Evangelical Lutheran Church in America v. Atlantic Mutual Insurance , 169 F.3d 947 ( 1999 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 98-50311
EVANGELICAL LUTHERAN CHURCH IN AMERICA, (ELCA);
TEXAS-LOUISIANA GULF COAST SYNOD OF THE
EVANGELICAL LUTHERAN CHURCH IN AMERICA
Plaintiffs - Appellees
versus
ATLANTIC MUTUAL INSURANCE COMPANY
Defendant - Appellant
Appeal from the United States District Court
for the Western District of Texas
March 11, 1999
Before HIGGINBOTHAM, BENAVIDES, and DENNIS, Circuit Judges.
HIGGINBOTHAM, Circuit Judge:
This is a choice-of-law puzzle with a substantive law question
about whether the insurance company defendant has the duty to
defend the plaintiffs in litigation against them. Because we find
that Illinois law applies and imposes a duty to defend, we AFFIRM.
I
This is a suit for declaratory judgment resting on diversity
jurisdiction by Evangelical Lutheran Church in America and the
Texas-Louisiana Gulf Coast Synod of the Evangelical Lutheran Church
in America against their insurer, Atlantic Mutual Insurance Co.
The insureds claim, and the district court agreed, that the
insurance company has a duty to defend them with respect to
allegations of negligence in a Texas civil action styled Clark v.
Baker. The company denied coverage both for the defense of the
underlying action and for any damages that might be received.
The Clark lawsuit alleged that Richard Carl Baker, a minister
whom the ELCA had ordained, sexually assaulted Cindy Clark, a
learning disabled adult. The assaults allegedly occurred from 1993
to 1994 at the Brenham State School, an institution for the
mentally handicapped operated by the state in Brenham, Texas. In
March 1997, Clark amended her petition to name the ELCA and the
Synod as defendants. The insureds allegedly were negligent in
training, supervising, placing, and monitoring Chaplain Baker, who
has been indicted for alleged sexual contact with three mentally
handicapped individuals. Baker was never an agent or employee of
the ELCA or the Synod, but graduated from the Lutheran Theological
Seminary, located in Gettysburg, Pennsylvania, in 1959. He is
listed on the ELCA clergy roster as a retired Lutheran pastor.
Two insurance policies, each including a Comprehensive General
Liability and a Commercial Umbrella Liability component,
potentially apply. The first provided nationwide coverage for the
Evangelical Church, and the second covered both the Synod and
approximately 40 other regional synods. Both policies included a
provision agreeing to pay “damages because of ‘bodily injury’ or
‘property damage’ to which this insurance applies,” but the
2
policies explicitly require that “[t]he ‘bodily injury’ or
‘property damage’ must be caused by an ‘occurrence.’” An
“occurrence” is “an accident, including continuous or repeated
exposure to substantially the same general conditions.” Both
policies excluded “‘bodily injury’ or ‘property damage’ expected or
intended from the standpoint of the insured.”1
The policies were negotiated at ELCA’s headquarters in
Chicago, and delivered through a New York insurance broker, Arthur
J. Gallagher & Co. Upon receipt, Gallagher delivered the policies
to the ELCA in Chicago. Gallagher billed the policies from New
York, but ELCA pays the premiums from Chicago, and the Synod
apparently pays its premiums from its Houston office.
The plaintiffs’ suit here was originally filed in the Northern
District Court of Illinois and transferred by Atlantic Mutual to
the Western District of Texas, pursuant to 28 U.S.C. § 1404(a).
Atlantic Mutual had filed its own declaratory judgment action, but
that suit was dismissed. After the transfer, Atlantic Mutual
sought summary judgment. In December, 1997, the district court
1
Both policies also provided for coverage attributable to “any
negligent act, error and omission of the insured arising out of the
performance of professional services for others in the insured’s
capacity as a pastoral counselor.” This coverage, however, did not
apply to “[l]icentious, immoral or sexual behavior intended to lead
to or culminating in any sexual act.” Although Atlantic Mutual
emphasizes this provision, it does not apply. Even if Chaplain
Baker was acting “as a pastoral counselor,” the insureds were not,
since Baker was not working for them at the time.
3
rejected this motion and subsequently granted judgment in favor of
the insureds. This appeal followed.
