U.S. Court of Appeals for the Fifth Circuit, CH Offshore v. Mexiship Ocean, Docket No. 24-20525

Alter Ego Relationship

 

To Pierce the Corporate Veil

 

State Law Attachment Claim

 

Texas Law

 

 

 

Next, CH Offshore’s alternative pleading would rest on an alter ego relationship between Mexiship Ocean and Mexiship Texas. Namely, CH Offshore would bring a state law attachment claim to reach additional funds in the Vantage Bank account and, therefore, seeks to pierce the corporate veil between Mexiship Texas and Mexiship Ocean. Because this is a state law claim, Texas law regarding alter ego would apply. See Ledford v. Keen, 9 F.4th 335, 339 (5th Cir. 2021). “Texas law permits courts to ʻdisregard the corporate fiction . . . when the corporate form has been used as part of a basically unfair device to achieve an inequitable result.’” Ledford, 9 F.4th at 339. Texas law applies alter ego by considering the “total dealings,” to determine if there is “such unity between the parties that the separateness of the corporation has ceased.” Mancorp, Inc. v. Culpepper, 802 S.W.2d 226, 228 (Tex. 1990) (citing Castleberry v. Branscum, 721 S.W.2d 270, 276 (Tex. 1986)); see also Villar v. Crowley Maritime Corp., 990 F.2d 1489, 1496 (5th Cir. 1993) (discussing Texas law providing three categories in which to pierce the veil, including when the “corporation is the alter ego of its owners or shareholders”).

 

 

Our court has also applied a “laundry list” of factors for consideration when piercing the veil for liability purposes, including: common stock ownership, common directors, financing relationships between the parties, the subsidiary operating with inadequate capital, daily operations that are intertwined, and lack of observation of basic corporate formalities, such as keeping books and records and holding board meetings. See United States v. Jon-T Chems., Inc., 768 F.2d 686, 690 n.6, 691–92 (5th Cir. 1985) (noting that “federal and state alter ego tests are essentially the same” and citing factors from Nelson v. Int'l Paint Co., 734 F.2d 1084, 1093 (5th Cir. 1984) (applying Texas state law)). In the context of jurisdictional veil-piercing instead, if that were required in the present case, our court has considered similar alter ego factors under Texas state law but acknowledged that there are different elements of proof. See Licea, 952 F.3d at 213 (discussing Texas state jurisdictional alter ego factors).

 

 

For the purposes of the futility inquiry, we need only be concerned that CH Offshore can adequately plead an alter ego theory to support its state law attachment claim. And from limited discovery, a number of facts emerged. To briefly summarize, Mr. Perez occupies roles across both Mexiship Ocean and Mexiship Texas that bestow wide-ranging authority. Mexiship Texas does not have any offices separate from Mexiship Ocean’s, and Mr. Perez conducts Mexiship Texas’s business by making use of Mexiship Ocean’s resources, such as his Mexiship Ocean-domain email address. Further, Mr. Perez has addressed the business model: “The relationship of the companies is very simple. I own both companies, Mexiship Ocean is used for operations of Mexiship and Mexiship Texas is the financing arm of Mexiship.” The companies irrefutably have a business relationship of some sort—as evidenced by Mexiship Texas (the financing arm) sending the deposit to Seahorse for Mexiship Ocean’s (the operating arm) charter at Mr. Perez’s direction and discretion—but the companies deny any such relationship altogether.

 

 

Ultimately, “alter ego determinations are highly fact-based, and require considering the totality of the circumstances in which the instrumentality functions.” Bridas S.A.P.I.C. v. Gov’t of Turkm., 345 F.3d 347, 359 (5th Cir. 2003). “In making an alter ego determination, a court is ʻconcerned with reality and not form, and with how the corporation operated.’” Bridas S.A.P.I.C. v. Gov’t of Turkmenistan, 447 F.3d 411, 416 (5th Cir. 2006) (quoting Jon-T Chemicals, Inc., 768 F.2d at 693). Such factual determinations are the prerogative of the district court. But with no explanation from the district court on its Rule 15 analysis, and in light of the foregoing evidence that is already available and that is probative of the alter ego factors, we cannot deduce that no such grounds for CH Offshore’s alternative claim exist.

 

 

As the above discussion details, this is not an instance in which “justification for the denial is readily apparent.” Marucci Sports, L.L.C., 751 F.3d at 378 (cleaned up). Because the district court provided no explanation for its denial despite CH Offshore’s detailed arguments in favor of leave to amend, we reverse the denial as an abuse of discretion.

 

 

For the foregoing reasons, we VACATE the district court’s order, which vacated the maritime writ of garnishment and denied CH Offshore leave to amend its complaint, and REMAND with instructions to grant CH Offshore leave to amend its complaint.

 

 

 

 

(U.S. Court of Appeals for the Fifth Circuit, Dec. 19, 2025, CH Offshore v. Mexiship Ocean, Docket No. 24-20525)

 

 

Supreme Court of Texas, The Ohio Casualty Insurance Company v. Patterson-UTI Energy, Inc.; and Marsh USA, Inc., Docket No. 23-0006

Insurance Law

 

Interpretation of an Excess-Insurance Policy

 

Do We Look to the Underlying Policy?

 

Texas Law

 

 

 

On Petition for Review from the Court of Appeals for the Fourteenth District of Texas

 

 

We must decide whether the excess-insurance policy in this case covers the insured’s legal-defense expenses. Excess policies provide coverage that becomes available when an underlying insurance policy’s limits have been exhausted. Logically enough, therefore, the underlying policy often features prominently in excess-coverage disputes, especially when the excess policy is a “follow-form” contract—one that can be shorter and simpler than the underlying policy because it embraces many of the underlying policy’s terms. But even for follow-form excess policies, the contract that governs a dispute about excess coverage is the excess policy, not the underlying policy. As in any contractual case, therefore, we begin with the excess policy’s text and look to the underlying policy only to the extent that the parties consented to incorporate its terms. The court of appeals inverted this process: “We start from the ground up, first examining the terms of the underlying policy and then looking to the excess policy to determine coverage.” 656 S.W.3d 729, 734 (Tex. App.—Houston [14th Dist.] 2022). This mistaken approach led to an erroneous result: while the underlying policy covered the insured’s defense expenses, the excess policy does not. We therefore reverse the court of appeals’ judgment, render judgment in part, and remand to the trial court for further proceedings.

