National Union Fire Insurance v. U.S. Liquids, Inc.

United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS February 17, 2004
FOR THE FIFTH CIRCUIT
Charles R. Fulbruge III
Clerk
No. 03-20542
NATIONAL UNION FIRE INSURANCE CO. OF PITTSBURGH, PA,
Plaintiff-Counter Defendant-Appellee,
versus
U.S. LIQUIDS, INC.; MICHAEL P. LAWLOR; W. GREGORY ORR; EARL J.
BLACKWELL; GARY J. VAN ROOYAN; WILLIAM A. ROTHROCK, IV; ALFRED
TYLER, II; JAMES E. McENEANEY, JR.; JOHN N. HATSOPOLOS; ROGER A
RAMSEY,
Defendants-Counter Claimants-Appellants.
Appeal from the United States District Court
For the Southern District of Texas
(H-01-CV-1980)
Before JOLLY, HIGGINBOTHAM, and DeMOSS, Circuit Judges.
PER CURIAM:*
Defendants-Counter Claimants-Appellants U.S. Liquids, Inc., et
al. (collectively, “USL”) seek reversal of the district court’s
grant of summary judgment that declared Plaintiff-Counter
Defendant-Appellee National Union Fire Insurance Co. (“National
Union”) had no obligation both (1) to indemnify USL under a
*
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opinion should not be published and is not precedent except under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.
Directors, Officers, and Corporate Liability insurance policy (the
“Policy”) for securities and shareholder derivative claims and
(2) to advance USL defense costs for such claims under the Policy.
Because we find the pollution exclusion is unambiguous and clearly
barred both coverage of and defense costs for the claims, we AFFIRM
the decision of the district court.
BACKGROUND
This appeal concerns a dispute over insurance coverage under
the Policy entered into by the insurer National Union and the
insured USL. USL is a provider of integrated liquid waste
management services, including collection, processing, recovery,
and disposal. In February 1999 USL negotiated and purchased the
Policy from National Union. The Policy included a “Securities Plus
II” endorsement to cover securities claims, including those “based
upon or attributable to, in part or in whole, the purchase or sale,
or offer or solicitation of an offer to purchase or sell, any
securities of [USL]” and class or derivative claims “alleging any
Wrongful Act of an Insured.” The Policy also included several
exclusions, including the pollution exclusion at issue, which
denied coverage for any loss in connection with a claim:
(l) alleging, arising out of, based upon, attributable
to, or in any way involving, directly or indirectly:
(1) the actual, alleged or threatened
discharge, dispersal, release or escape
of pollutants; or
(2) any direction or request to test for,
2
monitor, clean up, remove, contain,
treat, detoxify or neutralize pollutants,
including but not limited to a Claim alleging
damage to the Company or its securities
holders.
Pollutants include (but are not limited to)
any solid, liquid, gaseous or thermal irritant
or contaminant, including smoke, vapor, soot,
fumes, acids, alkalis, chemicals and waste.
Waste includes (but is not limited to)
materials to be recycled, reconditioned or
reclaimed.
The pollution exclusion applied to any “Loss in connection with a
Claim.” The Policy clearly stated that “[t]he term ‘Claim’ shall
include a Securities Claim.” The Policy also provided for the
advancement of defense costs, according to the terms of the Policy,
prior to the final disposition of any claim. But the Policy
specifically provided that “the Insurer does not . . . assume any
duty to defend.”
The two underlying, pending federal lawsuits filed against USL
include a consolidated securities class action brought by the
shareholders of USL and a shareholder derivative suit filed on
behalf of USL against certain directors and officers of USL. The
plaintiff class in the securities action consists of shareholders
who allege that they either purchased USL common stock between May
1998 and August 1999 or acquired USL common stock in a March 1999
secondary public offering at artificially inflated prices and in
reliance on materially false and misleading statements presented in
press releases issued by USL and documents USL filed with the SEC
3
between May 1998 and August 1999. The derivative suit accuses
USL’s directors and officers of intentional and negligent breach of
their fiduciary duties in causing USL to violate federal
environmental and securities laws, to falsify compliance with state
and federal law, and to inflate earnings by knowingly engaging in
illegal toxic waste disposal.
