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Starwood Hotels and Resorts Worldwide, Inc. v. Century Surety Co.

June 5, 2007

STARWOOD HOTELS AND RESORTS WORLDWIDE, INC., PLAINTIFF,
v.
CENTURY SURETY COMPANY, DEFENDANT.



The opinion of the court was delivered by: Sim Lake United States District Judge

MEMORANDUM OPINION AND ORDER

Plaintiff, Starwood Hotels and Resorts Worldwide, Inc. (Starwood), brings this action against defendant, Century Surety Company (Century), for breach of contract and violation of Sections 541.051 and 542.056 of the Texas Insurance Code and Section 17.46 of the Texas Deceptive Trade Practices Act. Century counterclaims under 28 U.S.C. §§ 2201 and 2202 seeking declaration of its rights and obligations to Starwood. Pending before the court is Defendant Century Surety Company's Motion for Partial Summary Judgment (Docket Entry No. 34) and Plaintiff's Motion for Partial Summary Judgment (Docket Entry No. 36). For the reasons explained below Century's motion will be granted, and Starwood's motion will be denied.

I. Undisputed Facts

On July 29, 2004, Starwood entered into a contract with Absolute Glassworks (Absolute) for the installation of windows at the St. Regis Hotel in Houston, Texas. The contract required Absolute to carry commercial general liability insurance naming Starwood as additional insured.*fn1 Absolute held commercial general liability insurance from Century. The Century Policy, No. CCP298662, was effective from March 22, 2004, to March 22, 2005.*fn2 Effective August 10, 2004, the Century Policy was amended to include an endorsement under which Starwood was expressly designated an additional insured.*fn3

The Century Policy provided the following grant of coverage:

1. Insuring Agreement

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies. We will have the right and duty to defend the insured against any "suit" seeking those damages. However, we will have no duty to defend the Insured against any "suit" seeking damages for "bodily injury" or "property damage" to which this insurance does not apply. We may, at our discretion, investigate any "occurrence" and settle any claim or "suit" that may result. But (1) The amount we will pay for damages is limited as described in Section III - Limits Of Insurance; and (2) Our right and duty to defend ends when we have used up the applicable limit of insurance in the payment of judgments or settlements under Coverages A or B or medical expenses under Coverage C.

No other obligation or liability to pay sums or perform acts or services is covered unless explicitly provided for under Supplementary Payments - Coverages A and B.*fn4 Starwood also had general liability insurance from Zurich-American Insurance Company, Policy No. GLO 8298007-05, effective from December 31, 2003, through December 31, 2004.*fn5

On August 25, 2004, Arturo Tobillas sustained fatal injuries when he fell to the ground from the fifth floor of the St. Regis Hotel in Houston, Texas. On May 3, 2005, Tobillas's estate and his parents (claimants) filed suit against Starwood, Rita Tobillas, et al. v. Starwood Hotels & Resorts Worldwide, et al., Cause No. 05-CV-01904, United States District Court for the Southern District of Texas, Houston Division (underlying lawsuit). Alleging that "Arturo Tobillas was an employee of "Absolute" and/or dually employed and under the control of "Hotel" Defendant [i.e., Starwood], in the course and scope of his employment, at times material therein and on such occasion of his death,"*fn6 the claimants in the underlying lawsuit asserted claims pursuant to the Texas Wrongful Death Act, Texas Civil Practices & Remedies Code §§ 71.001, 71.004, et seq., subchapter A, the Texas Survival Act, Texas Civil Practices & Remedies Code § 71.021(a)-(c), and common law claims for negligence, gross negligence, and intentional infliction of emotional distress.*fn7

On June 22, 2005, counsel for Starwood wrote to Century demanding that Century "assume responsibility" for Starwood's defense in the underlying lawsuit and "acknowledge its contractual obligation to provide indemnity for any damages" ultimately awarded therein.*fn8 On August 4, 2005, Century denied coverage citing the "Action Over Exclusion" of its policy.*fn9 On August 16, 2005, Starwood contested Century's denial of coverage.*fn10 On September 21, 2005, Century notified Starwood that although it "stands by and reiterates its analysis and coverage position enunciated in its August 04, 2005 letter . . . Century Surety agrees to provide a qualified defense subject to this reservation of rights."*fn11

Century's letter to Starwood explained that those reasonable and necessary defense fees and expenses incurred by Starwood in defending those claims and actions asserted against it by Plaintiffs in the Underlying Lawsuit from Starwood's June 22, 2005 notice to Century Surety up to and including the present and future incurred reasonable and necessary defense fees and expenses may, possibly, be subject to reimbursement to Starwood and/or its insurer from Century Surety.*fn12

After settling the underlying lawsuit and fully funding the settlement, Century explained to Starwood that "settlement of the Tobillas litigation should not be construed as a waiver of any position Century Surety has taken concerning coverage for this claim. Century Surety reserves its right to pursue a determination of coverage on this matter as detailed in prior correspondence."*fn13

Starwood filed this action seeking defense costs on April 11, 2006 (Docket Entry No. 1). On May 26, 2006, Century filed its counterclaim seeking declaration that it had no duty to defend Starwood, no duty to indemnify Starwood against the allegations in the underlying lawsuit, and no obligation to pay Starwood's costs of defense beyond those that it had already voluntarily offered to pay pursuant to a reservation of rights (Docket Entry No. 5). On August 24, 2006, Century filed an amended counterclaim reasserting its initial counterclaim and adding counterclaims for breach of contract, quasi-contract, and quantum meruit (Docket Entry No. 20).

