Westport v. Atchley, Fussell, Waldrop & Hlavinka

Decision Date10 April 2003
Docket NumberNo. 5:01 CV 280.,5:01 CV 280.
Citation267 F.Supp.2d 601
PartiesWESTPORT INSURANCE CORP. Plaintiff v. ATCHLEY, RUSSELL, WALDROP & HLAVINKA, L.L.P., et al. Defendants
CourtU.S. District Court — Eastern District of Texas

George J. Manos, Jeffrey A. Goldwater, Michelle M. Bracke, Bollinger Ruberry & Garvey, Chicago, IL, Snow Eugene Bush, Jr., Snow E. Bush, Jr. PC, Longview, TX, Bryan G. Schumann, Terri M. Tegtman, Chicago, IL, for plaintiff.

A. Paul Miller, Miller James Miller & Hronsby, Texarkana, TX, for Atchley Russell Waldrop & Hlavinka, L.L.P., Charles J. Hlavinka, defendants.

Alice Oliver Parrott, Burrow & Parrott, Houston, TX, Philip Charles Brashier, McGlinchey & Stafford, Houston, TX, for Estate of Keaton, Patricia Keaton, defendants.

AMENDED MEMORANDUM ORDER1

.

FOLSOM, District Judge.

Plaintiff-insurer filed this declaratory judgment action against its insured, Defendant Atchley, Russell, Waldrop & Hlavinka, et. al. ("Atchley Russell"). Atchley Russell counterclaimed for declaratory judgment. Both parties seek a determination of their rights and obligations under a professional malpractice insurance contract. Now before the Court are the parties' cross motions for summary judgment on the duty to defend and the duty to indemnify (Dkt. Nos. 33 & 34). Also before the Court is Plaintiffs Motion to Strike the Affidavit of Don Morris (Dkt. No. 40). For the reasons stated herein, Plaintiff-insurer's Motion for Summary Judgment (Dkt. No. 34) is DENIED. Defendants' Motion for Summary Judgment (Dkt. No. 33) is GRANTED IN PART and DENIED IN PART. Also, Plaintiffs Motion to Strike (Dkt. No. 40) is DENIED AS MOOT.

I. PROCEDURAL BACKGROUND

Originally, the Court scheduled a hearing for oral argument on the parties' summary judgment motions. But because this case was set as a bench trial, the Court also gave the parties notice that it would hear and consider evidence on any factual matters that might remain in dispute. At the hearing, Defendants presented live testimony from several witnesses. Plaintiffinsurer insisted that no factual disputes existed on the record and that the motions could be decided as a matter of law; therefore, the company chose not to present any evidence. Instead, it re-urged the Court to enter judgment as a matter of law. The insurer also objected to the taking of any testimony.2

After the hearing, the Court instructed the parties to submit additional briefing. Those briefs were to aid the Court in determining whether it could decide the indemnification issue, rather than only the duty to defend, before the conclusion of the underlying malpractice litigation in the state court. The Court directed the parties to address Texas law that appeared to restrain the Court from reaching the indemnification issue. The Court has reviewed the additional briefing and the applicable law. Now, the Court issues this Amended Memorandum Order on the parties' cross motions for summary judgment, both of which focus on interpreting "Exclusion B" under section XIV of the insurance contract.

II. SUMMARY JUDGMENT STANDARD

Summary judgment is appropriate only "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." FED. R. CIV. P. 56(c). "A dispute about a material fact is `genuine' if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Sreeram v. Louisiana State Univ. Med. Center-Shreveport, 188 F.3d 314, 318 (5th Cir.1999)(citing Anderson v. Liberty Lobby Inc., All U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)). The district court should construe factual disputes "in the light most favorable to the nonmovant, but only if both parties have introduced evidence showing that an actual controversy exists." See Edwards v. Your Credit, Inc., 148 F.3d 427, 432 (5th Cir.1998).

III. DISCUSSION
A. Duty to Defend

In Texas, the duty to defend is distinct and separate from the duty to indemnify. King v. Dallas Fire Ins. Co., 85 S.W.3d 185 (Tex.2002) (citing Nat'l Union Fire Ins. Co. v. Merchants Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997)). Also, the duty to defend is broader than the duty to indemnify. The first question Texas courts face is whether an insurer has a duty to defend the insured under the insurance policy. To make this determination, Texas courts apply a specialized analysis.