 

 

Each year, Patterson buys insurance to protect itself from costs arising from any incident that might occur during drilling operations involving its rigs. Patterson covers its risk by building an “insurance tower,” which consists of a primary policy that underlies multiple layers of excess coverage. For the 2017–2018 policy year, Patterson bought several lines of insurance through its broker, respondent Marsh USA, Inc. One of those lines—the “underlying policy” in this case—was an umbrella policy from Liberty Mutual Insurance Europe, Ltd. Patterson also obtained various additional excess policies through Marsh, including the one from Ohio Casualty at issue here.

 

 

(…) Patterson then sued Ohio Casualty and Marsh. In its live petition, Patterson alleged that Ohio Casualty’s refusal breached the contract and violated the Insurance Code. In the alternative (and assuming that the excess policy did not cover defense expenses), Patterson alleged that Marsh violated the Insurance Code and committed negligence, negligent misrepresentation, fraud, and breach of contract by failing to procure an insurance policy that did cover defense expenses.

 

 

The parties filed competing motions for summary judgment regarding whether the Ohio Casualty policy covers defense expenses. The trial court granted Patterson’s motion and denied Ohio Casualty’s. The court determined that “the defense costs sought by Patterson are covered under the Ohio Casualty policy at issue in this case because the Ohio Casualty policy did not clearly and unambiguously exclude the coverage for defense costs provided by the underlying primary policy.” To expedite resolution of the case, the parties jointly moved for entry of an agreed final judgment, which the trial court signed. Ohio Casualty appealed.

 

 

The court of appeals affirmed. It noted the parties’ agreement that the underlying policy covers defense expenses. Id. at 734–35. The excess policy, the court then noted is a “follow form” policy that does not unambiguously exclude defense expenses. Id. at 735–37. Therefore, the court reasoned, the excess policy necessarily also covers those expenses. Id. at 738. We granted Ohio Casualty’s petition for review and now reverse.

 

 

“As early as 1886, this Court recognized as ‘a cardinal principle of...insurance law’ that ‘the policy is the contract; and if outside papers are to be imported into it, this must be done in so clear a manner as to leave no doubt of the intention of the parties.’”  ExxonMobil Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, 672 S.W.3d 415, 418 (Tex. 2023) (quoting Goddard v. E. Tex. Fire Ins. Co., 1 S.W. 906, 907 (Tex. 1886)). In other words, “we begin with the text of the policy at issue; we refer to extrinsic documents only if that policy clearly requires doing so; and we refer to such extrinsic documents only to the extent of the incorporation and no further.” Id. at 418–19. We have applied this principle in the context of follow-form excess-insurance policies. See RSUI Indem. Co. v. Lynd Co., 466 S.W.3d 113, 118 (Tex. 2015).

 

 

At all times, the excess policy itself remains the contract that governs a dispute about its coverage. The court of appeals should have first “looked to the excess policy to determine coverage” rather than “first examining the terms of the underlying policy.” 656 S.W.3d at 734.

 

 

(…) “damages”—a term that, without more, does not include defense expenses. See Corral-Lerma, 451 S.W.3d at 387.

 

 

In other words, the excess policy confines its coverage to sums paid to an adverse party, like the personal-injury claimants who sued Patterson after the drilling-rig incident. Cf. In re Farmers Tex. County Mut. Ins. Co., 621 S.W.3d 261, 270–71 (Tex. 2021) (stating that either a judgment or a settlement may trigger a duty to indemnify). Attorney’s fees could fall within that scope. For example, if a fee-shifting statute led to a judgment requiring Patterson to pay the adverse party’s attorney’s fees, Ohio Casualty would presumably be obligated to indemnify Patterson for that amount because Patterson would be legally obligated to pay it as part of the satisfaction of a claim. But the excess policy does not cover fees that Patterson paid its own attorneys.

 

 

 

 

 

 

 

(Supreme Court of Texas, Dec. 20, 2024, The Ohio Casualty Insurance Company v. Patterson-UTI Energy, Inc.; and Marsh USA, Inc., Docket No. 23-0006)

Supreme Court of Texas, The Ohio Casualty Insurance Company v. Patterson-UTI Energy, Inc.; and Marsh USA, Inc., Docket No. 23-0006

Interpretation of Legal Texts

 

Surplusage Canon

 

Texas Law

 

 

 

 

The surplusage canon “has its exceptions.” Whole Woman’s Health v. Jackson, 642 S.W.3d 569, 581 (Tex. 2022). “Like all canons of construction, the surplusage canon ‘must be applied with judgment and discretion, and with careful regard to context.’” Id. at 582 (quoting Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 176–77 (2012). And “we have repeatedly recognized, when faced with legal language that appears repetitive or otherwise unnecessary, that drafters often include redundant language to illustrate or emphasize their intent.” Id. For example, in Philadelphia Indemnity Insurance Co. v. White, the tenant pointed out “an apparent redundancy” in a lease. 490 S.W.3d 468, 477 (Tex. 2016). The lease included “catchall” language providing that the tenant would be responsible for losses not caused by the landlord’s negligence or fault but also specifically provided that the tenant would be responsible for particular types of damage. Id. We noted that “though we strive to construe contracts in a manner that avoids rendering any language superfluous, redundancies may be used for clarity, emphasis, or both.” Id.

