Fifth Circuit Reaffirms Burdens of Proof Regarding Duties to Defend and Indemnify Under Louisiana Law
Insurance Law Update
Fifth Circuit Court of Appeals
In Martco Limited Partnership v. Wellons, Inc., ___ F.3d ____, 2009 WL 3855710 (5th Cir. (La.) November 19, 2009), the Fifth Circuit Court of Appeals held that an insurer has both a duty to defend and a duty to indemnify its insured where the underlying complaint is sufficient to trigger the duty to defend and where the insurer cannot establish a policy exclusion to excuse it from its duty to indemnify.
Wellons, Inc. was hired by Martco Limited Partnership to improve an existing Wellons thermal oil heating system in Martco’s plant. Several problems arose after the Wellons unit was updated, causing unplanned downtime at the Martco plant. Martco sued Wellons for breach of contract, and Wellons sought a defense and indemnity from Admiral Insurance Company. Admiral refused, stating that Martco’s underlying complaint did not trigger coverage and that policy exclusions foreclosed any duty to defend or indemnify. Wellons cross-complained against Admiral, seeking a declaration that Admiral had a duty to defend and indemnify. The trial court entered summary judgment in favor of Wellons on the duty to indemnify, but held that Admiral had no duty to defend.
The Fifth Circuit Court of Appeals affirmed in part and reversed in part, agreeing with the trial court that Admiral had a duty to indemnify, but also finding that Admiral had a duty to defend. Applying Louisiana law, the court stated that the insured bears the initial burden to show that facts pleaded in the complaint fall within an insuring clause. The burden then shifts to the insurer to show that the allegations unambiguously fall within a policy exclusion. Whenever the pleadings disclose a possibility of liability, the insurer has a duty to defend. Likewise, to deny indemnity, the insurer must unambiguously show that a policy exclusion applies. However, in addition to the pleadings, the court will also look to the evidence adduced at trial when assessing the duty to indemnify. Martco’s complaint alleged that repeated “excessive ash carryover” from Wellon’s unit caused a “physical degrading of the infrastructure.” Unlike the trial court, the Court of Appeals found this allegation sufficient to support “property damage” caused by an “occurrence” under the policy, such that Admiral owed Wellons a duty to defend. Both the trial and appellate courts held that Admiral had a duty to indemnify Wellons, finding that “property damage” to “other property” arose from Wellon’s product because Martco lost the use of its plant due to the problems with the Wellons unit.