As part of an expansion plan announced in 1997, USL acquired
numerous smaller waste management businesses between November 1996
and October 1999. The shareholders contend that USL’s rapid growth
campaign took place without regard to or disclosure of these
companies’ improper waste disposal practices. Both complaints
filed by the shareholders present a similar factual account of
USL’s illegal activities. Allegations regarding USL’s polluting
activities initially stemmed from an FBI investigation into one
specific company USL acquired – City Environmental, Inc. (“City
Environmental”). This investigation was based on information about
City Environmental’s USL-owned Detroit, Michigan, plant. A
confidential source alleged that USL was knowingly discharging
liquid hazardous waste into Detroit’s sewer system and illegally
transporting and disposing of hazardous waste. After five
witnesses cooperated with the government and agents searched the
Detroit plant, EPA authorities shut down part of the plant.
These events signaled the start of a cleanup process at the
Detroit plant, a criminal investigation of USL, and a revelation of
illegal practices that USL had actively concealed from investors
4
and the public. In August 1999 trading of USL’s stock was
suspended for six days. Analysts downgraded USL’s stock rating,
and the stock value dramatically fell $10.75 per share. In a
January 31, 2000, press release, USL announced its 1999 earnings
would be substantially reduced due to the closing and cleanup costs
at the Detroit plant.1
After the underlying suits were filed, USL made demand on
National Union to defend, contending the claims raised in the suits
were covered by the Policy. National Union denied that the claims
were covered, citing the Policy’s pollution exclusion, and filed
suit based on diversity jurisdiction in district court, seeking a
declaratory judgment that it is not obligated to defend or
indemnify USL in the two underlying federal suits filed against USL
and its directors and officers – the consolidated securities class
action and the shareholder derivative action. USL counterclaimed
for declaratory judgment and breach of contract. The district
court granted summary judgment in favor of National Union, and USL
now appeals.
DISCUSSION
We review a district court’s summary judgment rulings de novo,
and apply the same standard as the district court. Travelers Cas.
1
The consolidated securities complaint also alleged that USL and
its directors and officers knew about and did not disclose that
similar illegal practices regarding dumping of solid and liquid
wastes were knowingly taking place at several other USL-owned
facilities.
5
& Sur. Co. of Am. v. Baptist Health Sys., 313 F.3d 295, 297 (5th
Cir. 2002) (citing Potomac Ins. Co. v. Jayhawk Med. Acceptance
Corp., 198 F.3d 548, 550 (5th Cir. 2000)). Under Fed. R. Civ. P.
56(c), district courts properly grant summary judgment if, viewing
the facts in the light most favorable to the nonmovant, the movant
shows there is no genuine issue of material fact such that the
movant is entitled to judgment as a matter of law. Id.; see also
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986). The
district court’s interpretation of an insurance contract is a
question of law also subject to de novo review. Canutillo Indep.
Sch. Dist. v. Nat’l Union Fire Ins. Co., 99 F.3d 695, 700 (5th Cir.
1996) (citations omitted).
Both parties agree that the Policy should be interpreted under
Texas law. In Texas, courts employ general rules of contract
construction to insurance policies. Balandran v. Safeco Ins. Co.
of Am., 972 S.W.2d 738, 740-41 (Tex. 1998). The terms of an
insurance policy are unambiguous as a matter of law if they can be
given definite or certain legal meaning. Nat’l Union Fire Ins. Co.