 

 

 

 

(Supreme Court of Texas, Dec. 20, 2024, The Ohio Casualty Insurance Company v. Patterson-UTI Energy, Inc.; and Marsh USA, Inc., Docket No. 23-0006)

 

 

 

U.S. Court of Appeals for the Ninth Circuit, EB Holdings II, Inc. v. Illinois National Insurance Comp., Docket No. 23-15556

Insurance Law

 

Conflict-of-Laws

 

Affirmative Defense

 

Diversity Cases

 

Choice-of-Law Rules of the Forum State

 

Texas and Nevada Law

 

 

 

 

Appeal from the United States District Court for the District of Nevada

 

 

The Insureds are holding companies incorporated in Nevada and headquartered in Dallas, Texas. In 2015, the Insureds had dozens of subsidiaries, through which the Insureds operated battery recycling facilities and manufactured supplies for the oil exploration industry. EBH II’s principal asset was ownership of 86.9% of Eco-Bat Technologies, Ltd. (Eco-Bat), a supplier of recycled lead based in the United Kingdom. Howard Meyers was a Director and the President of both Insureds in 2015. Albert Lospinoso was the other Director of EBH II. In the summer of 2015, the Insureds sought to renew their Directors and Officers and Private Company Liability Insurance Policy with Illinois National Insurance Company (Illinois National), an American International Group, Inc. (AIG) subsidiary organized pursuant to Illinois law with a principal place of business in New York. The Insureds were seeking to renew coverage not only for themselves but also for dozens of their subsidiary companies, including Eco-Bat and Eco-Bat’s subsidiaries. To facilitate the renewal, the Insureds’ insurance broker sent numerous documents to AIG’s underwriters that summer relating to the finances of the Insureds and their subsidiaries. These documents included a consolidated balance sheet of Eco-Bat America, LLC (EBA), a wholly owned subsidiary of Eco-Bat. This document represented that the subsidiary, EBA, had $29.9 million in long-term debt.

 

 

The District Court erred in concluding that Nevada law, and not Texas law, governs the affirmative defense.

 

It is well-established in the federal courts that a conflict-of-laws analysis may result in the laws of different jurisdictions applying to different issues in the same case. Allstate Ins. Co. v. Hague, 449 U.S. 302, 307 (1981). “It is also well-established that in diversity cases, such as this one, ‘federal courts must apply the choice-of-law rules of the forum state.’” Rustico v. Intuitive Surgical, Inc., 993 F.3d 1085, 1091 (9th Cir. 2021) (quoting Ledesma v. Jack Stewart Produce, Inc., 816 F.2d 482, 484 (9th Cir. 1987)). Here, the forum state is Nevada. “Nevada tends to follow the Restatement . . . in determining choice-of-law questions involving contracts, generally, and insurance contracts, in particular.” Progressive Gulf Ins. Co. v. Faehnrich, 327 P.3d 1061, 1063 (Nev. 2014). That includes § 187 of the Restatement, which, according to the Nevada Supreme Court, permits the parties “within broad limits to choose the law that will determine the validity and effect of their contract.” Ferdie Sievers & Lake Tahoe Land Co. v. Diversified Mortg. Invs., 603 P.2d 270, 273 (Nev. 1979). Nevertheless, where an insurance policy does not evince a clear choice-of-law governing a particular issue, the Nevada Supreme Court has instructed its courts to apply § 188 of the Restatement, i.e., the “substantial relationship” test. See, e.g., Sotirakis v. United Serv. Auto. Ass’n, 787 P.2d 788, 789–90 (Nev. 1990). That test requires courts to consider: “(a) the place of contracting, (b) the place of negotiation of the contract, (c) the place of performance, (d) the location of the subject matter of the contract, and (e) the domicil, residence, nationality, place of incorporation and place of business of the parties.” Restatement § 188. Each factor of the test must be “evaluated according to its relative importance with respect to the particular issue” that gave rise to the choice-of-law dispute in the first place. Id.

 

 

Section 187 of the Restatement permits the parties “within broad limits to choose the law that will determine the validity and effect of their contract.” Ferdie, 603 P.2d at 273. Parties typically effectuate that choice through an express choice-of-law provision in their contract. See Restatement § 187 cmt. a (“When the parties have made such a choice, they will usually refer expressly to the state of the chosen law in their contract, and this is the best way of insuring that their desires will be given effect.”). It is undisputed that the insurance policy in this case lacks such a provision. Nevertheless, commentary to the Restatement makes clear that an express choice-of-law provision is not required for § 187 to apply to a particular issue. See Restatement § 187 cmt. a.1 “The fact that a contract contains legal expressions, or makes reference to legal doctrines, that are peculiar to the local law of a particular state may provide persuasive evidence that the parties wished to have the law of that particular state applied.” Id.

 

 

(…) Because we conclude that Texas law applies to the defense of material misrepresentation, there is no reason to entertain the Insureds’ broader argument that Texas law applies to the entire policy. Cf. George K. Baum & Co. v. Twin City Fire Ins. Co., 760 F.3d 795, 799–800 (8th Cir. 2014) (applying comment (a) to § 187 of the Restatement to hold that New York law governed an entire insurance policy that lacked an express choice-of-law clause because it “contained numerous New York-specific provisions”). (Fn. 2).

 

 

 

 

 

 

(U.S. Court of Appeals for the Ninth Circuit, July 29, 2024, EB Holdings II, Inc. v. Illinois National Insurance Comp., Docket No. 23-15556, for Publication)

U.S. Court of Appeals for the Fifth Circuit, Southwest Airlines Company v. Liberty Insurance Underwriters, Inc., Docket No. 22-10942

Insurance Law

 

Coverage Re: Subsequent Business Decisions

 

General Purpose of Business Interruption Insurance

 

Cyber Risk Insurance

 

Duty to Mitigate

 

Summary Judgment on a Bad Faith Claim

 

Interpretation of an Insurance Policy

 

Meaning of the Terms “Loss”; “Incur”; and “Sole Cause.”

 

Texas Law

 

 

 

Appeal from the United States District Court for the Northern District of Texas USDC No. 3:19-CV-2218

 

 

 

 

Defendant Liberty Insurance Underwriters denied Plaintiff Southwest Airlines’s claim for reimbursement under its cyber risk insurance policy for costs related to a computer system failure. The district court granted summary judgment for Liberty, concluding that those costs were purely discretionary and therefore either not covered under the policy’s insuring clause or barred by the policy’s exclusions. We conclude that the costs are not categorically barred from coverage as a matter of law, and accordingly we reverse and remand for proceedings consistent with our opinion.

