Twin City Fire Insurance v. City of Madison ( 2002 )

UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 01-60378
TWIN CITY FIRE INSURANCE COMPANY,
Plaintiff-Counter Defendant-Appellee,
VERSUS
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.
Appeals from the United States District Court
For the Southern District of Mississippi
October 28, 2002
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
2
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.
3
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
1
Madison contends that if estoppel applies, we do not need to
address the coverage issue, because the insurer’s liability will be
a foregone conclusion. While this may be true in principle, it is
not true on summary judgment, because we are not asked to determine
whether estoppel applies, but only whether a genuine issue of fact
exists pertaining to the question of estoppel. As discussed later
in Part III, we disagree with the district court and find that fact
issues do exist which are material to the question of estoppel. If
upon remand a fact finder determines that the insurer is not
estopped, however, the district court will be faced with the same
question on the exclusion it has already decided. For this reason,
we will review its decision on the exclusion issue as well.
4
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
2
This Court denied the City’s motion to certify the question
whether a Mississippi municipality can lawfully enact and enforce
a developmental impact fee ordinance.
5
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).
3
As part of a settlement, Madison waived all extra-contractual
damages against Twin City (but not third-party defendants,
discussed later). The only issue on the counterclaim is whether
the offending actions estop Twin City from denying liability under
the policy.
6
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
4
Appleman discusses a number of concepts of waiver and estoppel
in the context of insurance policies, see generally 8 Eric Mills
7
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 to
“Hartford Insurance Co.” While the letters recited certain
allegations of the complaint and a number of policy exclusions, the
only remark about exclusion 3(h) among the list of exclusions in
the letters was: “to the extent which the complaint asserts unjust
enrichment by the defendants at the expense of the plaintiffs,
Holmes, Holmes’ Appleman on Insurance 2d § 50.9 (1998), and it is
true that some if applied will not expand coverage in the face of
a clear exclusion. Id. at 242 (“The doctrine of equitable estoppel
is not available to bring within the coverage of an insurance
policy risks that are not covered by its terms or that are
expressly excluded therefrom.”); see also Gilley v. Protective Life
Ins. Co., 17 F.3d 775 (5th Cir. 1994) (insurer’s letter to an
insured that coverage would begin for her son does not waive or
enlarge the policy which under its terms does not contemplate such
coverage).
The Mississippi Supreme Court provided a useful comparison of two
different analyses of waiver in Hartford Accident & Indemnity Co.
v. Lockard, 239 Miss. 644, 124 So. 2d 849 (1960). For waiver based
on an agent’s alleged knowledge that the insured used his truck
with a trailer, the insurer was not estopped to deny coverage and
did not “waive” the clear exclusion of the trailer in the policy.
124 So. 2d at 852-55. However, for waiver under the very same
policy based on different alleged conduct — refusal to defend — a
different analysis applies. Despite the express policy exclusion,
the insurer may become liable if the insured was “misled to his
hurt or prejudice” by the conduct or representations of the insurer
on which he relied. 124 So. 2d at 856.
8
Section 3h would serve to exclude coverage for such allegations.”
The reservation of rights was “as to the issues of coverage
identified as well as any other issues which we may become aware of
or which may come into existence at a later date.”
Although these first two reservation-of-rights letters were
delivered shortly after the Home Builders filed the two lawsuits
against Madison (November 1995 and October 1998), it was January
2000, with the Home Builders’ trial less than a month away, when
Twin City sent a third reservation-of-rights letter which
identified Twin City as the party reserving rights and informed the
insured of its position. This letter stated, “The policy does not
provide coverage . . . if Madison enacted the [IFO] without proper
authority, or if Madison obtained remuneration or financial gain to
which it was not legally entitled. Consequently, Twin City
reserves its right to deny coverage under Paragraph 3(h) of the
policy.” Further, this letter stated that “based on our present
understanding of the claims, we believe that in the event of an
adverse judgment against Madison, any award of damages likely would
not be covered by the policy.”
A fact finder might conclude that Twin City did not
effectively advise Madison of its opinion that any damages
recovered by the Home Builders would not be covered until it sent
this letter. If an insurer is defending under a reservation of
rights, “the insured should be immediately notified of a possible
conflict of interest between his interests and the interests of his
9
insurance company so as to enable him to give informed
consideration to the retention of other counsel.” 7C John Alan
Appleman, Appleman Insurance Law & Practice § 4694 at 365 (1979).
