Lynch Properties, Inc. v. Potomac Ins. Co. of Illinois

• Decision Date: 07 November 1996
• Docket Number: Civil Action No. 3:96-CV-0230-G.
• Citation: 962 F.Supp. 956
• Parties: LYNCH PROPERTIES, INC., Plaintiff, v. POTOMAC INSURANCE COMPANY OF ILLINOIS, Defendant.
• Court: U.S. District Court — Northern District of Texas

962 F.Supp. 956

LYNCH PROPERTIES, INC., Plaintiff, v. POTOMAC INSURANCE COMPANY OF ILLINOIS, Defendant.

Civil Action No. 3:96-CV-0230-G.

United States District Court, N.D. Texas, Dallas Division.

November 7, 1996.

COPYRIGHT MATERIAL OMITTED

Charles L. Perry, Arter Hadden Johnson & Bromberg, Dallas, for plaintiff.

Russell Joseph Bowman, Cozen & O'Connor, Dallas, for defendant.

MEMORANDUM ORDER

FISH, District Judge.

Before the court is the motion of the defendant Potomac Insurance Company of Illinois ("Potomac") for summary judgment. For the reasons stated below, the motion is granted.

I. BACKGROUND

This case involves a dispute over the extent of coverage under an employee fidelity policy issued by Potomac to plaintiff Lynch Properties, Inc. ("Lynch"). From February 22, 1994 through February 22, 1995, Potomac provided commercial property, liability, and crime coverage to Lynch under the terms of its insurance policy number TPP 1091956-02 ("the policy"). Defendant's Motion for Summary Judgment ("Motion"), Exhibit D at 1. The crime coverage portion of the policy provided Lynch with blanket employee dishonesty insurance. Id. at 1, 48-54. Lynch was the only named insured on the policy. Id. at 1, 48.

Lynch was in the business of owning and managing commercial real estate and investing in private companies. Sherri Pogue Deposition ("Pogue Depo.") at 7. However, Lynch also performed various accounting duties for the private funds of Martha H. Lynch ("Ms.Lynch"), the eighty-seven year-old mother of Lynch's president, Harry H. Lynch. Id. at 15, 29. These duties involved writing checks, reconciling bank statements, and preparing financial statements. Id. at 18. Ms. Lynch's funds were initially held in accounts at Cullen Frost Bank but were later moved to Comerica Bank. Id. at 16. Though Ms. Lynch invested in one of Lynch's entities, the personal funds for which Lynch provided accounting services did not derive from any Lynch property or investment. Id. at 28-29. No formal written agreement governed Lynch's handling of Ms. Lynch's funds, but Ms. Lynch did pay a fee for the accounting duties performed. Id. at 16, 21. This fee was part of a larger, $50,000 fee that Ms. Lynch paid yearly for Lynch to manage the investment she had in one of its entities. Id. at 45-46.

From mid-1991 through March, 1994, Eva Bartlett ("Bartlett"), one of the bookkeepers at Lynch, managed the multiple checking accounts containing Ms. Lynch's personal funds. Id. at 18-20. Aside from bookkeeping duties, Bartlett also handled requests from Ms. Lynch for the payment of bills or for spending money. Id. at 18, 21, 31. The checks for spending money required Bartlett to go to the bank, cash a check authorized by Ms. Lynch, Harry H. Lynch, or Ms. Lynch's other son Bill Lynch, and deliver the cash to a courier service for delivery to Ms. Lynch or her personal secretary. Id. at 21, 35-36.

Around the third week of September, 1994, one of the bookkeepers at Lynch discovered a discrepancy between a cancelled check and the entry for that check recorded in the general ledger of Ms. Lynch's personal accounts. Id. at 12. The bookkeeper then began to match each check booked into the ledger with the actual check written, id. at 14, and the investigation ultimately revealed that Bartlett had embezzled approximately $19,000 from Ms. Lynch's personal accounts. Id. at 12, 36-42; Motion at 2. No funds had been embezzled from any of the Lynch accounts managed by Bartlett, Pogue Depo. at 25-26, and Lynch transferred its own funds to replace those embezzled by Bartlett from Ms. Lynch's accounts. Sherri Pogue Affidavit at 1.

Based on the $19,000 loss, Lynch filed a claim with Potomac under the policy. All of the parties investigating the claim were uncertain as to whether the policy covered Lynch, and they sought legal advice in an effort to give Lynch the benefit of any doubt. Darrell Wayne Davis Deposition ("Davis Depo.") at 94-95. Potomac later denied the claim on the basis of several provisions and exclusions in the policy. Motion, Exhibit E, Letter Denying Coverage.

Lynch filed suit on March 22, 1995 to collect for its claimed loss under the policy. Plaintiff's Original Petition at 2. Lynch also included causes of action for breach of good faith and for relief under the Texas Deceptive Trade Practices Act and Insurance Code stemming from Potomac's denial of its claim. Id. at 3; Plaintiff's First Amended Original Petition at 3. After removing the case to this court, Potomac moved for summary judgment, arguing that the policy's terms unambiguously showed that it did not cover Lynch for liabilities resulting from Bartlett's conduct and that the genuine dispute over coverage precluded Lynch's recovery on its other causes of action. For the reasons stated below, Potomac's motion is granted.

