J.E.M. v. Fidelity & Cas. Co. of New York

• Decision Date: 01 August 1996
• Docket Number: No. 01-95-01127-CV,01-95-01127-CV
• Citation: 928 S.W.2d 668
• Parties: J.E.M. and S.J.B., Individually and as next friend of J.B., Jr., A Minor, Appellants, v. FIDELITY & CASUALTY COMPANY OF NEW YORK, Appellee. (1st Dist.)
• Court: Texas Court of Appeals

Page 668

928 S.W.2d 668

J.E.M. and S.J.B., Individually and as next friend of J.B., Jr., A Minor, Appellants, v. FIDELITY & CASUALTY COMPANY OF NEW YORK, Appellee.

No. 01-95-01127-CV.

Court of Appeals of Texas,

Houston (1st Dist.).

Aug. 1, 1996.

Kenneth W. Lewis, Brett S. Thomas, Beaumont, for Appellants.

Susan C. Stevenson, Houston, for Appellee.

Before COHEN, WILSON and O'CONNOR, JJ.

OPINION

O'CONNOR, Justice.

This is an appeal from a summary judgment rendered in favor of Fidelity & Casualty Company of New York (Fidelity). Fidelity filed a declaratory judgment action to determine its duty to defend James B. and Barbara B. (the defendants) in the underlying tort lawsuit filed by J.E.M. and S.J.B. (the plaintiffs) below. The trial court granted summary judgment declaring that the defendants' homeowner policy provided no coverage for J.E.M. and S.J.B.'s claims and that Fidelity had no duty to defend the defendant in the underlying lawsuit.

In September 1990, Fidelity issued a standard homeowner's policy to the defendants. The policy included coverage for personal liability, but excluded coverage for bodily injury or property damage caused intentionally by or at the direction of the insured or to sickness or disease transmitted through sexual contact. ¹

In October 1992, J.E.M. and S.J.B. sued the defendants. ² The petition alleges that James B. sexually abused his stepdaughter, J.E.M., in 1977, 1978, and 1979. The petition also alleges that James B. sexually abused his step-grandson, J.B., Jr., during December 1990, and that the sexual abuse was "either intentional torts or the result of uncontrolled sexual urges brought about by an underlying psychosexual disorder." The petition states that James B. "was negligent in failing to inform other responsible adults of his conduct, in failing to seek professional held, and in continuing to allow himself to be alone with his stepdaughter and step-grandson."

The defendants demanded Fidelity provide them a defense in the sexual abuse lawsuit according to the terms of their homeowner's policy. By letter dated November 9, 1992, Fidelity agreed to defend them under a reservation of rights.

In April, 1994, another of the defendants' insurers filed a declaratory judgment action to construe the terms of its policy. Fidelity intervened and J.E.M. and S.J.B. were added to that suit. Fidelity moved for summary judgment, which the trial court granted, declaring (1) that the policy provided no coverage to the defendants for J.E.M.'s and S.J.B.'s claims, and (2) that Fidelity had no duty to defend them. In eight points of error, J.E.M. and S.J.B. contend the trial court erred by granting Fidelity's motion for summary judgment.

Summary judgment is proper only when a movant establishes there is no genuine issue of material fact and the movant is entitled to judgment as a matter of law. Randall's Food Mkts., Inc. v. Johnson, 891 S.W.2d 640, 644 (Tex.1995); Bangert v. Baylor College of Medicine, 881 S.W.2d 564, 566 (Tex.App.--Houston [1st Dist.] 1994, writ denied).

1. Justiciability of duty to defend issue

In point of error one, the plaintiffs argue that the summary judgment was improper because the issue of whether Fidelity owed a duty to defend the defendant was not a justiciable issue. Unless there is a justiciable issue, the trial court does not have subject matter jurisdiction under the Declaratory Judgment Act. TEX. CIV. PRAC. & REM.CODE §§ 37.002-37.011 (1996).

An interested party under a written contract whose rights and legal relations are at issue may ask the court to resolve questions of construction or validity arising under the contract. TEX. CIV. PRAC. & REM.CODE § 37.004(a); Sanford v. Liberty Mut. Fire Ins. Co., 845 S.W.2d 354, 357 (Tex.App.--Houston [1st Dist.] 1992), writ denied, 879 S.W.2d 9 (Tex.1994). Whether an insurer has a duty to defend presents a justiciable question suitable for a declaratory judgment action. Firemen's Ins. Co. v. Burch, 442 S.W.2d 331, 332 (Tex.1968); Sanford, 845 S.W.2d at 357.

