This appeal involves a claim for coverage brought by Snug Harbor, Ltd. (Snug Harbor) under a comprehensive general liability (CGL) insurance policy issued by Zurich Insurance Company (Zurich). Snug Harbor alleges that (1) Zurich's insured--First South Savings Corporation (First South)--mishandled a petition and citation which was to be served on Snug Harbor, thereby causing a default judgment to be entered against Snug Harbor in Texas state court, and (2) the mishandling of this citation and petition constitutes "property damage" for purposes of the CGL policy. Following trial, the district court entered judgment in favor of Snug Harbor in the amount of $2,230,000. We reverse and render judgment in favor of Zurich.

* On October 15, 1985, while at his home in a condominium project owned by Snug Harbor, Stephen Campbell was stabbed by a Snug Harbor employee. Seeking remedy for his injuries, Campbell brought suit in Texas state court in January 1986 against Snug Harbor, its general partner Claude Williams, and others connected with the property.

On the same day notice of Campbell's suit was allegedly1 served on Snug Harbor, First South--holder of a mortgage on the Snug Harbor property--held a foreclosure sale and took possession of the Snug Harbor premises. Snug Harbor asserts that, as a result of First South taking possession of its premises, it never received a copy of the Campbell petition and citation which, pursuant to Rule 106 of the Texas Rules of Civil Procedure, should have been left at "the defendant's usual place of business." Snug Harbor never responded to Campbell's suit, and a default judgment was entered against it on June 12, 1986 in the amount of $500,000 plus post-judgment interest.

In August 1987, Snug Harbor brought suit in Texas state court against (1) Zurich,2 (2) Essary, Hart & MacWilliams, Inc. (Essary),3 and (3) First South. Snug Harbor later amended its petition, limiting its action to claims for negligence and breach of fiduciary duty based on First South's failure to forward the Campbell petition and citation to Snug Harbor. In February 1990, First South made several demands on Zurich to assume its defense and pay the Campbell default judgment.4 Zurich formally refused to defend First South on April 13, 1990, asserting that (1) Snug Harbor did not suffer "property damage" within the meaning of the CGL policy; (2) even if Snug Harbor did suffer property damage under the policy, such damage was not caused by an occurrence within the policy period; and (3) any coverage otherwise applicable was excluded by the policy's "care, custody, and control" exclusion clause.

During these proceedings, First South was placed in conservatorship; the Federal Savings and Loan Insurance Corporation (FSLIC) was appointed conservator and the Federal Deposit Insurance Corporation (FDIC) was appointed manager. The FSLIC and the FDIC intervened as defendants, removed the case to federal court, and the Resolution Trust Corporation (RTC) replaced the FSLIC as conservator. Thereafter, the case was whittled down to the dispute now before us: The district court dismissed claims against the FDIC and RTC with prejudice, and Snug Harbor and Campbell settled with Essary for $807,000 and with First South for $700,000.5 Snug Harbor also took an assignment of First South's cross-claim against Zurich in which First South alleged that Zurich had breached a duty to defend in accordance with the CGL policy.

Following trial, the district court instructed the jury that Zurich had a duty to defend First South and asked the jury to determine whether Zurich's failure to defend was a bad faith breach of that duty. Finding that Zurich had acted in bad faith and with reckless disregard in failing to defend First South, the jury returned a verdict against Zurich and awarded First South $30,000 in attorney's fees and $1,500,000 in punitive damages.6 The district court entered judgment in accordance with the jury verdict, and Zurich filed a Motion for Judgment Notwithstanding the Verdict and Alternative Motion for New Trial--a motion the district court denied. Modifying its earlier judgment, the district court then entered judgment in favor of Snug Harbor and against Zurich for (1) $30,000 in attorney's fees, (2) $1,500,000 in exemplary damages, and (3) $700,000 in actual damages--the full amount of the First South settlement. Zurich appeals.

