Liberty Ins. Corp. v. Omni Constr. Co.

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Liberty Insurance Corporation, Plaintiff, v. Omni Construction Company, Inc. and Odom Texas Development, LLC, Defendants.

Civil Action No. 4:21-cv-02119

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

September 23, 2022

MEMORANDUM AND RECOMMENDATION

Yvonne Y. Ho, United States Magistrate Judge

Plaintiff Liberty Insurance Corporation has filed a motion for summary judgment asserting that it owes no coverage for an arbitration award obtained against its insured, Defendant Omni Construction Company, Inc., and in favor of Defendant Odom Texas Development, LLC. Dkt. 41. The case was referred to the undersigned judge. Dkt. 37. After carefully considering the motion, Dkt. 41, Odom's response, Dkt 46, Liberty's reply, Dkt. 47, and the applicable law, it is recommended that Liberty's motion for summary judgment be granted.

Background

Liberty is an Illinois corporation with its principal place of business in Massachusetts. Dkt. 1 ¶ 3. Liberty issued commercial general liability and umbrella policies to Omni in Ohio, where Omni was incorporated and maintained its principal place of business. Dkt. 1 ¶ 4; Dkt. 41-2 at 008; Dkt. 41-3 at 094; Dkt. 41-4 at 183; Dkt 41-5 at 266 (policies); Dkt. 41-6 (Ohio Secretary of State). Those policies provided coverage for “‘bodily injury' or ‘property damage' caused by an ‘occurrence'” during the policy periods which spanned from January 28, 2017 to January 28, 2019.^[1] Dkt. 41-2 at 008, 020 § 1(b)(1); Dkt. 41-3 at 094, 105 § 1(a); Dkt. 41-4 at 183; Dkt. 41-5 at 266.

In April 2017, Omni retained Odom to provide general contracting services for building an ALOFT brand hotel in Shenandoah, Texas. Dkt. 1, Ex. B at 2. Omni's performance deteriorated as the project progressed. Id. According to Odom, Omni sought unjustified charge orders, overbilled for work performed, and performed deficient work. Id. at 2-3. The City of Shenandoah issued a stop-work order, and liens were filed in connection with the project. Id. at 3. In June 2018, Omni abandoned the project, leading Odom to terminate the parties' agreement. Id. at 4-5.

In May 2019, Odom initiated an arbitration proceeding against Omni, alleging that Omni had breached its contractual obligations. Dkt. 1 ¶ 12; Dkt. 1-1. In December 2019, Odom's counsel provided notice of the proceeding to Omni's insurer, Liberty. Dkt. 41-1 ¶ 5. Liberty tried to investigate Odom's claims but discovered that Omni had gone out of business. Id. ¶¶ 6-9. Omni did not appear or otherwise participate in the arbitration. Dkt. 1-3 at 1. After a hearing, and on January 5, 2021, the arbitrator awarded Odom actual damages of $5,568,151.52 for Omni's breach of contract, pre- and postjudgment interest, arbitration expenses, and $102,001.60 in attorneys' fees. Dkt. 1-3 at 2-3.

In June 2021, Liberty filed this suit against its insured, Omni, and against Odom, seeking a declaration that it owes no coverage for the arbitration award. Dkt. 1 ¶¶ 30-33. Omni did not appear, leading to entry of a default judgment against it. Dkt. 21. Odom asserted a counterclaim against Liberty, Dkt. 9, but the Court granted Liberty's motion to dismiss it. Dkts. 13, 38, 40. Liberty has now moved for summary judgment on its request for a nocoverage declaration against Odom. Dkt. 41.

Legal Standard

Summary judgment is warranted if “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). “A dispute is genuine ‘if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.'” Westfall v. Luna, 903 F.3d 534, 546 (5th Cir. 2018) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). A fact is material if the issue that it tends to resolve “could affect the outcome of the action.” Dyer v. Houston, 964 F.3d 374, 379-80 (5th Cir. 2020) (citing Sierra Club, Inc. v. Sandy Creek Energy Assocs., L.P., 627 F.3d 134, 138 (5th Cir. 2010)). When resolving a motion for summary judgment, the court must view the facts and any reasonable inferences “in the light most favorable to the nonmoving party.” See Amerisure Ins. Co. v. Navigators Ins. Co., 611 F.3d 299, 304 (5th Cir. 2010) (internal quotation marks omitted).