When an insurer is defending under a reservation of rights, the
carrier “should afford the insured ample opportunity to select his
own independent counsel to look after his interest.” Moeller, 707
So. 2d at 1070. Here, the reservation-of-rights letters offered no
opportunity to the insured to select its own independent counsel.
Rather, they referred the “defense of this entire matter” to Levy’s
firm. With this evidence Madison demonstrates an issue for trial,
i.e., whether the notice to the insured of the conflict of
interests was adequate, clear, and timely.
The evidence leaves room for conflicting inferences regarding
not only notice to Madison of the conflict of interests and the
right to select its own counsel, but also its alleged consent to
continue with Terry Levy as its defense counsel. Twin City asks us
to hold, based on Levy’s 27 April 1999 letter5 and evidence that
5
A letter of 27 April 1999 from Levy to the Mayor of Madison
stated: “As we discussed, under the Moeller descision
[sic], since your insurer, is providing the
City a defense but reserving its rights to pay
any indemnity for the claim, the City has the
option to designate its own counsel to defend
the suit at the carrier’s expense. However,
it is our understanding that the City believes
it is in its best interest for Daniel, Coker .
. . to continue the defense of this action.
In light of such, we do not believe there is
any conflict of interest in our firm
representing the City in this action. If you
ever believe that a conflict does exist in our
10
Levy conferred with Madison’s city attorney about Moeller, that
Madison made an informed decision to continue with Levy despite the
conflict. Levy’s 27 April 1999 letter leaves fact questions about
the adequacy of the Moeller notice, because Levy gave his client an
opinion that no conflict existed when a bona fide conflict did
exist. Further, a fact finder might conclude from Levy’s testimony
that he was not aware of the conflict himself. Accordingly, the
inference could still be drawn that Madison did not give informed
consent under those circumstances.6
The foregoing might also support an inference that Twin City
effectively withdrew the defense or breached the duty to defend.
Such conduct could give rise to application of equitable estoppel,
preventing the insurer from denying liability under the policy, if
Madison can show that the conduct resulted in prejudice to the
insured. Southern Farm Bureau, 119 So. 2d at 272.
The evidence presents a genuine issue of fact regarding
firms representation of you or you believe we
are not representing the City’s interest
regarding this lawsuit to the City’s
satisfaction, please advise us of such
immediately so we can make sure that the
City’s interest is being properly protected.”
Sealed ex. N.
6
We also reject the notion that Madison’s city attorney bore
responsibility for discerning whether a conflict existed. It was
the insurer’s choice to defend under a reservation of rights, and
by choosing to furnish legal representation for the claims with the
single law firm, it created a conflict of interest. See Moeller,
707 So. 2d at 1071. The duty is on the insurer, not the insured,
to determine whether a conflict exists and to notify the insured.
11
prejudice, because the very ruling obtained by Levy in favor of the
City in Home Builders (that the IFO was a tax) was used against the
City in this coverage dispute. Had it known earlier, the City
could have hired its own attorney who might have foregone the
jurisdictional tax argument. A reasonable fact finder might
believe that Madison relied on Twin City’s conduct in assuming the
defense and did not know until three weeks before trial that it had
no truly independent counsel. One might find that Madison learned
only within that month before trial that its insurer had hired
counsel to defeat coverage, was using Levy’s work product against
Madison, and was suing Madison for the costs of defense7 over the
past five years. Moeller recognized that allowing an insured the
opportunity to select its own counsel to defend the claim at the
insurer’s expense can prevent such prejudice as the insurer gaining
“‘access to confidential or privileged information in the process
of the defense which it might later use to its advantage in
litigation concerning coverage.’” Moeller, 707 So. 2d at 1069
(quoting CHI of Alaska, Inc. v. Employers Reinsurance Corp., 844
P.2d 1113, 1116 (Alaska 1993)).
The facts could permit the inference that Madison relied on
Twin City’s appointment of Levy as counsel, was prejudiced, and has
7
Twin City dropped its claim for the cost of defense early in
these proceedings.
12
compensable damages.8 Viewing the summary judgment evidence
favorably to Madison, we see the need for a trial, because there
are “genuine factual issues that properly can be resolved only by
a finder of fact because they may reasonably be resolved in favor
of either party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
250, 106 S. Ct. 2505, 2511 (U.S. 1986). Because these fact issues
are germane to the question whether Twin City discharged its duty
to defend or mishandled the claim, they may provide grounds to
estop Twin City from denying liability. Accordingly, we find
summary judgment inappropriate on the counterclaim by Madison.
IV.