v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex. 1995) (citing Coker
v. Coker, 650 S.W.2d 391, 393 (Tex. 1983)). If the court finds no
ambiguity, the court’s duty is to enforce the policy according to
its plain meaning. Puckett v. United States Fire Ins. Co., 678
S.W.2d 936, 938 (Tex. 1984) (citation omitted). “The fact that the
parties disagree as to coverage does not create an ambiguity, nor
6
may extrinsic evidence be admitted for the purpose of creating an
ambiguity.” Sharp v. State Farm Fire & Cas. Ins. Co., 115 F.3d
1258, 1261 (5th Cir. 1997) (applying Texas law); see also CBI
Indus., 907 S.W.2d at 520. Courts may determine the lack of a duty
to indemnify under a policy where an exclusion clearly applies to
all claims in a pending, underlying suit. See Am. States Ins. Co.
v. Bailey, 133 F.3d 363, 368 (5th Cir. 1998) (applying Texas law).
“A claim need only bear an incidental relationship to the described
conduct for the exclusion to apply.” Scottsdale Ins. Co. v. Texas
Sec. Concepts & Investigation, 173 F.3d 941, 943 (5th Cir. 1999)
(applying Texas law) (citation omitted).
The Texas Supreme Court has found that “[i]f, however, the
language of a policy or contract is subject to two or more
reasonable interpretations, it is ambiguous.” CBI Indus., 907
S.W.2d at 520. Courts can only consider the parties’
interpretation of a contract if the court first determines a
contract to be ambiguous. Id. (citing Sun Oil Co. (Delaware) v.
Madeley, 626 S.W.2d 726, 732 (Tex. 1981)). There are two types of
ambiguities: patent ambiguities are evident from the face of the
contract and latent ambiguities arise when the terms of the
contract are applied to the subject with which the contract deals.
CBI Indus., 907 F.2d at 520. If the court finds an ambiguity in
the contract provisions, particularly in an exclusion clause, the
court should construe the policy strictly against the insurer.
7
Bailey, 133 F.3d at 369; Balandran, 972 S.W.2d at 741 (noting that,
where an ambiguity is found, courts should adopt the insured’s
interpretation as long as it is reasonable, even where the
insurer’s interpretation is a more reasonable interpretation).
Here, the district court adopted the magistrate’s
recommendation, which interpreted the terms of the parties’
insurance policy under Texas law and concluded National Union had
shown that the unambiguous pollution exclusion of the Policy barred
coverage for the underlying suits against USL and its directors and
officers.
Whether the district court erred in finding National Union had no
duty to indemnify USL under the Policy.
On appeal, USL argues that the Policy provides coverage for
the underlying securities and derivative claims, notwithstanding
the pollution exclusion. USL contends that the explicit grant of
coverage in the Securities Plus II endorsement for securities
claims would be rendered meaningless by reading the pollution
exclusion to apply.2 USL also stresses that even if the Policy
does not provide outright for coverage of the underlying suits,
2
The district court discounted this argument because even though
USL is in the business of waste disposal, the pollution exclusion
does not eliminate coverage for any securities claim that does not
stem from the discharge of pollution, e.g., self-dealing,
embezzlement, or ultra vires acts. We agree and note that the
Securities Plus II also functioned to permit both USL and National
Union to elect arbitration or judicial proceedings to settle
disputes in connection with the Policy, as opposed to the main
policy, which required both parties to submit to AAA-binding
arbitration.
8
there is an ambiguity about whether the Policy provides such
coverage that should be construed in favor of the insured USL’s
reasonable interpretation of the Policy’s coverage.
USL next maintains that because many of the claims in the
securities and derivative suits are unrelated to pollution and
require proof of unrelated facts, National Union is obligated to
defend and indemnify. USL is correct that Texas recognizes a rule
where if a loss “is caused by a covered peril and an excluded peril
that are independent causes of the loss, the insurer is liable.”
Guar. Nat’l Ins. Co. v. N. River Ins. Co., 909 F.2d 133, 137 (5th
Cir. 1990) (applying Texas law). USL thus contends that the
physical causes of the losses in the underlying suits – alleged
omissions and misrepresentations, and inadequate due diligence –
are independent and unrelated to pollution, and therefore are
distinct covered events.
