American States Insurance v. Synod of the Russian Orthodox Church Outside of Russia

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT March 2, 2006
Charles R. Fulbruge III
Clerk
No. 04-51223
AMERICAN STATES INSURANCE COMPANY; ET AL,
Plaintiffs,
AMERICAN ECONOMY INSURANCE COMPANY,
Plaintiff-Appellant,
versus
SYNOD OF THE RUSSIAN ORTHODOX CHURCH OUTSIDE OF RUSSIA; ET AL,
Defendants,
SYNOD OF THE RUSSIAN ORTHODOX CHURCH OUTSIDE OF RUSSIA,
Defendant-Appellee.
_________________________
Appeal from the United States District Court
for the Western District of Texas
USDC No. 1:00-CV-824
_________________________
Before REAVLEY, HIGGINBOTHAM, and GARZA, Circuit Judges.
PER CURIAM:*
American Economy Insurance Co. (“American Economy”) appeals
the district court’s judgment, entered on remand from this Court,
declaring that American Economy has a duty to indemnify the Synod
of Bishops of the Russian Orthodox Church Outside of Russia (the
“Church”) for the costs of the settlement and attendant litigation
*
Pursuant to the 5TH CIR. R. 47.5, the court has determined that this
opinion should not be published and is not precedent except under limited
circumstances set forth in 5TH CIR. R. 47.5.4.
of a separate lawsuit. We affirm.
I
In August 2000, the Church was sued in Texas state court on
behalf of a minor, SSG, who alleged that he had been molested by
two monks at a monastery in Blanco County, Texas. The Church
promptly notified American Economy, its then insurer, of the suit.
American Economy agreed to defend the Church, subject to a
reservation of its right to contest coverage. Mr. Jacobs, hired by
American Economy, and Ms. Hughes, hired by the Church, both
represented the Church in the underlying suit.
The Church then sought a declaratory judgment in Texas state
court to clarify American Economy’s obligations to the Church under
the insurance policy. Among other things, the Church sought a
declaration that American Economy had a duty to defend and
indemnify it in the underlying lawsuit. American Economy removed
the case to federal court. Both parties moved for partial summary
judgment on the issues of defense and indemnification. The
district court granted partial summary judgment in favor of the
Church and ordered that American Economy defend and indemnify the
Church. American Economy filed a motion for reconsideration.
The parties in the underlying suit commenced settlement
negotiations, for which American Economy assigned Ms. Fowler as
claim adjuster. The underlying lawsuit by the minor was then
settled. As a result, the parties to the federal district court
2
case agreed to dismiss as moot all issues related to the duty to
defend while reserving rights to contest indemnification. The
district court denied the motion for reconsideration, concluding
that American Economy had a duty to indemnify. American Economy
appealed.
This Court, in Bishops I, vacated the district court’s
judgment with respect to the duty to indemnify and remanded the
case, finding that the district court “erred when it incorrectly
assumed that [American Economy] had a duty to indemnify the Church
based solely on its duty to defend.”1 This Court further held that
the duty to indemnify is measured against the actual basis for an
insured’s liability and that “[t]he district court should have
determined whether the Church had shown that the settled claim was
a covered loss under the insurance policy” in order for the Church
to be indemnified.2 In footnote four, this Court explained that it
was unable to make the determination itself based on the record,
for lack of evidence proving that the dates of molestation
coincided with the term of coverage under the insurance policy.3
On remand, the district court found that SSG’s claim was a
covered loss under the policy and that American Economy had a duty
to indemnify the Church because the incidents leading up to the
1
Am. States Ins. Co. v. Synod of the Russian Orthodox Church Outside of
Russia, 335 F.3d 493, 496 (5th Cir. 2003) (“Bishops I”).
2
Id.3
Id. at 497 n.4.
3
underlying lawsuit occurred during the coverage term. American
Economy appealed, claiming that the district court erred by failing
to follow this Court’s mandate that it consider whether the
settlement represented a potentially covered loss under the policy.
Specifically, American Economy argued that the district court
failed to examine whether the settlement award represented punitive
damages which are not insurable under controlling New York law.4
This Court reversed in Bishops II, finding a justiciable issue
of fact regarding whether some portion of the settlement
represented uninsurable punitive damages.5 We described the
relevant New York law as requiring an insurer “to indemnify an
insured for a settlement when the settlement is made to settle a
suit which involved a potential liability based on the facts known
to the insured, and the settlement was reasonable in light of the
size of possible recovery and the likelihood that the insured would
have been found liable at trial.”6 We also noted the lack of
evidence demonstrating what percent of the award was punitive and,
therefore, reversed the judgment declaring American Economy liable
4
See Public Service Mut. Ins. Co. v. Goldfarb, 425 N.E.2d 810, 814 (N.Y.
1981). While New York law initially governs, the settlement agreement contains
an unambiguous choice of law provision, selecting Texas law as the controlling
jurisprudence.
5
Am. States Ins. Co. v. Synod of the Russian Orthodox Church Outside of
Russia, 2004 U.S. App. LEXIS 18310 (“Bishops II”) (citing National Union Fire
Ins. Co. of Pittsburgh Pa. v. Ambassador Group, Inc., 556 N.Y.S.2d 549, 553 (App.
