997 (5th Cir. 1992). "Summary
judgment is proper only if 'there is no genuine issue as to any
material fact and . . . the moving party is entitled to judgment as
a matter of law.'" Harbor Insurance Co. v. Trammell Crow Co., 854
F.2d 94, 98 (5th Cir. 1988)(quoting Fed. R. Civ. P. 56(c)). We
consider all of the facts contained in the pleadings, depositions,
admissions, answers to interrogatories, affidavits, and the
inferences to be drawn therefrom in the light most favorable to the
non-moving party. Weyant v. Acceptance Ins. Co., 917 F.2d 209, 212
(5th Cir. 1990). We review the district court's interpretation of
an insurance policy de novo. Heinhuis v. Venture Associates, Inc.,
959 F.2d 551, 553 (5th Cir. 1992).
Our review is not limited to the district court's analysis.
A grant of summary judgment may be affirmed on a legal basis not
ruled upon below. "We may affirm even in situations in which the
district court's ruling was incorrect, as long as the result was
proper." Texas Refrigeration Supply, Inc. v. Federal Deposit Ins.
Corp., 953 F.2d 975, 980 (5th Cir. 1992).
7
Urban contends that the renewal policy should not be enforced
as written due to mutual mistake. Harbor has admitted that the
delivered policy did not reflect the agreement of the parties.
Nevertheless, the district court held that the policy could not be
reformed to correct the mutual mistake, because the policy was an
integrated document that could not be altered by parol evidence.
Furthermore, the district court held that as a matter of law an
insured is bound by the terms of a policy when he accepts the
policy.
We disagree with these rulings. As we see it, under Texas
law, reformation requires an original agreement followed by a
mutual mistake made in reducing the original agreement to writing.
Cherokee Water Co. v. Forderhause, 741 S.W.2d 377, 379 (Tex. 1987).
Reformation is allowed even when a written contract purports to be
completely integrated. See Restatement (Second) of Contracts
§ 155, comment a (1981).6 "[T]he parol evidence rule does not
preclude such a showing of mistake." Id. Moreover, the insured's
failure to read the policy does not bar correction of the mistake.
Aetna Ins. Co. v. Paddock, 301 F.2d 807, 811 (5th Cir. 1962)(Texas
law). Texas adopted the majority rule that does not require the
insured to examine the delivered policy and permits him to rely
upon the assumption that the agreement was expressed in the
writing. Firemen's Fund Indemnity Co. v. Boyle Gen'l Tire Co., 392
S.W.2d 352, 355 (Tex. 1965).
6
This section was cited with approval by the Texas Supreme
Court in Forderhause, 741 S.W.2d at 379.
8
Harbor's admission equates to an admission of mutual mistake.
Both parties agreed that the renewal policy would contain the terms
of the existing policy, including its endorsement modifying
exclusion (e). Harbor does not contend that reformation is barred
by the parol evidence rule or Urban's acceptance of the policy.
Harbor urges us to affirm the grant of summary judgment on the
basis that Urban's request for reformation is barred by the statute
of limitations.
The parties argue that different four-year statutes of
limitations apply that began to run on different dates. Urban
contends that its suit for damages is governed by the statute of
limitations for actions on debts. Tex. Civ. Prac. & Rem. Code
§ 16.004(a)(3). This limitations period arguably runs from
Harbor's denial of coverage. Harbor, on the other hand, maintains
that the statute of limitations for reformation actions applies.
Tex. Civ. Prac. & Rem. Code § 16.051. It is well settled in Texas
that the limitations period for instrument reformation is subject
to the discovery rule. See, e.g., Tucker v. Atlantic Richfield
Co., 787 S.W.2d 555, 558 (Tex. App.--Corpus Christi 1990, writ
denied). The discovery rule provides that limitations run from the
date the plaintiff discovers or should have discovered, in the
exercise of reasonable care and diligence, the nature of the
injury. Willis v. Maverick, 760 S.W.2d 642, 644 (Tex. 1988).