Madison also asserted bad faith claims handling and tort
claims against third-party defendants involved in adjusting
Madison’s claims, namely, Hartford Fire Insurance Company (Twin
City’s parent corporation), Hartford Financial Services Group,
Inc., Specialty Risk Services, Inc. (“SRS”) (a Hartford
subsidiary), Michael P. Dandini (a Hartford claims consultant), and
Kimberly J. Chabert (an SRS claims consultant). Madison sued these
affiliates of Twin City for grossly negligent claims handling,
tortious interference with contract, misrepresentation, fraud, and
8
As for the contention that Madison cannot show a genuine issue
of fact material to damages, Madison’s potential liability herein
for reimbursement of the $250,000 paid in settlement to the Home
Builders constitutes damage enough to defeat summary judgment. On
the verge of trial Madison asked its insurer to settle within the
policy limits; had it had the confidence in having an independent
attorney, it might have proceeded to trial and obtained a victory.
13
breach of fiduciary duty.
These claims depend in part on the same evidence Madison
presents against Twin City on the counterclaim discussed above.
Because issues of fact remain, we find summary judgment
inappropriate for these defendants as well, excepting Hartford
Financial Services Group.9
In addition to the issues of fact concerning breach of the
duty to defend discussed above, Madison has demonstrated a number
of other issues of fact: whether Chabert was involved in both
claims analysis and coverage analysis, prejudicing the insured with
a conflict of interests; whether Hartford Fire adequately separated
claim-handling responsibility from coverage analysis; whether
Chabert remained silent about a conflict of interests while
developing a strategy of noncoverage; whether Chabert ever told
Levy that she and Dandini were involved in coverage, though she
instructed him to send them both status reports containing
confidential information received from the client, detrimental to
coverage; whether Dandini relied on confidential information from
Levy’s status reports to develop a coverage defense or in deciding
to hire independent coverage counsel; whether coverage counsel
conducted any investigation besides the one performed by Levy;
whether the entire claims file was forwarded to Phelps Dunbar to
9
As appellees point out, Madison waived any claim against this
defendant by not arguing in its opening brief that it has
demonstrated an issue for trial concerning this defendant.
14
formulate its non-coverage position; whether third-party defendants
relied on Levy’s legal defense against the underlying claims10 to
formulate a strategy to defeat coverage in this action; and whether
the timing and content of the commencement of this action
demonstrated bad faith (claiming defense costs when Moeller plainly
precludes such recovery).
These facts in dispute leave a question regarding third
parties’ gross negligence in claim handling. A fact finder might
consider that coverage analysts having unfettered access to
privileged information from appointed defense counsel in the
presence of an undisclosed conflict support the tort claims
asserted herein. Finding no fact issue suggested as to the
liability of Hartford Financial Services Group, however, we affirm
the summary judgment in favor of that third-party defendant.
V.
10
Twin City specifically challenges Madison’s ability to show
a genuine issue of fact that anyone relied on Levy’s status report
or defense strategy. Levy argued in Home Builders that the IFO was
a tax rather than a fee for federal jurisdictional purposes under
the Tax Injunction Act and won a dismissal on jurisdictional
grounds. On appeal from that dismissal, this Court noted Madison’s
contention that the ordinance fit squarely within the meaning of
“tax” as contemplated by the Tax Injunction Act. Home Builders,
143 F.3d at 1010. Although this Court noted that we were not
deciding for purposes of other statutes or litigation whether the
IFO constituted a tax or fee, 143 F.3d at 1011 n.12, it is
abundantly clear that the district court found the tax/fee
distinction in Home Builders instructive for state law purposes,
and concluded, like Home Builders, that the IFO was a tax not a
fee. To that extent a fact finder might conclude that Madison’s
very argument in those proceedings became the basis for a ruling
against it in this coverage dispute.
15
The City’s motion to recuse having been filed in the district
court after this appeal was noticed, the question of recusal is not
before this Court.
VI.
Fact issues surround the questions whether Twin City and
affiliates notified Madison of the conflict of interests,
sufficiently offered Madison the right to Moeller counsel, or used
confidential information or Levy’s arguments (made earlier on
behalf of Madison) against Madison in this action. Summary
judgment is not appropriate on the liability issue, because Twin
City may be estopped by its conduct from denying liability.
Factual issues preclude summary judgment on the claims against
third-party defendants as well, with the exception of Hartford
Financial Services Group. Accordingly, the judgment of the
district court is affirmed in part as to the exclusion and summary
judgment in favor of Hartford Financial Services Group, reversed in
part, and the matter is remanded.
AFFIRMED IN PART, REVERSED IN PART, and REMANDED.
16