II. Standard of Review

Summary judgment is authorized if the movant establishes that there is no genuine dispute about any material fact and the law entitles it to judgment. Fed. R. Civ. P. 56(c). Disputes about material facts are "genuine" if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Anderson v. Liberty Lobby, Inc., 106 S.Ct. 2505, 2511 (1986). The Supreme Court has interpreted the plain language of Rule 56(c) to mandate the entry of summary judgment "after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 106 S.Ct. 2548, 2552 (1986). A party moving for summary judgment "must 'demonstrate the absence of a genuine issue of material fact,' but need not negate the elements of the non-movant's case." Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) (en banc), (quoting Celotex, 106 S.Ct. at 2553-2554). Factual controversies are to be resolved in favor of the non-movant, "but only when . . . both parties have submitted evidence of contradictory facts." Little, 37 F.3d at 1075.

III. Cross-Motions for Partial Summary Judgment

Starwood argues that it is entitled to partial summary judgment on its breach of contract claim for the full amount of its defense costs and for attorney's fees.*fn14 Century argues that it is entitled to partial summary judgment declaring that it has no duty to defend Starwood in the underlying lawsuit, and that if it has such a duty, it is limited to half of Starwood's defense costs because when Tobillas died Starwood was covered against the allegations in the underlying lawsuit by the Zurich Policy.*fn15

A. Principles of Insurance Contract Construction

In diversity cases federal courts must apply the substantive law of the forum state. See Erie R.R. Co. v. Tompkins, 58 S.Ct. 817 (1938). Texas Industries, Inc. v. Factory Mut. Ins. Co., F.3d , 2007 WL 1376337, *1 (5th Cir. May 11, 2007) (citing Farrell Constr. Co. v. Jefferson Parish, La., 896 F.2d 136, 140 (5th Cir. 1990)). Absent direct authority from the state's highest court, the court must apply state law mindful of what it thinks that court would decide. See Centennial Ins. Co. v. Ryder Truck Rental, Inc., 149 F.3d 378, 382 (5th Cir. 1998).

Texas rules of contract construction require unambiguous policy language, i.e., language worded so that it can be given a definite or certain legal meaning, to be construed as a matter of law. See National Union Fire Ins. Co. of Pittsburgh, PA v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex. 1995). Whether a contract is ambiguous is a question of law. Kelley-Coppedge, Inc. v. Highlands Ins. Co., 980 S.W.2d 462, 464 (Tex. 1998). An ambiguity does not arise simply because the parties offer conflicting interpretations. An ambiguity exists only if the contract language is susceptible to two or more reasonable interpretations. Id. at 465. When an insurance policy can be given multiple reasonable interpretations, "[i]t is a settled rule that policies of insurance will be interpreted and construed liberally in favor of the insured and strictly against the insurer." Texas Industries, F.3d at , 2007 WL 1376337, *2 (quoting Kelly Assocs., Ltd. v. Aetna Cas. and Sur. Co., 681 S.W.2d 593, 596 (Tex. 1984) (noting that this rule is "especially so when dealing with exceptions and words of limitation")).

B. Did Century Have a Duty to Defend Starwood?

1. Applicable Law

Texas follows the "eight-corners rule" under which an insurer's duty to defend is determined by the underlying pleadings, considered in light of the policy provisions without regard to the truth or falsity of those allegations. See GuideOne Elite Ins. Co. v. Fielder Rd. Baptist Church, 197 S.W.3d 305, 308 (Tex. 2006). Facts outside the pleadings, even those easily ascertained, are ordinarily not material to the determination, and allegations against the insured are liberally construed in favor of coverage. Id. "If a petition does not allege facts within the scope of coverage, an insurer is not legally required to defend a suit against its insured," American Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 848 (Tex. 1994), but if the four corners of a petition allege facts stating a cause of action that potentially falls within the four corners of the policy's scope of coverage, the insurer has a duty to defend. See Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523, 528 (5th Cir. 2004). If all the facts alleged in the underlying petition fall outside the scope of coverage, there is no duty to defend. Id. Doubts regarding the duty to defend are resolved in favor of the duty. Id. The insured bears the initial burden of establishing that a claim against it is potentially within the policy's coverage. Id. If the insured meets this burden, the burden shifts to the insurer to ...


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