American States Insurance v. Natchez Steam Laundry

United States Court of Appeals,
Fifth Circuit.
No. 96-60731.
AMERICAN STATES INSURANCE COMPANY, Plaintiff-Counter-Defendant-
Appellee,
v.
NATCHEZ STEAM LAUNDRY, a Division of Vicksburg Laundry,
and
James Simmons, Defendants-Counter-Claimants-Appellants.
Jan. 6, 1998.
Appeal from the United States District Court for the Southern
District of Mississippi.
Before REYNALDO G. GARZA, SMITH and WIENER, Circuit Judges.
JERRY E. SMITH, Circuit Judge:
The district court granted summary judgment for American
States Insurance Company ("American States"), holding that it had
no duty to defend its insureds, Natchez Steam Laundry ("Natchez")
and the laundry's owner, James Simmons, from an Equal Employment
Opportunity Commission ("EEOC") lawsuit alleging intentional sexual
harassment. The court also granted American States summary
judgment on the insureds' counterclaim, dismissing their contention
that the insurance agent had orally modified the contract and that
American States had acted in bad faith. Finding no error, we
affirm.
I.
In February 1995, the EEOC sued Natchez and its chief
executive officer and owner, James Simmons, charging various
1
employment-related offenses, including hostile work environment,
quid pro quo sexual harassment, retaliation, and constructive
discharge. The agency further alleged that "[t]he unlawful
employment practices complained of were and are intentional."
Natchez and Simmons turned to American States, demanding
defense of, and coverage for, the EEOC claims. Two policies were
in effect at the time of the alleged harassment: a comprehensive
general liability policy and an umbrella policy. After receiving
advice from its lawyers, American States denied coverage.
American States then sought a declaratory judgment that it had
no duty to defend either insured, claiming that the charged
offenses fell squarely within the intentional-acts exclusion to the
policies.1 Natchez and Simmons disputed this conclusion and
claimed that any touching, if it even occurred, was purely
accidental—the inevitable result of the close working quarters in
the laundry.
Natchez and Simmons also counterclaimed, arguing that the
American States agent who sold Simmons the policies had represented
that lawsuits for sexual harassment were covered. Natchez and
Simmons further contended that American States's failure to
investigate the facts underlying the EEOC charges constituted bad
faith. The district court granted summary judgment for American
States.
II.
1
American States also invokes the employer liability
exclusion, but we do not reach that issue.
2
We review grants of summary judgment de novo. Knight v.
United States Fidelity & Guar. Ins. Co., 65 F.3d 34, 36 (5th
Cir.1995). "The interpretation of an insurance contract, including
the question of whether the contract is ambiguous, is a legal
determination meriting de novo review." National Union Fire Ins.
Co. v. Kasler Corp., 906 F.2d 196, 198 (5th Cir.1990). Under
Mississippi law—which both sides agree governs interpretation of
the policies—ambiguities regarding defense obligations are
construed strictly against the insurer. Mulberry Square Prods.,
Inc. v. State Farm Fire & Cas. Co., 101 F.3d 414, 420 (5th
Cir.1996).
III.
Both policies contain an intentional-acts exclusion, providing
that coverage does not extend to bodily injury or property damage
"expected or intended from the standpoint of the insured."
American States argues that the injuries alleged in the EEOC
complaint come within this exclusion.
A.
The general rule in Mississippi is that an insurer's duty to
defend hinges on the allegations in the underlying complaint.
State Farm Mut. Auto. Ins. Co. v. Taylor, 233 So. 2d 805, 808
(Miss.1970). Under Mississippi law, "an insurer's duty to defend
an action against its insured is measured by the allegations in the
plaintiff's pleadings regardless of the ultimate outcome of the
action." EEOC v. Southern Pub. Co., 894 F.2d 785, 789 (5th
Cir.1990).
3
The EEOC complaint states that "[t]he unlawful employment
practices complained of were and are intentional." The policies
exclude coverage for damages resulting from intentional acts by the
insured. We agree with American States that Simmons's alleged
conduct falls squarely within the policy exclusions.
