Allstate Insurance Company v. Ruth Hallman

IN THE SUPREME COURT OF TEXAS

IN THE SUPREME COURT OF

TEXAS

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No.

03-0957

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Allstate

Insurance Company, Petitioner

v.

Ruth

Hallman, Respondent

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On Petition for Review from

the

Court of Appeals for the

Fifth District of Texas

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Argued October 20, 2004 .

Chief Justice Jefferson delivered the

opinion of the Court.

In

this case we must determine whether, under a homeowners insurance policy’s

terms, an insurer has a duty to defend and indemnify an insured’s potential

liability for damages resulting from limestone mining operations conducted on

the insured’s property. Neighboring property owners sued Ruth Hallman

(“Hallman”) for damages related to limestone mining on her property. Hallman

sought coverage under her homeowners insurance policy (“the policy”) with

Allstate Insurance Company (“Allstate”), requesting that Allstate defend and

indemnify her in the lawsuit. Allstate and Hallman both sought a declaratory

judgment to determine whether the policy covered the underlying litigation. The

trial court granted summary judgment in Allstate’s favor. The court of appeals

reversed the trial court’s judgment and remanded for further proceedings,

holding that Allstate had a duty to defend and indemnify Hallman in the

limestone mining litigation. 114 S.W.3d 656, 663 . Because we conclude that

damages to third parties caused by commercial limestone mining conducted on an

insured’s property fall within the policy’s business pursuits exclusion, we

reverse the court of appeals’ judgment and render judgment for Allstate.

I

Background

In

1995, Hallman leased property she owns in rural

Kaufman

County to Norton Crushing, Inc.

(“Norton”) for limestone mining. [1]

In 1996, neighboring landowners sued Hallman, Norton, and all subcontractors

involved in the mining project, alleging that the blasting from the mining

damaged their property and their health. Hallman filed a claim under the policy

requesting defense and indemnification. Allstate agreed to defend Hallman under

a reservation of rights but filed this declaratory judgment action seeking a

determination that Hallman’s claim was not covered under the policy’s terms.

Hallman counterclaimed seeking a declaration that Allstate had a duty to defend

and indemnify her in the underlying litigation. Both parties sought attorney’s

fees.

Allstate

moved for summary judgment, arguing that the injuries and damages relating to

the limestone mining did not constitute an “occurrence” as required for coverage

under the policy, and alternatively, that the mining operations were excepted

from coverage under the policy’s business pursuits exclusion. Hallman moved for

partial summary judgment, asserting that she was entitled to a defense because

her neighbors’ allegations constituted an “occurrence” as defined in the policy.

The trial court granted Allstate’s motion, denied Hallman’s, and denied both

parties’ requests for attorney’s fees. The court of appeals reversed, concluding

that the policy covered Hallman’s claim because: (1) the mining damages

constituted an “occurrence,” and (2) the business pursuits exclusion did not

apply. 114 S.W.3d at 663 . The court of appeals remanded the attorney’s fees

issue to the trial court for further proceedings.

Id . at 663-64. We granted

Allstate’s petition for review to determine whether the policy covers potential

liability for damages from commercial limestone mining. 47

Tex. Sup. Ct. J. 753 (July 2, 2004).

During

oral argument before this Court, the parties announced that the underlying

lawsuit between Hallman and her neighbors had recently concluded with a jury

verdict in Hallman’s favor. Allstate provided Hallman with a defense throughout

the trial and does not intend to seek reimbursement for the defense costs.

II

Mootness

As

a preliminary matter, we must consider whether the conclusion of the underlying

litigation renders this case moot. The main issue here is whether Allstate has a

duty to defend and indemnify Hallman in the mining litigation. Allstate,

however, has already provided the requested defense, for which it will not seek

reimbursement. Additionally, because Hallman was not found liable at trial,

there is nothing for Allstate to indemnify. Nevertheless, both parties maintain

that a justiciable controversy remains because Hallman

continues to seek an award of attorney’s fees for expenses incurred in defending

against Allstate’s declaratory judgment action and in pursuing her own

declaratory relief.

