Western Heritage Ins. Co. v. Magic Years Learning Centers and Child Care, Inc.

United States Court of Appeals,
Fifth Circuit.
No. 94-60136.
WESTERN HERITAGE INSURANCE COMPANY, Plaintiff-Appellant,
v.
MAGIC YEARS LEARNING CENTERS AND CHILD CARE, INC., et al.,
Defendants,
Magic Years Learning Centers and Child Care, Inc., Charles R.
Wilson, and Doris J. Wilson, Defendants-Appellees.
Feb. 16, 1995.
Appeal from the United States District Court for the Southern
District of Texas.
Before JONES and STEWART, Circuit Judges, and DUPLANTIER,* District
Judge.
DUPLANTIER, District Judge:
Charles R. Wilson and his wife Doris J. Wilson operate Magic
Years Learning Centers and Child Care, Inc. (Magic Years), a child
day care center. Mr. Wilson serves as president of Magic Years,
and his wife is its secretary and treasurer. Theresa L. Alexander,
a former employee of Magic Years, and her husband filed suit in
state court against Magic Years and Mr. and Mrs. Wilson, claiming
that Mr. Wilson sexually harassed Mrs. Alexander. Western Heritage
Insurance Company (Western Heritage) insured Magic Years and Mr.
and Mrs. Wilson during the period of Mrs. Alexander's employment.
In this suit for declaratory judgment, the district court decreed
that Western Heritage must defend its insureds, Magic Years and Mr.
*
District Judge for the Eastern District of Louisiana,
sitting by designation.
1
and Mrs. Wilson, in the underlying state court action brought by
the Alexanders and pay any judgment rendered against them. Western
Heritage appealed.1 We AFFIRM the judgment in favor of Mr. and
Mrs. Wilson, but we REVERSE the judgment in favor of Magic Years.
Mrs. Alexander was an employee of Magic Years for slightly
over sixteen months. During that time, the Western Heritage
comprehensive general liability insurance policy at issue listed
"Charles & Doris Wilson dba Magic Years Learning Center and Child
Care, Inc." as the named insured. All the parties treat this
strange designation as referring to three insureds: Mr. Wilson,
Mrs. Wilson and the corporation.
The state court suit by the Alexanders alleged that Mr. Wilson
sexually harassed Mrs. Alexander at work and under other
circumstances, that such harassment led to her constructive
discharge, that he invaded her right to privacy by asking probing
questions about her personal life and sexual activities, that he
unlawfully imprisoned her, that the harassment and her constructive
discharge violated her federal and state civil rights, that he
committed assault and battery by touching her in an offensive,
unwelcome manner, and that he acted with such want of care and
conscious indifference as to warrant punitive damages. The
Alexanders claimed that Mrs. Wilson and Magic Years were
responsible under the doctrine of respondeat superior for Mr.
1
The Alexanders also sought exemplary damages in their state
court suit. Magic Years and the Wilsons do not dispute the
district court's declaration that exemplary damages are
specifically excluded by the insurance policy and hence not
covered.
2
Wilson's conduct and that they were grossly negligent in entrusting
him with supervisory responsibility, in not providing a workplace
free of sexual harassment, and in not providing an adequate avenue
for redress. They also alleged that Magic Years and the Wilsons
intentionally inflicted severe emotional distress upon Mrs.
Alexander. Mr. Alexander asserted a claim for loss of consortium.
Magic Years and the Wilsons made demand upon Western Heritage to
defend them in the state court suit and to pay any judgment arising
out of it.
Western Heritage filed this action seeking a declaration that
it owed no duty to defend or indemnify Magic Years or the Wilsons
in the underlying state court suit; in a counterclaim Magic Years
and the Wilsons sought a declaration that Western Heritage must
defend and indemnify them. The parties filed cross motions for
summary judgment with a stipulation that the policy and the
Alexanders' pleadings in the underlying state court suit
constituted the relevant evidence.
The district court held that the policy covered the
Alexanders' state court claim and that the employer exclusion
clause did not exclude coverage, because some of the allegations
concerned conduct that occurred outside the course of Mrs.
Alexander's employment.
Western Heritage contends that the policy's definition of
occurrence does not cover sexual harassment, and, even if it does,
the allegations in the Alexanders' suit are excluded from coverage
by the assault and battery exclusion endorsement. Western Heritage
3
further contends that if the state court claims are otherwise
covered, they are excluded by the employer liability exclusion
clause.
TEXAS LAW
Texas substantive law controls this diversity jurisdiction
case. Under Texas insurance law, an insurer is required to defend
any case in which at least some of the allegations in the pleadings
present a claim covered by the policy. See Gulf Chem. &
Metallurgical Corp. v. Associated Metals & Minerals Corp., 1 F.3d
365, 369 (5th Cir.1993). In determining whether the policy covers
the allegations, the court must enforce the policy as written if it
can be given only one reasonable construction. Nat'l Union Fire
Ins. Co. v. Hudson Energy Co., Inc., 811 S.W.2d 552, 555
(Tex.1991). However, if the insurance policy is ambiguous,
susceptible of more than one reasonable interpretation, the court
must adopt the construction that most favors the insured. Id.;
Barnett v. Aetna Life Ins. Co., 723 S.W.2d 663, 665 (Tex.1987).