(a) the district court erred in submitting the issue of coverage to the jury;

(b) the district court erred in holding that Zurich had a duty to defend First South;

(c) the district court erred in failing to conclude that, as a matter of law, Zurich did not breach its duty of good faith and fair dealing; and

(d) the district court erred in awarding damages.

* Zurich contends that, as a matter of law, Snug Harbor's claim against First South was not covered by the Zurich-issued policy because (1) the only loss Snug Harbor could have suffered was loss of notice of the Campbell suit--a loss that does not constitute "property damage" for purposes of the Zurich policy, and, (2) even if this alleged misplacement of the Campbell citation and petition is construed as "property damage," it did not occur during the policy period. Therefore, Zurich asserts, the district court erred by submitting this question to the jury.

The question before us is one of contract interpretation. We review such questions de novo unless they arise from ambiguity in the language of the contract. See Carpenters Amended & Restated Health Benefit Fund v. Holleman, 751 F.2d 763, 766 (5th Cir.1985).7 Therefore, to the extent that the language within an insurance policy is coherent and the parties' intent is clear from that language, our standard of review is de novo. See Holleman, 751 F.2d at 766 ("As long as the contract as a whole is coherent, ambiguities can be resolved as a matter of law, without looking beyond the four corners of the document."). We find that the language within the Zurich-issued policy is unambiguous8 and, therefore, our standard of review is de novo. Id.

* The Zurich-issued policy provides CGL insurance coverage for property damage,9 which the policy defines as:

(1) physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or (2) loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period.10

Snug Harbor asserts that its loss of the use of the Campbell citation and petition constitutes such property damage. We disagree.

Whether the mishandling of a legal document leading to the entry of a default judgment constitutes "property damage" for CGL insurance purposes is a question of first impression.11 Nevertheless, the volumes of case law interpreting "property damage" provide us with guidance. See generally, 1A ROWLAND H. LONG, THE LAW OF LIABILITY INSURANCE (1992) § 10.05 (titled Bodily Injury or Property Damage ). Courts generally have interpreted property damage to require (1) actual damage to tangible property or (2) the loss of use of property with tangible monetary value.12 Courts have also held that purely economic losses--for example, loss of the use of money a claimant would have received but for the insured's negligence--do not constitute "the loss of use of tangible property."13

Snug Harbor--bearer of the burden of establishing that the claim against it falls within the coverage provided by the Zurich-issued policy14--relies upon Lay v. Aetna Ins., 599 S.W.2d 684 (Tex.Civ.App.--Austin 1980, writ ref'd n.r.e) (action brought against insurer for negligent location of oil well), as authority for its proposition that the Campbell petition constitutes lost tangible personal property under the CGL policy. Specifically, Snug Harbor relies upon the Lay court's statement that " '[t]angible property' is commonly understood to be property that is capable of being handled or touched." Id. at 686 (citations omitted). Our reading of Lay is much broader than this statement--that is, Snug Harbor overlooks the fact that the Lay court, after making this statement, went on to hold that purchase of an assignment of drilling rights and payment of attorney and surveyor fees do not constitute injury to, destruction of, or loss of use of tangible property. Id. The court held that, rather, "[t]he purchase of the assignment was an economic transaction involving the exchange of money for the privilege of drilling and producing oil." Id.

The Campbell petition and citation had no intrinsic value or use beyond notifying Snug Harbor that legal action had commenced against it. The substantive loss resulting from the alleged mishandling of this documentation is loss of that notice, which resulted in a default judgment.15 We find that, as a matter of law, such a loss does not constitute a property loss for CGL policy purposes.162

Zurich also asserts that there was no occurrence17 during the policy period because the alleged misplacement of the Campbell petition and citation occurred two weeks before First South added itself to the Zurich-issued policy and did not become apparent until after default judgment was entered on June 12, 1986--over two months after First South canceled the Zurich policy. We agree.

