Vogelbusch USA, Inc. v. State Farm Lloyds, Inc., and State Farm Fire and Casualty Company

Affirmed and Memorandum Opinion filed July 13, 2004

Affirmed and Memorandum Opinion filed July 13, 2004.

In The

Fourteenth Court of Appeals

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NO. 14-03-00600-CV

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VOGELBUSCH USA, INC., Appellant

V.

STATE FARM LLOYDS AND STATE FARM FIRE & CASUALTY COMPANY, Appellees

_______________________________________________________________________

On Appeal from the 189th District Court

Harris County, Texas

Trial Court Cause No. 02-38881

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M E M O R A N D U M   O P I N I O N

In this insurance-coverage declaratory-judgment case, we must decide whether the trial court erred in granting summary judgment that the insurers under a commercial general liability policy and a commercial umbrella policy have no duty to defend their insured in regard to a counterclaim asserted against the insured by a purchaser of the insured=s product.  At issue are the policies= products-completed-operations-hazard exclusions.  Finding that the counterclaim alleges facts that clearly fall within these unambiguous policy exclusions, we affirm the trial court=s judgment.

I.  Factual and Procedural Background

Archer Daniels Midland Company (hereinafter the APlant Owner@) owns and operates an alcohol plant in Peoria, Illinois.  This plant produces Ahigh purity beverage grade alcohol@ based on a fermentation process.  The Plant Owner contracted with appellant Vogelbusch USA, Inc. for Vogelbusch to engineer and design a high purity ethanol dehydrator to be installed at this alcohol plant.  According to the Plant Owner, this dehydrator was to receive Araw alcohol@ produced by the Plant Owner=s existing distillation process and produce dehydrated, beverage-quality alcohol as well as byproduct that could be used again in the plant=s distillation process. Vogelbusch proceeded to engineer and design a high purity ethanol dehydrator, which was installed at the Plant Owner=s Illinois plant.  However, the Plant Owner claims that the dehydrator did not produce beverage-grade ethanol because of the presence of a contaminant C diethyl ether C in the finished product. 

Asserting that the Plant Owner had not paid Vogelbusch all sums owed under the contract, Vogelbusch filed a breach-of-contract action against the Plant Owner in the Circuit Court of Cook County, Illinois.  The Plant Owner answered and asserted a counterclaim against Vogelbusch, alleging claims for breach of contract, negligent misrepresentation, breach of implied warranty of merchantability, and breach of implied warranty of fitness for a particular purpose. 

Vogelbusch is the insured under (1) a commercial general liability insurance policy (ACGL Policy@) issued by appellee State Farm Lloyds and (2) a commercial umbrella insurance policy (AUmbrella Policy@) issued by appellee State Farm Fire & Casualty Company .  The CGL Policy and the Umbrella Policy covered Vogelbusch during the time period relevant to the Plant Owner=s counterclaim.  After these insurers (collectively referred to hereinafter as AState Farm@) refused to defend Vogelbusch or admit coverage under their policies, Vogelbusch filed suit against them alleging breach of contract and seeking a declaratory judgment that State Farm has a duty to defend and indemnify Vogelbusch against the Plant Owner=s counterclaim.  State Farm answered, asserting that there is no duty to defend or indemnify based on exclusions in the insurance policies.

After hearing cross-motions for summary judgment filed by both Vogelbusch and State Farm, the trial court denied Vogelbusch=s motion and granted State Farm=s motion, determining that the insurers owe Vogelbusch no duty to defend or indemnify against the allegations contained in the Plant Owner=s counterclaim.  In this appeal, Vogelbusch asserts the trial court should have granted its motion for summary judgment.

II.  Standard of Review

A summary-judgment movant must establish its right to summary judgment on the issues presented to the trial court by conclusively proving all elements of the movant=s claim or defense as a matter of law.  See Tex. R. Civ. P. 166a(c); Havlen v. McDougall, 22 S.W.3d 343, 345 (Tex. 2000).  When both parties move for summary judgment, each party must carry its own burden, and neither can prevail because of the failure of the other to discharge its burden. INAC Corp. v. Underwriters at Lloyd=s, 56 S.W.3d 242, 247 (Tex. App.CHouston [14th Dist.] 2001, no pet.).  Because each party was a movant, the burden for each was the same: to establish entitlement to a summary judgment by conclusively proving all the elements of the claim or defense as a matter of law. Id.  When both sides move for summary judgment and the trial court grants one motion and denies the other, the appellate court must review all summary‑judgment evidence, determine all issues presented, and render the judgment that the trial court should have rendered.  FM Props. Operating Co. v. City of Austin, 22 S.W.3d 868, 872 (Tex. 2000).  This court reviews the summary‑judgment evidence using familiar standards of review. See Dolcefino v. Randolph, 19 S.W.3d 906, 916 (Tex. App.CHouston [14th Dist.] 2000, pet. denied).