There is, however, a narrow exception to the general rule:
Mississippi courts impose a duty to defend upon an insurer who has
knowledge, or could obtain knowledge through a reasonable
investigation, of the existence of facts that trigger coverage. In
State Farm, 233 So. 2d at 808, the court observed that "a divergence
may exist between the facts as alleged in the petition and the
actual facts as they are known to or reasonably ascertainable by
the insurer, in which latter case the insurer has a duty to
defend...." Similarly, in Meng v. Bituminous Cas. Corp., 626
F. Supp. 1237, 1241 (S.D.Miss.1986), the court noted that "where the
complaint alleges facts which fall within a policy exclusion, the
insurer is not obligated to defend unless it later learns or is
apprised of facts which indicate coverage."
Natchez and Simmons argue that since they promptly notified
American States that any touching was unintentional, American
States knew of "facts" that triggered its duty to defend. This
argument fails for a simple reason: Natchez and Simmons have not
supplied "facts" that indicate coverage. Simmons's contention that
his bawdy behavior was accidental is not a "fact," but only an
assertion.
Were we to accept Simmons's legal argument, an insured could
4
trigger the duty to defend merely by denying the allegations in the
complaint. Allowing Simmons to defeat the intentional acts
exclusion in this way would increase the investigatory burden on
insurers and eviscerate Mississippi's general rule—that an insurer
can determine whether it has a duty to defend by comparing the
complaint to the policy.
B.
Although Mississippi courts have skirted the issue, some
courts in this circuit have deemed sexual harassment an intentional
act as a matter of law. See, e.g., Old Republic Ins. Co. v.
Comprehensive Health Care Assocs., 786 F. Supp. 629, 632-33
(N.D.Tex.1992), aff'd, 2 F.3d 105 (5th Cir.1993). Other courts
reach the same destination by a different route, holding that
sexual harassment is not an "occurrence" and therefore is excluded
from coverage. See, e.g., Cornhill Ins. PLC v. Valsamis, Inc., 106
F.3d 80, 88 (5th Cir.1997). Because we rely on the plain language
of the EEOC complaint, which alleges intentional conduct, we need
not reach this larger issue.
C.
Even if Simmons's actions are found to be intentional,
Natchez contends that it should not be held liable for its owner's
conduct. Because the insurance policies treat Natchez and Simmons
as separate insureds, Natchez argues that a finding that Simmons
acted intentionally does not necessarily mean that Natchez did so.
Natchez directs us to Western Heritage Ins. Co. v. Magic Years
Learning Ctrs. & Child Care, Inc., 45 F.3d 85 (5th Cir.1995), a
5
case with similar facts that arose under Texas law.2 There, a
former employee sued the Wilsons (the owners of a day care center)
and the business itself, claiming that she had been sexually
harassed by Mr. Wilson. Mr. and Mrs. Wilson and the business were
listed as separate insureds on the same policy. The insurer denied
coverage to all parties on the ground that sexual harassment is an
intentional act and thus falls outside the definition of
"occurrence." The court agreed with the insurer that the policy
did not cover Mr. Wilson—because his conduct was intentional—but
held that Mrs. Wilson and the business were covered. The court
concluded: "[T]he alleged acts or omissions are within the general
definition of occurrence, because there is no contention that Mrs.
Wilson or [the business] expected or intended to injure" the
plaintiff. Id. at 89.
The instant case differs from Western Heritage in one
important respect: Here, the underlying complaint charged that the
business acted intentionally. The Western Heritage plaintiff sued
the business under a theory of respondeat superior, alleging gross
negligence in entrusting Mr. Wilson with supervisory
responsibility, in not providing a workplace free of sexual
harassment, and in not providing an avenue for redress. Id. at 87.
Here, the EEOC sued the business for similar conduct—failure to
2
As noted in New York Life Ins. Co. v. Travelers Ins. Co., 92
F.3d 336, 340 n. 4 (5th Cir.1996), parts of Western Heritage are
inconsistent with our holding in Columbia Mut. Ins. Co. v. Fiesta
Mart, Inc., 987 F.2d 1124 (5th Cir.1993). We do not attempt to
reconcile this apparent conflict; we discuss Western Heritage
merely to illustrate that Natchez cannot prevail even under Western
Heritage's more favorable standard.