Texas courts have concluded that the time of an occurrence is when a claimant sustains actual damage--not necessarily when the act or omission causing that damage is committed. See, e.g., Dorchester Dev. Corp. v. Safeco Ins., 737 S.W.2d 380, 383 (Tex.App.--Dallas 1987, no writ).18 This is an approach adopted by the majority of courts. See, e.g., Blue Streak Indus. v. N.L. Indus., 650 F. Supp. 733, 736 (E.D.La.1986) (fact that accident may be gradual process does not provide coverage under CGL policy if results of accident occur after policy has expired); see generally, APPLEMAN, supra, at § 4491.01 ("[T]he time of the occurrence of the accident within an indemnity policy is generally not considered to be the time the wrongful act was committed but the time when the complaining party was actually damaged.") (footnote and citations omitted). Although Snug Harbor's alleged loss of use of the Campbell citation and petition occurred during the policy period, the manifestation of that alleged loss did not.19

We have found that (1) the alleged misplacement of the Campbell petition does not constitute a property loss for the purposes of the Zurich-issued CGL policy and, (2) even if we were to construe it as such, it does not constitute an occurrence during the policy period.20 Therefore, we conclude that, as a matter of law, Snug Harbor's claim against First South was not covered by the Zurich-issued policy--that is, no conflicting inferences can be drawn from the evidence and no reasonable person could have found that the Zurich-issued policy covered Snug Harbor's claim.21 Accordingly, we find that the district court erred in submitting this issue to the jury.

Zurich also contends that the district court erred in holding that it had a duty to defend First South. We agree.

An insurer's duty to defend is expansive--that is, "[i]f any allegation in the complaint is even potentially covered by the policy[,] then the insurer has a duty to defend its insured." Enserch Corp. v. Shand Morahan & Co., 952 F.2d 1485, 1492 (5th Cir.1992) (emphasis added); cf. Old Republic Ins. v. Comprehensive Health Care, 786 F. Supp. 629, 631 (N.D.Tex.1992) ("Texas rules of interpretation construe insurance policies in favor of the insured.") (citations omitted). Nevertheless, this duty is not limitless: Although the outer boundary of a policy's potential coverage may be expansive, an insurer's duty to defend ceases there. See Old Republic, 786 F. Supp. at 631, 632-33 (holding that insurers had no duty to defend where claims were based upon alleged intentional acts that did not constitute "occurrences"); Fidelity & Guar. Ins. Underwriters v. McManus, 633 S.W.2d 787, 788 (Tex.1982);22 Thornhill v. Houston Gen. Lloyds, 802 S.W.2d 127, 130 (Tex.App.--Fort Worth 1991, no writ) (holding that insurer had no duty to defend suit against insureds alleging negligence in sale of intoxicating liquor where policy language excluded such coverage); T.C. Bateson Const. v. Lumbermens Mut. Cas., 784 S.W.2d 692, 700 (Tex.App.--Houston [14th Dist.] 1989, writ denied) ("The allegations in the petition are not at issue here, and having found no ambiguity in the provisions of the policy, we find no duty to defend.").23

In determining whether an insurer had a duty to defend, we look to the face of the pleadings.24 "The insurer is under a legal duty to defend if, and only if, the petition alleges facts construing a cause of action within the coverage of the policy." Maryland Cas. v. Mitchell, 322 F.2d 37, 39 (5th Cir.1963) (footnote omitted).25 We have concluded that the allegations in Snug Harbor's Second Amended Complaint26 constitute neither property damage nor an occurrence during the Zurich policy period.27 Although Zurich's duty to defend is greater than its duty to indemnify,28 we find that Snug Harbor's claim falls well over the fence encircling potential liability under the Zurich-issued policy. We conclude, therefore, that Zurich had no duty to defend First South.

According to Zurich, the district court erred in concluding that Zurich breached a duty of good faith and fair dealing by refusing to defend First South. We agree.