We

agree with the parties that this case is not moot. A case becomes moot if a

controversy ceases to exist or the parties lack a legally cognizable interest in

the outcome. Bd. of Adjustment of San

Antonio v. Wende , 92

S.W.3d 424, 427 (Tex. 2002). In

Camarena v. Texas Employment Commission ,

754 S.W.2d 149, 151 (Tex. 1988),

we held that a dispute over attorneys fees is a live controversy. In that

declaratory judgment action, farm workers sued to challenge the

constitutionality of the Texas Unemployment Compensation Act’s (“TUCA”)

agricultural exemption. Id .

at 150. The trial court held that the act was unconstitutional but found that

sovereign immunity barred the farm workers’ request for attorney’s fees.

Id . Four months later, the

Legislature amended the TUCA, rectifying the offending provision.

Id . Consequently, the trial

court modified its judgment, holding that the amended act was constitutional and

enjoining the former act’s enforcement.

Id . The Texas Employment

Commission appealed, arguing that the amendment rendered the case moot.

Id . The farm workers

cross-appealed, contesting the denial of attorney’s fees.

Id . The court of appeals

held that the case was moot and that attorney’s fees were barred by sovereign

immunity. Id . at 150-151.

We disagreed, holding:

Clearly,

a controversy exists between the farm workers and

TEC. The "live" issue in controversy is

whether or not the farm workers have a legally cognizable interest in recovering

their attorney's fees and costs. The fact that the Legislature wisely undertook

action to bring the farm workers within the scope of TUCA does not moot or void

the workers' interest in obtaining attorneys fees and costs for the successful

disposition of their claim. Contrary to the court of appeals' suggestion, the

attorney's fees issue need not be severed in order to be considered; it is an

integral part of the farm workers' claim and as such breathes life into the

appeal. Due to the existence of the "live" issue of attorney's fees and costs,

we hold that the suit was not moot.

Id .

at 151.

Similarly,

Hallman’s remaining interest in obtaining attorney’s fees “breathes life” into

this appeal and prevents it from being moot. See id. The parties

correctly point out that in order to resolve the attorney’s fees dispute, we

must first determine whether Allstate had a duty to defend and indemnify under

the policy. In a declaratory judgment proceeding, the trial court has the

discretion to award “equitable and just” attorney’s fees. Tex . Civ . Prac . & Rem. Code § 37.009. Here, the

trial court, having found against Hallman on the coverage issue, also denied her

request for attorney’s fees. Because the court of appeals found that Hallman

prevailed on the coverage issue, it remanded the attorney’s fees question to the

trial court. 114 S.W.3d at 663-64 . Our decision in this case will resolve

whether Allstate had a duty to defend. The controversy is live because an

affirmative answer would necessitate a remand to the trial court to consider

whether an award of attorney’s fees is appropriate in light of the changed

status of prevailing parties. Accordingly, we will address the merits of this

coverage dispute.

III

Discussion

To

determine an insurer’s duty to defend, we look at the allegations in the

pleadings and the insurance policy’s language. Nat’l Union Fire Ins. Co. of

Pittsburgh ,

Pa. v. Merchs . Fast Motor Lines, Inc ., 939 S.W.2d 139, 141

(Tex. 1997); Heyden Newport Chem. Corp. v. S. Gen. Ins . Co., 387

S.W.2d 22, 24 (Tex. 1965). If the

pleadings do not allege facts within the scope of the policy’s coverage, an

insurer does not have a duty to defend. Am. Physicians Ins. Exch. v.

Garcia , 876 S.W.2d 842, 848

(Tex. 1994). However, in the event

of an ambiguity, we construe the pleadings liberally, resolving any doubt in

favor of coverage. Merchs . Fast Motor Lines,

Inc. , 939 S.W.2d at 141 ; Heyden Newport Chem.

