First Community Bancshares v. St. Paul Mercury Insurance

Case: 13-50657 Document: 00512837831 Page: 1 Date Filed: 11/14/2014
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
No. 13-50657 FILED
November 14, 2014
Lyle W. Cayce
FIRST COMMUNITY BANCSHARES, Clerk
Plaintiff-Appellee Cross-Appellant
v.
ST. PAUL MERCURY INSURANCE COMPANY,
Defendant-Appellant Cross-Appellee
Appeals from the United States District Court
for the Western District of Texas
USDC No. 6:12-CV-193
Before SMITH, BARKSDALE, and HAYNES, Circuit Judges.
PER CURIAM:*
First Community Bancshares (“First Community”) sued St. Paul
Mercury Insurance Company (“St. Paul”), seeking a declaratory judgment that
St. Paul owed First Community a duty to defend two class-action lawsuits, and
alleging violation of the duty of good faith and fair dealing. The district court
resolved cross–motions for summary judgment, (1) finding that St. Paul owed
First Community a duty to defend, but (2) denying First Community’s claim
* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.
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alleging violation of the duty of good faith and fair dealing. Each party
appealed the portion of the judgment adverse to it. For the reasons that follow,
we AFFIRM the judgment of the district court.
I. Background
First Community is a banking institution that operates branches across
the state of Texas. Prior to the events giving rise to this action, St. Paul issued
First Community an insurance policy (“the Policy”) that includes a Bankers
Professional Liability Insuring Agreement. The agreement covers “Loss for
which the Insureds become legally obligated to pay on account of any
Claim . . . for a Professional Services Act” and imposes a duty to defend on St.
Paul as to any covered claim. The Policy defines “professional services” to
include services performed “pursuant to an agreement between [a] customer
and the Company for a fee, commission or other monetary compensation.”
Central to this litigation, the Policy excludes from coverage claims “based upon,
arising out of or attributable to any dispute involving fees or charges for an
Insured’s services”—the “fee-dispute exclusion.”
Pursuant to the Policy, First Community requested a defense from St.
Paul in two class action lawsuits brought against First Community by its
customers. In both cases, the plaintiffs sued individually and on behalf of a
class of similarly situated individuals who, among other things, were assessed
overdraft fees by First Community. The introductory paragraph of both
petitions describes the action as “arising from [First Community’s] unfair and
unconscionable assessment and collection of excessive overdraft fees.” The
petitions allege, among other things, that First Community: failed to disclose
material information about its overdraft protection services, including that it
would always reorder debit transactions from highest to lowest; manipulated
transactions by amassing charges over multiple days and posting them to
customers’ accounts on a single day in order of descending transaction amount
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so as to increase the amount of overdraft fees customers were charged; charged
overdraft fees even when there were sufficient funds in customers’ accounts;
and provided account statements and electronic balances that were incorrect,
deceptive, and misleading, thus “prevent[ing] customers from ascertaining the
accurate balances in their accounts.” Through these lawsuits, the plaintiffs
sought disgorgement of fees, actual damages, restitution, and an order
enjoining First Community “from continuing its overdraft policies and
practices on the grounds that they are wrongful, unfair and unconscionable.”
St. Paul denied First Community’s defense request as to each suit,
asserting that the claims were precluded by the Policy’s fee-dispute exclusion.
First Community thus filed this action seeking a declaratory judgment that
St. Paul owed a duty to defend First Community in the underlying suits and
asserting a claim for breach of the duty of good faith and fair dealing. 1 The
parties filed cross–motions for summary judgment, and the district court
entered a final judgment granting summary judgment for First Community
on the duty to defend claim and for St. Paul on the duty of good faith and fair
dealing claim. The district court entered final judgment, and both parties
timely appealed.
II. Standard of Review
We review the district court’s grant of summary judgment de novo. Nat’l
Cas. Co. v. W. World Ins. Co., 669 F.3d 608, 612 (5th Cir. 2012). Likewise, the
interpretation of an insurance contract is reviewed de novo. Id. “Because this
is a diversity case involving a Texas contract, Texas rules of contract
1 First Community also alleged a violation of the Texas Insurance Code’s Prompt
Payment of Claims provision, and the district court granted summary judgment on this claim
in favor of St. Paul. First Community did not appeal the denial of this claim because the
parties entered into a partial settlement on the claim post-judgment.