Div. 1990).
6
Am. States Ins. Co., 2004 U.S. App. LEXIS 18310 (citing Luria Bros & Co.
v. Alliance Insurance Co., 780 F.2d 1082, 1091 (2d Cir. 1986)).
4
for indemnification of the Church for all settlement expenses.7 We
remanded the case to the district court for a determination of the
amount of any punitive damages impermissibly included in the
settlement award.
On remand, following a bench trial, the district court found
that the settlement award did not contain an award of punitive
damages. American Economy now argues that the district court erred
on remand by limiting the inquiry to only the possibility of
punitive damages in the settlement award and challenges whether the
record supports a finding that the Church fully met its burden of
proof to show coverage under Luria Bros. & Co.8 Specifically,
American Economy contends that the Church has not established that
the settlement derives from covered losses under the policy and
that the settlement amount was reasonable in view of the potential
liability and the probability of recovery.
II
On appeal from judgment after a bench trial, we review the
district court’s findings of fact for clear error and questions of
law de novo.9 A finding of fact is clearly erroneous “when,
7
Id.8
Luria Bros & Co., 780 F.2d at 1091; Employers Casualty Co. v. Block, 744
S.W.2d 940, 943-44 (Tex. 1988) (stating the insured has the burden to prove
insurance coverage), cited in Am. States Ins. Co., 335 F.3d at 496.
9
Houston Exploration Co. v. Halliburton Energy Serv. Inc., 359 F.3d 777,
779-780 (5th Cir. 2004) (citing Gebreyesus v. F.C. Schaffer & Assoc. Inc., 204
F.3d 639, 642 (5th Cir. 2000)).
5
although there is evidence to support it, the reviewing court,
based on all evidence, is left with the definitive and firm
conviction that a mistake has been committed.”10 However, findings
induced by, or resulting from, a misapprehension of controlling
substantive principles of law lose that insulation of the clearly
erroneous standard.11 We review de novo whether a district court
faithfully and accurately followed our mandate on remand.12
III
Under governing New York law,13 the Church has the burden of
demonstrating two elements, in order to establish that American
Economy has a duty to pay for the settlement. The Church must show
(A) that “the settlement [was] made to settle a suit which involved
a potential liability based on the facts known to the insured” and
(B) that “the settlement was reasonable in light of the size of
possible recovery and the likelihood that the insured would have
been found liable at trial.”14
A.
American Economy argues that our opinion on remand did not
10
Id.; Canal Barge Co. Inc., v. Torco Oil Co., 220 F.3d 370, 375 (5th
Cir. 2000).
11
U.S. v. Richberg, 398 F.2d 523, 530 (5th Cir. 1968).
12
Sobley v. Southern Natural Gas Co., 302 F.3d 325, 332 (5th Cir. 1998).
13
Am. States Ins. Co., 335 F.3d at 495.
14
Am. States Ins. Co., 2004 U.S. App. LEXIS 18310 (citing Luria Bros &
Co., 780 F.2d at 1091).
6
imply that the Church had answered the larger question of whether
the settlement represents payment solely for covered claims, that
the district court incorrectly limited the inquiry on remand to
determining the amount of any punitive damages included in the
settlement, and that, ultimately, the Church did not meet its
burden of proving the settlement amounts allocatable to the
policy.15 Specifically, American Economy presently contends that
the settlement award impermissibly includes reparation for the
intentional conduct of the monks, not covered under the insurance
policy,16 which inflates the settlement award beyond that for which
American Economy is responsible.
On the first appeal to this Court, Bishops I, American Economy
refuted the district court’s holding that the duty to defend was
commensurate with the duty to indemnify. Relying on Servidone,17
American Economy, though admitting a duty to defend, contended that
it did not owe a duty to indemnify. Arguing that the district
court applied the wrong standard in determining its duty to
15
Am. States Ins. Co., 335 F.3d at 497 n. 3.
16
The monks do not qualify as insureds because clergy are considered
insureds under the policy only “with respect to their duties as such;” their
intentional misconduct does not constitute an occurrence as required by the
policy because sexual molestation is intentional (Public Service Mut. Ins. Co.
v. Camp Raleigh, Inc., 650 N.Y.S.2d 136, 137 (1996)). Furthermore, intentional
criminal conduct is uninsurable under New York law (Goldfarb, 425 N.E.2d at 813).
17
Servidone Construction Corp. v. Security Insurance Co. of Hartford, 64
N.Y.2d 419 (1985) (“The duty to defend is measured against the allegations of
pleadings but the duty to pay is determined by the actual basis for the insured’s
liability to a third party.”), cited in Am. States Ins. Co., 335 F.3d at 496.
7
indemnify the Church, American Economy asserted that it owed no
duty because the church had not proved that it faced actual
liability. We rejected that argument, holding that the Church need
not prove its own liability.18 Rather, it need only show that the
claims would be covered under the terms of the insurance
agreement–-a showing that the district court on remand found the
Church made by demonstrating an occurrence of bodily injury during
the policy period in the coverage territory. Therefore, the
district court ruled, as a matter of law, that the Church met its
burden of proving that the claims against the Church would be
covered under the policy agreement.