A finding of bad faith cannot be premised solely on the breach of a contractual duty, such as the duty to defend. See United Servs. Auto. Ass'n v. Pennington, 810 S.W.2d 777, 783 (Tex.App.--San Antonio 1991, writ denied) (breach of implied covenant of good faith and fair dealing must be based on breach of legal duty, such as negligent handling of claim, the existence of which is independent of the contract between the parties); see also Employers Nat'l Ins. v. Zurich Am. Ins., 792 F.2d 517, 520-21 (5th Cir.1986) (where court applied Texas law, setting aside finding of bad faith premised on wrongful refusal to defend) (noting that Texas courts would follow majority rule that mere failure to defend will not support bad faith finding). Moreover, "delays or refusal to pay are not unreasonable where there is a legitimate question of policy construction." National Union Fire Ins. v. Hudson Energy, 780 S.W.2d 417, 427 (Tex.App.--Texarkana 1989), aff'd, 811 S.W.2d 552 (Tex.1991); see also Plattenburg v. Allstate Ins., 918 F.2d 562, 563-64 (5th Cir.1990) (where evidence shows justifiable reason existed for action of insurer, action cannot, as matter of law, constitute bad faith). Because Snug Harbor's claim of bad faith is an appendage to its assertion that Zurich breached a contractual duty to defend29--a duty we have found to be nonexistent,30 we find that it is without merit.31

Finally, Zurich challenges the district court's judgment against it in the amount of $2,230,000--a judgment consisting of $30,000 in attorney's fees, $1,500,000 in exemplary damages, and $700,000 to fully cover the First South settlement with Snug Harbor. Because we have found that, as a matter of law, Snug Harbor's claim against First South was not covered by the Zurich-issued insurance policy and that Zurich had no duty to defend First South, we conclude that the district court's award against Zurich is unsupported.

For the foregoing reasons, we REVERSE the district court's judgment in favor of Snug Harbor and RENDER JUDGMENT in favor of Zurich.

KENT, District Judge, concurring in part and dissenting in part.

I agree with the majority that the trial court erred in concluding that Zurich breached its duty of good faith and fair dealing by refusing to defend First South. Otherwise, I would affirm the trial court in all respects, and I must therefore respectfully dissent.

My departure from the majority begins with the order of consideration of the two remaining issues. The majority first concludes that Snug Harbor's claim against First South was not covered by the policy, and then easily concludes that Zurich had no duty to defend First South. In other words, because the majority now concludes, after the fact, that Snug Harbor's claim was not covered, it also concludes that Zurich's refusal to defend was reasonable, given the information available to Zurich at the time it made this decision.

This approach begs the question. Obviously, at the time Zurich decided not to defend First South, Zurich did not have the benefit of this decision. Moreover, as the issue of whether the mishandling of a legal document constitutes "property damage" under a CGL policy is one of first impression, there was little if any case law available to guide Zurich's decision.1

Under Texas law, an insurer's duty to defend its insured is much broader than its duty to indemnify. While the insurer is bound to pay only those claims that are in fact covered by the policy, it must defend its insured against all claims that are potentially covered. Enserch Corp. v. Shand Morahan & Co., 952 F.2d 1485, 1492-93 (5th Cir.1992). Moreover, an insurer will not be held liable for denying coverage if its denial was based on a reasonable and legitimate, although erroneous, construction of the policy,2 but it will be held liable for the breach of its duty to defend unless it can demonstrate that, after resolving all doubts in favor of the insured, a reasonable person could have concluded that there was a reasonable basis to refuse to defend the claim. Enserch Corp., 952 F.2d at 1492. Applying these standards to the facts of the instant case, I conclude that Snug Harbor's claim was at least potentially covered by the Zurich policy.

More than forty years after the invention of the computer, the notion that information alone may constitute property is no longer a novel one. Indeed, at oral argument, Zurich agreed that the loss of a computer disc could constitute property damage for purposes of a CGL policy. Zurich's counsel asserted, however, that the loss of a computer disc or a document would only constitute property damage if the information contained therein has some uniform market value that is the same for all individuals--such as a trade secret. The majority apparently agrees stating that

[t]he Campbell petition and citation had no intrinsic value or use beyond notifying Snug Harbor that legal action had commenced against it. The substantive loss resulting from the alleged mishandling of this documentation is loss of that notice, which resulted in a default judgment. We find that, as a matter of law, such a loss does not constitute a "property loss" for CGL policy purposes.

