Western Heritage Ins. Co. v. Magic Years Learning Centers and Child Care, Inc.

• Decision Date: 16 February 1995
• Docket Number: No. 94-60136,94-60136
• Parties: 67 Fair Empl.Prac.Cas. (BNA) 1319, 66 Empl. Prac. Dec. P 43,448 WESTERN HERITAGE INSURANCE COMPANY, Plaintiff-Appellant, v. MAGIC YEARS LEARNING CENTERS AND CHILD CARE, INC., et al., Defendants, Magic Years Learning Centers and Child Care, Inc., Charles R. Wilson, and Doris J. Wilson, Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 85

45 F.3d 85

67 Fair Empl.Prac.Cas. (BNA) 1319,

66 Empl. Prac. Dec. P 43,448

WESTERN HERITAGE INSURANCE COMPANY, Plaintiff-Appellant, v. MAGIC YEARS LEARNING CENTERS AND CHILD CARE, INC., et al., Defendants,

Magic Years Learning Centers and Child Care, Inc., Charles

R. Wilson, and Doris J. Wilson, Defendants-Appellees.

No. 94-60136.

United States Court of Appeals, Fifth Circuit.

Feb. 16, 1995.

H. Lee Lewis, Jr., Griggs & Harrison, Houston, TX, for appellant.

Thomas W. McQuage, Greer, Herz & Adams, Galveston, TX, for appellees.

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

Before JONES and STEWART, Circuit Judges, and DUPLANTIER, ^* District Judge.

DUPLANTIER, District Judge:

Charles R. Wilson and his wife Doris J. Wilson operate Magic Years Learning Centers and Child Care, Inc. (Magic Years), a child day care center. Mr. Wilson serves as president of Magic Years, and his wife is its secretary and treasurer. Theresa L. Alexander, a former employee of Magic Years, and her husband filed suit in state court against Magic Years and Mr. and Mrs. Wilson, claiming that Mr. Wilson sexually harassed Mrs. Alexander. Western Heritage Insurance Company (Western Heritage) insured Magic Years and Mr. and Mrs. Wilson during the period of Mrs. Alexander's employment. In this suit for declaratory judgment, the district court decreed that Western Heritage must defend its insureds, Magic Years and Mr. and Mrs. Wilson, in the underlying state court action brought by the Alexanders and pay any judgment rendered against them. Western Heritage appealed. ¹ We AFFIRM the judgment in favor of Mr. and Mrs. Wilson, but we REVERSE the judgment in favor of Magic Years.

Mrs. Alexander was an employee of Magic Years for slightly over sixteen months. During that time, the Western Heritage comprehensive general liability insurance policy at issue listed "Charles & Doris Wilson dba Magic Years Learning Center and Child Care, Inc." as the named insured. All the parties treat this strange designation as referring to three insureds: Mr. Wilson, Mrs. Wilson and the corporation.

The state court suit by the Alexanders alleged that Mr. Wilson sexually harassed Mrs. Alexander at work and under other circumstances, that such harassment led to her constructive discharge, that he invaded her right to privacy by asking probing questions about her personal life and sexual activities, that he unlawfully imprisoned her, that the harassment and her constructive discharge violated her federal and state civil rights, that he committed assault and battery by touching her in an offensive, unwelcome manner, and that he acted with such want of care and conscious indifference as to warrant punitive damages. The Alexanders claimed that Mrs. Wilson and Magic Years were responsible under the doctrine of respondeat superior for Mr. Wilson's conduct and that they were grossly negligent in entrusting him with supervisory responsibility, in not providing a workplace free of sexual harassment, and in not providing an adequate avenue for redress. They also alleged that Magic Years and the Wilsons intentionally inflicted severe emotional distress upon Mrs. Alexander. Mr. Alexander asserted a claim for loss of consortium. Magic Years and the Wilsons made demand upon Western Heritage to defend them in the state court suit and to pay any judgment arising out of it.

