Fair Operating Inc, et al v. Mid-Continent Cslty

United States Court of Appeals
Fifth Circuit
F I L E D
August 1, 2006
Charles R. Fulbruge III
Clerk
In the
United States Court of Appeals
for the Fifth Circuit
_______________
m 05-50917
_______________
FAIR OPERATING, INC.; RALPH E. FAIR, INC.,
Plaintiffs-Appellees,
VERSUS
MID-CONTINENT CASUALTY COMPANY,
Defendant-Appellant.
_________________________
Appeal from the United States District Court
for the Western District of Texas
m 5:04-CV-418
______________________________
Before SMITH and STEWART, Circuit Judges,
and CRANE,* District Judge.
JERRY E. SMITH, Circuit Judge:**
Mid-Continent Casualty Company (“Mid-
Continent”) brings an interlocutory appeal
from an order requiring it to defend Fair Op-
erating, Inc., and Ralph E. Fair, Inc. (collec-
tively “Fair”), in a pollution lawsuit in state
court. Finding no error, we affirm the order
and remand for further proceedings. * District Judge of the United States District
Court for the Southern District of Texas, sitting by
designation.
** Pursuant to 5TH CIR. R. 47.5, the court has de-
termined that this opinion should not be published
(continued...)
**(...continued)
and is not precedent except under the limited cir-
cumstances set forth in 5TH CIR. R. 47.5.4.

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I.
Fair was sued in state court for allegedly
allowing pollutants to escape from its oil and
gas facilities. The suit, styled Ayala v. Phillips
Properties, Inc. (“Ayala”), alleges, in relevant
part, the following:
The (plaintiffs’) properties . . . are contam-
inated and continue to be contaminated
. . . . The contaminants escaped and con-
tinue to escape from the defendants’ facili-
ties and instrumentalities complained of
herein into the air, soil, and groundwater,
then migrated and continue to migrate
throughout the contaminated area . . . .
Fair holds a general liability policy with
Mid-Continent that covers liability for “pol-
lution incidents,” which it defines as “the sud-
den and accidental emission, discharge, re-
lease, or escape of pollutants into or upon land
or the atmosphere . . . .” The policy requires
Mid-Continent to defend Fair against lawsuits
alleging covered events. Fair asked Mid-Con-
tinent to defend it in Ayala, and Mid-Continent
refused. Using diversity jurisdiction, Fair sued
Mid-Continent in federal court seeking a
declaratoryjudgment requiring Mid-Continent
to provide a defense. The case is governed by
Texas law.
Fair moved for partial summary judgment,
asking the court to look only to the “eight cor-
ners” of the insurance contract and the Ayala
complaint in determining whether there is a
duty to defend. Mid-Continent argued that al-
though the Ayala complaint alleged an acci-
dent, it did not allege a “sudden” emission as
required under the policy. Mid-Continent fur-
ther contended that because the terms of the
documents were not specific enough to deter-
mine whether a duty to defend had arisen, the
court should consult extrinsic evidence. The
court initiallydenied Fair’s motion and ordered
discovery on the duty to defend.
Fair moved for reconsideration, urging that
to inquire into the manner of the accident
would be at odds with the defensive position it
wished to take in Ayala. The district court
agreed, reversed its previous order, and grant-
ed Fair’s request to compel Mid-Continent to
provide a defense. Citing authority it had not
previously considered, the court found that
Texas law requires an insurer to defend where
the facts alleged in the complaint potentially
state a cause of action that falls within the
terms of the policy. See Northfield Ins. Co. v.
Loving Home Care, Inc., 363 F.3d 523, 528
(5th Cir. 2004).
The court further held that (absent excep-
tional circumstances not present here) Texas
law required it to look no further than the
“eight corners” of the policy and the Ayala
complaint in ruling on a duty to defend; con-
sideration of extrinsic evidence was therefore
inappropriate. The district court certified the
issue for interlocutory appeal under 28 U.S.C.
§ 1292(b), and this court granted leave for
Mid-Continent to appeal.
The Ayala litigation was settled before oral
argument of this case. A justiciable contro-
versy remains, however, regarding the legal
fees expended in defense of the Ayala litiga-
tion before it was settled.
II.
We turn first to whether, on the face of the
Ayala complaint and Fair’s insurance policy,
Mid-Continent had a duty to defend Fair. We
review de novo the question whether an in-
surer has a duty to defend. Guar. Nat’l Ins.
Co. v. Vic Mfg. Co., 143 F.3d 192, 193 (5th
Cir. 1998).

