Twin City Fire Ins. Co. v. City of Madison, Miss.

• Decision Date: 28 October 2002
• Docket Number: No. 01-60378.,01-60378.
• Parties: TWIN CITY FIRE INSURANCE COMPANY, Plaintiff-Counter Defendant-Appellee, v. CITY OF MADISON, MISSISSIPPI, Defendant-Counter Claimant-Third Party Plaintiff-Appellant, Hartford Fire Insurance Company; Hartford Financial Services Group, Inc.; Specialty Risk Services, Inc.; Michael P. Dandini; Kimberly J. Chabert, Third-Party Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

309 F.3d 901

TWIN CITY FIRE INSURANCE COMPANY, Plaintiff-Counter Defendant-Appellee, v. CITY OF MADISON, MISSISSIPPI, Defendant-Counter Claimant-Third Party Plaintiff-Appellant, Hartford Fire Insurance Company; Hartford Financial Services Group, Inc.; Specialty Risk Services, Inc.; Michael P. Dandini; Kimberly J. Chabert, Third-Party Defendants-Appellees.

No. 01-60378.

United States Court of Appeals, Fifth Circuit.

October 28, 2002.

COPYRIGHT MATERIAL OMITTED

John P. Sneed, Michael Brunson Wallace (argued), James William Shelson, Phelps Dunbar, Jackson, MS, for Twin City Fire Ins. Co.

James L. Carroll (argued), Myles A. Parker (argued), David K. Pharr, Carroll, Warren & Parker, Jackson, MS, for City of Madison, Miss.

Appeals from the United States District Court for the Southern District of Mississippi.

Before DUHÉ, DeMOSS and CLEMENT, Circuit Judges.

DUHÉ, Circuit Judge:

Plaintiff Twin City Fire Insurance Company sued its insured, the City of Madison, Mississippi, for a declaratory judgment denying coverage under a policy issued to Madison and for reimbursement of defense costs concerning two lawsuits brought against Madison. After settlement of the underlying claims for $250,000, Twin City dropped its claim for defense costs and added a claim herein for reimbursement of the settlement amount. Madison counter-claimed asserting coverage under the policy and liability based on estoppel. Madison also asserted third-party tort claims against affiliates of Twin City involved in adjusting Madison's claims.

The district court granted summary judgment to Twin City, holding that a policy exclusion applied so that Twin City was entitled to reimbursement from its insured of the amount paid in settlement of the underlying claims. On the City's counterclaim the court ruled that estoppel cannot create or expand coverage. Granting summary judgment to third-party defendants, the court ruled that Madison failed to show a genuine issue of material fact regarding its third party claims. Madison timely appeals. Finding fact questions material to the issue of estoppel and the third-party claims, except concerning Hartford Financial Services Group, we affirm in part, reverse in part, and remand.

I.

The Public Official Errors and Omissions Liability Insurance Policy issued to Madison covers damages that the City becomes legally obligated to pay because of errors or omissions of public officials. The underlying damage claim was based on the City's 1986 impact fee ordinance ("IFO") which required housing developers, in order to obtain a building permit, to pay per-lot fees upon filing a preliminary subdivision plat and upon plat approval. Twin City provided Madison a defense under its errors and omissions policy against the claims, with a reservation of rights.

Several developers sued the City in federal district court, asserting various claims pertaining to the IFO. Upon a finding that IFO was a tax, the matter was dismissed for lack of jurisdiction under the Tax Injunction Act. This Court affirmed the dismissal on the jurisdictional ground that the IFO was a tax, not a fee. Home Builders Assoc. of Mississippi, Inc. v. City of Madison, 143 F.3d 1006 (5th Cir.1998). The developers then sued Madison in state court contending that the IFO violated state law and comprised an unconstitutional taking.

The developers settled their claims with Madison for $250,000. In a separate agreement with Madison, Twin City agreed to pay the settlement amount to the developers, reserving its right to seek recoupment from Madison in this declaratory judgment action.

Twin City contends that the claims are excluded, relying on exclusion 3(h) for "Liability arising out of any insured obtaining remuneration or financial gain to which such insured was not legally entitled." The district court held that the IFO constituted a tax, following the analysis of Home Builders. Further, it found no legislative authority for the tax, and held that the IFO funds were illegal tax revenues. It therefore applied exclusion 3(h) regarding financial gain to which the City was not legally entitled.

II.

This court reviews the grant of summary judgment motion de novo, using the same criteria as the district court, reviewing the evidence and inferences to be drawn therefrom in the light most favorable to the nonmoving party. Hanks v. Transcontinental Gas Pipe Line Corp., 953 F.2d 996, 997 (5th Cir.1992).

