In December 2017, the Fifth Circuit gave general contractors an early holiday gift wrapped in the opinion styled Lyda Swinerton Builders, Inc. v. Oklahoma Surety Co., 877 F.3d 600 (2017).  Swinerton was hired in 2003 as the general contractor on a ten-story office building in College Station, Texas, and contracted with several subs, including A.D. Willis Company, whose scope of work was identified in the subcontract as “ROOFING, ORNAMENTAL METAL, METAL WALL PANELS, And ROUGH CARPENTRY.”  Id. at 605. The subcontract obligated Willis to name Swinerton as an additional insured on its general liability policy for liabilities arising out of Willis’s work and also contained an indemnity agreement.  Willis signed the contract, but struck portions of the indemnity clause covering Swinerton’s own negligence and strict liability. Swinerton did not countersign the contract or complain of Willis’s changes, and the work went forward. Id. at 606.

Oklahoma Surety issued a CGL policy to Willis that identified Willis as a “ROOFING CONTRACTOR.”  The policy was endorsed to name Swinerton as an additional insured, but only “with respect to liability directly attributable to” Willis’s work and only when Willis “agreed by written ‘insured contract’” to designate Swinerton.  Id.  “Insured contract” was defined in the policy, as usual, to include agreements under which the named insured assumes the tort liability of a third party.

The construction ran into problems and the owner filed suit against Swinerton in 2008.  Among the deficiencies, the owner specifically identified “the roof” and also asserted that Swinerton “consistently failed to comply with its contractual obligations to adequately supervise work performed by subcontractors.”  Id. at 607.  Swinerton filed third-party petitions against various subs, including Willis.  The owner then filed two amended petitions—the first which added negligence claims against Swinerton, including negligence in supervising the subcontractors, and the second which identified Willis not only as a third-party defendant but as a subcontractor whose negligence contributed to the property damage. Id. at 607-08.

Swinerton tendered the three owner-filed petitions to Oklahoma Surety for defense, all of which Oklahoma Surety denied. A federal coverage action ensued between Swinerton and several insurers; eventually only Oklahoma Surety was left standing.  Id. at 608-09. The district court rendered judgment for Swinerton on its claims for breach of contract, statutory prompt-payment penalties, and attorney’s fees, but denied Swinerton’s claim for violations of Chapter 541 of the Texas Insurance Code, ruling that Swinerton failed to prove an independent injury.  The parties filed cross-appeals. Id. at 609.

On appeal, the Fifth Circuit dealt Swinerton a lay-down hand, remanding even the district court’s carve-out for Oklahoma Surety.  First, the court held that “insured contract” requirement in the additional-insured endorsement did not mean Willis had to assume all of Swinerton’s tort liability. Neither the lack of Swinerton’s countersignature nor the portions of the indemnity clause struck by Willis affected the fact that Willis agreed in writing to assume Swinerton’s tort liability; the policy did not require that the “insured contract” be enforceable.  Id. at 610-11.  Turning next to the eight-corners rule, the court held that Oklahoma Surety had a duty to defend Swinerton from the time of the original petition. Even though that petition did not identify Willis by name and alleged only “breach of contract,” the court noted that the petition alleged property damage resulting from the actions of “subcontractors” and specifically mentioned the roof.  Reading those factual allegations in conjunction with the policy identifying Willis as a roofing contractor, the court held it “requires no more than a logical inference to conclude that at least some of the alleged property damage was potentially attributable to Willis.”  Id. at 613.  The petition allegations of project commencement on December 1, 2003, and effective abandonment on February 13, 2008, were also sufficient to trigger coverage for property damage occurring during Oklahoma Surety’s 2006-07 policy period.  Id.  Finding a duty to defend, the court affirmed the district court’s award of the 18% prompt-payment penalty and attorneys’ fees in favor of Swinerton.  Id. at 615.

Finally, the court reversed and remanded Swinerton’s claims for violations of Chapter 541 of the Texas Insurance Code, based primarily on the Texas Supreme Court’s statements regarding the independent-injury rule and an insured’s “entitlement to benefits” in USAA Texas Lloyds Co. v. Menchaca. Id.at 617-18.  The court concluded that the independent-injury rule applies to and limits only damages other than policy benefits that flow or stem from a denial of policy benefits, not to the benefits themselves.  Id. Because the Texas Supreme Court granted a motion for rehearing in Menchaca just three days after the Fifth Circuit issued its opinion, the validity of the court’s discussion of that case is uncertain.

Takeaways: The court’s inference—using a petition’s allegations and an insurance policy’s description of the insured’s business—is one of the most expansive applications of the eight-corners rule we’ve seen in the context of additional insured coverage. While each case is distinct, Swinerton Builders demonstrates that an insurer’s duty to defend its additional insured may be triggered even when the named insured is not mentioned by name.