Baylor Health Care System v. Employers Reinsurance

• Citation: 492 F.3d 318
• Decision Date: 05 July 2007
• Docket Number: No. 06-10582.,06-10582.
• Parties: BAYLOR HEALTH CARE SYSTEM; Health Care Insurance Company of Texas Ltd., Individually and as Assignee of Church University Insurance Company Ltd., Plaintiffs-Appellants, v. EMPLOYERS REINSURANCE CORPORATION, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

492 F.3d 318

BAYLOR HEALTH CARE SYSTEM; Health Care Insurance Company of Texas Ltd., Individually and as Assignee of Church University Insurance Company Ltd., Plaintiffs-Appellants, v. EMPLOYERS REINSURANCE CORPORATION, Defendant-Appellee.

No. 06-10582.

United States Court of Appeals, Fifth Circuit.

July 5, 2007.

Kevin Lamar Sewell (argued), Walker Sewell, Dallas, TX, for Plaintiffs-Appellants.

Sherman Vance Wittie (argued), William Neil Rambin, Sedgwick, Detert, Moran & Arnold, Dallas, TX, for Defendant-Appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before HIGGINBOTHAM, WIENER, and CLEMENT, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

Plaintiff-Appellant Baylor Health Care System appeals from the district court's summary judgment dismissal of Baylor's declaratory judgment and breach of contract suit against Defendant-Appellee Employers Reinsurance Corporation ("ERC"). The court concluded that Baylor and ERC confected an accord and satisfaction of ERC's obligations under Baylor's liability policy when they agreed to fund the settlement of a tort claim against Baylor and performed according to the terms of that agreement. We reverse and remand.

I

Baylor was insured under a medical and professional liability policy issued by Church University Insurance Company, a "captive insurer," wholly owned by Baylor and insuring only the risks of Baylor and its affiliated companies.¹ The policy provided Baylor up to $25 million of coverage, in excess of a $3.5 million self-insured retention. ERC assumed Baylor's risk under the policy pursuant to a reinsurance certificate in which ERC agreed to (1) indemnify Baylor for all amounts above its self-insured retention paid to settle tort claims or satisfy judgments, and (2) reimburse Baylor for any defense costs attributable to losses covered by the Policy.

In April 2000, Kristi Hamilton sued Baylor in Texas state court, alleging that members of its nursing staff negligently caused her newborn son to suffer serious brain damage. In October 2001, Hamilton and Baylor attempted to mediate their dispute. At the mediation, Hamilton presented evidence indicating that Baylor's nurses may have been guilty of gross negligence or malice, which, if proven, could subject Baylor to punitive damages. ERC advised Baylor that (1) the Policy did not cover punitive damages, and (2) ERC would not be responsible for any increase in the settlement value of Hamilton's claim resulting from the threat of punitive damages. At the conclusion of the mediation, Hamilton issued a $12 million settlement demand with a 48-hour deadline for acceptance.

Following the mediation, Baylor and ERC continued to discuss Hamilton's settlement offer. They agreed that Hamilton's suit presented a risk of liability well in excess of $12 million and decided to accept Hamilton's offer. ERC insisted, however, that it would not be responsible for any settlement amounts attributable to the threat of punitive damages. Recognizing that resolving this punitive damage-related dispute likely would take longer than Hamilton's settlement deadline allowed, Baylor and ERC agreed to (1) devise an arrangement which would fund a settlement of Hamilton's claims for up to $12 million, and (2) resolve their apportionment issues in a post-settlement arbitration or mock jury procedure.

ERC initially proposed that, to fund the Hamilton settlement, (1) Baylor would pay its $3.5 million self-insured retention, (2) ERC would pay the next $5 million, and (3) Baylor would pay any amount over this $8.5 million combined contribution. Then, at a later date, ERC and Baylor would "try" the Hamilton case before an arbitration panel or mock jury, which would render a verdict and award damages. The outcome of the mock trial would provide the basis for the ultimate determination of how to allocate the settlement amount between Baylor and ERC.² Baylor indicated its general agreement with this proposal but rejected the specific apportionment methodology proposed by ERC.³

The next morning, Baylor's counsel sent an email message to ERC representatives containing the following provision:

Baylor and ERC have agreed this morning (10/12) that Baylor will contribute the first $500,000 toward a settlement in excess of $8.5 million, and if settlement exceeds $10 million, Baylor will contribute the first $500,000 over $10 million. So total Baylor exposure is $1 million in excess of $3.5 SIR [self-insured retention].