Regarding reformation, the limitations period begins to run from
the time the party seeking reformation discovered, or should have
discovered, the error or omission in the instrument. Tucker, 787
9
S.W.2d at 558. On summary judgment, the movant asserting
limitations as a defense must negate the discovery rule by
establishing that there is no genuine issue of fact about when the
plaintiff discovered or should have discovered the nature of his
injury. Burns v. Thomas, 786 S.W.2d 266 (Tex. 1990).
Urban insists that the statute of limitations for reformation
actions does not apply, because it does not seek the affirmative
relief of reformation. Urban argues that the relief it seeks is
enforcement of the parties' intended agreement. Although Urban's
breach of contract claim requires that the policy be interpreted in
light of the proof of mutual mistake, Urban reasons that
interpretation in an enforcement suit differs from praying for
relief in the form of reformation.
We are not persuaded by this reasoning. The fact that
intended agreements may be enforced without a prior action for
reformation is not dispositive. See Republic Ins. Co. v. Silverton
Elevators, Inc., 493 S.W.2d 748, 754 (Tex. 1973) (holding that
intended agreement may be enforced upon proof of mutual mistake
without a formal reformation proceeding). This rule recognized
that the merger of law and equity permitted actions for reformation
and enforcement after a mutual mistake to be collapsed into a
single lawsuit. Regardless of the label placed upon that lawsuit,
a party asserting mutual mistake seeks relief in the substance, if
not necessarily the form, of reformation. Texas courts reflect
this reality by applying the rules regarding the limitations of
reformation actions to the assertion of mutual mistake as a
10
defense. See Snellings v. Snellings, 482 S.W.2d 707, 709 (Tex.
Civ. App.--Waco 1972, writ ref'd n.r.e.). Following that lead, we
hold that the statute of limitations may bar the assertion of
mutual mistake under the circumstances presented here.
Collier Cobb was Urban's agent for procuring insurance. John
Irwin testified that Collier Cobb reviewed policies upon arrival to
check for errors. It followed that procedure when Harbor delivered
the renewal policy in May 1981. Irwin was made aware of the
endorsement's omission. He made a note referring to the omission
on Collier Cobb's copy of a May 22, 1981, letter to Urban. Urban
notes that the record does not disclose the date that Irwin learned
of the omission, but otherwise does not point to evidence
contradicting these facts.
Harbor has the burden of establishing when the limitations
period began to run. Citing Irwin's testimony, Harbor demonstrated
that Urban or its agent, Collier Cobb, had actual knowledge of the
omission in 1981. In the alternative, Harbor argues that with
reasonable care and diligence, Urban should have discovered the
omission of the endorsement when sued by Augusta in February 1985.
At the latest, therefore, the limitations period expired in
February 1989. Urban did not assert its right to reformation until
after this litigation commenced in September 1989.
Urban suggests several avenues of escape from limitations.
All stem from the public policy of protecting insureds from
language in insurance policies of which they are not aware.
Because Urban had actual knowledge of the omission, none of these
11
principles are of help to it. For example, Urban asserts the rule
that insurers have a duty to call to the insured's attention any
changes in the coverage or conditions of a renewed policy. See
generally Annotation, "Insurance Company as Bound by Greater
Coverage in Earlier Policy Where Renewal Policy is Issued Without
Calling to Insured's Attention a Reduction in the Policy Coverage,"
91 A.L.R. 2d 546 (1963) (collecting cases); see also Liverpool &
London & Globe Ins. Co. v. Swann, 382 S.W.2d 521, 522 (Tex. Civ.
App.--Beaumont 1964, no writ)(noting that in absence of contrary
agreement, renewal is presumably upon same terms as original
policy). As noted above, Texas law does not require the insured to
examine the delivered policy. Firemen's Fund Indemnity Co. v.
Boyle Gen'l Tire Co., 392 S.W.2d 352, 355 (Tex. 1965).