On the second appeal to this Court, Bishops II, American
Economy, citing Luria Bros & Co.,19 urged that the district court
failed to determine properly if the settlement represented a
covered loss. Specifically, American Economy argued that the
settlement award impermissibly included punitive damages. We
agreed and remanded for a lack of evidence allocating funds within
18
Luria Bros & Co., 780 F.2d at 1091; see Uniroyal v. Home Insurance Co.,
707 F.Supp. 1368, 1379 (E.D.N.Y. 1998) (stating “an otherwise covered claim, once
settled, [need not] be proven anew by the insured”), cited in Am. States Ins.
Co., 335 F.3d at 496.
19
Id. (stating the insured need not establish actual liability to the
party with whom it has settled "so long as...a potential liability on the facts
known to the [insured is] shown to exist, culminating in a settlement in an
amount reasonable in view of the size of possible recovery and degree of
probability of claimant's success against the [insured]" (quoting Damanti v. A/S
Inger, 314 F.2d 395, 397 (2d Cir. 1963), cert. denied, 375 U.S. 834 (1963)),
cited in Am. States Ins. Co., 2004 U.S. App. LEXIS 18310).
8
the settlement payment.20
On remand, the district court determined that the total
settlement amount represented only compensatory damages. American
Economy does not now object to this determination but, on this, the
third appeal to this Court, contends that the ruling as to punitive
damages still does not answer the question of coverage; removing
punitive damages still leaves the possibility that a portion of the
compensatory damages may have been negotiated in satisfaction of
the monks’ intentional conduct, also prohibited from inclusion in
the settlement payment under the insurance policy.
The Church answers that American Economy has waived the
argument by not raising it earlier. We agree. It did not raise
the issue of intentional criminal conduct as a bar to coverage on
the first appeal of the same legal question. American Economy had
the opportunity to argue that some portion of the settlement was
not covered, and it did–concerning punitive damages. It should
have raised the intentional conduct argument then, where we could
have addressed it and instructed the lower court accordingly.
American Economy, however, did not. The contention was waived,
and, thus, the district court did not err in limiting its inquiry
only to the allocation of compensatory and punitive damages in the
settlement.
B.
20
See Am. States Ins. Co., 2004 U.S. App. LEXIS 18310.
9
Again relying on Luria Bros & Co.,21 American Economy urges
that the Church failed to meet its burden of proof concerning the
reasonableness of the settlement amount, given the limited size of
the potential recovery and the unlikelihood of success. Though the
district court did not expressly address the reasonableness issue
apart from the issue of whether punitive damages were included in
the settlement agreement, the district court appropriately relied
on Certain Underwriters, which holds that a reservation of rights
agreement between the insurer and the insured “merely preserves
procedural avenues. It does not articulate any agreement or
substantive position that could be read to conflict with the
express language [of the settlement agreement].”22 The district
court held, and it is uncontested, that the settlement agreement
unambiguously excludes punitive damages. Where the insurer has a
reservation of rights agreement and is involved in the settlement
negotiations, as the district court found,23 the insurer has no
right to challenge the allocation between parties and claims of a
clearly apportioned settlement amount.24
We are persuaded that this also rings true for protestations
21
Luria Bros. & Co., 780 F.2d at 1091., cited in Am. States Ins. Co., 335
F.3d at 496.
22
Certain Underwriters at Lloyd’s, London v. Oryx Energy Company, 203
F.3d 898, 901 (5th Cir. 2000).
23
The district court expressly found that “the insurer was not absent
from the negotiating table.”
24
Certain Underwriters at Lloyd’s, London, 203 F.3d at 901.
10
over the reasonableness of the settlement.25 If American Economy
participated in the settlement process, it may not now challenge
the reasonableness of the settlement amount. American Economy
denies its participation.
American Economy received and rejected the first two
settlement demands. Though American Economy downplays its
significance, American Economy’s own hire, Mr. Jacobs, represented
the Church in the underlying lawsuit and set a range of the
Church’s potential liability at $300,000-$900,000–-a range that
American Economy acknowledged includes the settlement amount of
$787,500. American Economy made the first counteroffer, in
response to the settlement demand. Ms. Fowler, American Economy’s
adjuster, requested updates and was habitually informed of
negotiation progress, including the subsequent offers and
counteroffers. Also, it was Mr. Jacobs who drafted the settlement
agreement that memorializes the parties’ intentions. We conclude
that the district court did not clearly err in findings that
American Economy participated in the settlement negotiations.
The district court appropriately resolved the viable issues on
remand, regarding the potential liability under the policy and the
reasonableness of the settlement.
AFFIRMED.
25
Id. (“...having participated fully in the settlement...the district
court did not err in focusing on the Release as the embodiment of the parties’
intent and declining to consider...other proposed factors.”).
11
Judge Garza concurs in the opinion except for Part III-B, and
in the judgment.
12