III.  Analysis

To resolve this insurance-coverage dispute, we apply the rules of contract construction.  See Kelley‑Coppedge, Inc. v. Highlands Ins. Co., 980 S.W.2d 462, 464 (Tex. 1998).  In applying these rules, our primary concern is to ascertain the parties= intent as expressed in the language of the policy.  See id.  In determining the intention of the parties, we look only within the four corners of the insurance agreement to see what is actually stated, and not what was allegedly meant.  See Esquivel v. Murray Guard, Inc., 992 S.W.2d 536, 544 (Tex. App.CHouston [14th Dist.] 1999, pet. denied).  We must consider all of the provisions with reference to the entire contract; no single provision will be controlling.  Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983).  If a written contract is so worded that it can be given a definite or certain legal meaning, then it is unambiguous, and we may not accept parol evidence as to the parties= intent.  Kelley‑Coppedge, 980 S.W.2d at 464.  Whether a contract is ambiguous is a question of law.  Id.

In analyzing insurance-coverage disputes of this nature, we look first to the policy and then to the pleading to determine if coverage exists.  If a pleading does not allege facts within the scope of coverage, an insurer is not legally required to defend a suit against its insured.  Nat=l Union Fire Ins. Co. v. Merchs. Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997).  We determine State Farm=s duty to defend based on the allegations of the Plant Owner=s counterclaim and the language of the insurance policy.  See id.  This standard for determining coverage from the four corners of the pleading and the four corners of the insurance policy is referred to as the Aeight corners@ rule.  See id.  Applying the Aeight corners@ rule, we give the allegations in the Plant Owner=s counterclaim a liberal interpretation.  See id.  If the counterclaim does not state facts sufficient to bring the case clearly within or without the coverage, the general rule is that the insurer is obligated to defend if potentially there is a case under the counterclaim within the coverage of the policy.  See id. In making this determination, we must focus on the counterclaim=s factual allegations that show the origin of the damages rather than on the legal theories alleged.  See id.  We will not read facts into the Plant Owner=s counterclaim, nor will we look outside of the counterclaim, or imagine factual scenarios which might trigger coverage.^[1]  See id. at 142.

A.        What are the terms of the insurance-policy exclusions at issue in this case?

The CGL Policy excludes from coverage Aproperty damage to your work arising out of it or any part of it and included in the products-completed operations hazard.@^[2]  The CGL Policy contains, in pertinent part, the following definitions^[3]:

products-completed operations hazard:

a.         includes all bodily injury and property damage arising out of your product or  your work except products that are still in your physical  possession or work that has not yet been completed or abandoned.  The bodily injury or property damage must occur away from premises you own or rent unless your business includes the selling, handling or distribution of  your product for consumption on premises you own or rent.

Your work will be deemed completed at the earliest of the following times:

(1)       when all of the work called for in your contract has been completed;

(2)       when all of the work to be done at the site has been completed if your contract calls for work at more than one site; or

(3)       when that part of the work done at a job site has been put to its intended use by any person or organization other than another contractor or subcontractor working on the same project.

Work that may need service, maintenance, correction, repair or replacement, but which is otherwise complete, will be treated as completed . . . .

. . .

your product:

a.         means:

(1)       any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by . . . you . . . and

(2)       containers (other than vehicles), materials, parts or equipment furnished in connection with such goods or products;

b.         includes:

(1)       warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of any of the items included in a.(1) and a.(2) above; and

(2)       the providing of or failure to provide warnings or instructions . . . .

your work:

a.         means:

(1)       work or operations performed by you or on your behalf; and

(2)       materials, parts or equipment furnished in connection with such work or operations;

b.         includes:

(1)       warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of any of the items included in a.(1) and a.(2) above; and

(2)       the providing of or failure to provide warnings or instructions.

The Umbrella Policy does not apply to any activity or operation defined as AProducts Hazard@ in the policy.  The Umbrella Policy defines AProducts Hazard,@ in pertinent part, as follows:

(1)       the handling or use of or the existence of any condition in or a warranty of goods or products manufactured, sold, handled or distributed by the Named Insured or by others trading under its name, if the occurrence happens after possession of such goods or products has been relinquished to others by the Named Insured or by others trading under its name and if such occurrence happens, away from premises owned by, rented to or controlled by the Named Insured . . .   ; or

(2)       operations, including any act or omission in connection with operations performed by or on behalf of the Named Insured on the premises or elsewhere and whether or not goods or products are involved in such operations, if the occurrence happens after such operations have been completed or abandoned and happens away from premises owned by, rented to or controlled by the Named Insured provided, operations shall not be deemed incomplete because improperly or defectively performed or because further operations may be required pursuant to an agreement. . . .