Because exceptions and limitations of liability are even more
strictly construed against the insurer, " "we must adopt the
construction of an exclusionary clause urged by the insured as long
as that construction is not itself unreasonable, even if the
construction urged by the insurer appears to be more reasonable or
a more accurate reflection of the parties' intent.' " Barnett, 723
S.W.2d at 666 (quoting Glover v. Nat'l Ins. Underwriters, 545
S.W.2d 755, 761 (Tex.1977)). Therefore, we must read the
allegations of the underlying state court suit in light of the
4
policy's insuring provisions and exclusions to determine whether
there is coverage, bearing in mind these liberal rules of
construction in favor of the insured.
"OCCURRENCE"
The insuring provision in the policy reads as follows:
The company will pay on behalf of the insured all sums which
the insured shall become legally obligated to pay as damages
because of
(a) bodily injury or
(b) property damage
to which this insurance applies, caused by an occurrence, and
the company shall have the right and duty to defend any suit
against the insured seeking damages on account of such bodily
injury....
Therefore, to trigger the duty to defend, the pleadings in the
underlying state court suit must allege facts which constitute
bodily injury caused by an occurrence that the policy does not
exclude.
The policy defines an occurrence as "an accident, including
continuous or repeated exposure to conditions, which results in
bodily injury or property damage neither expected nor intended from
the standpoint of the insured."2 Western Heritage contends that
the definition of occurrence excludes intentionally inflicted
injuries and therefore excludes the allegations which arise out of
sexual harassment because Mr. Wilson intended or expected to injure
Mrs. Alexander when he harassed her and touched her in an
2
The policy defines bodily injury as "physical injury,
sickness or disease sustained by any person which occurs during
the policy period...."
5
offensive, unwelcome manner. With respect to the Alexanders' state
court suit, the general policy definition of occurrence is trumped
by the following special endorsement:
Physical and/or Mental Abuse Limitation Endorsement
In consideration of the premium charged, it is hereby
understood and agreed that Bodily Injury and Property Damage
includes any act, which may be considered sexual in nature and
could be classified as an Abuse, Harassment, Molestation,
Corporal Punishment or an Invasion of an individual's right of
Privacy or control over their physical and/or mental
properties by or at the direction of an Insured, an Insured's
employee or any other person involved in any capacity of the
Insured's operation....
* * * * * *
Severability of Insurance
This insurance applies separately to each Insured....
(underlining emphasis added).
Regardless of whether the general definition of occurrence
would exclude allegations of sexual harassment by the insured, the
endorsement expressly provides for coverage of such claims. To
hold otherwise would render the endorsement meaningless. See
Barnett, 723 S.W.2d at 666 (stating that a court should read a
contract, including an insurance policy, to give effect to each
part of the contract unless doing so would do violence to the rules
of law or construction).
The alleged acts of Mr. Wilson complained of in the underlying
state court suit are covered by the endorsement because they all
"may be considered sexual in nature and could be classified as an
Abuse, Harassment, Molestation, Corporal Punishment or an Invasion
of an individual's right of Privacy." Alternatively, from the
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standpoint of Magic Years and Mrs. Wilson,3 not only do the
allegations in the underlying state court suit fall within the
endorsement, but the alleged acts or omissions are within the
general definition of occurrence, because there is no contention
that Mrs. Wilson or Magic Years expected or intended to injure the
Alexanders. See Walker v. Lumbermens Mut. Casualty Co., 491 S.W.2d
696 (Tex.Civ.App.1973) (holding that exclusion of intentional acts
in homeowner's policy does not apply to parent who is being held
liable for son's intentional acts).
ASSAULT AND BATTERY EXCLUSION
Western Heritage also contends that the allegations involving
assault and battery and offensive touching are excluded from
coverage by the following assault and battery exclusion
endorsement:
It is agreed that the insurance does not apply to bodily
injury or property damage arising out of assault and battery
or out of any act or omission in connection with the
prevention or suppression of such acts, whether caused by or
at the instigation or direction of the insured, his employees,
patrons or any other person.
The underlying state court suit is based upon alleged sexual
harassment, expressly covered by the policy's "physical and/or
mental abuse limitation endorsement." The allegations of assault
and battery, unlawful imprisonment, and intentional infliction of
emotional distress are alternative legal theories of liability for
the alleged sexual harassment. The physical/mental abuse
endorsement would be meaningless with respect to claims of physical
3
The endorsement, which contains a severability of insurance
clause, must be applied separately to each insured.
7
abuse if the assault and battery exclusion were applicable. The
assault and battery exclusion is trumped by this special
endorsement, just as is the definition of occurrence.