The plaintiffs argue, without authority, that before a justiciable issue is presented, the insurer must first deny coverage and refuse to defend unconditionally. We disagree. The purpose of a declaratory judgment is to obtain a clarification of one's rights. Frost v. Sun Oil Co., 560 S.W.2d 467, 473 (Tex.Civ.App.--Houston [1st Dist.] 1977, no writ). It is preventative in nature and is intended as a means for determining the rights of parties when a controversy has arisen, even before any wrong has actually been committed. Donald v. Carr, 407 S.W.2d 288, 292 (Tex.Civ.App.--Dallas 1966, no writ). The purpose of the Declaratory Judgment Act would be defeated if we were to require Fidelity to take a position on coverage, and possibly breach its contract, before filing a declaratory judgment action seeking a construction of that contract.

The issue of whether Fidelity owed the defendants a duty to defend was a justiciable issue. We overrule point of error one.

2. Justiciability of duty to indemnify

In a related point, the plaintiffs argue that the issue of whether Fidelity owed a duty to indemnify the defendant was premature, thus not a justiciable issue. We agree. The trial court has no jurisdiction to declare the insurer's liability to indemnify its insured for damages that might be assessed against the insured in a pending lawsuit. Burch, 442 S.W.2d at 333-35. Any determination of an insurer's duty to pay would be hypothetical before judgment is granted against the insured, and the court's opinion would be purely advisory. Id.

Fidelity argues this case is distinguishable from Burch because it presented evidence to the trial court that it had tendered its entire policy limits to settle the plaintiffs' claims against Barbara B. Thus, Fidelity argues that the issue is whether it owed a duty to further indemnify James B. in light of the fact that the policy limits had been exhausted by settling the claims against Barbara B. Fidelity contends that under these circumstances, the issue of its duty to indemnify James B. would be ripe because it would not be contingent on proof of the evidence adduced in the underlying lawsuit, but would only require proof that the policy had been exhausted.

While this argument may have merit, it was not properly presented to the trial court. Fidelity presented evidence that it had exhausted its policy limits in its reply to the plaintiffs' response to its motion for summary judgment. Fidelity filed its reply, with the evidence of settlement, on the day of the summary judgment hearing. Summary judgment evidence may be filed late only with leave of court. Benchmark Bank v. Crowder, 919 S.W.2d 657, 663 (Tex.1996). Therefore, this evidence will not be considered as being before the trial court. Id.

In the absence of any summary judgment evidence showing that the policy was exhausted prior to trial, we must conclude that the rule of law in Burch applies. Because the underlying tort suit had not yet reached a verdict at the time the summary judgment was entered, the issue was not yet justiciable. We sustain point of error four and reform the judgment to delete the declaration that Fidelity has no duty to pay any judgment which may be rendered in the underlying lawsuit.

3. Sufficiency of reservation of rights letter

In points of error two and three, the plaintiffs contend Fidelity waived its right to contest coverage because its reservation of rights letter was ambiguous. Waiver or estoppel may preclude an insurer from forfeiting a policy because of the insured's failure to comply with a term of the policy, but these doctrines do not normally operate to preclude the insurer's "no coverage" defense. Texas Farmers Ins. Co. v. McGuire, 744 S.W.2d 601, 602-603 (Tex.1988). However, if an insurer assumes the insured's defense without obtaining a non-waiver agreement or a reservation of rights, and the insurer has knowledge of facts indicating noncoverage, the insurer waives all defenses, including the defense of "no coverage." Farmers Texas County Mut. Ins. Co. v. Wilkinson, 601 S.W.2d 520, 521-22 (Tex.Civ.App.--Austin 1980, writ ref'd n.r.e.).

The plaintiffs argue that Fidelity's reservation of rights letter was insufficient to preserve its "no coverage" defense. The reservation of rights letter that was sent by Fidelity's adjuster to the defendant provided:

As you know per our discussion of November 5, 1992, we represent Fidelity & Casualty Company, the insurance carrier for [the defendants] under the above captioned policy. You may also be aware that we have been asked to investigate and defend a claim involving the above captioned. The purpose of this letter is to inform you with respect to its investigation of this matter, or any claims arising out of it, the negotiation or settlement of any claims, or in the undertaking of the defense of the lawsuit, Fidelity & Casualty reserves the right to assert any and all defenses it may have as to the claims alleged against you.

According to the Plaintiff's Original Petition sexual offenses against the plaintiff [J.E.M.] are believed to have occurred one or more times in 1977, 1978, and 1979. Your policy of insurance with Fidelity & Casualty Company, as stated above, was from 9/5/90 to 9/5/91. Consequently, you would have no insurance coverage for any of the allegations regarding [J.E.M.] because the allegations occurred outside of your policy effective dates. We would instruct you to immediately place Farmers Insurance Company on notice of this claim as those policies were in effect during that time. They will need to become involved immediately in defense of this suit.

The petition also alleges intentional acts and we wish to advise you that any covered allegations which are the result of any intentional act will not be covered.

Please refer to your Homeowners Policy Coverage D Exclusions--Coverage D. shall not apply: (5.) To bodily injury or property damage caused intentionally...