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AmGuard Insurance Co. v. Lone Star Legal Aid

United States District Court, S.D. Texas, Houston Division

January 6, 2020

AmGuard Insurance Company, Plaintiff,
Lone Star Legal Aid, et al., Defendants.


          Gray H. Miller, Senior United States District Judge.

         Several motions are pending before the court: plaintiff AmGuard Insurance Company's (“AmGuard”) motion for summary judgment (Dkt. 45) against defendants Lone Star Legal Aid (“Lone Star”), BXS Insurance, Inc. (“BXS”), and intervenor AIG Specialty Insurance Company (“AIG”) (collectively, “Defendants”); Defendants' motion for partial summary judgment against AmGuard (Dkt. 51); cross motions to exclude expert witness testimony (Dkts. 53, 54); and Defendants' objections to AmGuard's summary judgment evidence (Dkt. 62). The deadlines for responses and replies have elapsed, and the motions are now ripe for consideration. Having considered the motions, responses, replies, record evidence, and applicable law, the court is of the opinion that AmGuard's motion (Dkt. 45) should be GRANTED in part, and DENIED in part; Defendants' motion for partial summary judgment (Dkt. 51) should be DENIED; the motions to exclude (Dkts. 53, 54) should be DENIED; and Defendants' objections (Dkt. 62) should be SUSTAINED in part.

         I. Background

         This case involves an insurance coverage dispute between AmGuard and Lone Star. Lone Star, through its insurance broker and co-defendant BXS, obtained an insurance policy from AmGuard covering Lone Star's principal office building (“Building”) located at 1415 Fannin Street in Houston, Texas and other Lone Star properties for the period between June 10, 2017 and June 10, 2018 (“Policy”). Dkt. 45 at 7. The Policy included a Protective Safeguards Endorsement (“PSE”) that added certain conditions precedent and exclusions. Id. Among other things, the PSE specifically required Lone Star to maintain an automatic sprinkler system in the Building. Id.; Dkt. 45-1 at 112.

         On August 28, 2017, the Building was damaged when flooding from Hurricane Harvey caused an explosion in an electric utility vault that resulted in a fire inside the Building. Dkt. 45 at 7. Because the Building did not have an automatic sprinkler system prior to the fire, AmGuard denied Lone Star's loss claim. Id. at 7.

         AmGuard filed this suit against Lone Star and BXS seeking a declaration of the rights and obligations of the parties under the Policy. Dkt. 1. Lone Star and BXS each answered and filed counterclaims against AmGuard seeking declaratory relief, and asserting contractual, extra-contractual, and statutory claims. Dkt. 26, 28. AIG intervened after purchasing portions of Lone Star's claims against AmGuard. Dkt. 29.

         AmGuard now moves for summary judgment on all claims because, AmGuard argues, whether coverage for the claimed damage exists is a dispositive issue that may be determined as a matter of law on the Policy's express language. Dkt. 45. Defendants respond that summary judgment on their breach of contract claim is in order because the lack of an automatic sprinkler system did not contribute to the fire damage and the Texas Insurance Code precludes AmGuard from denying coverage due to a breach of a fire insurance policy that did not contribute to the claimed damage. Dkt. 51.

         II. Legal Standard

         A court shall grant summary judgment when a “movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). “[A] fact is genuinely in dispute only if a reasonable jury could return a verdict for the nonmoving party.” Fordoche, Inc. v. Texaco, Inc., 436 F.3d 388, 392 (5th Cir. 2006). The moving party bears the initial burden of demonstrating the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2540 (1986). If the moving party meets its burden, the burden shifts to the non-moving party to set forth specific facts showing a genuine issue for trial. Fed.R.Civ.P. 56(e). The court must view the evidence in the light most favorable to the non-movant and draw all justifiable inferences in favor of the non-movant. Envtl. Conservation Org. v. City of Dallas, 529 F.3d 519, 524 (5th Cir. 2008).

         III. Analysis

         AmGuard asserts that no genuine issue of material fact exists and judgment as a matter of law in its favor is appropriate because the plain language of the contract is unambiguous and disposes of all claims. Dkt. 45. In response, Defendants argue that the plain, unambiguous language of the contract supports judgment in its favor, or alternatively, a provision of the Texas Insurance Code (known as the Anti-Technicality Statute) precludes AmGuard from denying coverage in this case unless Lone Star's breach of the insurance contract contributed to the claimed damage. Dkt. 51. Defendants also submitted evidence to support their claim that Lone Star's breach did not contribute to the claimed damage. Id. AmGuard denies the Anti-Technicality Statute applies in this case, but also submits evidence to show that the claimed damage would have been less but for Lone Star's breach. Dkt. 56. Both sides have objected to the summary judgment evidence offered by the other. Dkts. 53, 54, 62. The court will consider each of these arguments in turn.

