New Madrid County Reorganized School Dist. No. 1, Enlarged v. Continental Cas. Co.

• Decision Date: 29 May 1990
• Docket Number: Nos. 89-1986,89-2025,s. 89-1986
• Citation: 904 F.2d 1236
• Parties: 60 Ed. Law Rep. 1109 NEW MADRID COUNTY REORGANIZED SCHOOL DISTRICT NO. 1, ENLARGED, Appellee, v. CONTINENTAL CASUALTY CO., Appellant. NEW MADRID COUNTY REORGANIZED SCHOOL DISTRICT NO. 1, ENLARGED, Appellant, v. CONTINENTAL CASUALTY CO., Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1236

904 F.2d 1236

60 Ed. Law Rep. 1109

NEW MADRID COUNTY REORGANIZED SCHOOL DISTRICT NO. 1, ENLARGED, Appellee, v. CONTINENTAL CASUALTY CO., Appellant.

NEW MADRID COUNTY REORGANIZED SCHOOL DISTRICT NO. 1, ENLARGED, Appellant, v. CONTINENTAL CASUALTY CO., Appellee.

Nos. 89-1986, 89-2025.

United States Court of Appeals,

Eighth Circuit.

Submitted March 14, 1990.

Decided May 29, 1990.

John J. Mohan, St. Louis, Mo., for Continental Cas. Co.

Harold D. Jones, New Madrid, Mo., for New Madrid County Reorganized School Dist.

Before WOLLMAN, Circuit Judge, and FLOYD R. GIBSON, Senior Circuit Judge, and DUMBAULD, ^* Senior District Judge.

FLOYD R. GIBSON, Senior Circuit Judge.

New Madrid County Reorganized School District No. 1 ("the School District") brought this suit against its insurer, Continental Casualty Company, for reimbursement under a liability insurance policy for sums the School District paid to a group of its teachers in settlement of a Sec. 1983 suit. The School District also sought damages for vexatious refusal to pay and attorneys' fees. The district court ¹ held that the School District was entitled to recover the settlement it paid to the teachers. It found, however, that the School District was not entitled to damages for vexatious refusal. In addition, the district court awarded the School District attorneys' fees.

We affirm the district court's holding that Continental Casualty is obligated to cover the School District's liability to the teachers in the Sec. 1983 suit. We affirm the ruling that Continental Casualty is not liable for vexatious refusal. However, we reverse the district court's award of attorneys' fees.

I. BACKGROUND

In August 1980 Continental Casualty issued to the School District a liability insurance policy entitled "Board of Education Liability Including School District Reimbursement Policy," which was effective from August 25, 1980, through August 25, 1983. The policy provided coverage to the School District for claims made against it for "wrongful acts." The policy defined "wrongful act" as:

any actual or alleged errors or misstatement or misleading statement or act or omission or neglect or breach of duty by the Assureds in the discharge of their duties, individually or collectively, or any matter claimed against them solely by reason of their being or having been Assureds during this policy period.

Appendix at 75.

The policy provided for some exclusions, including, for example, claims against the School District for false arrest, libel, slander, defamation of character, assault, and battery. It did not contain any general exclusion for claims against the School District for intentional wrongful acts. Nor did the policy include a duty-to-defend provision. Rather, it stated that the School District must retain its own legal counsel for the defense of any claim covered under the policy.

In October 1982, the Missouri National Education Association and other plaintiffs consisting of ten current and former teachers of the School District (collectively "the teachers") commenced a federal lawsuit based on 42 U.S.C. Sec. 1983 against the School District. The teachers alleged that the School District denied renewal of teaching contracts, made involuntary reassignments, and denied certain contractual benefits in retaliation for the teachers' exercise of their First Amendment rights in joining a particular educational association. A jury returned a verdict in favor of two of the teachers but awarded them no damages. The district court granted the two successful teachers declaratory and injunctive relief. The district court also assessed a portion of costs and fees against the School District. Missouri Nat'l Educ. Ass'n. v. New Madrid County R-1 Enlarged School District, 606 F.Supp. 25 (E.D.Mo.1984). On appeal, the Eighth Circuit affirmed the district court's grant of relief to the two successful teachers but remanded the case for a new trial on all other issues. Missouri Nat'l Educ. Ass'n. v. New Madrid County R-1 Enlarged School District, 810 F.2d 164 (8th Cir.1987).

Following that decision, the School District settled the case with the teachers for $268,373.51: $198,373.51 for costs and attorneys' fees, and $70,000 as a compromise settlement of all remaining claims.