Corp., 387 S.W.2d at 26 .

Under

the terms of the policy, Allstate has a duty to defend Hallman against a suit

alleging damages caused by an “occurrence.” However, the policy specifically

excludes from coverage: “bodily injury or property damage arising out of or in

connection with a business engaged in by an insured. But this exclusion does not

apply to activities which are ordinarily incidental to non-business pursuits.”

“Business” is defined as “ includ [ ing ] trade, profession or occupation.” Allstate argues that

Hallman’s claim is barred from coverage under this business pursuits

exclusion.

Although

the business pursuits exclusion is a fairly common provision of insurance

policies, we have never directly addressed its application. [2]

The parties and the court of appeals relied on the standard set forth by the San

Antonio Court of Appeals in United Services Automobile Ass’n v. Pennington , 810 S.W.2d 777, 778-80 (Tex.

App. B San

Antonio 1991 , writ denied), a case involving a business pursuits exclusion

provision substantially identical to the one here. The Pennington court,

after reviewing the dictionary definitions of “trade,” “profession,” and

“occupation,” as well as case law from other jurisdictions, defined the

“business pursuits” inquiry as involving two elements: “(1) continuity or

regularity of the activity, and (2) a profit motive, usually as a means of

livelihood, gainful employment, earning a living, procuring subsistence or

financial gain, a commercial transaction or engagement.”

Id . at 780 (citations

omitted). Regarding the second element, the court further noted: “The profit

need not be realized - the issue is the expectation or anticipation for profit

in the future - since often business ventures result in a loss.”

Id .

Most

jurisdictions follow similar versions of this two-part inquiry when construing

business pursuits exclusions. See , e.g., Sun Alliance Ins. Co. of

P.R., Inc. v. Soto , 836 F.2d 834, 836 (3d Cir. 1988); Stuart v. Am.

States Ins. Co. 953 P.2d 462, 465

(Wash. 1998); Frankenmuth Mut . Ins. Co. v. Kompus , 354

N.W.2d 303, 307-308 (Mich. Ct. App. 1984); see also

Lee R. Russ & Thomas F. Segalla, Couch on

Insurance § 128:13 (3d ed. 1997 & Supp. 2004). A few jurisdictions,

however, limit the exclusion’s application to those activities that constitute

an insured’s principal occupation. See, e.g., Brown v. Peninsular Fire Ins.

Co. , 320 S.E.2d 208, 209 (Ga. Ct. App. 1984); Asbury v. Ind. Union Mut . Ins. Co , 441 N.E.2d 232, 239 (Ind. Ct. App. 1982).

Because the policy’s definition of business as “including trade, profession or

occupation” encompasses more than an insured’s primary occupation, we conclude

that the majority approach more accurately describes the exclusion’s parameters.

Accordingly, we adopt the two-part standard articulated in

Pennington for determining whether a claim is excluded from coverage

under the business pursuits exclusion. See Pennington , 810 S.W.2d at 780 .

Applying

the Pennington standard, the court of appeals concluded that the

underlying petition did not allege continuity of activity because Hallman

entered into only one lease agreement, which was executed nearly ten years ago.

114 S.W.3d at 662 . The court further noted the petition’s failure to allege that

Hallman leased her property as a means of livelihood, or earning a living, or

that her principal business was leasing property. Id . Based on these

conclusions, the court of appeals held that the business pursuits exclusion did

not apply to Hallman’s claim. See id . at 662-63.

We

disagree. By narrowly limiting its focus to Hallman’s initial execution of the

lease, the court of appeals misconstrued the nature of commercial leasing

activity. The pleadings establish that the mining activity conducted on

Hallman’s property pursuant to the lease began in 1995, was ongoing at the time

the plaintiffs initiated their suit in 1996, and remained ongoing at the time

the plaintiffs filed their sixth amended petition in 2001. Although Hallman

executed only one lease, until that lease expires, she is perpetually engaged in

the continuous act of leasing her property to the mining company. Thus, the

limestone mining lease meets the continuity requirement of the business pursuits

exclusion.