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interpretation control.” Admiral Ins. Co. v. Ford, 607 F.3d 420, 422 (5th Cir.
2010) (citation and internal quotation marks omitted).
III. Discussion
A. Duty to Defend
“In determining whether an insurer’s duty to defend is triggered, Texas
courts strictly apply the ‘eight-corners rule,’ which looks only to the four
corners of the most recent complaint in the underlying action as well as the
four corners of the insurance policy.” City of College Station, Tex. v. Star Ins.
Co., 735 F.3d 332, 336 (5th Cir. 2013) (quoting Nat’l Cas., 669 F.3d at 612). “If
the underlying complaint pleads facts sufficient to create the potential of
covered liability, the insurer has a duty to defend the entire case, even if the
allegations are demonstrably false, fraudulent, or groundless, and even if some
of the injuries alleged are not covered or fall within the scope of an exclusion.”
Id.; see also Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487, 491, 495–96
(Tex. 2008). Thus, “‘[w]hile the duty to defend is triggered by a single alleged
injury that falls within the scope of the coverage provision, exclusions negate
the insure[r]’s duty to defend only when all of the alleged injuries that fall into
the coverage provision are subsumed under the exclusionary provision.’” City
of College Station, 735 F.3d at 337 (quoting Nat’l Cas., 669 F.3d at 616).
St. Paul concedes that the two suits fall within the Policy’s scope of
coverage for professional services acts; it argues only that the entirety of the
allegations also fall within the fee-dispute exclusion. We disagree. As did the
district court, we hold that St. Paul owes a duty to defend since at least some
of the factual allegations in the complaint do not fall within the fee-dispute
exclusion. We conclude that even if we accept St. Paul’s broad construction of
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the exclusion, at least some allegations potentially fall outside of the exclusion
and within coverage. 2
In considering the scope of the allegations, we must construe the
petitions liberally, see City of College Station, 735 F.3d at 337, and “focus on
the factual allegations rather than the legal theories asserted,” Farmers Tex.
Cnty. Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 82 (Tex. 1997). The petitions in
this case include the following factual allegations—regarding First
Community’s providing misleading information on its account practices and
customers’ account balances—that do not have a causal connection to a
disagreement that necessarily includes fees:
First Community’s “Debit Agreement fails to indicate that [it] will
always reorder debits highest to lowest.”
First Community “misleads its customers regarding its reordering
practices, as [it] does not state unequivocally that it will reorder
debits from highest to lowest.”
First Community’s “delayed posting [of transactions] prevents
customers from ascertaining the accurate balances in their
accounts.”
First Community “fails to provide customers with accurate balance
information.”
First Community “provides inaccurate balance information to its
customers through its electronic network. In certain cases, [First
Community] informs its customers that they have a positive
balance when, in reality, they have a negative balance, despite
[First Community’s] actual knowledge of outstanding debits and
transactions.”
While overdraft fees may have sometimes accompanied these alleged
facts, this is not necessarily always the case. Instead, the primary harm
2First Community argues that a narrower, reasonable interpretation of the exclusion
is that it encompasses only those claims that arise out of a disagreement regarding the
amount of fees. Because we conclude that St. Paul owes a duty to defend even applying St.
Paul’s proposed definition, we need not decide whether First Community’s proposed
definition is reasonable.
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stemming from these allegations is that customers could not ascertain their
account balances and could not accurately plan spending, withdrawals, and
deposits.
Nor do these factual allegations necessarily bear a causal relationship to
fees: charging of fees was not the practice that caused the harm, even if First
Community’s actions were motivated by a desire to obtain more fees. Cf. Cont’l
Cas. Co v. Feingerts & Kelly, APLC, 132 F. App’x 14, 17–18 (5th Cir. 2005)
(unpublished) (in applying an exclusion for legal fees, concluding that certain
damages were “not a consequence of legal fees charged by the Firm,” and the
“mere fact that [the insured’s] actions were allegedly motivated by a desire for
additional fees does not mean that [the] injury is a consequence of legal fees”). 3
Instead, fees are an additional harm caused by the policies and practices of
which the plaintiffs complain. Along these lines, the relief sought is not only
the return of fees: the petitions also request actual damages and an “[o]rder
enjoining [First Community] from continuing its overdraft policies and
practices on the grounds that they are wrongful, unfair and unconscionable.”