Western Heritage filed this action seeking a declaration that it owed no duty to defend or indemnify Magic Years or the Wilsons in the underlying state court suit; in a counterclaim Magic Years and the Wilsons sought a declaration that Western Heritage must defend and indemnify them. The parties filed cross motions for summary judgment with a stipulation that the policy and the Alexanders' pleadings in the underlying state court suit constituted the relevant evidence.

The district court held that the policy covered the Alexanders' state court claim and that the employer exclusion clause did not exclude coverage, because some of the allegations concerned conduct that occurred outside the course of Mrs. Alexander's employment.

Western Heritage contends that the policy's definition of occurrence does not cover sexual harassment, and, even if it does, the allegations in the Alexanders' suit are excluded from coverage by the assault and battery exclusion endorsement. Western Heritage further contends that if the state court claims are otherwise covered, they are excluded by the employer liability exclusion clause.

TEXAS LAW

Texas substantive law controls this diversity jurisdiction case. Under Texas insurance law, an insurer is required to defend

any case in which at least some of the allegations in the pleadings present a claim covered by the policy. See Gulf Chem. & Metallurgical Corp. v. Associated Metals & Minerals Corp., 1 F.3d 365, 369 (5th Cir.1993). In determining whether the policy covers the allegations, the court must enforce the policy as written if it can be given only one reasonable construction. Nat'l Union Fire Ins. Co. v. Hudson Energy Co., Inc., 811 S.W.2d 552, 555 (Tex.1991). However, if the insurance policy is ambiguous, susceptible of more than one reasonable interpretation, the court must adopt the construction that most favors the insured. Id.; Barnett v. Aetna Life Ins. Co., 723 S.W.2d 663, 665 (Tex.1987). Because exceptions and limitations of liability are even more strictly construed against the insurer, " 'we must adopt the construction of an exclusionary clause urged by the insured as long as that construction is not itself unreasonable, even if the construction urged by the insurer appears to be more reasonable or a more accurate reflection of the parties' intent.' " Barnett, 723 S.W.2d at 666 (quoting Glover v. Nat'l Ins. Underwriters, 545 S.W.2d 755, 761 (Tex.1977)). Therefore, we must read the allegations of the underlying state court suit in light of the policy's insuring provisions and exclusions to determine whether there is coverage, bearing in mind these liberal rules of construction in favor of the insured.

"OCCURRENCE"

The insuring provision in the policy reads as follows:

The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of

(a) bodily injury or

(b) property damage

to which this insurance applies, caused by an occurrence, and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury....

Therefore, to trigger the duty to defend, the pleadings in the underlying state court suit must allege facts which constitute bodily injury caused by an occurrence that the policy does not exclude.

The policy defines an occurrence as "an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured." ² Western Heritage contends that the definition of occurrence excludes intentionally inflicted injuries and therefore excludes the allegations which arise out of sexual harassment because Mr. Wilson intended or expected to injure Mrs. Alexander when he harassed her and touched her in an offensive, unwelcome manner. With respect to the Alexanders' state court suit, the general policy definition of occurrence is trumped by the following special endorsement:

Physical and/or Mental Abuse Limitation Endorsement

In consideration of the premium charged, it is hereby understood and agreed that Bodily Injury and Property Damage includes any act, which may be considered sexual in nature and could be classified as an Abuse, Harassment, Molestation, Corporal Punishment or an Invasion of an individual's right of Privacy or control over their physical and/or mental properties by or at the direction of an Insured, an Insured's employee or any other person involved in any capacity of the Insured's operation....

* * * * * *

Severability of Insurance

This insurance applies separately to each Insured....

(underlining emphasis added).

Regardless of whether the general definition of occurrence would exclude allegations of sexual harassment by the insured, the endorsement expressly provides for coverage of such claims. To hold otherwise would render the endorsement meaningless. See The alleged acts of Mr. Wilson complained of in the underlying state court suit are covered by the endorsement because they all "may be considered sexual in nature and could be classified as an Abuse, Harassment, Molestation, Corporal Punishment or an Invasion of an individual's right of Privacy." Alternatively, from the standpoint of Magic Years and Mrs....