The Fifth Circuit Court of Appeals recently affirmed a decision of the U.S. District Court for the Southern District of Texas holding that a jury’s finding of knowing misconduct on the part of an insured does not preclude the finding of a covered “accident” resulting from such misconduct. National Union Fire Insurance Company of Pittsburgh, Pennsylvania v. Puget Plastics Corp., No. 06-41619 (5th Cir. June 23, 2008).

According to the Fifth Circuit’s description of the underlying circumstances, Puget Plastics Corp. supplied 5,000 plastic water chambers to Microtherm, Inc. for use in a tankless water heater system. Eight hundred of the chambers allegedly ruptured, causing significant water damage. In a subsequent lawsuit brought by Microtherm against Puget, the jury found that Puget had knowingly violated the Texas Deceptive Trade Practices Act (“DTPA”) by disregarding recommended temperature guidelines promulgated by the supplier of the plastic. The jury awarded over $22 million in damages to Microtherm.

Upon submission of a claim, Puget’s commercial umbrella insurer disclaimed coverage and filed suit in federal court seeking a declaratory judgment that no coverage was owed. The Southern District of Texas found in Puget’s favor on summary judgment, and the insurer appealed the decision.

Puget’s umbrella policy defined an “occurrence” as “an accident . . . which results in . . . Property Damage neither expected nor intended from the standpoint of the insured.” The Fifth Circuit explained that under Texas law, a deliberate act may constitute an accident unless (1) the resulting damage was “highly probable” because it was “the natural and expected result of the insured’s actions,” (2) “the insured intended the injury,” or (3) the insured’s acts constitute an intentional tort.

The insurer argued that the damage could not have resulted from an “accident” because the jury found that Puget knowingly violated the DTPA. However, the Fifth Circuit disagreed, reasoning that while the jury found Puget deliberately violated the DTPA, it did not conclude that Puget expected or intended the harm, or that the harm was highly probable.

In addition, the court pointed out that violations of the DTPA are not intentional torts. Rejecting the notion that any knowing misconduct cannot constitute an accident, the court concluded that Puget was not barred from establishing an occurrence as a matter of law.

For a full copy of the court’s decision, click here.