ERC will contribute all amounts towards a settlement up to $12 million, except for the Baylor SIR and $1 million [sic], subject to structure above. Please confirm it.

ERC's representative agreed by return email the same day, and, after some additional negotiation, the Hamilton lawsuit was settled for $10.8 million. ERC and Baylor contributed to the settlement as agreed: Baylor paid its $3.5 million self-insured retention, plus a $1 million contribution pursuant to the terms of the email agreement, and ERC paid the remaining $6.3 million. ERC also reimbursed Baylor 58.3% of its defense costs, a share proportional to its contribution to the total settlement amount.

Baylor later requested that ERC reimburse Baylor both the $1 million it contributed above its self-insured retention, and the defense costs attributable to that additional contribution. ERC refused, and Baylor filed suit in Texas state court for declaratory judgment and breach of contract. ERC removed the case to the district court, and both parties eventually filed motions for summary judgment. The court granted ERC's motion, holding that the parties' execution and performance of the Agreement amounted to an accord and satisfaction of any obligation ERC had under the Policy. Baylor appealed.

II

A

This court reviews the district court's grant of summary judgment de novo.⁴ Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law."⁵ In determining whether there is a genuine issue of material fact, all facts must be evaluated in the light most favorable to the non-moving party.⁶

B

Under Texas law, "[a]ccord and satisfaction, as a defense to a claim based upon a contract, exists when the parties have entered into a new contract, express or implied, which discharges the obligations under the original contract in a manner otherwise than as originally agreed."⁷ The "accord" is the new contract in which the parties mutually agree that one party will give and the other will accept something that is different from what each expected from the old contract.⁸ The "satisfaction" is the actual performance of the new agreement.⁹ Any claim arising out of a contract may be the subject matter of an accord and satisfaction, provided the contract is not illegal.¹⁰

A valid accord and satisfaction requires more than the mere payment or acceptance of money.¹¹ There must be an "unmistakable communication" establishing that performance according to the terms of the new agreement will satisfy the underlying obligation created by the original contract.¹² Such communication "must be plain, definite, certain, clear, full, explicit, not susceptible of any other interpretation, and accompanied by acts and declarations that [the parties are] sure to understand."¹³ Nevertheless, the new agreement need not explicitly state that it is intended to supersede the original contract.¹⁴ Rather, courts may look to the circumstances surrounding the execution of the new agreement to determine if there has been an agreement to discharge the original obligation.¹⁵ When the parties' intent is "resting in implication," however, the circumstantial evidence must "irresistibly point to the conclusion" that, in reaching a new agreement, the parties assented to a complete discharge of the original obligation.

The question presented in this case is whether the agreement comprised an "unmistakable communication" that it was intended to effect a complete discharge of all of ERC's obligations under the Policy, or whether the circumstances surrounding the execution of the agreement "irresistibly point" to the conclusion that the parties assented to a complete discharge of ERC's obligations under the Policy.

As noted above, the entirety of the Agreement is set forth in the following email communication from Baylor to ERC:

Baylor and ERC have agreed this morning (10/12) that Baylor will contribute the first $500,000 toward a settlement in excess of $8.5 million, and if settlement exceeds $10 million, Baylor will contribute the first $500,000 over $10 million. So total Baylor exposure is $1 million in excess of $3.5 SIR [self-insured retention].

ERC will contribute all amounts towards a settlement up to $12 million, except for the Baylor SIR and $1 million [sic], subject to structure above. Please confirm it.

In its summary judgment ruling, the district court reasoned that, because the email communication between ERC and Baylor was "a classic offer and acceptance, forming a contract," and because ERC "tendered a conforming check, which [Baylor] accepted," then "[t]he elements of accord and satisfaction are thus present."

The court made no threshold inquiry whether the agreement unequivocally manifested the parties' intent to discharge their obligations under the policy. In rejecting Baylor's contention that it had confected only an interim settlement-financing agreement, the court determined that the agreement was "a straightforward allocation of settlement responsibility" and ERC's performance constituted a "full satisfaction" of its obligation for the Hamilton settlement under the policy. Specifically, the court pointed to the agreement's provision that "total Baylor exposure is $1 million in excess of $3.5 [self-insured retention]" as a clear...