In PPI Technology Services, L.P. v. Liberty Mutual Insurance Company, No. 12-40189, 2012 WL 5950943 (5th Cir. Nov. 29, 2012), the United States Court of Appeals for the Fifth Circuit, construing Texas law, affirmed a summary judgment ruling in favor of the insurer. The Fifth Circuit held that the insurer did not have a duty to defend the policyholder under a commercial general liability (“CGL”) policy because, under Texas’s “eight corners” rule, the allegations of “property damage” in the underlying complaint were not factual allegations that triggered the duty to defend.
The underlying plaintiffs filed suit against alleging that the policyholder negligently drilled an oil and gas well at an incorrect location, resulting in a “dry hole.” Id. at *1. The underlying plaintiffs expressly alleged that the policyholder caused “property damage” including “physical injury to tangible property, including all resulting loss of use of the property,” and sought more than $4.7 million in drilling costs and delay rental fees. Id. at *4.
The policyholder sought a defense from its CGL insurer. After the insurer denied coverage on the ground that the suit did not allege property damage, the policyholder sued the insurer for breach of contract, violation of the Texas Insurance Code, and bad faith. Id. at *2. The federal district court agreed with the insurer that property damage was not alleged and granted summary judgment in its favor.
On appeal, the Fifth Circuit recognized that the policyholder bears the burden to establish that a claim is potentially within the policy’s coverage, but noted that if doubt exists, the allegations should be construed in favor of the policyholder when deciding if there is a duty to defend. Id. at *4. Even under this broad duty to defend standard, the Fifth Circuit found the allegations in the underlying suit too conclusory to trigger a duty to defend. The court agreed with the insurer’s argument that drilling costs and rental fees -- i.e., economic losses -- did not constitute injury to tangible property because “tangible property” is understood as capable of being handled or touched. Id. at 5. The court also held that the allegation of “property damage” in the plaintiffs’ complaint was a label or legal theory rather than a factual allegation. Id. at 6-7. The court explained that “[w]e do not consider mere use of the phrase ‘property damage’ and parroted Policy language as sufficient factual allegations. None of the assertions of ‘property damage’ in the underlying lawsuits are accompanied by facts illustrating specific harm or damage to tangible property.” Id. at 6.
The PPI Technology decision confirms that the duty to defend is determined by factual allegations that potentially implicate coverage, and not by unsupported legal theories or merely quoting policy language.