Canutillo Independent School Dist. v. National Union Fire Ins. Co. of Pittsburgh, Pa.

• Decision Date: 13 November 1996
• Docket Number: No. 95-50924,95-50924
• Citation: 99 F.3d 695
• Parties: 113 Ed. Law Rep. 1108 CANUTILLO INDEPENDENT SCHOOL DISTRICT, Plaintiff-Appellee, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 695

99 F.3d 695

113 Ed. Law Rep. 1108

CANUTILLO INDEPENDENT SCHOOL DISTRICT, Plaintiff-Appellee, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA Defendant-Appellant.

No. 95-50924.

United States Court of Appeals Fifth Circuit.

Nov. 13, 1996.

E. Link Beck, John P. Mobbs, Beck & Associates, El Paso, TX, for plaintiff-appellee,

Paul D. Schoonover, James Alexander McCorquodale, Vial, Hamilton, Koch & Knox, Dallas, TX, Fred Lawrence Shuchart, Hirsch, Robinson, Sheiness & Glover, Houston, TX, Patrick A. Groves, El Paso, TX, Jimmy Preston Wrotenbery, Magenheim, Bateman, Robinson, Wrotenberry & Helfand, Houston, TX, for defendant-appellant.

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

Before JONES, DUHE and EMILIO M. GARZA, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

National Union Fire Insurance Company ("National Union") sought a declaratory judgment that it had no duty under a contract of insurance to defend or indemnify Canutillo Independent School District ("Canutillo") against certain claims brought by third parties. Canutillo counterclaimed for breach of those duties, breach of the duty of good faith and fair dealing, gross negligence, and violations of the Texas Insurance Code and the Texas Deceptive Trade Practices Act ("DTPA"). After realigning the parties, the district court granted partial summary judgment in favor of Canutillo on the duties to defend and indemnify, and a jury awarded damages in favor of Canutillo on the remaining claims. National Union now appeals. We reverse both the district court's grant of summary judgment and the jury award and render judgment in favor of National Union.

I

Canutillo purchased a School Leaders Errors and Omissions Policy ("Policy") from National Union. Under the Policy, National Union agreed to indemnify Canutillo for damages resulting from certain legal claims against it and to defend any action or suit against Canutillo covered by the Policy.

In 1991, the parents of five second-grade girls alleged that their children had been sexually abused by Tony Perales ("Perales"), a health and physical education teacher at Canutillo Elementary School. Perales was later tried and convicted for his offenses. The fact of Perales's sexual molestation is undisputed in this appeal.

Canutillo notified National Union of the abuse and requested that it defend Canutillo against any potential lawsuits by the families of the victims. Prior to the onset of litigation, the families offered to settle all claims against Canutillo for $30,000 per family, or a total of $150,000. Canutillo rejected the settlement, and the families filed suit against the school district in the Western District of Texas asserting claims under state law and 42 U.S.C. § 1983. The lawsuit was styled Mendoza v. Canutillo I.S.D., Civil Action No. EP-91-CA-322 (W.D.Tex.) ("Mendoza "). Canutillo then contacted National Union and again demanded that National Union defend it under the Policy. National Union, however, denied coverage and refused to assume representation, expressly relying on the Policy's exclusions for claims arising out of criminal conduct, assault, battery, and bodily injury.

National Union consulted attorney James L. Gallagher ("Gallagher") for an expert opinion as to whether the Policy covered the Mendoza claims. Gallagher concluded that National Union did not have a duty to defend Canutillo under the Policy and recommended that National Union file a declaratory judgment action. Rather than file such an action immediately, however, National Union offered to defend Canutillo, provided that Canutillo waive any bad faith claims against it. Canutillo, however, declined the offer and proceeded to defend the litigation without National Union's representation.

The Mendoza plaintiffs twice amended their complaint during the course of the litigation. The second amended complaint abandoned the state law tort claims and the § 1983 claim against Canutillo, asserted a § 1983 claim against Perales, and sought damages as well as declaratory and injunctive relief against Canutillo under Title IX of the Education Amendments of 1972, 20 U.S.C. §§ 1681-1688. ¹ Given the substantial differences between the first and second amended complaints, National Union again consulted Gallagher concerning its duties and liabilities under the Policy. Gallagher concluded that while the Policy did not cover suits for money damages arising out of Perales's sexual abuse, National Union had a duty to defend Canutillo on the basis of the nonpecuniary claims asserted under Title IX. ² National Union therefore assumed Canutillo's defense for the remainder of the litigation, but reserved its right to seek a declaratory judgment with respect to its duty to indemnify Canutillo.

