St. Paul Mercury Ins. Co. v. Duke University, 87-3768

• Decision Date: 06 September 1988
• Docket Number: No. 87-3768,87-3768
• Citation: 849 F.2d 133
• Parties: 47 Ed. Law Rep. 405 ST. PAUL MERCURY INSURANCE COMPANY, Plaintiff-Appellee, v. DUKE UNIVERSITY; Leonard R. Prosnitz, Defendants-Appellants, and Raymond U, Defendant.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 133

849 F.2d 133

47 Ed. Law Rep. 405

ST. PAUL MERCURY INSURANCE COMPANY, Plaintiff-Appellee, v. DUKE UNIVERSITY; Leonard R. Prosnitz, Defendants-Appellants and Raymond U, Defendant.

No. 87-3768.

United States Court of Appeals Fourth Circuit.

Argued May 4, 1988.

Decided June 22, 1988.

Rehearing and Rehearing En Banc Denied Sept. 6, 1988.

Robert A. Burgoyne (Fulbright & Jaworski, Laura B. Luger, Moore & Van Allen, on brief), for defendants-appellants.

Joseph W. Yates, III, Barbara B. Weyher (Yates, Fleishman, McLamb & Weyher, on brief), for plaintiff-appellee.

Before HALL and WILKINSON, Circuit Judges, and MERHIGE, Senior United States District Judge for the Eastern District of Virginia, sitting by designation.

WILKINSON, Circuit Judge:

This is a declaratory judgment action brought by St. Paul Mercury Insurance Co. to determine coverage under an insurance policy issued by St. Paul to Duke University. A former employee of Duke, Dr. Raymond U, won judgments in North Carolina state court against Duke for malicious prosecution and against another Duke employee, Dr. Leonard Prosnitz, for defamation. Each judgment entailed an award of both compensatory and punitive damages.

St. Paul brought this action to resolve disputes over coverage, and the district court held that the policy did not, by its terms, cover the damages awarded against Prosnitz. It also held that, although the policy terms provided coverage for the punitive damages awarded against Duke, that coverage was barred by the public policy of North Carolina. Because the policy specifically excluded from coverage the damages awarded against Prosnitz, we affirm the district court's holding in that respect. We reverse the district court's decision with respect to the punitive damages awarded against Duke. In the absence of an explicit North Carolina public policy with respect to the award of such damages, the terms of the insurance contract are controlling.

I.

In 1983, a device known as a Thermotron, which is used in cancer research, was installed at Duke. A dispute arose between Duke, Dr. U, Dr. Prosnitz, and other Duke employees over the ownership of and access to the machine. As a result, Duke brought suit against Dr. U. The parties to that suit entered a consent agreement, and Duke voluntarily dismissed its suit. U then brought suit in North Carolina state court against Duke for malicious prosecution and against Prosnitz for libel and slander. A jury awarded U $30,000 in compensatory damages and $1,000,000 in punitive damages against Duke and $50,000 in compensatory damages and $50,000 in punitive damages against Prosnitz.

Duke and Prosnitz filed claims under Duke's insurance policy with St. Paul. The policy, over 150 pages in length, was issued in 1982 and provided coverage for a variety of losses stemming from the tortious behavior of Duke and its employees. Duke paid a premium in excess of $270,000 for each of the three years of the policy. St. Paul, refusing to pay any damages awarded against Prosnitz, or the punitive damages awarded against Duke, brought this suit to determine the scope of the policy's coverage.

The district court held that a provision in the policy, which excluded coverage for claims by employees for personal injury caused by fellow employees, barred coverage for the judgment against Prosnitz. St. Paul Mercury Insurance Co. v. Duke University, 670 F.Supp. 630, 632-33 (M.D.N.C.1987). We agree. The district court also found that the policy, by its terms, covered the punitive damages awarded against Duke. Id. at 633-34. The parties do not dispute this holding. The district court went on to hold, however, that the public policy of North Carolina forbids insurance coverage of punitive damages arising from intentional (albeit non-criminal) conduct, and refused to enforce the policy as written. Id. at 637. We reverse this holding.

II.

In general, courts may refuse to enforce a contract as written where enforcement would contravene public policy. However, our commercial system depends on the ability of parties to contract with certainty. Were courts free to refuse to enforce contracts as written on the basis of their own conceptions of the public good, the parties to contracts would be left to guess at the content of their bargains, and the stability of commercial relations would be jeopardized.

The power to refuse to enforce contracts on the ground of public policy is therefore limited to occasions where the contract would violate "some explicit public policy" that is "well defined and dominant, and [which] is to be ascertained 'by reference to the laws and legal precedents and not from general considerations of supposed public interests.' " United Paperworkers International Union v. Misco, Inc., --- U.S. ----, 108 S.Ct. 364, 373, 98 L.Ed.2d 286 (1987) (quoting W.R. Grace & Co. v. Rubber Workers, 461 U.S. 757, 766, 103 S.Ct. 2177, 2183, 76 L.Ed.2d 298 (1983); see also Smithy Braedon Co. v. Hadid, 825 F.2d 787, 790 (4th Cir.1987). "[T]he usual and most important function of courts of justice is rather to maintain and enforce contracts, than to enable parties thereto to escape from their obligations on the pretext of public policy, unless it clearly appears that they contravene public right or the general welfare." Smithy Braedon, 825 F.2d at 791 (quoting Baltimore & Ohio Southwestern Railway Co. v. Voigt, 176 U.S. 498, 505, 20 S.Ct. 385, 387, 44 L.Ed. 560 (1900)).

The district court recognized that "[i]n the first instance ... questions as to public policy are for legislative determination." 670 F.Supp. at 635 (quoting Gardner v. North Carolina State Bar, 316 N.C. 285, 293, 341 S.E.2d 517, 522 (1986) ) (emphasis added by district court). It went on to note, however, that the North Carolina legislature had provided no guidance on the question of whether insurance coverage of punitive damages arising from intentional but non-criminal acts is permissible, and took the absence of such guidance as an invitation to undertake its own analysis of public policy.

The district court thus saw its role as akin to that of a federal court sitting in diversity which must apply state law in an area in which the state itself has not spoken. In such a situation, the prediction of state law by the district court might be justified. In this case, while the district court did not err in looking to state law, its duty was to enforce the contract as written unless enforcement was forbidden by an existent state policy. Having found no such policy, the district court was bound to enforce the bargain as made by the parties.

The express reservation by North Carolina courts of the issue presented here does not justify the district court's refusal to enforce the contract. In Mazza v. Medical Mutual Insurance Co., 311 N.C. 621, 626, 319 S.E.2d 217, 220 (1984), the Supreme Court of North Carolina held that it does not contravene public policy to enforce an insurance contract providing coverage for punitive damages arising from wanton or grossly negligent conduct. The Mazza court held that in such a case the public interest would be best served by requiring the insurance company to fulfill its obligation. Id. 319 S.E.2d at 221. The Mazza court, however, explicitly reserved the question of whether public policy prohibits insurance coverage for punitive damages arising from intentional conduct. Id. 319 S.E.2d at 220.

The district court, without explanation, found that the reservation of the issue in Mazza supported its decision in this case. 670 F.Supp. at 635. St. Paul argues that the Mazza court's reservation of the issue indicates that that court would decide the question differently with respect to intentional acts, and that the district...