Generally, Texas state courts analyze whether the duty to defend arises by examining only two things: (1) the insurance contract; and (2) the claimant's petition in the underlying suit against the insured. As the Texas Supreme Court has stated: "An insurer's duty to defend is determined solely by the allegations in the pleadings and the language of the insurance policy." King, 85 S.W.3d at 187. Thus, Texas examines only the "eight corners" of the two documents—the pleadings in the suit filed by the claimant against the insured and the insurance contract between the insurer and the insured—to determine whether the duty to defend has been triggered. This approach is also called the "complaint allegation rule." Whether the insurer must defend the insured is determined as a matter of law because the Court need only examine the policy language and the allegations in the underlying petition to make the decision. See also Nat'l Union, Fire Ins. Co. v. Merchants Fast Motor Lines, Inc., 939 S.W.2d 139,141 (Tex.1997).

Texas's eight corner's approach requires the Court to undertake two basic steps to decide whether the insurer must defend its insured in any given case. First, the Court must construe the contract. Second, it must examine the factual allegations made in the underlying suit and determine whether those allegations could possibly state a claim covered by the insured's policy. The Court now turns to examine the policy language.

1. Step One: Contract Construction
a. General Rules of Construction

When interpreting an insurance contract, Texas law requires that the terms be construed against the insurer to avoid excluding coverage, so long as more than one reasonable interpretation exists. Nat'l Union Fire Ins. Co. of Pittsburgh, PA v. Willis, 296 F.3d 336, 339 (5th Cir. 2002). The insured's construction of the exclusionary clause must be adopted as long as that construction is not unreasonable. This is the case even if the insurer's proffered construction would be more reasonable. Insurance Co. of North America v. Cash, 475 S.W.2d 912 (Tex.1971). However, these preferences for adopting the insured's interpretation only apply where the contract language is ambiguous. Mang v. Travelers Ins. Co., 412 S.W.2d 672, 674 (Tex.Civ.App.1967, writ ref'd). A contract is only ambiguous if it is susceptible to two or more reasonable interpretations. See Glover v. Nat'l Ins. Underwriters, 545 S.W.2d 755 (Tex.1977). The Court interprets the contract so that every term is given effect, but it reads the terms in the context of the whole contract, so that no provision is controlling. Willis, 296 F.3d at 339.

An ambiguity, however, does not arise merely because the parties advance conflicting interpretations. Columbia Gas Transmission Corp. v. New Ulm Gas, Ltd., 940 S.W.2d 587, 589 (Tex.1996); Gen. Agents Ins. Co. v. Arredondo, 52 S.W.3d 762, 766 (Tex.App.-San Antonio 2001, pet. denied). The contract is unambiguous if it can be given definite legal meaning. Id. Texas law indicates that whether an ambiguity exists is determined as a matter of law by "examining the contract as a whole in light of the circumstances present when the contract was entered." Columbia Gas, 940 S.W.2d at 589. At bottom, the Court's goal in construing the contract is to give effect to the parties' intent. Willis, 296 F.3d at 339.

b. Construing Exclusion B of the Contract

The Court looks first to the policy, which is a "claims-made" policy. The relevant exclusion on which Plain tiff-insurer relies is XIV(B), which reads as follows:

This POLICY shall not apply to any CLAIM based upon, arising out of, attributable to, or directly or indirectly resulting from:

B. any act, error, omission, circumstance... occurring prior to the effective date of this POLICY if any INSURED at the effective date knew or could have reasonably foreseen that such act, error, omission [or] circumstance... might be the basis of a CLAIM.

The term "Claim" is defined as:

[A] demand made upon any INSURED for LOSS as defined in each of the attached COVERAGE UNITS, including, but not limited to, service of suit or institution of arbitration proceedings or admin. proceedings against any INSURED.

The term "Loss" is defined as "monetary and compensatory portion[s] of any judgment, award or settlement."3

The Court concludes that this language is unambiguous. The exclusion seeks to preclude coverage in two general situations, as follows: (1) when, before the policy period begins, the attorney has subjective knowledge that a claim will be made against him;4 and (2) when the attorney is engaged in willful blindness by ignoring the high probability that his actions will result in a claim being filed against him.5 The following discussion explains how the exclusion's two prongs function, first standing alone, and then in tandem.

(1) subjective component

The policy language excludes the following:

any act, error, omission, circumstance... occurring prior to the effective date of this POLICY if any INSURED at the effective date knew ... that such act, error, omission [or] circumstance ... might be the basis of a CLAIM.

The policy's plain language shows that the first prong of Exclusion B applies in three situations. The common denominator in all of these is that the attorney must have had subjective knowledge that his client intended to bring a claim at a point in time prior to the beginning of...

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