Analysis

I. The insurance policies are governed by Ohio law, not Texas law.

Resolution of the issues depends in large part on what state's law applies. Liberty maintains, and Odom does not dispute, that Ohio law would conclusively negate coverage for its claimed losses from Omni's defective workmanship or delays. See Westfield Ins. Co. v. Custom Agri Sys., Inc., 979 N.E.2d 269, 275 (Ohio 2012) (holding damages from faulty workmanship are not claims for “property damage” caused by an “occurrence” under a commercial general liability policy); Westfield Ins. Co. v. Coastal Grp., Inc., 2006 WL 120041, at *2 (Ohio Ct. App. Jan. 18, 2006) (holding construction delay “is a risk inherent in [a] construction contract[ ], not an ‘accident' and therefore, not an ‘occurrence'”); Dkt. 47 at 6 (noting Omni's waiver of response to this issue). In contrast, the parties agree that Texas law does not foreclose treating property damage stemming from faulty work as a covered “occurrence.” See Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 16 (Tex. 2007) (holding that insured's faulty workmanship can constitute an “‘occurrence' when ‘property damage' results from the ‘unexpected, unforeseen or undesigned happening or consequence' of the insured's negligent behavior”); Dkt. 46 at 9-11; Dkt. 47 at 7.

The divergent approaches of Ohio and Texas law to the underlying issue warrant a choice-of-law analysis. As a federal court sitting in diversity, this Court applies the choice-of-law principles of the forum state. Sorrels Steel Co. v. Great Sw. Corp., 906 F.2d 158, 167 (5th Cir. 1990). “For contract cases, Texas uses the ‘most significant relationship' test described in Section 6 of the Restatement (Second) of Conflict of Laws (‘Restatement'), in light of certain ‘contacts' listed” in either or both Sections 188 and 196 of the Restatement. Coachmen Indus., Inc. v. Willis of Ill., Inc., 2008 WL 1912861, at *2 (S.D. Tex. Apr. 28, 2008) (citing, inter alia, Citizens Ins. Co. of Am. v. Daccach, 217 S.W.3d 430, 442-43 (Tex. 2007), and Minn. Mining & Mfg. Co. v. Nishika Ltd., 953 S.W.2d 733, 735-36 (Tex. 1997)) (footnotes omitted); see also, e.g., E. Concrete Materials, Inc. v. ACE Am. Ins. Co., 948 F.3d 289, 299 (5th Cir. 2020) (recognizing that Texas law follows the most significant relationship test under the Restatement (Second) of Conflicts of Laws § 188(1) (1971)). Based on the choice-of-law analysis below, the Court concludes that the coverage question is controlled by Ohio law.

A. Article 21.42 of the Texas Insurance Code does not apply.

Under Section 6 of the Restatement, the Court first considers “whether the particular substantive law is subject to a clear choice of law determination by the Legislature of the forum state.” Citizens Ins. Co. of Am., 217 S.W.3d at 443 (citing Marmon v. Mustang Aviation, 430 S.W.2d 182 (Tex. 1968); Restatement (Second) of Conflict of Laws § 6(1) (1971)). The Texas statute cited by Odom provides:

Any contract of insurance payable to any citizen or inhabitant of this State by any insurance company or corporation doing business within this State shall be held to be a contract made and entered into under and by virtue of the laws of this State relating to insurance, and governed thereby, notwithstanding such policy or contract of insurance may provide that the contract was executed and the premiums and policy (in case it becomes a demand) should be payable without this State, or a the home office of the company or corporation issuing the same.

Tex. Ins. Code Ann. art. 21.42.

As Odom notes, article 21.42 “applies to an insurance contract when: (1) the insurance proceeds are payable to a Texas citizen or inhabitant; (2) the policy is issued by an insurer doing business in Texas; and (3) the policy is issued in the course of the insurer's business in Texas.” Reddy Ice Corp. v. Travelers Lloyds Ins. Co., 145 S.W.3d 337, 341 (Tex. App.-Houston [14th Dist.] 2004, pet. denied). But Odom fails to acknowledge binding authority limiting the reach of article 21.42, to avoid giving it extraterritorial effect. See Aetna Life Ins. Co. v. Dunken, 266 U.S. 389, 390-91, 399 (1924) (applying predecessor statute to policy issued in Tennessee would unconstitutionally “regulate business outside the state of Texas and control contracts made by citizens of other states in disregard of their laws”); Austin Bldg. Co. v. Nat'l Union Fire Ins. Co., 432 S.W.2d 697, 701 (Tex. 1968) (holding, based on Aetna Life, that article 21.42 could not “be given extraterritorial effect,” such that Kansas, not Texas law, governed a policy executed in Kansas).

Summarizing these principles, the Fifth Circuit explained that “article 21.42 [is] designed only to assure that Texas law will apply to contracts made between Texas citizens and insurance companies doing business in Texas, when and only when those contracts are made in the course of the company's Texas business.” Howell v. Am. Life Stock Ins. Co., 483 F.2d 1354, 1360 (5th Cir. 1973) (discussing Austin Bldg. Co.) (emphasis removed); see also Butler v. Mut. Life Assur. Co. of Can., 600 F.2d 532, 534 (5th Cir. 1979) (adhering to this principle for policy signed in Canada, where “[n]o events regarding the making of the contract occurred in Texas”). Texas state appellate decisions are consistent with these authorities. See, e.g., Scottsdale Ins. Co. v Nat'l Emergency Servs., Inc., 175 S.W.3d 284, 292 (Tex. App.-Houston [1st Dist.] 2004, pet. denied) (rejecting application of article 21.42 when insured was...