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The policy covers only “sudden and acci-
dental” incidents of pollution. Mid-Continent
argues that because the Ayala complaint does
not explicitly describe the alleged emissions as
“sudden,” it does not state a covered claim,
and there is no duty to defend. Mid-Continent
misreads Texas law.
We have most recently explained Texas’s
law on the duty to defend in Northfield. The
duty to defend and the duty to indemnify are
distinct and separate duties. King v. Dallas
Fire Ins. Co., 85 S.W.3d 185, 187 (Tex.
2002). In Texas the duty to defend is broader
than the duty to indemnify. Am. States Ins.
Co. v. Bailey, 133 F.3d 363, 368 (5th Cir.
1998). An insurer’s duty to defend is deter-
mined solely by the allegations in the pleadings
and the language of the policy.
This is the “eight corners” or “complaint al-
legation rule.” Northfield, 363 F.3d at 528. A
duty to defend arises “when the facts alleged in
the complaint, if taken as true, would poten-
tially state a cause of action falling within the
terms of the policy.” Id. (citing Canutillo
Indep. Sch. Dist. v. Nat'l Union Fire Ins. Co.,
99 F.3d 695, 701 (5th Cir. 1996)). “The in-
surer is obligated to defend the insured, pro-
vided that the petition or complaint alleges at
least one cause of action potentially within the
policy’s coverage.” Id. “In case of doubt as
to whether or not the allegations of a com-
plaint against the insured state a cause of ac-
tion within the coverage of a liability policy
sufficient to compel the insurer to defend the
action, such doubt will be resolved in the in-
sured’s favor.”1
The question is whether the Ayala com-
plaint alleges a cause of action potentially cov-
ered by Fair’s policy. It does.
The complaint alleges the “escape” of con-
taminants from Fair’s control. It does not spe-
cify the manner in which the escape occurred,2
but the allegations are sufficiently broad to en-
compass sudden and non-sudden emissions.
An “escape” can of course be sudden or other-
wise. The facts of this case, if further devel-
oped, might indicate that the escape was not
sudden, but that cannot be determined yet.
A sudden escape of pollutants from Fair’s
control, which would be covered under the
policy, is certainly a potential fact that could
arise from this case. There is at least doubt
whether the factual allegations in the Ayala
complaint state a cause of action covered by
the policy. Under Texas law, a duty to defend
arises in such a case, and the cases relied on by
Mid-Continent do not alter this conclusion.3
1 Nat’l Union Fire Ins. Co. v. Merchants Fast
Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex.
1997) (citing Heyden Newport Chem. Corp. v. S.
(continued...)
1(...continued)
Gen. Ins. Co., 387 S.W.2d 22, 26 (Tex. 1965)).
2 The Ayala complaint states as follows: “The
nature of the Contamination of the intervenors’
properties is inherently undiscoverable because the
contamination is not discernable from the surface
without specialized training and the use of special-
ized equipment.” The complaint is intentionally
vague about how and when the contamination
occurred.
3 The decision in Mustang Tractor & Equip.
Co. v. Liberty Mut. Ins. Co., 76 F.3d 89, 92-93
(5th Cir. 1996), interpreting the same “sudden”
emissions clause as that found in Fair’s policy, is
uninstructive. Mustang Tractor dealt with the
insurer’s duty to indemnify rather than its duty to
defend. Here, the question is whether Mid-Con-
(continued...)