Next,

we consider whether profit was Hallman’s motivation for leasing her property.

The court of appeals, noting that courts are limited to the language in the

pleadings and the policy when determining an insurer’s duty to defend, concluded

that the lease failed to meet the profit motive requirement. 114 S.W.3d at

662-63 . Admittedly, the pleadings do not contain any reference to Hallman’s

pecuniary interest in the lease, nor do they expound on her motive for leasing

her property. However, we conclude that, in this circumstance, a profit motive

can be inferred from the nature of the activity. One generally does not allow

limestone mining with dynamite blasting to occur on his or her property without

some expectation of remuneration or monetary gain. See

Lee R. Russ & Thomas F. Segalla, Couch on

Insurance § 128:13 (3d ed. 1997) (noting that courts look “particularly

to the nature of the activity” when determining if an activity constitutes a

business pursuit”); cf . In re San Juan Dupont Plaza Hotel Fire Litig ., 789 F. Supp. 1212, 1220 (D. P.R. 1992) (holding

that business pursuits exclusion defeated coverage because “[ i ] nvestment activities are

commercial ventures which, by their very nature, are entered into with the

intent to earn profit”); Vallas v.

Cincinnati Ins. Co. , 624 So.2d 568, 571 (Ala. 1993) (finding business

pursuits exclusion applicable and noting “we cannot say that the limited

partnership, which was formed to buy and sell investment real property for

capital gain, was not ‘an undertaking . . . for gain [or] profit’“); State

Farm Fire & Cas . Co. v. Drasin , 199 Cal. Rptr . 749,

750, 753 (Cal. Ct. App. 1984) (claims arising from partnership agreement to

acquire mining leases fell under business pursuits exclusion where “[t]he

purpose of acquiring the mining leases was to enjoy the production of income,

profits and write-offs incidental to the mining operations”).

Furthermore,

as numerous courts have recognized, the purpose of the business pursuits

exclusion is to lower homeowners insurance premiums by removing coverage for

activities that are not typically associated with the operation and maintenance

of one’s home. See, e.g., Buirkle v. Hanover Ins.

Cos. , 832 F.Supp . 469, 486-487 (D. Mass. 1993);

Kepner v. W. Fire Ins. Co., 509 P.2d

222, 223 (Ariz. 1973); LeBlanc v. Brossard , 396 So.2d 535, 536 (La. Ct.

App. 1981). Commercial limestone mining is not an activity typically associated

with owning and maintaining a home. Thus, the limestone mining lease at issue

here is exactly the type of commercial enterprise that the business pursuits

provision was designed to exclude.

We

hold that Hallman’s lease to Norton constituted a business pursuit and therefore

the allegations in the underlying litigation are excluded from coverage under

the policy.

IV

Conclusion

Therefore,

even if the allegations in the underlying lawsuit state an “occurrence,” — a

question we do not reach — we nevertheless conclude that the business pursuits

exclusion applies and bars coverage. Because the trial court reached the same

conclusion and denied Hallman’s request for fees, there is no need to remand

this case to the trial court for a determination of Hallman’s request for

attorney's fees. Accordingly, we reverse the court of appeals’ judgment and

render judgment for Allstate. See Tex . R. App. P 60.2(c).

______________________________

Wallace B.

Jefferson

Chief Justice

OPINION

DELIVERED : March 11,

2004

[1] Meridien Aggregates, Co.,

L.L.P. (“ Meridien ”) purchased Norton’s interest in

1999 and now operates the lease.

[2] We have, however, addressed the “activities incidental

to non-business pursuits” exception to the exclusion. See State Farm Fire

& Cas . Co. v. Reed , 873

S.W.2d 698, 698-701 ( Tex. 1993).