 

 

On July 20, 2016, Southwest suffered a massive computer failure, which resulted in a three-day disruption of its flight schedule. During the disruption, approximately 475,839 Southwest customers experienced either a flight cancelation or a delay of two hours or more. Just weeks earlier, Southwest had purchased a so-called cyber risk insurance policy from non-party AIG, Inc. The policy included a provision for “System Failure Coverage” providing that the insurer “shall pay all Loss . . . that an Insured incurs . . . solely as a result of a System Failure .  .  .  .” Southwest also purchased a series of follow form excess policies, including one from Liberty. Under the Liberty policy, the company provided excess coverage under the terms of AIG’s cyber risk policy for up to $10 million in losses. The excess policy positioned Liberty above three other excess insurers and AIG. Liberty’s coverage was only implicated if Southwest’s system-failure-related losses exceeded $50 million. Southwest calculated that it ultimately incurred more than $77 million in losses as a result of the system failure and resulting flight disruptions. To recoup those losses, it began climbing the cyber risk insurance tower, and, by March 2018, it had collected $50 million from AIG and the other insurers on the first three tiers. When it reached Liberty, however, its claim was denied. Liberty challenged five categories of Southwest’s claimed losses, without which its covered losses would total less than $50 million and therefore would not trigger the Liberty policy: ·FareSaver Promo codes, constituting $16,563,656.00 in costs. FareSaver Promo codes are 50% discount codes; each code is redeemable for up to eight passengers. The codes were disbursed to customers whose flights were canceled or delayed two hours or more. ·Travel vouchers, constituting $6,644,801.00 in costs. Southwest issued such vouchers for specific dollar amounts and disbursed to customers whose flights were canceled or delayed two hours or more. ·Cover Refunds, constituting $7,366,000.00 in costs. Cover Refunds are reimbursements made by customer service agents to customers upon request to compensate for alternate travel arrangements, such as buses, rental cars, and hotels. ·Rapid Rewards Points, constituting $3,561,363.00 in costs. Rapid Rewards Points are redeemable for airline tickets and were distributed to members of its frequent flier program whose flights were canceled or delayed two hours or more. ·Advertising costs, constituting $1,217,921.00 in costs. Southwest was conducting a sale at the time of the system failure, and, as a result of it, extended the sale for a week. On September 16, 2019, Southwest sued Liberty for breach of contract, bad faith, and declaratory judgment on the issue of coverage. Liberty moved for summary judgment, arguing that Southwest’s claims failed due to the lack of coverage under the System Failure Coverage provision, or, alternatively, due to the operation of three exclusions in the policy. Southwest filed a cross-motion for partial summary judgment. On September 6, 2022, the district court issued a terse order granting Liberty’s motion. The district court’s analysis on the central issue in this appeal was contained in a footnote, in which it concluded that Southwest’s costs were not caused by the system failure but rather were the result of “various and purely discretionary customer-related rewards programs, practices and market promotions.” It also concluded that coverage was barred under the policy exclusions and that Southwest’s bad faith claims failed by operation of law and on the merits. Finally, it denied Southwest’s motion for partial summary judgment. Southwest appealed.

 

 

Texas law applies to the Liberty policy. See Tex. Ins. Code Ann. art. 21.42. “In Texas, the construction of a contract presents a question of law.” Balfour Beatty Constr., L.L.C. v. Liberty Mut. Fire Ins. Co., 968 F.3d 504, 509 (5th Cir. 2020).

 

 

As set forth above, the policy’s System Failure Coverage provision covers “all Loss . . . that an Insured incurs . . . solely as a result of a System Failure . . ..” Liberty argues that all five categories of costs that Southwest claimed were not incurred solely as a result of the system failure but rather were the result of Southwest’s subsequent business decisions. Southwest acknowledges that those costs were the result of business decisions but argues that, under the plain terms of the policy, they are covered.

 

 

In Texas, interpretation of an insurance policy begins with its actual words, “because it is ‘presumed parties intend what the words of their contract say.’” Terry Black’s Barbecue, L.L.C. v. State Auto. Mut. Ins. Co., 22 F.4th 450, 454 (5th Cir. 2022) (quoting Gilbert Tex. Constr., L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118, 126 (Tex. 2010)). Because we must determine whether the five categories of costs were losses incurred solely as a result of the system failure, our inquiry requires us to determine the meaning of the terms “Loss”; “incur”; and “sole cause.” When a policy defines a term, we use that definition; otherwise, we endeavor to find the term’s “ordinary and generally-accepted meaning.” Terry Black’s, 22 F.4th at 455 (citing Gilbert, 327 S.W.3d at 126). Texas law requires us to begin that inquiry with the dictionary. Cooper Indus. Ltd. v. Nat’l Union Fire Ins. Co. Pittsburgh, 876 F.3d 119, 128 (5th Cir. 2017). We then look to “the term’s usage in other statutes, court decisions, and similar authorities.” Pharr-San Juan-Alamo Indep. Sch. Dist. v. Texas Pol. Subdivisions Prop./Cas. Joint Self Ins. Fund, 642 S.W.3d 466, 474 (Tex. 2022). Here, the policy defines “losses” to mean, as relevant, “costs that would not have been incurred but for a Material Interruption.” It defines Material Interruption as “the actual and measurable interruption or suspension of an Insured’s business directly caused by . . . a System Failure.”