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The district court therefore correctly deter-
mined that, based on the “eight corners” of the
Ayala complaint and Fair’s insurance policy,
Texas law obligated Mid-Continent to defend
Fair in Ayala.
III.
Mid-Continent contends that even if it loses
on an “eight corners” analysis, the district
court erred by not going beyond the bounds of
the complaint and the policy to consider ex-
trinsic evidence relevant to the duty to defend.
Mid-Continent urges this court to remand the
case for development of such evidence.
We turn, once more, to Northfield, in
which we described the very limited circum-
stances in which a Texas court might consider
extrinsic evidence in ruling on a duty to de-
fend. We concluded that “the current Texas
Supreme Court would not recognize any ex-
ception to the strict eight corners rule.”
Northfield, 363 F.3d at 531. In the rare event
in which a Texas court would consider extrin-
sic evidence, it would do so only if two condi-
tions were met: (1) “when it is initially impos-
sible to discern whether coverage is potentially
implicated,” and (2) “when the extrinsic evi-
dence goes solely to a fundamental issue of
coverage which does not overlap with the mer-
its of or engage the truth or falsity of any facts
alleged in the underlying case.” Id.4
As to the first element, it is not impossible
to determine whether the Ayala allegations po-
tentially implicate coverage. As explained
above, the allegations fall potentiallywithin the
policy’s coverage, and a duty to defend there-
fore arises. Consequently, Texas courts would
not allow for the development of extrinsic
evidence in this case, and the district court
correctly denied Mid-Continent’s request to
do so.5
IV.
Mid-Continent’s remaining issues on appeal
are without merit. It has provided this court
3(...continued)
tinent has a duty to defend Fair in Ayala, not
whether Mid-Continent will ultimately have to in-
demnify Fair for the settlement amount. Under
Texas law, these are separate legal duties that
courts approach using distinct legal and factual
inquiries.
Mid-Continent also cites Guaranty Nat’l Ins.
Co. v. Vic Mfg. Co., 143 F.3d 192 (5th Cir. 1998),
in which we held that no duty to defend existed
under Texas law because policy language requiring
a sudden emission was not satisfied by the allega-
tions in the complaint. In Guaranty National,
however, the allegations were of knowing and in-
tentional discharge of pollutants over an extended
period of time. We held that the facts as alleged
could not support a finding that the pollution in
that case was a sudden accident.
The Ayala complaint does not allege intentional
misconduct by Fair. There is no dispute that Fair’s
pollution was accidental; the only question is
whether it was sudden. Because the facts alleged
in the complaint could support a finding of sudden
or non-sudden emission, a duty to defend arises
under Texas law.
4 The Texas Supreme Court recently confirmed
this court’s Erie guess by explicitly relying on
Northfield’s two-part test in rejecting an insurer’s
request for an exception to the “eight corners” rule.
See GuideOne Elite Ins. Co. v. Fielder Road Bap-
tist Church, No. 04-0692, 2006 Tex. LEXIS 608,
at *5-*17 (Tex. June 30, 2006).
5 Because the first element of the test is not met,
we need not consider whether the development of
extrinsic evidence would go to the merits of the
underlying litigation, a question that is complicated
by the fact that Ayala has now settled.

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with no reason to doubt the district court’s
factual finding that Ralph E. Fair, Inc., is an
unnamed insured on the policy as a co-owner
or co-venturer. Furthermore, its contention
that much of the Ayala complaint states un-
covered claims is irrelevant. For a duty to
defend to arise under Texas law, only one
claim must be covered. See Canutillo, 99 F.3d
at 701.
In summary, the district court correctly de-
termined that Mid-Continent had a duty to de-
fend Fair in the Ayala litigation. The order ap-
pealed from, accordingly, is AFFIRMED, and
this matter is REMANDED for any necessary
further proceedings.

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