USL also claims that the district court inaccurately stated
Texas law when it accepted the magistrate’s conclusion that, based
on Scottsdale, 173 F.3d at 943, the “arising out of” language in
pollution exclusion required a broad, general, and comprehensive
interpretation of the exclusion. USL contends that such exclusions
should be read narrowly so as to favor coverage and that the Texas
Supreme Court in King v. Dallas Fire Insurance Co., 85 S.W.3d 185,
190-91 (Tex. 2002), has rejected the “but for” test to interpret
exclusions in insurance policies. USL argues even if the “but for”
9
test can be applied, there must be a causal connection found
between the injury and the events excluded by the policy: here the
alleged misrepresentations and omissions broke the chain of
causation between pollution and the underlying claims. Finally,
USL relies heavily on a Sixth Circuit case, Owens Corning v.
National Union Fire Insurance Co., No. 97-3367, 1998 WL 774109 (6th
Cir. Oct. 13, 1998) (unpublished), where the Sixth Circuit found
that an asbestos exclusion did not bar coverage for the securities
claims against the insured.
National Union answers USL with one main contention – “All of
the claims made against USL in the underlying lawsuits have one
genesis: pollution.” In other words, the pollution exclusion is
unambiguous and absolutely bars coverage of the securities and
derivative claims because they allege, arise out of, are based
upon, are attributable to, or involve, directly or indirectly, “the
actual, alleged, or threatened discharge, dispersal, release or
escape of pollutants.” National Union points out the pollution
exclusion applies to all claims, “including but not limited to a
Claim alleging damage to [USL] or its securities holders.” Because
the factual allegations in both underlying suits fall squarely
within the scope of the pollution exclusion, National Union asserts
it has no duty to indemnify USL.
National Union contends that absolute pollution exclusions
similar to the one in the Policy have been consistently declared
10
clear and unambiguous and thus are enforced by Texas courts. See
CBI Indus., 907 S.W.2d at 521; E&L Chipping Co. v. Hanover Ins.
Co., Inc., 962 S.W.2d 272, 277 (Tex. App.–Beaumont 1998, no pet.
h.) (describing a similar pollution exclusion as “clear and
susceptible of only one possible interpretation”). National Union
notes that no Texas case has specifically addressed the
applicability of the pollution exclusion to claims under a
directors, officers, and corporate liability policy but cites cases
from other district and circuit courts for the proposition that
coverage is properly denied when the wrongful acts of the company
and its directors and officers are inextricably intertwined, even
indirectly, with pollution as indicated in the plain language of
the exclusion. See High Voltage Eng’g Corp. v. Fed. Ins. Co.,
981 F.2d 596, 602 (1st Cir. 1992); Employers Ins. of Wausau v.
Duplan Corp., 899 F. Supp. 1112, 1128 (S.D.N.Y. 1995).3
National Union submits the language of the pollution exclusion
is broad, much broader than USL chooses to admit by focusing only
on the phrase “arising out of” – “[I]t is not possible to credibly
deny that the factual allegations in the underlying lawsuits are
based upon, attributable to, and involve, both directly and
3
USL argues that both these cases concerned personal injury or
property damage, rather than the type of loss at issue here.
However, what USL does not point out is that in Duplan, the
district court noted that even if there was a breach of fiduciary
claim made against the insured, such claim also would be barred by
the pollution exclusion. 899 F. Supp. at 1128.
11
indirectly, the illegal polluting activities of [USL].” (Emphasis
added). National Union answers USL’s argument that if there are
both covered and excluded independent causes of the loss, the
insurer is liable; that doctrine does not apply here because there
is no independent, intervening, covered cause of the loss.
Polluting activities committed by USL and its directors and
officers are precisely what was misrepresented and not disclosed to
USL’s shareholders and are thus “inextricably intertwined” with the
company’s and its shareholders’ losses. Therefore, the causes are
concurrent, which renders National Union not liable. N. River,
909 F.2d at 137. National Union asserts that even if the pollution
exclusion had only contained “arising out of” language, the causal
nexus between USL’s alleged misrepresentations about pollution and
pollution under the exclusion is fulfilled.
