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Click here for the full text of this decision FACTS:Electronic Data Systems Corp. (EDS), a global technology services company that regularly provided computer and electronic services for the North Atlantic Treaty Organization, commenced doing business with someone who portrayed himself as “Col. West,” an official in charge of a covert NATO procurement project involving the purchase of sophisticated electronic equipment with expenditures of $80 billion to $100 billion. West engaged EDS to become general contractor of that endeavor. EDS invited Akai Musical Instrument Corp. and Pioneer New Media Technologies Inc. to bid on the project. Akai and Pioneer signed Test to Destruction Authorization Agreements and shipped property worth millions of dollars, supposedly to NATO representatives. After shipments over the course of three years, EDS, Akai and Pioneer learned that the operation was a fraud perpetrated by “Col. West” who was neither a military officer nor affiliated with NATO. The equipment shipped by Akai and Pioneer was not received or used by NATO personnel, but was used or sold by West for commercial purposes or his private gain. Akai sued EDS for negligent misrepresentations regarding the fraudulent scheme. Pioneer intervened. Ace Property and Casualty Co., as a successor insurer, insured EDS under two commercial general liability policies, which together spanned the time that products had been shipped by Akai and Pioneer. EDS called on Ace to provide a defense to the claims asserted against it by Akai and Pioneer. Ace refused, claiming that the alleged negligent misrepresentations were not “occurrences” under the commercial general liability policies. EDS eventually settled the suit, and its excess professional liability insurance carrier, Federal Insurance Company, paid the defense and indemnity costs in excess of EDS’s deductible. Asserting subrogation rights, Federal brought suit against Ace for declaratory relief and damages of more than $5 million because of Ace’s refusal to defend or cover the claims against EDS. The parties filed cross-motions for summary judgment. The district court ruled in Ace’s favor, concluding that property loss resulting from EDS’s alleged negligent misrepresentations did not constitute an “accident” and therefore was not an “occurrence” under the policies. Federal appealed the district court’s summary judgment in favor of Ace. HOLDING:Affirmed. The court states that the issue on appeal is whether Ace had a duty to defend or to indemnify EDS. Federal contends that a negligent misrepresentation constitutes an “occurrence,” defined by the policy as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The term “accident” is not otherwise defined in the policies. But the court determines that it need not resolve whether, under Texas law, negligent misrepresentations can ever constitute an “occurrence” because, under the facts of the case, none of EDS’s conduct nor any of its alleged omissions was an “accident” within the meaning of the policy. The court reasons that EDS fully intended and expected that the property shipped by Akai and Pioneer would never be returned to them. The fact that EDS was mistaken about the true use to which the property would be put and was unaware of the scam being perpetrated upon it when it made representations to Akai and Pioneer does not render EDS’s conduct an accident. The court points out that, according to the pleadings, EDS may not have known that the NATO project was a hoax, but EDS did expect that Akai’s and Pioneer’s products would never be returned. Because EDS intended Akai and Pioneer to ship sample products to NATO representatives, expecting that the products would never be returned, the court finds that the loss of those products was the natural and probable consequence of EDS’s representations. The court states that the allegation that EDS was negligent in failing to research or validate the legitimacy of the NATO project does not alter its analysis. Because the losses were an effect EDS did “intend to produce” and that EDS could “be charged with the design of producing,” the court holds that they were not caused by an “accident.” Therefore, the court concludes, there was no “occurrence” within the meaning of Ace’s policies. OPINION:Priscilla R. Owen, J.; Jolly, Dennis, and Owen, JJ.

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