While there is much to be said for this argument, I am not entirely persuaded. In my view an argument can be made that, in a particular case, the loss of a document may constitute property damage if the information contained in that document had some identifiable value to the document's owner or intended recipient, even though the information contained in the document has no market value.

Arguably there is little difference between a person who is deprived of a document containing a trade secret or the like and a person who is deprived of a document containing information which is valuable to him given his particular circumstances, although it may be of little value to others. For example, the purchaser of a machine may receive a document that explains how to start and operate the machine. This information may be of little interest to those who do not own such machines and may not have a market value--the information may be available in library books and the manufacturer may be willing to provide a duplicate copy at no charge if the original is lost. If the machine's owner is deprived of the document while out on a job site far from libraries and FAX machines, however, he will certainly suffer a loss, and, to my mind at least, it is difficult to distinguish this loss from the loss suffered by one who loses a document containing a trade secret or the like. Certainly a market exists for trade secrets, while one does not for the document in the hypothetical; but this is not, to my mind, a meaningful distinction. In both instances, the owner has been deprived of valuable information. The fact that no market exists for the information lost by the machine owner in no way lessens or diminishes his loss. Nor does the existence of a market for trade secrets somehow transmogrify the document containing the trade secret into property: while no market exists for the machine owner's document, he would probably be willing to pay a great deal for its return in the circumstances hypothesized above.

Similarly there is arguably little difference between the petition and citation in this case and those types of documents the loss of which everyone agrees would constitute property damage under a CGL policy. Although information contained in a petition and citation may be of little value to one who is not a party to the lawsuit, it is normally quite valuable to the party that has been sued. If the party filing a lawsuit were not required by law to notify the party being sued, surely those entities that are sued repeatedly would be willing to pay some private firm to gather and disseminate this information.

All this is not to say that the majority's conclusion that Snug Harbor's loss was not covered by the policy is not correct. However, the question is whether, at the time Zurich declined to defend First South, First South's claim was potentially covered by the policy. In my view, the arguments the majority uses to support its conclusions that Zurich had no duty of coverage only serve to highlight the fact that First South's claim was at least potentially covered by the policy.

Similarly, although I find the majority's arguments persuasive, I must also respectfully dissent from the majority's conclusion that Snug Harbor's loss was not covered by the Zurich policy. Although this issue is governed by Texas law, the question has never been addressed by any Texas court. Moreover, there is no suggestion that any improper evidence was received or that Plaintiff-Appellee's counsel engaged in improper jury argument or other untoward conduct. Under such circumstances, I do not think an appellate court should be so willing to set aside the hard work of this seasoned and thoughtful trial court on the ground that no reasonable jury could have reached the conclusion that a jury did, in fact, reach. This is especially true where, as here, the appellate decision does not settle or clarify a broad issue of law. In my view, today's decision is a narrow one: unless and until the Texas Supreme Court says otherwise, the loss of a document such as a petition and citation will not constitute property damage under a CGL policy. Beyond this, I do not think that this decision settles or clarifies any significant aspect of insurance law. Rather, I think that this decision will only serve to encourage insurers not only to deny coverage but also to refuse to defend their insureds even in the face of potential liability and an absolute dearth of legal authority supporting such refusals.

In my view, with the exception of the submission of the bad faith issue to the jury,3 the trial judge and jury did an excellent job under difficult and trying circumstances. Despite an absence of authority for such a result, the majority chooses to disregard the work of a remarkably conscientious trial court and to substitute its own judgment. Therefore, save and except for the bad faith issue, I would affirm the trial court in all respects, and I must therefore respectfully dissent.