 

 

We therefore conclude that Southwest’s five categories of costs satisfy that lenient but-for causation standard and are therefore “losses.” The policy does not define “incur” but the Texas Supreme Court has done our work for us here, relying on dictionaries to define “incur” to mean to “become liable for,” Garcia v. Gomez, 319 S.W.3d 638, 642 n.4 (Tex.  2010) (citing Webster’s Ninth New Collegiate Dictionary 611 (1984) and Incur, Black’s Law Dictionary 771 (7th ed.1999) (“to suffer or bring on oneself (a liability or expense)”)). Another dictionary similarly defines “incur” as “to become liable or subject to” or to “bring down upon oneself.” Incur, merriam-webster.com, https://www.merriam-webster.com/dictionary/incur (last visited Dec. 12, 2023). Because Southwest’s five categories of costs were ones that Southwest brought upon itself, we therefore conclude that they were “losses” that it “incurred.” The policy does not define “solely.” According to the Texas Supreme Court, also relying on a dictionary, the word means “‘to the exclusion of all else’” and “‘without another.’” Northland Indus. v. Kouba, 620 S.W.3d 411, 416 (Tex. 2020) (citing Webster’s Ninth New Collegiate Dictionary (1984); Webster’s Third New Int’l Dictionary (2002)). But that definition, standing alone, does not resolve the question. Namely, it does not tell us whether “to the exclusion of all else” means there can be no intermediate causes—such as a discretionary decision—or whether it only means there can be no other originating or precipitating causes. We look to Texas law for more clarity. See Pharr, 642 S.W.3d at 474. The parties concede that there are no cases directly on point in the context of business interruption insurance. Oral Arg. at 04:19–04:23; 34:04–34:28, https://www.ca5.uscourts.gov/OralArgRecordings/22/22-10942_10-4-2023.mp3. But the policy at issue is hardly the first time the words “sole” or “solely” have been used in a Texas insurance policy with regard to causation. In Wright v. Western Southern Life Insurance Company, for example, an injury policy covered “the loss of a foot ‘solely as a result of accidental bodily injury sustained or disease . . ..’” 443 S.W.2d 790, 790 (Tex. App.—Eastland 1969, no writ). The insured claimed that gangrene was the sole cause of the loss of his foot. See id. at 790-91. In interpreting the policy, the Court of Civil Appeals explained that a “sole” cause is one independent of any other cause, applying the Texas Supreme Court’s decision in Mutual Benefit Health & Accident Association v. Hudman, 398 S.W.2d 110 (Tex. 1965)). Accordingly, the court held that gangrene was not the sole cause of the loss because it was not the independent cause; rather, the sole cause was an earlier gunshot, which alone precipitated the gangrene infection and ultimately the amputation of the plaintiff’s foot. Wright, 443 S.W.2d at 790–92.

 

 

Much more recently, we applied that same definition of sole cause to a Texas life insurance policy that paid out only when a bodily injury was the “sole cause” of death. Wells v. Minn. Life Ins. Co., 885 F.3d 885, 888 (5th Cir. 2018); see also id. at 892–93. Like the court in Wright, we equated sole cause to independent cause. Id. at 892. Applying that definition, we concluded that an injury is still the sole cause of death even if death resulted more directly from complications like septic shock or multi-system organ failure. Id. at 893–94. We explained that those complications were not independent causes but rather were caused by the original injury. Id. In turn, the complications did not “strip the original injury of its ‘sole proximate cause’ status.” Id. at 894. Here, Liberty argues that the system failure cannot be the sole cause of Southwest’s claimed costs because the “independent” and “more direct” cause of those losses was Southwest’s decision to incur them. But those decisions can only be independent, sole causes of the costs if they were the precipitating causes of the costs. The decisions, like the infection in Wright or the medical complications in Wells, were not precipitating causes that competed with the system failure, but links in a causal chain that led back to the system failure. To be clear, this inquiry only shows that the district court erred in concluding that Southwest’s five categories of costs were all precluded as a matter of law because they were discretionary. We do not determine whether the system failure was in fact the sole cause of each of the costs that Southwest claims.

 

 

To that end, Liberty argues that if Southwest’s covered losses include discretionary costs, Southwest could “literally dictate the amount of its own ‘loss.’” But that would only be true if no causation standard applied at all. The policy still requires a causal nexus between the system failure and Southwest’s costs. Indeed, it even contains a provision to guide that causation inquiry, limiting coverage to only the costs that are deemed appropriate based on Southwest’s “probable business” if no system failure occurred. Likewise, basic insurance principles still apply. The general purpose of business interruption insurance is “to compensate an insured for losses stemming from an interruption of normal business operations.  .  . thus preserving the continuity of the insured’s business earnings by placing the insured in the position that it would have occupied if there had been no interruption.” 11A Couch on Ins. § 167:9 (3d ed. 2023). And as with any other contract, “the general duty to mitigate damages may come into play as a factor in construing policy coverage terms.” Id. at § 168:15. Under those principles, costs that Southwest incurred for mitigation may be recoverable, but recovery that would put Southwest in a better position than it would have occupied without the interruption would seem to be beyond the scope.

 

 

For any of its claimed costs, Southwest, to survive summary judgment on its bad faith claim, must make a prima facie case that Liberty “knew or should have known that it was reasonably clear that Southwest’s claim was covered” but denied the claim anyway. Universe Life Ins. Co. v. Giles, 950 S.W.2d 48, 49 (Tex. 1997). Southwest must show “the absence of a reasonable basis to deny the claim,” id. at 51, or, put differently, the absence of a bona fide dispute as to coverage, Higginbotham v. State Farm Mut. Auto. Ins. Co., 103 F.3d 456, 460 (5th Cir.1997).

 

 

 

 

Secondary sources: Couch on Ins. § 167:9 (3d ed. 2023).

 

 

 

 

(U.S. Court of Appeals for the Fifth Circuit, Jan. 16, 2024, Southwest Airlines Company v. Liberty Insurance Underwriters, Inc., Docket No. 22-10942)

U.S. Court of Appeals for the Fifth Circuit, Windermere Oaks v. Allied World Specialty Insurance Comp., Docket No. 22-50218

Insurance Law

 

Exclusion

 

Exclusion of Contractual Liability

 

Breach of Fiduciary Duty

 

Ultra Vires Acts

 

Breach of the Duty to Defend

 

Claim Based on a Common-Law Duty  

 

Texas Law

 

 

 

 

Appeal from the United States District Court for the Western District of Texas USDC No. 1:21-CV-258

 

 

 

This insurance dispute turns on a simple principle of law: A claim for breach of fiduciary duty is not a claim for breach of contract, and is therefore not subject to exclusion from coverage under a contractual liability exclusion. That’s what the district court found here in granting summary judgment in favor of the insured. We accordingly affirm.