II. ANALYSIS

At the outset, the court notes that this is a diversity case, and as a result, the court must apply Texas law. Erie R. Co. v. Tompkins, 304 U.S. 64, 78-79, 58 S.Ct. 817, 822-23, 82 L.Ed. 1188 (1938). Since — as Potomac points out — the precise policy terms at issue in this case have not been interpreted by any Texas court, Brief in Support of Defendant's Motion for Summary Judgment ("Brief") at 5, this court will look to general principles of Texas law regarding the interpretation of insurance contracts. In addition, after considering the opinions of other courts which have construed the disputed terms, this court must predict how the Texas Supreme Court would interpret these terms. Benante v. Allstate Insurance Company, 477 F.2d 553, 554 (5th Cir.1973) (where no state court has decided point in issue, federal court should male "educated guess" as to how that state's supreme court would rule).

A. Evidentiary Burdens on Motion for Summary Judgment

Summary judgment is proper when the pleadings and evidence on file show that no genuine issue exists as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c).¹ "[T]he substantive law will identify which facts are material." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). The movant makes such a showing by informing the court of the basis of its motion and by identifying the portions of the record which reveal there are no genuine material fact issues. See Celotex Corporation v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986). Once the movant makes this showing, the nonmovant must then direct the court's attention to evidence in the record sufficient to establish that there is a genuine issue of material fact for trial. Id. at 323-24, 106 S.Ct. at 2552-53. To carry this burden, the opponent must do more than simply show some metaphysical doubt as to the material facts. Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corporation, 475 U.S. 574, 586, 106 S.Ct. 1348, 1355-56, 89 L.Ed.2d 538 (1986). Instead, it must show that the evidence is sufficient to support a resolution of the factual issue in its favor. Anderson, 477 U.S. at 249, 106 S.Ct. at 2510-11. All of the evidence must be viewed, however, in a light most favorable to the motion's opponent. Id. at 255, 106 S.Ct. at 2513 (citing Adickes v. S.H. Kress & Co., 398 U.S. 144, 158-59, 90 S.Ct. 1598, 1609, 26 L.Ed.2d 142 (1970)). Summary judgment is properly entered against a party if after adequate time for discovery, it fails to establish the existence of an element essential to its case and as to which it will bear the burden of proof at trial. Celotex, supra, 477 U.S. at 322-23, 106 S.Ct. at 2552-53.

B. Insurance Policy Interpretation Under Texas Law

In National Union Fire Insurance Company of Pittsburgh, Pennsylvania v. CBI Industries, Inc., 907 S.W.2d 517 (Tex.1995), the Texas Supreme Court summarized the approach courts must take when interpreting insurance contracts. "Insurance policies are controlled by rules of interpretation and construction which are applicable to contracts generally." Id. at 520; see also Nutmeg Insurance Company v. Pro-Line Corporation, 836 F.Supp. 385, 388 (N.D.Tex.1993) (citing National Union Fire Ins. Co. of Pittsburgh, Pa. v. Hudson Energy Co., 811 S.W.2d 552, 555 (Tex.1991)). "The primary concern of a court in construing a written contract is to ascertain the true intent of the parties as expressed in the instrument." CBI Industries, 907 S.W.2d at 520. In determining the intent of the parties, the court construes the policy to give effect to each of its terms and to avoid rendering any term meaningless. Ideal Mutual Insurance Co. v. Last Days Evangelical Association, Inc., 783 F.2d 1234, 1238 (5th Cir.1986).

In construing a contract, the court must determine whether its meaning is ambiguous. "Whether a contract is ambiguous is a question of law for the court to decide by looking at the contract as a whole...." CBI Industries, 907 S.W.2d at 520; see also Brooks, Tarlton, Gilbert, Douglas, & Kressler v. United States Fire Insurance Company, 832 F.2d 1358, 1364 (5th Cir.1987). A written contract is ambiguous if its language "is subject to two or more reasonable inter-pretations" but is not ambiguous if it is "so worded that it can be given a definite or certain legal meaning." CBI Industries, 907 S.W.2d at 520. Mere disagreement between the parties about the correct interpretation of the term will not render the term ambiguous, nor will it transform the issue of law into an issue of fact. D.E. W., Inc. v. Local 93 Laborers' International Union of North America, 957 F.2d 196, 199 (5th Cir.1992).

Where a policy term is ambiguous, the court will construe that term in favor of the insured. Toops v. Gulf Coast Marine Inc., 72 F.3d 483, 486 (5th Cir.1996) (quoting Adams v. John Hancock Mutual Life Ins. Co., 797 F.Supp. 563, 567 (W.D.Tex.1992) [aff'd, 49 F.3d 728 (5th.Cir.1995) (table)]). In addition, when construing a policy term that excludes or limits coverage, the court must adopt any...