This case does not involve the operation of policy terms of
which the insured was ignorant. Through Collier Cobb, Urban gained
actual knowledge that the policy did not contain the endorsement
modifying exclusion (e). Urban evidently assumed that the terms of
the intended agreement were enforceable,7 but took no legal steps
to ensure their enforceability until 1989. The question presented
7
The testimony of E.A. Anderson, a claims executive with 34
years of insurance industry experience, indicates that this
assumption was not completely unreasonable. He state that it was
the industry's custom and practice to provide coverage on the
basis of intended agreements as shown by underwriting files,
regardless of the actual policy language. Nonetheless, we are
constrained by the holdings of the Texas courts, which state that
the statute of limitations for reformation begins to run from the
actual discovery of the error or omission. Accrual of the cause
of action "does not await the plaintiff's recognition that he has
grounds for a lawsuit." Arabian Shield Development Co. v. Hunt,
808 S.W.2d 577, 583 (Tex. App.--Dallas 1991, writ denied).
12
is whether Urban may seek reformation eight years after learning
that the policy did not conform to the intended terms. By the
statute of limitations, the answer is no. The district court did
not err in refusing to enforce the terms of the omitted
endorsement.
For the first time on appeal, Urban asserts the alternative
argument that the unmodified policy Harbor delivered provides
coverage. The unmodified terms of the work performed clause, by
themselves, would exclude coverage. See Eulich v. Home Indemnity
Co., 503 S.W.2d 846, 849 (Tex. Civ. App.--Dallas 1973, writ ref'd
n.r.e.); T.C. Bateson Constr. Co. v. Lumbermens Mutual Casualty
Co., 784 S.W.2d 692, 696 (Tex. App.--Houston [14th Dist.] 1989,
writ denied). Urban contends that those terms are not operative
due to an ambiguity arising from the umbrella policy's
incorporation of provisions of Aetna's primary policy. Generally,
this court will not rule on issues not presented to the district
court below. Capps v. Humble Oil & Refining Co., 536 F.2d 80, 82
(5th Cir. 1976). We will not address the merits of this argument.
In addition to suing for breach of contract, Urban alleged
that Harbor violated its duties of reasonable care, good faith, and
fair dealing. The district court held that because Harbor had a
reasonable basis for denying coverage it did not breach its duty of
good faith and fair dealing by refusing to pay Urban's claim or to
settle with Augusta. Later, the district court ruled that Urban's
remaining statutory claims were time barred.
13
A cause of action for breach of the duty of good faith and
fair dealing occurs when there is no reasonable basis for the
denial or delay of payment of a claim or when an insurer fails to
determine whether there is any reasonable basis for the denial or
delay. Arnold v. National Cty. Mut. Fire Ins. Co., 725 S.W.2d 165,
167 (Tex. 1987). Whether there is a reasonable basis for denial is
judged by the facts known to the insurer at the time the claim was
denied. Automobile Ins. Co. of Hartford v. Davila, 805 S.W.2d 897,
903 (Tex. App.--Corpus Christi 1991, writ denied)(citing Viles v.
Security Nat'l Ins. Co., 788 S.W.2d 566, 567 (Tex. 1990)). We
assume without deciding that the duty of good faith and fair
dealing exists on the part of an excess carrier in a commercial
context. See Beaumont Rice Mill, Inc. v. Mid-American Indemnity
Ins. Co., 948 F.2d 950, 952 (5th Cir. 1991)(making same
assumption).
We agree with the district court's conclusion that Harbor
possessed a reasonable basis for the denial of Urban's claim. We
note that the absence of policy coverage, by itself, does not
foreclose recovery for the breach of the duty of good faith and
fair dealing. See First Texas Sav. Ass'n v. Reliance Ins. Co., 950
F.2d 1171, 1179 (5th Cir. 1992); see also Viles, 788 S.W.2d at 567.
In this case, Harbor reserved its rights under the policy in April
1989 and denied coverage on September 1, 1989. The written terms
of the policy, containing the unmodified work performed clause,
provided a reasonable basis for this denial of coverage.
We affirm the remainder of the district court's rulings.
14
Urban's negligence claim fails because Harbor had a reasonable
basis for denying coverage and therefore for refusing to settle
Augusta's suit. Urban's misrepresentation claims under the Texas
Insurance Code and DTPA are time barred due to its actual knowledge
of the omissions in 1981. Aside from assertions in the argument of
counsel, Urban has not shown that Harbor made any representations
regarding coverage after delivering the renewal policy.
AFFIRMED.
15