         A. Plain Language of the Policy

         The parties do not dispute that Texas law controls the interpretation of the Policy. Under Texas Law, insurance policies are interpreted “under the well-established rules of contract construction.” Great Am. Ins. Co. v. Primo, 512 S.W.3d 890, 892 (Tex. 2017). “The goal of contract interpretation is to ascertain the parties' true intent as expressed by the plain language they used.” Id. at 893. “[E]very contract should be interpreted as a whole and in accordance with the plain meaning of its terms, ” and “no provision is rendered meaningless.” Id. at 892-93. Terms are assigned “their ordinary and generally accepted meaning unless the contract directs otherwise.” Id. at 893. “Endorsements to a policy generally supersede and control over conflicting printed terms within the main policy; however, the provisions found in the main policy and endorsement should be construed together unless doing so would negate or render superfluous the additional coverage afforded in the endorsement.” Mid-Continent Cas. Co. v. Bay Rock Operating Co., 614 F.3d 105, 115 (5th Cir. 2010) (internal quotations omitted).

         “If the language lends itself to a clear and definite legal meaning, the contract is not ambiguous and will be construed as a matter of law.” Id. Ambiguities arise “only when the contract is actually susceptible to two or more reasonable interpretations.” Id. (Internal quotations omitted). “The fact that the parties disagree about the policy's meaning does not create an ambiguity.” Id.

         The burden of establishing coverage under the terms of the policy lies with the insured and shifts to the insurer to plead and prove the policy excludes coverage. See JAW The Pointe, L.L.C. v. Lexington Ins. Co., 460 S.W.3d 597, 603 (Tex. 2015); see also Tex. Ins. Code § 554.002 (“Language of exclusion in the contract or an exception to coverage claimed by the insurer . . . constitutes an avoidance or an affirmative defense.”).

         The parties agree that the Policy would cover the claimed loss but for the PSE's requirement that Lone Star maintain an automatic sprinkler system.[1] Dkt. 45 at 7; 51 at 6-9. Specifically, the PSE alters the Policy to require Lone Star to “maintain the protective devices or services listed in the Schedule, ” and excludes “loss or damages caused by or resulting from fire if, prior to the fire, [Lone Star] . . . [f]ailed to maintain any protective safeguard listed in the Schedule.” Dkt. 45-1 at 112. The PSE schedule identified the Building as a covered property and an automatic sprinkler system as a required protective safeguard for the Building. Id. at 111-12. Notwithstanding the unambiguous language of the PSE, Defendants assert the Policy still covers the claimed damage under a separate provision-the water exclusion provision. Dkt. 51 at 21-24.

         However, the language and structure of the Policy subvert Defendants' argument. The Policy's first section is titled “Section I - PROPERTY.” Dkt. 45-1 at 33. Section I is further divided into several subsections, including “A. Coverage” and “B. Exclusions.” Dkt. 45-1 at 33, 46. As the titles suggest, subsection A details the types of damage the Policy will pay for, whereas subsection B lists specific instances where damage that might otherwise be covered under subsection A is not included within the Policy's protections. In other words, the Policy obligates AmGuard to cover any claimed damage listed in subsection A unless a specific provision in subsection B excludes such damage from coverage.

         The water exclusion provision is located within subsection B and reads as follows:

B. Exclusions
1. We will not pay for loss or damage caused directly or indirectly by . . .
g. Water
(1) Flood . . .
But if any of the above, in Paragraphs (1) through (5), results in fire, explosion or sprinkler leakage, we will pay for the loss or damage caused by that fire, explosion or sprinkler leakage.

Id. at 46, 48. According to Defendants, the final sentence in the water exclusion provision provides coverage for any fire resulting from flooding in a covered property. But this is counter to the provision's unambiguous language. The water exclusion provision specifically excludes damage caused by flooding, and then carves out “damage caused by . . . fire, explosion or sprinkler leakage” from that exclusion. In doing so, the Policy does not provide an independent basis for coverage, but instead retains coverage for such damage within the coverage in subsection A. However, that coverage is still subject to other exclusions, including the PSE which amends subsection B to specifically exclude “loss or damage caused by or resulting from fire if, prior to the fire, ” Lone Star did not maintain an automatic sprinkler system in the Building. Id. at 111-12.

         Defendants cite State Farm Lloyds v. Marchetti, 962 S.W.2d 58 (Tex. App.-Houston [1st Dist.] 1997, pet. denied), in support for their argument that the PSE's general exclusionary language does not apply to the alleged specific grant of coverage in the water exclusion provision. Dkt. 51 at 22-23. In Marchetti, an insured sought coverage of damage to their home from the backup of water and raw sewage through a drain opening in their utility room caused by local flooding. 962 S.W.2d at 59. The insurance policy at issue was structured similarly to the Policy in ...

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