II
Our first task is to determine which state’s substantive law
applied. Because this action was filed in the Northern District of
Illinois and transferred under § 1404(a), Illinois choice-of-law
rules apply. See Ferens v. John Deere Co., 494 U.S. 516 (1990).
Illinois choice-of-law doctrine in this area is “obscure,” Lee v.
Interstate Fire & Cas. Co., 86 F.3d 101, 102 (7th Cir. 1996), but
in this case, precedent produces a clear result, the application of
Illinois substantive law.
In Lapham-Hickey Steel Corp. v. Protection Mutual Insurance
Co., 655 N.E.2d 842 (Ill. 1995), the Illinois Supreme Court
considered an insurance policy delivered in Illinois covering the
subject matter property in Minnesota, as well as property located
in five other states. “[T]o obtain a consistent interpretation of
the policy and to reasonably apply Illinois choice of law
principles,” the court ruled, “Illinois law must govern the
interpretation of this policy.” Id. at 527. The insurance policies
in the instant case covered nationwide risks, and obtaining a
consistent interpretation of the policy requires application of
Illinois law.
The strongest counterargument relies on Society of Mount
Carmel v. National Ben Franklin Insurance Co., 643 N.E.2d 1280
(Ill. App. Ct. 1994). After reciting the various factors relevant
4
to choice-of-law analysis in Illinois,2 the court stated that the
“location of the insured risk is given special emphasis.” Id. at
1287. After quoting the Restatement comment that the “location of
the insured risk will be given greater weight than any other single
contact in determining the state of the applicable law provided
that the risk can be located, at least principally in a single
state,” Restatement (Second) of Conflict of Laws § 193 cmt. b, at
611 (1971), the court added: “This is so even where the policy in
question covers multiple risks located in several states, as is the
case here.” 643 N.E.2d at 1287.
Reliance on Mount Carmel is misplaced for two reasons. First,
the risk here arguably cannot “be located . . . principally in a
single state.” The risk here involves the possibility that a
pastor trained in Pennsylvania will cause injury in some other
state. This case is thus distinguishable from Mount Carmel. While
that case involved risks in multiple states, each of those risks
was discrete and could be identified with a specific state.
Second, Mount Carmel preceded Lapham-Hickey and was decided by a
lower court. Thus, to the extent that they are inconsistent,
Lapham-Hickey controls.
2
"[I]nsurance contract provisions may be governed by the
location of the subject matter, the place of delivery of the
contract, the domicile of the insured or of the insurer, the place
of the last act to give rise to a valid contract, the place of
performance, or other place bearing a relationship to the general
contract.” Id. at 1287 (citation omitted). The Illinois Supreme
Court reiterated these factors in Lapham-Hickey. See 655 N.E.2d at
526-27.
5
The appellants also seek refuge in two Seventh Circuit cases
applying Illinois law, Lee and Massachusetts Bay Insurance Co. v.
Vic Koenig Leasing, Inc., 136 F.3d 1116 (7th Cir. 1998). The Lee
court chose the place of the insured risk rather than the place of
the policy’s delivery because two insurance policies were involved,
one issued in the United Kingdom, the other in Illinois. Thus, to
achieve the Lapham-Hickey goal of consistent interpretation, the
Lee court properly ignored the means the Lapham-Hickey court chose
to arrive at this goal. In this case, by contrast, the Lapham-
Hickey goal is aligned with its means of choosing the law of the
state where the insurance policy was delivered. The Massachusetts
Bay decision did cite Society of Mount Carmel and did choose the
law corresponding to the location of the insured risk. In that
case, though, the insured risk was an automobile leased in
Tennessee, and there was no concern about multi-state coverage.
In sum, under Illinois choice-of-law rules, the place of the
insured risk does not receive special consideration where risks are
nationwide. This leaves Illinois and New York as possible
candidates for application of substantive law. The Lapham-Hickey
court placed some emphasis on the domicile of the insured, but no
emphasis on the insurer’s domicile, which was not even identified.
See id. at 845 (noting, before concluding, that “Lapham-Hickey is
an Illinois corporation and Protection is licensed to do business
in Illinois”). The law of Illinois, where ELCA was headquartered
6
and the insurance contract was delivered, is a better candidate
than the law of New York, as counsel conceded at oral argument.