We agree with the district court that the underlying claim falls under policy exclusion 3(h),¹ as the IFO was an unauthorized tax and illegal "financial gain." While Mississippi's Home Rule statute provides municipalities discretion in managing municipal affairs, it also addresses the limited power of a city to tax:

(1) The governing authorities of every municipality of this state shall have the care, management and control of the municipal affairs and its property and finances. In addition to those powers granted by specific provisions of general law, the governing authorities of municipalities shall have the power to adopt any ... ordinances with respect to such municipal affairs, property and finances which are not inconsistent with the Mississippi Constitution ... Code ... or any other statute .... Except as otherwise provided in subsection (2) of this section, the powers granted to governing authorities of municipalities in this section are complete without the existence of or reference to any specific authority granted in any other statute or law of the State of Mississippi....

(2) Unless such actions are specifically authorized by another statute or law of the State of Mississippi, this section shall not authorize the governing authorities of a municipality to (a) levy taxes of any kind or increase the levy of any authorized tax....

Miss.Code Ann. § 21-17-5 (West 2001) (emphasis added).

Even though under subsection (1) the City's powers of self-governance concerning municipal finances do not depend on any other statutory grant of authority, subsection (2) provides the exception: a municipality's power to levy a tax requires a "specific[] authoriz[ation] by another statute or law." Miss.Code Ann. § 21-17-5. None existed for this IFO. Under a plain reading of this statute, we reject the City's contention that it had authority to enact an IFO as part of the Home Rule Act.

We reject the City's further contention that the power to enact the IFO is impliedly granted by the legislation as a means to an end, or is incident to specific grants of authority to provide services, hospitals, and the like.² The power to levy taxes is not embraced in a general grant of power such as police power. Pitts v. Mayor of Vicksburg, 72 Miss. 181, 16 So. 418, 419 (1894). Nor will we characterize the impact fees as a regulatory fee rather than a tax, as Madison urges us to do, to avoid application of the plain terms of the Home Rule Act. Madison has not challenged the factual basis for the district court's characterization of this IFO as a classic tax.

Since the ordinance created a tax, and the City lacked specific authority to impose such a tax, the collection of monies thereunder fits squarely within exclusion 3(h).

III.

Madison contends in its counterclaim that Twin City should be estopped from denying liability under the policy because of various claims handling violations and breach of the duty to defend.³ When sued by Home Builders for the underlying claims, Madison made a demand upon Twin City for defense and indemnity, assuming the suits were covered under the errors and omissions liability policy. Upon notification of the claims, Twin City appointed Daniel, Coker law firm as counsel for Madison, with a reservation of rights. Terry Levy of Daniel, Coker defended the claims by Home Builders against the City in both the federal and state actions. When an insurer is defending under a reservation of rights, "a special obligation is placed upon the insurance carrier" because of the built-in conflict of interests. Moeller v. American Guar. & Liab. Ins. Co., 707 So.2d 1062, 1069 (Miss. 1996).

In support its estoppel claim, Madison points out the conflict of interests between itself and the insurer, in that Levy wanted coverage for his client the City, and Twin City seeks to avoid coverage. Levy reported to both Madison and Twin City's claims adjusters about defense of the matter. Madison contends that Twin City improperly utilized privileged information from Levy's claim file to develop Twin City's position of non-coverage.

The district court concluded that, as a matter of law, estoppel cannot expand coverage in the face of an otherwise applicable policy exclusion. We disagree. When the alleged misconduct of the insurer concerns the duty to defend, the insurer may be liable despite an exclusion otherwise applicable. Upon withdrawal from the defense of an action, for example, an insurer may be estopped from denying liability under a policy, if its conduct results in prejudice to the insured. Southern Farm Bureau Cas. Ins. Co. v. Logan, 238 Miss. 580, 119 So.2d 268, 272 (1960). Even if the insurer would not have been liable had it not assumed the defense in the first instance, it may become liable for withdrawing, because the assumption of the defense may give rise to a duty to continue with the defense. Id., 119 So.2d at 272. Additionally, a breach of the duty to defend renders the insurer liable to the insured for all damages, including in a proper case the amount of the judgment rendered against the insured.⁴

Madison's claim about conflict of interests may give rise to estoppel or liability for breach because it concerns the duty to defend. "A law firm which cannot be one hundred percent faithful to the interests of its clients offers no defense at all." Moeller, 707 So.2d at 1071.

The City of Madison complains that the reservation-of-rights letters were insufficient. Twin City's first two letters to Madison did not identify Twin City at all but reserved rights...