6
investigate the complaints against Simmons, to take action against
Simmons, and to provide an avenue for redress—but charged that
these omissions were intentional.
Under Mississippi law, the EEOC's allegation of intent is
sufficient to defeat coverage for Natchez. As we noted in Jones v.
Southern Marine & Aviation Underwriters, Inc., 739 F. Supp. 315, 324
(S.D.Miss.1988), aff'd, 888 F.2d 358 (5th Cir.1989), "[I]f a
plaintiff's allegations against an insured are unequivocal with
regard to claiming injury or damages caused by acts which, if
proved, would place his claim within an exclusion from coverage,
there is no duty to defend." Here, the allegations that Natchez
acted intentionally are unequivocal. Accordingly, American States
had no duty to defend.
IV.
In their counterclaim, Natchez and Simmons argue that
American States is bound by the oral representations of its agent,
Susan Loflin, who sold the policies to Simmons. Although they
concede that ordinarily the written language of an insurance policy
is binding, Natchez and Simmons suggest that Loflin told them that
the policies covered "all liabilities," including claims for sexual
harassment.
Under Mississippi law, the construction of an insurance
contract is limited to examining the policy. Employers Mut. Cas.
Co. v. Nosser, 250 Miss. 542, 164 So. 2d 426, 430 (1964). "The
policy itself is the sole manifestation of the parties' intent, and
no extrinsic evidence is permitted absent a finding by a court that
7
the language is ambiguous and cannot be understood from a reading
of the policy as a whole." Great N. Nekoosa Corp. v. Aetna Cas. &
Sur. Co., 921 F. Supp. 401, 406 (N.D.Miss.1996).
Nonetheless, an agent's oral representations, when relied
upon, sometimes can modify an insurance contract. Scott v.
Transport Indem. Co., 513 So. 2d 889, 894 (Miss.1987) ("Certain
verbal representations made by persons in authority may become ...
parts of the contract."). But this special rule does not apply
when the contractual language is plain. In Godfrey, Bassett v.
Huntington Lumber & Supply Co., 584 So. 2d 1254, 1257 (Miss.1991),
the court remarked that "a person is under an obligation to read a
contract before signing it, and will not as a general rule be heard
to complain of an oral misrepresentation the error of which would
have been disclosed by reading the contract."
As the district court noted, both policies patently exclude
claims for injuries stemming from intentional acts by the insured.
There is no suggestion that the contractual language is ambiguous.
Finally, it is difficult to understand how Simmons reconciled his
belief that he was covered for "all liabilities" with the
multi-page lists of exclusions.
V.
Natchez and Simmons accuse American States of bad faith and
seek punitive damages. They charge American States with failing to
investigate the allegations underlying the EEOC complaint before
denying coverage.
The Mississippi Supreme Court recently addressed an insurer's
8
duty to investigate. In Murphree v. Federal Ins. Co. & Inst. for
Tech. Dev., No. 94-CA-00669-SCT, 1997 Miss. LEXIS 145, --- So.2d --
-- (Miss. Apr. 10, 1997), the court held that
although it is well settled under Mississippi law that an
insurance company has a duty to investigate promptly and
adequately an insured's claim ... a plaintiff's burden in
proving a claim for bad faith refusal goes beyond merely
demonstrating that the investigation was negligent.... [T]his
level of negligence in conducting the investigation must be
such that a proper investigation by the insurer "would easily
adduce evidence showing its defenses to be without merit."
Id. at *21, --- So.2d at ---- (citing Merchants Nat'l Bank v.
Southeastern Fire Ins. Co., 751 F.2d 771, 777 (5th Cir.1985)).
Natchez and Simmons have supplied no persuasive evidence that
American States acted maliciously or committed anything approaching
an intentional tort. Nor would an investigation have "easily"
uncovered evidence showing its defenses to be "without merit."
American States obtained the opinion of counsel, then properly
denied the claim after reviewing the EEOC's allegations and the
insurance policies. Its investigation hardly reaches the
heightened level of negligence required for bad faith under
Mississippi law.
AFFIRMED.
9