Cf. Ace Am. Ins. Co. v. Ascend One Corp., No. CCB-06-CV-3371, 2007 WL
1774495, at *4 (D. Md. June 15, 2007) (considering similar policy language and
noting that the complaint was “not limited to a request that the allegedly
fraudulently obtained fees be returned”).
Construing the petitions liberally, we conclude that at least some of the
allegations in the underlying petitions are not excluded by the fee-dispute
exclusion. Accordingly, St. Paul owes First Community a duty to defend under
the Policy. 4
3Although Continental Casualty Co. is not “controlling precedent,” it is “persuasive
authority.” Ballard v. Burton, 444 F.3d 391, 401 n.7 (5th Cir. 2006) (citing 5TH CIR. R. 47.5.4).
4 St. Paul argues that the fee-dispute exclusion applies because: (1) the term “fee” is
used at least 120 times in the underlying petitions; (2) fees are the overarching focus of the
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B. Duty of Good Faith and Fair Dealing
First Community also presents a claim based on a violation of the duty
of good faith and fair dealing. The district court denied this claim on the
ground that “[a]n insurer has no common law duty of good faith and fair
dealing arising out of a contractual duty to defend” and, even assuming such a
duty exists, the summary judgment evidence demonstrated only a bona fide
coverage dispute. First Community argues on appeal that it asserted this
claim pursuant to Section 542.003(b)(4) of the Texas Insurance Code.
Even assuming arguendo that such a duty exists in this context, we agree
with the district court that the claim nonetheless fails because the summary
judgment evidence presents only a bona fide coverage dispute, not a bad faith
denial of the requests for a defense. 5 See Provident Am. Ins. Co. v. Castaneda,
988 S.W.2d 189, 194 (Tex. 1998) (“[E]vidence of a coverage dispute is not
evidence that liability under the policy had become reasonably clear.”); see also
Higginbotham v. State Farm Mut. Auto. Ins. Co., 103 F.3d 456, 459–60 (5th
Cir. 1997) (holding that a bona fide dispute over coverage negates a claim of
bad faith) (citing Lyons v. Millers Cas. Ins. Co., 866 S.W.2d 597, 600 (Tex.
petitions; and (3) the classes are defined as including those who were assessed fees. None of
these factors are determinative: the controlling question is whether, “focus[ing] on the factual
allegations rather than the legal theories asserted,” Griffin, 955 S.W.2d at 82, “all of the
alleged injuries that fall into the coverage provision are subsumed under the exclusionary
provision,” City of College Station, 735 F.3d at 337 (quoting Nat’l Cas., 669 F.3d at 616).
Here, regardless of the primary focus of the cases or how the classes are defined, at least
some of the factual allegations fall outside of the fee-dispute exclusion. See Ascend One Corp.,
2007 WL 1774495, at *4 (concluding that coverage was not determined by the fact that the
overall theory of the underlying class action was focused on fees); Hartford Cas. Ins. Co. v.
Chase Title, Inc., 247 F. Supp. 2d 779, 782 (D. Md. 2003) (finding it indeterminate that “the
‘primary thrust’ of the class action complaint is something excluded from coverage—a dispute
over fees”—since at least some of the allegations involved more than a dispute as to fees).
5 Given our holding, we do not reach either the issue of whether a private cause of
action can be maintained pursuant to § 542.003(b)(4) of the Texas Insurance Code, or the
issue of whether a common law duty of good faith and fair dealing exists in the duty-to-defend
context.
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1993)). Although we hold that St. Paul owes First Community a duty to defend
under the Policy, we conclude that the question was a close one such that the
duty to defend under the St. Paul policy never became reasonably clear. The
parties’ arguments in this case highlight that a bona fide coverage dispute
exists. See Lawyers Title Ins. Corp. v. Doubletree Partners, L.P., 739 F.3d 848,
869 (5th Cir. 2014). Accordingly, the district court properly granted summary
judgment in favor of St. Paul on this claim.
AFFIRMED. 6
6 First Community contended for the first time at oral argument that the fee-dispute
exclusion applies only to fees for services actually rendered as distinguished from fees where
no service was rendered. Because this argument was not properly briefed, it is waived. See
NLRB v. Seaport Printing & Ad Specialties, Inc., 589 F.3d 812, 816 n.7 (5th Cir. 2009). Even
were this issue not waived, we need not reach it because of our resolution of this appeal.
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