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Liberty Surplus Insurance Corp. v. Century Surety Co.

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

July 12, 2019



          Lee H. Rosenthal Chief United States District Judge

         This insurance-coverage dispute arises out of the construction of a public library in Edinburg, Texas. The City of Edinburg sued the general contractor, Descon Construction, L.P., in Texas state court, alleging breach of contract, breach of warranties, and negligence. The state court referred the case to arbitration under the parties' contract. The tribunal found that Descon Construction and a subcontractor hired to install the library roof, McAllen Steel Erectors, Inc., were liable for breaching contractual and warranty obligations. Edinburg received a $1.5 million award.

         Descon Construction asked Liberty Surplus Insurance Corporation to cover the award under four commercial general liability policies that Liberty had issued Descon Construction for the library construction. Liberty refused. Seeking a declaration that its policies do not cover the award, Liberty sued Descon Construction, Edinburg, and Century Surety Company, McAllen Steel's commercial general liability insurer. Liberty has moved for summary judgment, arguing that its policies do not cover the award or, alternatively, that Century must cover the award because the arbitration panel found that McAllen Steel was liable to Edinburg. Edinburg has cross-moved for a declaratory judgment that Liberty's policies cover the award, and Century has cross-moved for a declaratory judgment that its policy does not apply.

         Based on the pleadings, the motions and responses, the supplemental briefing, the record, the arguments of counsel, and the applicable law, the court finds that Liberty's policies cover only the arbitration award for the costs of repairing or replacing ceiling tiles, not for repairing or replacing the roof or exterior stucco. Liberty's summary judgment motion is granted in part and denied in part. (Docket Entry Nos. 36, 41). Edinburg's cross-motion is denied, with prejudice, as to coverage; the motion is denied, without prejudice, as to the amount of Liberty's liability for ceiling-tile damages. (Docket Entry No. 45). Century's cross-motion is denied as moot. (Docket Entry No. 44). The parties must submit an amended joint scheduling and docket control order setting out a discovery and dispositive-motion briefing schedule on the limited issue of damages for the ceiling tiles, and submit a stipulation as to the amount, by August 9, 2019. The joint proposed discovery plan must include a limit on the number of depositions and written interrogatories. The parties must appear for a status conference on August 23, 2019 at 2:00 p.m.

         The reasons for these rulings are set out in detail below.

         I. Background

         A. The Arbitration Award

         In January 2006, Descon Construction contracted with the City of Edinburg to build the Dustin Michael Sekula Memorial Library. (Docket Entry No. 36-15 at 1). Descon Construction subcontracted with McAllen Steel Erectors to install the library metal roof. (Id.). The library was “[s]ubstantial[ly] completed” in March 2007. (Id.). The roof began to leak within “two months of occupancy.” (Id.). Edinburg reported the leaks to Descon Construction and, though “multiple efforts were made to correct the leaking conditions, [the leaks] continued unabated for seven years.” (Id.).

         In August 2014, Edinburg sued Descon Construction in Texas state court, and the case was referred to arbitration under the parties' January 2006 contract. (Id. at 2). Edinburg submitted a claim to the American Arbitration Association in July 2016, asserting breach of contract, breach of warranties, and negligence based, in part, on 20 alleged roof defects. (Id. at 2, A-1-A-2).

         The arbitration panel found that the library roof was “defective”; “the exterior stucco system was defectively installed”; and certain work, including fire-caulking, had not been performed. (Id. at 6-7). The panel concluded that Descon Construction was liable for breach of contract and breach of warranty:

Descon's failure to follow the plans, failure to perform work in a workmanlike manner, performance of work that violated Code requirements, and failure to furnish a written warranty on the roof, constitutes a breach of its contractual obligations to [Edinburg]. Moreover, the Panel would point out that [Edinburg] afforded Descon seven years to cure the roof leaks before taking legal action. Had Descon constructed the roof to the plans, and the failure was solely a design defect, then the furnishing of defective plans by [Edinburg] would have been a material breach, but that was not the case. In making this Award, the Panel finds that [Edinburg] is entitled to replacement of the existing roof with one of like kind and quality as specified in the original plans, and that replacing the roof with a different roofing system would constitute a betterment.

(Id. at 6).[1] The panel itemized Edinburg's damages:

a. General Conditions
$ 78, 500.00
b. Stucco Repair
$ 46, 049.00
c. Fire-rated partitions (caulk)
$ 200.00
d. Roof replacement including structural repairs and ceiling tiles
$ 364, 556.00
e. Contractor fee
$ 39, 144.00
f. Contingency
$ 52, 845.00
g. Attorney's fees
$ 699, 913.00
h. Consulting fees and expenses
$ 118, 348.00
i. Prejudgment interest
$ 106, 544.94
Total -
$1, 506, 099.94

(Id. at 7-8).

         The panel also found that McAllen Steel breached its subcontract with Descon Construction by defectively installing the roof, entitling Descon Construction to recover $762, 537.36 from McAllen Steel. The panel itemized these damages as follows:

a. General Conditions
$ 69, 661.00
b. Roof replacement including structural repairs and ceiling tiles
$ 364, 556.00
c. Contractor fee
$ 34, 736.00
d. Contingency
$ 46, 895.00
e. Attorney's fees
$ 208, 109.00
f. Prejudgment interest
$ 38, 580.36
Total -
$ 762, 537.36

(Id. at 7-8).

         Descon Construction asked Liberty to cover the award in April 2018. (Docket Entry No. 36 at 7). Liberty refused, and this litigation followed. (Id.; Docket Entry No. 1).

         B. The Policies' Terms

         Liberty issued Descon Construction four commercial general liability policies, effective from April 2005 to April 2009. The policies each has limits of $1 million per occurrence and $2 million in the aggregate and each requires Liberty to “pay those sums . . . that [Descon Construction] becomes legally obligated to pay as damages because of . . . ‘property damage.'” (Docket Entry No. 36-2 at 4). “Property damage” is defined as “[p]hysical injury to tangible property, including all resulting loss of use of that property”; and “[l]oss of use of tangible property that is not physically injured.” (Id. at 23). ...

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