In response to the School District's requests for payment of its expenses in litigating the teachers' suit, Continental Casualty maintained that the School District had not suffered a loss covered by its policy. The School District then commenced this suit in Missouri state court, seeking reimbursement for the costs and settlement of the teachers' suit, damages for vexatious refusal to pay, and attorneys' fees for this action. Continental Casualty subsequently removed the case to federal district court.

After considering the case based on the parties' joint stipulations of fact and stipulated exhibits, the district court found that the School District was entitled to recover the settlement paid to the teachers in the Sec. 1983 suit. Further, the district court ruled that the School District did not prove vexatious refusal. Finally, the court awarded the School District attorneys' fees for this action. Continental Casualty moved the district court for a new trial or, in the alternative, to alter or amend the judgment. The court denied that motion. 732 F.Supp. 1004.

Continental Casualty now appeals, and the School District cross-appeals the district court's denial of damages for vexatious refusal to pay.

II. DISCUSSION

A. Coverage Under the Liability Policy

Continental Casualty argues in this appeal that the teachers' Sec. 1983 suit against the School District is not covered by the policy for three reasons: (1) the School District's actions against the teachers were not "wrongful acts" within the meaning of the policy's insuring clause; (2) the teachers' action was excluded from the policy's coverage by a provision excluding claims based on contractual obligations; and (3) public policy in Missouri forbids insurance coverage for an insured's intentional wrongful acts. We address each argument in turn.

1. "Wrongful Act"

Continental Casualty argues that the School District's insurance policy is essentially an "errors and omissions" policy which covers only negligent breaches of duty and not intentional misconduct. It cites cases involving other "errors and omissions" policies where no coverage was found and argues that the insurance policy involved here is similar and requires a like finding. We have examined those cases and disagree. The policies involved in the cases Continental Casualty relies upon contained language that suggested, if not explicitly provided, that the policy was intended only to cover damages caused by accident and not by intentional misconduct.

For example, in School Dist. No. 1, Multnomah County v. Mission Ins. Co., 58 Or.App. 692, 650 P.2d 929 (1982), the court was asked to determine whether a liability insurance policy covered the insured school district for claims against it for discrimination. The policy provided coverage for amounts the insured became liable for on account of claims for " 'breach of duty made against the insured by reason of any negligent act, error or omission....' " Id. at 695, 650 P.2d at 932. In addition, the policy specifically excluded coverage for " 'any dishonest, fraudulent, criminal or malicious act.' " Id. at 697, 650 P.2d at 934. The court examined the definitions of the terms "negligence," "error," and "omission," and concluded that each term suggested events of an accidental, unintended nature. Id. at 697, 650 P.2d at 934. The court thus held that the policy did not cover the insured's commission of intentional discrimination. Id. at 698-99, 650 P.2d at 935-36.

Continental Casualty submits that the policy involved in Mission Ins. Co. was "almost identical" to the policy involved here. We do not think that an insuring clause that covers an insured's "negligent acts, errors and omissions" is almost identical to one that covers an insured's "wrongful acts." The term "wrongful acts" can fairly be read to encompass more affirmative, willful behavior than can the phrase "negligent acts, errors, and omissions."

We are similarly unpersuaded by Continental Casualty's reliance on St. Paul Fire & Marine Ins. Co. v. Campbell County School Dist. No. 1, 612 F.Supp. 285 (D.Wyo.1985). There, an insured school district sought coverage under a liability policy when it was sued for violating a teacher's First Amendment rights. Three liability insurance policies were involved. The first covered " 'bodily injury' " inflicted by the insured " 'caused by an occurrence,' " and defined "occurrence" as " 'an accident ... which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured.' " Id. at 287. The second policy covered damages inflicted by the insured " 'because of bodily injury by accident or disease....' " Id. at 288. The third policy was a workers' compensation-type policy that was held inapplicable because the injured party chose to sue rather than recover under the Voluntary Compensation Endorsement of the policy. Id.

The court concluded that the plain language of the policies clearly excluded coverage for intentional acts and went on to analyze whether or not the insured's acts against the teacher were intentional. Again, Continental Casualty argues that the policy in St. Paul is similar to the policy involved in the instant case. Yet, a simple comparison of the policies' language shows otherwise. The policy in St. Paul quite clearly indicated that the parties did not intend that intentional acts would be covered. The policy involved in this case, however, does not lead to a similar conclusion.

We next turn to Angelina Casualty Co. v. Pattonville-Bridgeton Terrace Fire Protection Dist., 706 S.W.2d 483 (Mo.App.1986), the only Missouri case relied on by Continental Casualty for this argument. The policy...