We conclude that the relevant portions of the insurance policies are unambiguous.  See Kelley‑Coppedge, Inc., 980 S.W.2d at 464B67.  These policies exclude coverage for the Plant Owner=s counterclaim if the alleged property damage was allegedly caused by a product that Vogelbusch allegedly no longer possessed or by work Vogelbusch allegedly had completed. The CGL Policy states that Vogelbusch=s work is considered completed when Athat part of the work done at a job site has been put to its intended use by any person or organization other than another contractor or subcontractor working on the same project.@

B.        Does the Plant Owner allege that its property damage was caused by a product that Vogelbusch no longer possessed or by work Vogelbusch had completed?

Based on the unambiguous policy language, we review the Plant Owner=s counterclaim to see if it alleges that the Plant Owner=s property damage was caused by a product that Vogelbusch no longer possessed or by work Vogelbusch had completed.  The Plant Owner=s counterclaim contains the following material allegations:

1.         [The Plant Owner] . . . is a Delaware corporation which owns and operates a [sic] alcohol plant in Peoria, Illinois (APeoria facility@).

2.         At all relevant times, the Peoria facility was in the ethanol dehydration industry which includes the production of Ahigh purity beverage grade alcohol@ based upon a fermentation process.

. . .

4.         On or about December 9, 1996, Vogelbusch sent a proposal to [the Plant Owner] for a 60MMGPY molecular sieve dehydrator to be designed and installed at the Peoria facility . . . . As part of that proposal Vogelbusch agreed to design and install a high purity ethanol dehydrator which was to receive Araw alcohol@ from the Peoria facility=s existing distillation process and produce Adehydrated alcohol,@ with the byproduct to be returned to the existing distillation process. Based upon subsequent discussions between [the Plant Owner] and Vogelbusch in late December, the parties agreed that the dehydration system was intended to produce high purity ethanol, maintaining the beverage grade quality of the raw alcohol. 

5.         On or about January 9, 1997 [the Plant Owner] issued a purchase order to Vogelbusch for the design, installation and construction of the molecular sieve dehydration system to remove water from beverage grade alcohol at the Peoria facility.  The purchase order specified that the system would be installed at the Peoria facility as described above. . . .

6.         Pursuant to the Vogelbusch proposal and subsequent discussions between [the Plant Owner] and Vogelbusch, Vogelbusch accepted the purchase order, and agreed to perform the engineering, design and installation of the molecular sieve dehydration system, and to provide a high purity ethanol dehydrator to meet 100 parts per million (ppm) water content at a flow rate of 60MMGPY based on continuous operation for a 350-day year, which would produce high purity ethanol, maintaining the beverage grade quality of the raw alcohol.

7.         Vogelbusch began to perform services and to provide designs, specifications, and equipment as described in the proposal and purchase order.

8.         Pursuant to the advice and specifications of Vogelbusch, on March 14, 1997, [the Plant Owner] contracted with UOP Molecular Sieve to provide the molecular sieve which would be the component part to the dehydration system. . . .

9.         The Vogelbusch dehydration system designed, engineered, and sold by Vogelbusch was inadequate and failed to provide high purity beverage grade ethanol as described above because of the presence of diethyl ether in the finished product.  By April of 1997 the Vogelbusch dehydration system and the molecular sieve provided by UOP were generating a diethyl ether contaminant in the finished ethanol product resulting from the dehydration process.

10.       Vogelbusch breached its contract by manufacturing, designing, installing and selling a molecular sieve dehydration system which was inadequate and failed to provide high purity beverage grade ethanol because of the presence of diethyl ether contaminate [sic] in the finished product as described above.

11.       As a proximate result of Vogelbusch=s breach of contract, [the Plant Owner] had to repair and modify the system and lost profits due to decreased production and increased costs of production.

12.       As a proximate result of Vogelbusch=s breach of contract, [the Plant Owner] continued to run the system turning premium beverage grade alcohol into a finished product which was fit only for sale as a fuel at prices substantially lower than the value of high purity beverage grade ethanol, and continued to lose time during which it could have been producing ethanol which sold at a premium. . . .

. . .