EMPLOYER LIABILITY EXCLUSION
Western Heritage also argues that the allegations in the
state court suit are excluded by the following employer liability
exclusion clause:
This insurance does not apply:
(i) to bodily injury to any employee of the insured arising
out of and in the course of his employment by the insured for
which the insured may be held liable as an employer or in any
other capacity; * * * or
(iii) to bodily injury sustained by the spouse, child, parent,
brother, or sister of an employee of the insured as a
consequence of bodily injury to such employee arising out of
and in the course of his employment by the insured.
The policy defines an "insured" as:
any person or organization qualifying as an insured in the
"Persons Insured' provision.... The insurance afforded
applies separately to each Insured against whom claim is made
or suit is brought, except with respect to the limits of the
Company's liability.
By this employer liability exclusion, Western Heritage may have
intended to exclude coverage of claims by "any employee" of any
insured, but it did not do so. Instead, the policy excludes
coverage of claims by "any employee of the insured." (emphasis
added). The author of the policy knew how to write the word "any",
for he used it to modify "employee", but not "insured."
The definition of an "insured" in the policy provides that
"[t]he insurance afforded applies separately to each Insured
against whom claim is made or suit is brought." The "physical
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and/or mental abuse limitation endorsement," which provides for
coverage of the claims at issue, states that "[t]his insurance
applies separately to each Insured." Thus a claim against one
insured may be covered, even though the same claim against another
insured is excluded. See Commercial Standard Ins. Co. v. Am. Gen.
Ins. Co., 455 S.W.2d 714 (Tex.1970) (holding that the employee
exclusion clause is to be applied separately to each insured who
may be entitled to coverage whenever the policy contains a
severability of interests clause). Mindful that we must adopt any
construction of an exclusionary clause urged by the insured as long
as it is not unreasonable, Barnett, 723 S.W.2d at 666, we must read
the employer liability exclusion as applying separately to each
insured, excluding coverage of an insured only if that insured is
the employer of the injured party or the party's spouse.4
The employer liability exclusion does not apply to Mr. and
Mrs. Wilson, neither of whom was Mrs. Alexander's employer, but it
does apply to Magic Years, which was her employer. See Guaranty
Nat'l Ins. Co. v. Marshall County Bd. of Educ., 540 So. 2d 745, 749
4
Two recent decisions, one by a Texas Court of Appeals and
one by this circuit, apply an employer liability exclusion clause
to exclude coverage of both a corporate employer and an
individual. In the Texas case, Aberdeen Insurance Company v.
Bovee, the individual was apparently a co-employee. 777 S.W.2d
442 (Tex.Ct.App.1989). In the federal case, Pennsylvania
National Mutual Casualty Insurance Co. v. Kitty Hawk Airways,
Inc., the individual was the vice-president and "co-owner" of the
corporate defendant. 964 F.2d 478, 479 (5th Cir.1992). In
contrast with the instant Western Heritage policy, apparently
neither the Aberdeen nor the Pennsylvania National policy
contained a "severability of insurance" clause, and therefore
neither of those decisions consider the relationship between the
term "employer" and an individual who is not an employer but is
an insured.
9
(Ala.1989) (holding that employer liability exclusion clause does
not exclude coverage of claim of deceased employee against his
supervisors); Great S.W. Fire Ins. Co. v. Hercules Bldg. &
Wrecking Co., Inc., 35 Mass.App.Ct. 298, 619 N.E.2d 353 (1993)
(holding that general comprehensive liability insurance policy with
employer liability exclusion clause covered claims by an employee
against the owner/president/manager but not those against the
company), review denied, 416 Mass. 1106, 622 N.E.2d 1364 (1993).
All of the claims against Magic Years are excluded by the
employer liability exclusion clause, because Magic Years employed
Mrs. Alexander, the claims arose out of the course of her
employment, and the exclusion specifically applies to the
derivative claims of the injured employee's spouse. See Old
Republic Ins. Co. v. Comprehensive Health Care Assoc., Inc., 2 F.3d
105, 109 (5th Cir.1993) (stating that the employment-related
exclusion "broadly covers virtually any claim arising out of the
employment relationship").
Unlike the limiting language in the definition of "occurrence"
and the assault and battery exclusion, either of which if
applicable here would render the policy's "physical and/or mental
abuse limitation endorsement" meaningless, the employer liability
exclusion can be read together with the sexual claim endorsement.
Claims by a non-employee of an insured "which may be considered
sexual in nature" are covered by the policy, e.g., the claims
against Mr. and Mrs. Wilson; such claims by an employee of an
insured are excluded from coverage.
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For the foregoing reasons, we AFFIRM the district court's
judgment in favor of Mr. and Mrs. Wilson, REVERSE the judgment in
favor of Magic Years, and REMAND with instructions to enter
judgment in favor of Western Heritage declaring that Western
Heritage is not obligated to defend or indemnify Magic Years in the
underlying state court suit.
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