SOUTHERN DISTRICT OF TEXAS STRICTLY APPLIES EIGHT CORNERS RULE TO DETERMINE DUTY TO DEFEND

In Federal Ins. Co. v. Northfield Ins. Co., 2014 WL 47189484 (S. D. Tex. Sep. 22, 2014), two liability carriers recently disagreed on which carrier owed a duty to defend their mutual insured against a claim for contractual defense and indemnity.  ExxonMobil sued the insured, Wagner, seeking contractual defense and indemnity for three underlying suits against ExxonMobil alleging environmental damage to properties where Wagner had conducted operations.  Federal, who insured Wagner for seven consecutive years, defended Wagner.  Northfield, who insured Wagner for one year, refused to defend Wagner.  Strictly applying the Texas “eight corners” rule, the court concluded that several policy exclusions barred coverage for Wagner under Northfield’s policy, and Northfield was correct in its refusal to defend Wagner.

Notably, neither carrier briefed the issue of whether ExxonMobil’s lawsuit against Wagner, seeking contractual defense and indemnity, sought damages because of “property damage.” Instead, both parties treated ExxonMobil’s defense/indemnity suit against Wagner merely as a vehicle for passing the property damage claims in the underlying environmental suits directly to Wagner, and analyzed Wagner’s potential coverage in the context of pollution exclusions in their policies.  

The court made note of this omission several times, and hinted it thought the parties should have briefed it.  The court observed that there is Fifth Circuit precedent supporting the proposition that the phrase “because of… property damage” in the standard CGL insuring agreement is broad enough to cover both direct liability and indirect liability via indemnity.  However, it is important to bear in mind that even under this rule, when a lawsuit against an insured seeks only defense of an underlying suit which is ongoing, or seeks only defense costs for a resolved suit in which the claimant was not held liable for property damage, such a claim may not be a claim for “property damage.”