Canutillo settled the Mendoza claims on the eve of trial for a total of $1,040,000. Canutillo paid $40,000 in partial satisfaction of the judgment, and National Union purchased the remainder of the judgment from the Mendoza plaintiffs for $1 million. National Union thus stepped into the shoes of the Mendoza plaintiffs and became a judgment creditor of Canutillo. The settlement agreement conditioned National Union's right to recover the $1 million paid in purchase of the judgment on the outcome of a subsequent declaratory judgment action.

National Union exercised its right under the settlement agreement and filed a declaratory judgment action against Canutillo. Canutillo counterclaimed seeking (1) a judgment declaring that the Policy covers the Mendoza claims; (2) contract damages, including both the costs of defending the Mendoza claims before National Union assumed Canutillo's defense and the $40,000 paid in partial satisfaction of the settlement; and (3) money damages for National Union's alleged breach of the duty of good faith and fair dealing and violations of the DTPA and article 21.21 of the Texas Insurance Code. The district court realigned the parties, casting Canutillo as plaintiff and National Union as defendant.

Both parties moved for summary judgment on the issues of whether National Union had a duty to defend Canutillo prior to the filing of the second amended complaint and whether National Union had a duty to indemnify the school district for damages paid in settlement of the action. One week before trial, the district court, without opinion, entered partial summary judgment in favor of Canutillo on both issues.

The case therefore proceeded to trial on the remaining issues of contract damages, alleged breaches of the duty of good faith and fair dealing, and for violations of the Insurance Code and the DTPA. The jury found against National Union on every issue and found that the insurer had acted with gross negligence in refusing to represent to the school district. The jury awarded actual damages of $33,162 for Canutillo's defense costs, $40,000 for its share of the Mendoza settlement, and more than $7 million in punitive damages.

After the verdict, National Union moved for reconsideration of the district court's summary judgment rulings. The court withdrew its earlier orders and issued an opinion that again granted summary judgment in Canutillo's favor on the duty-to-defend issue. Noting that the duty to indemnify, unlike the duty to defend, is determined by the actual facts that underlie and result in liability, the court reopened the record and ordered the parties to submit further evidence and briefing. After consideration of the parties' submissions, the court issued a second opinion granting summary judgment in favor of Canutillo on the issue of National Union's duty to indemnify. Canutillo Indep. School Dist. v. National Union Fire Ins. Co., 900 F.Supp. 844 (W.D.Tex.1995). The court then entered judgment in favor of Canutillo for $7,173,791.51, plus attorneys' fees. National Union filed motions for judgment as a matter of law and for a new trial, both of which the court denied. National Union now appeals.

II

National Union first contends that the district court improperly granted Canutillo's motions for partial summary judgment on the duty to defend and the duty to indemnify.

A

We review a grant of summary judgment de novo. Hanks v. Transcontinental Gas Pipe Line Corp., 953 F.2d 996, 997 (5th Cir.1993). The district court's interpretation of an insurance contract is a question of law that we also review de novo. Principal Health Care of La., Inc. v. Lewer Agency, Inc., 38 F.3d 240, 242 (5th Cir.1994); F.D.I.C. v. Mijalis, 15 F.3d 1314, 1319 (5th Cir.1994).

Texas rules of contract interpretation control in this diversity case. See Amica Mut. Ins. Co. v. Moak, 55 F.3d 1093, 1095 (5th Cir.1995); Matter of Haber Oil Co., Inc., 12 F.3d 426, 443 (5th Cir.1994); TEX.INS.CODE ANN. art. 21.42 (West 1981). Under Texas law, the interpretation of insurance contracts is governed by the same rules that apply to contracts generally. Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 133 (Tex.1994). The terms used in an insurance policy are to be given their ordinary and generally accepted meaning, unless the policy shows that the words were meant in a technical or different sense. Security Mut. Cas. Co. v. Johnson, 584 S.W.2d 703, 704 (Tex.1979). The contract is to be considered as a whole, with each part given effect and meaning. Forbau, 876 S.W.2d at 133.

When considering the propriety of a grant of summary judgment in a case involving the construction of an insurance policy, we must determine whether the applicable terms of the policy are ambiguous. Yancey v. Floyd West & Co., 755 S.W.2d 914, 917 (Tex.App.--Fort Worth 1988, writ denied). The determination of ambiguity is a question of law; "it is only through resolution of ambiguities through the resort to extrinsic evidence which creates a question of fact." Brooks, Tarlton, Gilbert, Douglas & Kressler v. United States Fire Ins. Co., 832 F.2d 1358, 1364 (5th Cir.1987). A contract is ambiguous if it is reasonably susceptible of two...