In a suit brought by an additional insured seeking a declaratory judgment that an insurer had a duty to defend it in an underlying liability lawsuit, the Fifth Circuit reversed a Texas district court’s award of summary judgment in favor of the insurer and held that the insurer had a duty to defend the additional insured under the Texas “eight corners” rule.
In Gore Design Completions, Ltd. v. Hartford Fire Ins. Co., No. 08-50042 (Aug. 4, 2008), Gore Completions, Ltd. (“Gore”) was hired to perform work on a Boeing 737 Business Jet. Gore subcontracted the engineering and installation of an in-flight entertainment/cabin management system to BaySys Technologies (“BaySys”). Thereafter, BaySys subcontracted the work to Ron Orvis d/b/a AeroTask. Gore and AeroTask were sued for negligence, gross negligence, negligent hiring, and negligent supervision, among other claims, when the electrical system failed due to improperly joined electrical power panels, causing substantial physical damage to the aircraft. The matter was submitted for arbitration.
Gore was an additional insured under a commercial general liability policy issued to BaySys (the “Named Insured”), and it requested a defense under that policy in connection with the lawsuit. When the insurer declined Gore’s request for defense, Gore filed a declaratory judgment action in a Texas federal district court, seeking a determination of the insurer’s coverage obligations. The parties cross-moved for summary judgment on the issue of the insurer’s defense obligations under the policy. The district court decided in favor of the insurer.
In reversing the district court’s decision, the Fifth Circuit applied the Texas “eight corner’s” rule, which provides that the duty to defend must be determined solely from the terms of the policy and the terms of the third-party claimant’s pleadings. The rule prohibits looking to evidence outside the four corners of the two documents in rendering a coverage determination and any doubt is to be resolved in favor of coverage. Under this standard, the Fifth Circuit read the allegations of the complaint broadly and concluded that, notwithstanding the fact that BaySys (the Named Insured) was not named in the suit, the complaint clearly referenced it, contended that it was Gore’s agent, and sought to hold Gore responsible for the Named Insured’s alleged negligence, including Gore’s negligent hiring of BaySys and its agent. Turning to the policy, the appellate court found that Gore was an additional insured with respect to BaySys’ “work.” Accordingly, the court held that because the complaint alleged liability against the additional insured with respect to the Named Insured BaySys’ work, the insurer had a duty to defend Gore.
The Fifth Circuit next considered whether any policy exclusions were applicable that precluded coverage under the policy. The policy excluded coverage for property damage to personal property in the “care, custody or control of the insured.” Under Texas law, only the area subject to repair by an insured is considered to be within an insured’s “care, custody or control.” The Fifth Circuit held that because the complaint lacked any allegations concerning whose hands the aircraft was in at the time of the property damage, an ambiguity was created that had to be resolved in favor of coverage. Similarly, the court found that the “your work” exclusion did not apply to bar coverage because the complaint alleged damage to the entire aircraft, rather than only to the in-flight entertainment/cabin management system or the electrical system worked on by the Named Insured. Finally, in considering whether the “professional services exclusion” applied to bar coverage, the court determined that the complaint did not unequivocally place the blame for the plaintiff’s damages on engineering services. Citing to Texas law for the proposition that a “professional services” exclusion does not preclude a duty to defend where the complaint alleges both negligent professional services and negligent services of some other nature, the Fifth Circuit held that the “professional services” exclusion did not operate to bar coverage under the policy based on the allegations of the complaint. Finding that none of the exclusions applied, the Fifth Circuit reversed the district court’s holding and remanded the case for further proceedings consistent with its opinion.