To answer USL’s contention that the King case rejected the
“but for” test which the district court applied from Scottsdale,
National Union responds that King is inapposite here. National
Union is correct. King is limited to the situation where a policy
contains an “occurrence” requirement that must be triggered before
an employer can be covered for an employee’s intentional actions.
85 S.W.3d at 190-91 (distinguishing our Circuit’s “but for” test in
these circumstances because “there would be no cause of action
against the employer but for the employee’s intentional acts and
therefore there is no ‘occurrence’ to invoke the policy”).
12
Instead, we found that whether an “occurrence” triggered coverage
was to be determined from the insured’s standpoint. Id. at 188.
National Union correctly asserts the “but for” test is in all other
respects still good law; “the phrase ‘arise out of’ should be
interpreted as requiring a ‘but-for’ causal relationship.” Waffle
House, Inc. v. Travelers Indem. Co., No. 2-01-298-CV, 2003 WL
21666438, at *4 (Tex. App.–Fort Worth, July 17, 2003, writ denied)
(citing Utica Nat’l Ins. Co. v. Am. Indem. Co., 46 Tex. Sup. Ct. J.
866, 2003 WL 21468776, at *4 (Tex. June 26, 2003)). The “but for”
test applies here to the broadly worded pollution exclusion. That
is, National Union argues that the underlying claims would not
exist “but for” USL’s excluded polluting activities. Finally,
National Union discounts USL’s reliance on Owens Corning. In that
case, the Sixth Circuit completely discounted the pollution
exclusion in the policy because it was not “specific, clear, and
exact” as required by Ohio law. Owens Corning, 1998 WL 774109, at
*6. National Union asserts Ohio law is not analogous at all to
Texas law; Ohio law looks at whether the “chain of events [leading
to the loss] was unbroken,” id. at *4, while Texas law only
considers whether there is an “incidental relationship” between the
loss and the excluded conduct. Scottsdale, 173 F.3d at 943.
We find the district court here correctly determined that the
terms of the Policy’s pollution exclusion were clear and neither
patently nor latently ambiguous. Likewise, the court also properly
13
found that the losses described in the factual allegations of the
securities and derivative suits bore more than an incidental
relationship to the broad polluting conduct excluded in the Policy
and that “but for” such illegal activities those underlying claims
would not exist. Thus, the district court did not err in finding
National Union had no duty to indemnify USL.
Whether the district court erred in finding National Union had no
duty to advance defense costs to USL under the Policy.
The Policy provided that National Union would advance defense
costs to USL “pursuant to the terms herein” and “prior to the final
disposition of a Claim.” The Policy defined “Defense Costs” as
“reasonable and necessary fees, costs, and expenses . . . resulting
solely from the investigation, defense and appeal of a Claim
against the Insureds . . . .” If any exclusion were to apply, the
Policy provided that “[t]he Insurer shall not be liable to make any
payment for Loss in connection with a Claim made against an
Insured.” The definition of “Loss” included “Defense Costs.”
Thus, National Union was only obligated to advance defense costs to
USL for claims covered under the Policy.
USL’s again argues that the pollution exclusion does not
exclude coverage and so National Union is obligated under the
Policy to advance defense costs for the securities and derivative
suits. National Union replies that under the plain terms of the
pollution exclusion and the Policy, it has no duty to advance any
defense costs to USL.
14
Because the district court was correct in its determination
that the Policy’s clear pollution exclusion eliminated National
Union’s duty to indemnify USL for losses relating to the underlying
securities and shareholder derivative suits, we find the court did
not err in denying USL defense costs under the Policy.
CONCLUSION
Having carefully reviewed the record of this case and the
parties’ respective briefing and for the reasons set forth above,
we conclude that the district court did not err in granting summary
judgment to National Union. Therefore, we AFFIRM the decision of
the district court.
AFFIRMED.
15