16.       [The Plant Owner] realleges and incorporates by reference Paragraphs 1-15 as if same were set forth fully herein.

17.       By April of 1997, Vogelbusch was aware that the dehydration system it had manufactured, designed, installed and sold would not produce high purity beverage grade ethanol, but rather would generate an unacceptable diethyl ether contaminate [sic] in the finished ethanol product.

18.       Vogelbusch negligently misrepresented that the diethyl ether contaminant could be Aflushed@ out of the system through [the Plant Owner=s] continued operation of the dehydration system. 

19.       Vogelbusch knew or had reason to know that the diethyl ether could not be Aflushed@ out of the system based on other plants in Pekin and France with similar systems and the same resultant problem of diethyl ether in the finished product.  Vogelbusch had a duty to disclose the problems with diethyl ether contaminate [sic] in the finished product at other plants and to advise [the Plant Owner] that the contaminate [sic] could not be Aflushed@ out as represented.

20.       Vogelbusch advised [the Plant Owner] to continue to operate the dehydration system despite the resulting diethyl ether contaminate in the finished ethanol product.

21.       [The Plant Owner] justifiably relied on Vogelbusch in continuing to run the system turning premium beverage grade alcohol into a finished ethanol product which was fit only for sale as a fuel.

22.       As a proximate result of Vogelbusch=s negligent misrepresentation, [the Plant Owner] had to repair and modify the system and lost profits due to decreased production and increased costs of production.

23.       As a proximate result of Vogelbusch=s negligent misrepresentation, [the Plant Owner] continued to run the system turning premium beverage grade alcohol into a finished product which was fit only for sale as a fuel at prices substantially lower than the value of high purity beverage grade ethanol, and continued to lose time during which it could have been producing ethanol which sold at a premium. . . .   (emphasis added).

In adjudicating this appeal, we determine only whether the Plant Owner=s counterclaim alleges facts within the scope of coverage; we are not concerned with the truth or falsity of these factual allegations.  See Nat=l Union Fire Ins. Co., 939 S.W.2d at 141; Argonaut Southwest Ins. Co. v. Maupin, 500 S.W.2d 633, 635B36 (Tex. 1973) (holding that the Aduty to defend is determined by the allegations of the petition when considered in the light of the policy provisions without reference to the truth or falsity of such allegations@ and that A[t]he duty to defend does not depend on what the facts are, or what might be determined finally by the trier of facts@).  The Plant Owner makes the following allegations, among others, in its counterclaim:

!         By April of 1997, the Vogelbusch system and the molecular sieve provided by UOP were generating the alleged contamination in the Plant Owner=s finished ethanol product.^[4]

            !         As a result of Vogelbusch=s manufacturing, designing, installing, and selling an inadequate dehydration system, the Plant Owner continued to run the system.^[5]

!         Vogelbusch had manufactured, designed, installed, and sold the dehydration system in question by April of 1997.^[6]

!         Vogelbusch negligently represented that the alleged contaminant could be flushed out of the dehydration system through the Plant Owner=s continued operation of the system, and the Plant Owner justifiably relied on this representation in continuing to run the system.^[7] 

The Plant Owner=s counterclaim alleges that Vogelbusch=s work or its dehydration system caused property damage to Vogelbusch=s alcohol; however, the Plant Owner alleges that this damage occurred after Vogelbusch had transferred possession of the dehydration system to the Plant Owner and after Vogelbusch had completed its work by putting the system to its intended use by the Plant Owner.^[8]  Though we liberally construe the counterclaim to determine if it alleges facts within the coverage of the insurance policies, we do not read facts into the counterclaim, and we cannot look outside the counterclaim or imagine factual scenarios that might trigger coverage.^[9]  See Nat=l Union Fire Ins. Co., 939 S.W.2d at 141B42; Clemons v. State Farm Fire and Cas. Co., 879 S.W.2d 385, 392B93 (Tex. App.CHouston [14th Dist.] 1994, no writ).  Even giving the counterclaim a liberal construction, we conclude the facts alleged therein clearly fall within the above-quoted exclusions in the insurance policies.^[10]  See Nat=l Union Fire Ins. Co., 939 S.W.2d at 141B42; Clemons, 879 S.W.2d at 392B93; see also LaBatt Co. v. Hartford Lloyd=s Ins. Co., 776 S.W.2d 795, 798B99 (Tex. App.CCorpus Christi 1989, no writ) (holding that insurer had no duty to defend because allegations in underlying suit fell within the Aproduct hazard@ exclusion in the insurance policy). Thus, there is no duty to defend in this case.