 

 

Allied World Specialty Insurance Company issued a WaterPlus Package Insurance Policy to the Windermere Oaks Water Supply Corporation. That policy includes coverage for Public Officials and Management Liability. But it also includes various exclusions from coverage. At issue in this appeal is the exclusion for contractual liability. That provision states that coverage excludes: “damages,” “defense expenses,” costs or loss based upon, attributed to, arising out of, in consequence of, or in any way related to any contract or agreement to which the insured is a party or a third-party beneficiary, including, but not limited to, any representations made in anticipation of a contract or any interference with the performance of a contract.

 

 

Three individual members and partial owners of Windermere brought a suit (the “Underlying Suit”) against it, its various officials, and relevant others. This suit alleges that Windermere sold a valuable tract of land at Spicewood Airport to a commercial entity controlled by Windermere board member Dana Martin “for pennies on the dollar.” Because of this sale—as well as a subsequent settlement that “left the . . . fire sale transaction largely intact and gave Martin even more valuable Windermere property for no consideration”—the suit contends that Windermere’s losses have exceeded $1,000,000, resulting in rate hikes and fee increases. In doing so, the suit claims that Windermere “exceeded its powers” and the board of directors “exceeded their authority and breached their duties,” specifically alleging various ultra vires acts committed in violation of Section 20.002(c) of the Texas Business Organizations Code. These included: the unauthorized conveyance of property; improper use of the cooperative’s assets; improper disbursement of the cooperative’s assets to benefit the directors; and failure to recover loss, as well as for breach of fiduciary duty. Plaintiffs in this case subsequently brought suit against Allied World for its failure to defend them in the Underlying Lawsuit. After both sides sought summary judgment on the issue of the duty to defend, the district court granted Plaintiffs’ motion and denied Allied World’s motion. Allied World subsequently sought entry of judgment under Federal Rule of Civil Procedure 54(b), which the district court granted. Allied World then filed its timely notice of appeal.

 

 

“The insured bears the initial burden of showing that there is coverage, while the insurer bears the burden of proving the applicability of any exclusions in the policy.” Guar. Nat’l Ins. Co. v. Vic Mfg. Co., 143 F.3d 192, 193 (5th Cir. 1998). “In construing a contract, a court’s primary concern is to ascertain the intentions of the parties as expressed in the instrument.” Amedisys, Inc. v. Kingwood Home Health Care, LLC, 437 S.W.3d 507, 514 (Tex. 2014). “As with any other contract, the parties’ intent is governed by what they said.” Fiess v. State Farm Lloyds, 202 S.W.3d 744, 746 (Tex. 2006). See also Gilbert Texas Constr., L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118, 126 (Tex. 2010) (“We look at the language of the policy because we presume parties intend what the words of their contract say.”).

 

 

Under Texas’s so-called “eight-corners rule, the insurer’s duty to defend is determined by comparing the allegations in the plaintiff’s complaint to the policy provisions, without regard to the truth or falsity of those allegations and without reference to facts otherwise known or ultimately proven.” Monroe Guar. Ins. Co. v. BITCO Gen. Ins. Corp., 640 S.W.3d 195, 199 (Tex. 2022). When applying the rule, “we give the allegations in the complaint a liberal interpretation.” Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Merchants Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997). “In case of doubt as to whether or not the allegations of a complaint against the insured state a cause of action within the coverage of a liability policy sufficient to compel the insurer to defend the action, such doubt will be resolved in insured’s favor.” Id. (quotations omitted).

 

 

Or as this court has previously summed it up: “When in doubt, defend.” Gore Design Completions, Ltd. v. Hartford Fire Ins. Co., 538 F.3d 365, 369 (5th Cir. 2008).

 

 

Allied World contends that the district court was wrong to decline to apply the contractual liability exclusion to this case—and that the Underlying Lawsuit is indeed “based upon, attributed to, arising out of, in consequence of, or in any way related to the contract or agreement.” But the Underlying Lawsuit is not a suit for breach of contract. As Plaintiffs rightly point out, “the focus of the Underlying Lawsuit is, in fact, on the purported breach by . . . Plaintiffs of their fiduciary duties, by way of ultra vires acts and other misdeeds that gave rise to harm without regard to the ultimate contract.” These are claims that are “established at law”—not by contract—and “that could stand alone even if no contract ever existed.” See, e.g., Ewing Const. Co. v. Amerisure Ins. Co., 420 S.W.3d 30, 37 (Tex. 2014) (holding that a contractual liability exclusion did not apply to a claim based on a common-law duty to perform work with care and skill). The district court did not err in declining to apply the contractual exclusion.

 

 

Under the Texas Prompt Payment of Claims Act, Tex. Ins. Code § 542.060, an insurer’s breach of the duty to defend constitutes a per se violation. See, e.g., Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co., 279 S.W.3d 650, 652 (Tex. 2009). Allied World’s only arguments rely on the application of the contractual exclusion.

 

 

We therefore agree with Plaintiffs and the district court that Allied World is liable under the Act. We affirm.

 

 

 

 

(U.S. Court of Appeals for the Fifth Circuit, May 9, 2023, Windermere Oaks v. Allied World Specialty Insurance Comp., Docket No. 22-50218)

U.S. Court of Appeals for the Fifth Circuit, Corporativo Grupo R SA DE C.V. v. Marfield Limited Inc., Docket No. 22-20345

Admiralty

 

Maritime Law

 

Liens

 

Loans (Admiralty)

 

Preferred Naval Mortgage

 

Bareboat Charters

 

Standstill Agreements

 

London Maritime Arbitration Association Dispute Resolution Clause

 

 

State-Created Liens

 

Attachment of the Vessels under Texas State Law

 

 

 

 

 

Appeal from the United States District Court for the Southern District of Texas, USDC No. 4:19-CV-1963

 

 

In 2008, Intervenors-Appellees Caterpillar Financial Services Asia Pte Ltd (“Caterpillar”) and Eksportfinans ASA (“Eksportfinans”) provided a loan to Marfield Limited Incorporated (“Marfield”) for the construction of an offshore construction vessel named the M/V CABALLO MAYA (“MAYA”). To secure payment of this loan, Marfield executed and delivered a First Preferred Naval Mortgage to Eksportfinans and a Second Preferred Naval Mortgage to Caterpillar on December 19, 2008. As further security for outstanding sums owed to Caterpillar, Marfield executed a Third Preferred Naval Mortgage on April 17, 2014, encumbering the whole of the MAYA. The MAYA was flagged in Panama, so all three of those mortgages were submitted to the Panama Maritime Authority Directorate General of Public Registry of Property of Vessels (“PMA”), which is the central office for the recordation of Panamanian ship mortgages. The PMA reviewed all three mortgages twice and accepted them for recordation.