III
The policy provisions we have quoted, and in particular the
definition of “occurrence,” did not arise by accident, and indeed
it was confusion about what is an “accident” that spurred the
definitional changes leading to the current form of the exclusions.
Before 1966, Comprehensive General Liability policies generally
referred simply to an “accident,” but continued litigation and
uncertainty over this term led to the substitution of the word
“occurrence.” See 7A J. APPLEMAN, INSURANCE LAW AND PRACTICE § 4492
(1979); see also Queen City Farms, Inc. v. Central Nat’l Ins. Co.,
827 P.2d 1024, 1038-39 (Wash. Ct. App. 1994). In 1972, after
complaints that this definition was too restrictive, the definition
of “occurrence” was changed to “an accident, including continuous
or repeated exposure to conditions, which result in bodily injury
or property damage neither expected nor intended from the
standpoint of the insured.” See APPLEMAN, supra. The policies here
essentially track this definition, though the “expected nor
intended” phrase is now a separate exclusion rather than part of
the definition itself.
The language of the exclusions, of course, is still vague
enough to allow for generous amounts of litigation. See generally
James L. Rigelhaupt, Jr., Annotation, Construction and Application
of Provision of Liability Insurance Policy Expressly Excluding
7
Injuries Intended or Expected by Insured, 31 A.L.R. 4th 957 (1981 &
Supp. 1998). The factual situations confronted have been various.
See, e.g., Southern Md. Agric. Ass’n v. Bituminous Cas. Corp., 539
F. Supp. 1295 (D. Md. 1982) (holding, based on Maryland law, that
the alleged malicious interference with contract did not constitute
an “occurrence”); Adams v. Kent Ins. Co., 431 So. 2d 335 (Fla.
App. 1983) (counting damage from a sudden rainstorm as an
“occurrence,” based on a factual finding that the rain was
unexpected); Pique v. Saia, 450 So. 2d 654 (La. 1984) (requiring
coverage where the insured precipitated a brawl by swinging at a
police officer); Nielsen v. St. Paul. Cos., 583 P.2d 545 (Ore.
1978) (finding no intent to injure and thus no insurer liability in
case involving repossession of property); Gene’s Restaurant, Inc.
v. Nationwide Ins. Co., 548 A.2d 246 (Pa. 1988) (refusing coverage
in suit involving the beating of a restaurant patron, on the ground
that the beating was not an accident).
We need not develop a general theory for interpreting such
provisions, because the Illinois law is clear. The case applying
Illinois law that is most on point is United States Fidelity &
Guaranty Co. v. Open Sesame Child Care Center, 819 F. Supp. 756
(N.D. Ill. 1993). That case involved almost identical insurance
provisions, and the court concluded that allegations of negligent
hiring fell within the definition of “occurrence.” This case is
only persuasive authority, but its deductions from Illinois law are
persuasive.
8
Under Illinois law, if a complaint potentially supports a
ground for recovery, the insurer must defend the entire complaint.
See, e.g., Maryland Cas. Co. v. Peppers, 355 N.E.2d 24 (Ill. 1976).
More importantly, in USF&G v. Wilkin Insulation Co., 578 N.E.2d
926, 932 (Ill. 1991), the Illinois Supreme Court found that
allegedly negligent installation of asbestos-laced products was an
“occurrence” and was not excluded as an “intentional” act. Even
though the installation was intentional, the negligent hiring was
not. See also Mutual Serv. Cas. Ins. Co. v. Country Life Ins. Co.,
859 F.2d 548, 552 (7th Cir. 1988) (“Similar policy language in
other insurance cases has been construed so that intentional torts
are deemed outside the scope of such an ‘occurrence.’”); State Sec.
Ins. Co. v. Globe Auto Recycling Corp., 490 N.E.2d 12 (Ill. App.
Ct. 1986) (requiring insurance company to reimburse costs of
defending negligent hiring claim, even though negligence claim was
coupled with uncovered intentional tort claim).
Here, negligent training was not an intentional tort, and
Chaplain Baker’s acts are not the insureds’ intentional acts.
Thus, the insurance policy did not exclude the acts, and Atlantic
Mutual has a duty to defend.
AFFIRMED.
9