Vogelbusch relies heavily on a Texas case that states Awe find authority supporting the view that the >completed operations= exclusion does not apply in cases in which the damage or injury arises in connection with the sale or distribution of a product by an insured.@  Colony Ins. Co. v. H.R.K., Inc., 728 S.W.2d 848, 851 (Tex. App.CDallas 1987, no writ).  Although this case involved a products-completed-operations-hazard exclusion, the insurance policy provisions at issue and the allegations in the underlying litigation in the Colony Insurance case differ significantly from those involved in the case currently before us.  See id. at 849B51.  The Colony Insurance case is distinguishable and is not inconsistent with our resolution of the present case.  Furthermore, to the extent Vogelbusch argues that the Colony Insurance case announces a holding applicable to all products-completed-operations-hazard exclusions regardless of their wording, we reject that argument as contrary to Texas law.  See Nat=l Union Fire Ins. Co., 939 S.W.2d at 141 (holding that duty-to-defend analysis is based on language of the pleading and the insurance policy at issue).

We conclude that the trial court correctly granted State Farm=s motion for summary judgment and correctly denied Vogelbusch=s motion for summary judgment.  Accordingly, we overrule Vogelbusch=s sole issue on appeal and affirm the trial court=s judgment.

/s/        Kem Thompson Frost

Justice

Judgment rendered and Memorandum Opinion filed July 13, 2004.

Panel consists of Justices Edelman, Frost, and Guzman.

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^[1]  For this reason, we do not consider evidence extrinsic to the policies and the counterclaim, for example, the summary-judgment affidavit signed by Gunter Brodl, President of Vogelbusch, or exhibits attached to Vogelbusch=s complaint in the Illinois state court proceeding.  See Nat=l Union Fire Ins. Co., 939 S.W.2d at 141; Gomez v. Hartford Co. of the Midwest, 803 S.W.2d 438, 441 (Tex. App.CEl Paso 1991, writ denied).  No party to this appeal has asserted that any alleged exception to the Aeight corners@ rule applies to this case; therefore, we need not address whether any such exception exists or, if so, whether it applies to this case.  See Collier v. Allstate Cty. Mut. Ins. Co., 64 S.W.3d 54, 59 n.3 (Tex. App.CFort Worth 2001, no pet.).

^[2]  Emphasis in original.

^[3]  No emphasis has been added to the quoted policy language; all terms in bold are as they appear in the insurance policies. 

^[4]  See Paragraph 9 of the Plant Owner=s counterclaim supra.

^[5]   See id. at Paragraphs 10, 12.

^[6]  See id. at Paragraph 17.   

^[7]  See id. at Paragraphs 18, 20, 21, 23. 

^[8]  To fall within the exclusions in question, the alleged occurrence made the basis of the suit must also have happened away from premises owned by, rented to, or controlled by Vogelbusch.  The counterclaim alleges that the occurrence took place at the Plant Owner=s Peoria facility when the Plant Owner was operating the dehydration system in question.  Therefore, the allegations satisfy this additional requirement of the policy exclusions.

^[9]  Although a Purchase Requisition form attached to the Plant Owner=s counterclaim states that the Adelivery date desired@ for the UOP molecular sieve is AMay 1997,@ this form is dated March 14, 1997, and does not state that UOP delivered the sieve in May 1997.  This document indicates UOP delivered the sieve after March 14, 1997; however, it was created before delivery and provides no evidence of when UOP actually delivered the sieve.  Likewise, in the counterclaim, the Plant Owner bases one of its damage calculations on a single price for high-purity beverage-grade alcohol Ain late 1997.@  This could be when the Plant Owner sold some or all of the allegedly contaminated alcohol.  In any event, this allegation does not conflict with the other factual allegations showing that the counterclaim falls within exclusions in the insurance policies.

^[10]  The trial court stated in its judgment that State Farm owes no duty to defend or indemnify Vogelbusch against the allegations in the Plant Owner=s counterclaim. The Texas Supreme Court has held that, under certain circumstances, an insurer=s duty to indemnify may be adjudicated before the underlying litigation is resolved.  See Farmers Tex. Cty. Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 84 (Tex. 1997).  The trial court=s ruling on indemnity was limited to the counterclaim in question and any judgment based thereon. Furthermore, Vogelbusch argued in the trial court that, under the Griffin case, the indemnity issue is ripe for adjudication.  On appeal, Vogelbusch has not argued that, if State Farm has no duty to defend, then the trial court improperly reached the indemnity issue.  The propriety of the trial court=s indemnity ruling under Griffin is not before this court.