 

 

In 2012, Caterpillar and Intervenor-Appellee the Norwegian Government (“Norway”) provided a loan to Shanara Maritime International S.A. (“Shanara”) for construction of another offshore construction vessel named the M/V CABALLO MARANGO (“MARANGO”). To secure this loan, Shanara executed and delivered a First Preferred Naval Mortgage to Caterpillar and Norway on February 9, 2012. The following year, KFW IPEX-Bank GmbH (“KFW”) provided a loan to Shanara to finance the acquisition of cranes for installation aboard the MARANGO. To secure payment of this loan, Shanara executed and delivered a Second Preferred Naval Mortgage to KFW on January 24, 2013. The MAYA was also flagged in Panama, so both mortgages were submitted to the PMA, which reviewed the mortgages twice and accepted them for recordation.

 

 

Once construction of the MAYA and MARANGO was completed, Marfield and Shanara chartered the vessels to Oceanografia S.A. de C.V. (“Oceanografia”) for use in Mexico. The MAYA and the MARANGO were chartered there until early 2014, when the Mexican government seized the vessels in conjunction with its criminal investigation of Oceanografia. On February 28, 2014, Marfield and Shanara terminated their bareboat charters of the vessels with Oceanografia, and the vessels remained in the Mexican government’s custody. Shanara and Marfield could not generate revenue on the vessels and began to fall behind on their loan payments to Intervenors-Appellees Caterpillar, Norway, KFW, and Eksportfinans (collectively, the “Lenders”). Shortly after that, bankruptcy proceedings were commenced against Oceanografia in Mexico, and, on April 10, 2014, the Mexican government separately seized the MAYA and MARANGO in connection with the bankruptcy.

 

 

In early 2014, Grupo R, a Mexican conglomerate in the oil, gas, and energy sector, initiated discussions with Marfield and Shanara to purchase the MAYA and MARANGO. On March 21, 2014, the parties entered into purchase agreements for the vessels. Shanara and Marfield were subsequently unable to obtain the release of the vessels from the Mexican government, which violated the deadlines set forth in the purchase agreements. Since the agreements are governed by English Law and contain a London Maritime Arbitration Association dispute resolution clause, Grupo R initiated a London arbitration against Shanara and Marfield. Grupo R prevailed, and on May 30, 2019, a London Arbitration Panel entered awards of $5,000,000 against Marfield and $5,000,000 against Shanara.

 

 

From the initial arrest of the vessels until December 2017, the Lenders executed a number of amendments to the original loan agreements to reaffirm Marfield’s and Shanara’s payment obligations, which remained unfulfilled. On July 10, 2015, the Lenders, Marfield, and Shanara executed two Standstill Agreements in which Shanara and Marfield admitted that their cancellation of the Oceanografia charters constituted “materially adverse” events of default under their respective loan agreements. To avoid the imposition of liens over the MAYA and MARANGO, Caterpillar provided additional financing to Marfield and Shanara in the form of four “protective advances,” or loans. In return, Marfield and Shanara executed four Preferred Naval Mortgages in favor of Caterpillar to secure the outstanding amounts due, then registered those mortgages with the PMA. The PMA reviewed each of the mortgages twice, then accepted them for recordation. Since 2014, Shanara and Marfield have made no loan payments to the Lenders on any of the nine mortgages issued.

 

 

On May 30, 2019, Grupo R filed suit in the U.S. District Court for the Southern District of Texas seeking to attach the MAYA and MARANGO under the Texas Civil Practice and Remedies Code Section 61.001, et seq. Grupo R requested that the court attach the vessels so they could be sold at judicial auction to satisfy Grupo R’s arbitration awards. Grupo R attached a Certificate of Ownership and Encumbrance to its Complaint, identifying the First, Second, and Third Preferred mortgages over the MAYA and the MARANGO. At the time, the MAYA and MARANGO had been released from Mexican seizure and were located in Galveston, Texas.

 

 

On June 7, 2022, the court issued its findings of fact and conclusions of law, holding, in relevant part, that (1) Marfield and Shanara are in default under the loan agreements; and (2) the Lenders’ preferred ship mortgages related to said default outrank Grupo R’s state-created liens arising from Grupo R’s attachment of the MAYA and MARANGO under Texas state law. Grupo R timely appealed.

 

 

A.   Relative priority of the Lenders’ mortgages as to Grupo R’s state-created liens

 

On appeal, the parties dispute whether the Lenders’ liens created by the nine ship mortgages take priority over Grupo R’s liens that arose from the attachment of the MAYA and MARANGO under Texas state law. The relative priorities of the Lenders’ and Grupo R’s rights determine how the proceeds from the judicial sale of the MAYA and MARANGO should have been allocated. The law of the forum provides the relative rankings of the liens, while Panamanian law governs the substance of the liens. The ranking of liens in the United States, from highest priority to lowest priority, is as follows:

 

 

1. Custodia legis expenses;

 

2. Seamen’s liens for wages;

 

3. Salvage and general average liens;

 

4. Tort liens;

 

5. Preferred ship mortgage liens;

 

6. Liens for necessaries under CIMLA;

 

7. State-created liens that are maritime in nature;

 

8. Maritime liens for penalty/forfeiture for violation of federal statutes;

 

9. Perfected non-maritime liens;

 

10. Attachment liens;

 

11. Maritime liens in bankruptcy.

 

 

Under this ranking regime, Grupo R’s rights are classified as “state-created liens that are maritime in nature,” while the Lenders’ liens are classified as “preferred ship mortgages.” Grupo R’s liens arose when it caused the MAYA and MARANGO to be attached under Texas state law. The Lenders’ mortgage liens, on the other hand, arose when Shanara and Marfield failed to pay the mortgages over the MAYA and MARANGO, which had been executed in Panama and registered with the PMA. The Commercial Instruments and Maritime Liens Act (“CIMLA”), 46 U.S.C. § 31301 et seq., defines a preferred ship mortgage as a: mortgage  .  .  . established as a security on a foreign vessel if the mortgage . . . was executed under the laws of the foreign country under whose laws the ownership of the vessel is documented and has been registered under those laws in a public register at the port of registry of the vessel or at a central office.

 

 

The parties do not dispute that the Lenders’ preferred ship mortgage liens outrank Grupo R’s state-created maritime attachment liens, and the district court confirmed those rankings in its findings of fact and conclusions of law. The threshold issue on appeal is whether the Lenders’ mortgages are valid and enforceable against third parties like Grupo R, allowing Lenders to exercise their priority over the proceeds of the judicial sale of the MAYA and MARANGO.

 

 

B.   Validity and enforceability of the preferred ship mortgages under CIMLA and Panamanian law 

 

Grupo R and the Lenders agree that CIMLA and Panamanian law are implicated in the resolution of this lawsuit. At trial, it was undisputed that (1) the Vessels are registered under Panama’s flag; (2) the PMA is the public register or central office charged with recording vessel mortgages in Panama; and (3) all nine of the Lenders’ mortgages were recorded with the PMA, reviewed and accepted by the PMA before their recordation, and reviewed again by the PMA when it issued certificates confirming the mortgages’ compliance with Panamanian law. Under CIMLA, “a mortgage on a foreign vessel is preferred so long as it was properly (1) executed and (2) recorded under the laws of the nation in which the foreign vessel is registered.” For a preferred ship mortgage, CIMLA provides a cause of action in federal court “on default of any term of the preferred mortgage.” The mortgagee may bring a civil action or an admiralty action in personam against the mortgagor or guarantors to recover a deficiency. The mortgagee may also “enforce the preferred mortgage lien in a civil action in rem for . . . a foreign vessel.” As noted above, the parties agree that each of the Lender’s mortgages was executed in Panama and registered with the PMA. Accordingly, the Lenders’ mortgages are properly classified as “preferred ship mortgages” under CIMLA.

 

 

(…) Courts frequently accept affidavits from foreign-law experts to guide their analyses of foreign law.” When there are conflicting opinions offered by experts on foreign law, “it is not the credibility of the experts that is at issue, it is the persuasive force of the opinions they expressed.

 

 

The district court directed the allocation of proceeds of the MAYA and the MARANGO pursuant to its conclusions regarding the liens’ relative priorities. The proceeds from judicial sale of the MAYA were to be allocated as follows: (1) $63,243.90 to Grupo R and $663,745.12 to Caterpillar for their custodia legis lien claims; and (2) any remaining proceeds to Eksportfinans for its First Preferred Vessel Mortgage over the MAYA. The proceeds from the credit sale of the MARANGO were to be allocated to Grupo R in the amount of $63,243.90 for its custodia legis lien claims, and the remainder of the Amended Security Bond released to Norway, KFW, and Caterpillar.

 

 

(…) We are also not convinced that compliance with Article 260’s highly technical requirements is dispositive in this case. We previously held that it is “well established that the validity of a mortgage is dependent only on the existence of a debt actually secured by the mortgage and not on the description of the debt contained in the instrument.”

 

 

Further, other circuits have explained that foreign law plays a more limited role in determining the validity and enforceability of foreign mortgages under CIMLA. In M/V Prodromos, the Third Circuit explained that “the stringent procedural requirements for perfecting domestic ship mortgages are not imposed on foreign ship mortgages . . . to provide a simplified procedure for enforcing mortgages without destroying substantive rights.”

 

 

Oil Shipping (Bunkering) B.V. v. Sonmez Denizcilik Ve Ticaret A.S., 10 F.3d 1015, 1023 (3d Cir. 1993) (holding that the Ship Mortgage Act—CIMLA’s precursor—“specifically speaks to a limited role for foreign law by making the preferred status of foreign mortgages dependent only on their compliance with the execution and registration requirements of the applicable foreign law”).

 

 

We conclude that the district court correctly held that the nine preferred ship mortgages at issue are enforceable under CIMLA and Panamanian law, and that the Lenders’ preferred ship mortgage liens enjoy priority over Grupo R’s state-created maritime attachment liens.

 

 

For the reasons detailed above, we AFFIRM the district court’s findings of fact and conclusions of law with regard to (1) the validity, enforceability, and relative priority of the parties’ liens following the judicial sale of the MAYA and MARANGO, and (2) the status of Caterpillar’s and KFW’s lien positions following the credit sale of the MARANGO.

 

 

 

Secondary Sources: Varian, Rank and Priority of Maritime Liens, 47 Tul. L. Rev. 751 (1973); G. GILMORE AND C. BLACK, THE LAW OF ADMIRALTY, 596 (2d ed. 1975); SCHOENBAUM, ADMIRALTY & MAR. LAW §9:5 (6th ed. 2020); CHRISTIAN BREITZKE, JONATHAN S. LUX, MARITIME LAW DESK HANDBOOK, Part II. Flag and Registration of Vessels and Mortgages of Vessels (Wolters Kluwer 2019, 2021). This text was not introduced into the record as an exhibit, but the district court was authorized to consider it under Rule 44.1 of the Federal Rules of Civil Procedure. FED. R. CIV. P. 44.1.

 

 

 

 

(U.S. Court of Appeals for the Fifth Circuit, March 24, 2023, Corporativo Grupo R SA DE C.V. v. Marfield Limited Inc., Docket No. 22-20345)