Administaff, Inc. v. American International Speciality Lines Insurance , 75 F. App'x 239 ( 2003 )

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT September 9, 2003
_____________________ Charles R. Fulbruge III
Clerk
No. 02-21253
_____________________
Administaff, Inc. and Administaff of Texas, Inc.,
Plaintiffs- Counter Defendants-Appellants,
versus
American International Speciality Lines Insurance Company,
Defendant-Counter Claimant-Appellee.
_________________________________________________________________
Appeal from the United States District Court
for the Southern District of Texas
District Court No. H-02-CV-1964
_________________________________________________________________
Before WIENER, CLEMENT and PRADO, Circuit Judges.1
PRADO, Circuit Judge.
This appeal arises from a dispute between an insured and its
insurer. The appellant, Administaff, Inc. and its subsidiary,
Administaff of Texas, Inc., filed a lawsuit in district court
seeking declaratory judgment that Administaff’s insurer was bound
to defend it in a lawsuit.2 Both parties, the appellant-insured
1
Pursuant to 5th Cir. R. 47.5, this 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that this opinion should not be published and is not precedent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.
2
To simplify the language of this opinion, the Court will
refer to Administaff, Inc. and its subsidiary, Administaff of
Texas, Inc., as a single plaintiff-appellant.
1
and the appellee-insurer, moved for summary judgment. The
district court granted summary judgment in favor of the insurer
and stated in its judgment that the insurer did not have a duty
to defend the insured nor a duty to indemnify. In response, the
insured filed a notice of appeal.
Background Facts
The appellant is a professional employer organization that
provides personnel management and human resources services to
small and medium sized companies. The appellant purchased
insurance coverage from the appellee, American International
Speciality Lines Insurance. The policy included an obligation to
defend the insured in lawsuits. During the coverage period,
Aetna Life Insurance Company (Aetna) named the appellant as a
defendant in a counterclaim. The counterclaim arose from a
dispute between the appellant and Aetna in the provision of
health insurance to Administaff employees. The appellant
notified its insurer about the counterclaim, and the insurer
refused to defend the appellant because it maintained the policy
did not cover the claim. The appellant sought relief in district
court, but lost on summary judgment. On appeal, the appellant
maintains the district court erred by granting summary judgment
in favor of the appellee.
Standard of Review
In reviewing a district court's grant of summary judgment,
2
this Court uses the same standard of review used by the district
court. See Lowery v. Ill. Cent. Gulf R. Co., 891 F.2d 1187, 1190
(5th Cir. 1990). “The pleadings, depositions, answers to
interrogatories, and admissions on file, together with any
affidavits, must demonstrate that there is no genuine issue of
material fact and that the moving party is entitled to judgment
as a matter of law. Under this standard, questions of fact are
considered with deference to the nonmovant, while questions of
law are subject to de novo review.” Lowery, 891 F.2d at 1190(citations omitted). Although this Court ordinarily defers to the
district court in a diversity case like this one requiring
interpretation of state law, the Court is not bound by the
district court's interpretation and can reverse the court if the
district court incorrectly applied state law. See id.Whether the District Court Erred
In its first issue, the appellant argues that the district
court erred in determining the appellee had no duty to defend the
appellant in its defense of Aetna’s counterclaim. The appellant
maintains that the district court not only rejected the clear,
unequivocal language of the policy, but also rejected Texas law
in interpreting the policy limits. The appellant is correct.
Under Texas law, the question of insurance coverage is
determined under the “eight corners” rule. See Guaranty Nat’l
Ins. Co. v. Vic Mfg. Co., 143 F.3d 192, 193 (5th Cir. 1998).
3
Under this rule, the “court compares the four corners of the
insurance policy with the four corners of the plaintiff's
pleading to determine whether any claim alleged by the pleading
is potentially within the policy coverage.” Guaranty Nat’l Ins.
Co., 143 F.3d at 193. The district court makes this comparison
without reference to the truth or falsity of the plaintiff’s
allegations. See Guaranty Nat’l Ins. Co., 143 F.3d at 193.
“[I]f the allegations in the complaint will allow the plaintiff
to recover on a theory within the scope of the insurance policy,
there is potential liability against which the insurer is
obligated to defend.” Sentry Ins. v. R.J. Weber Co., Inc., 2
F.3d 554, 556 (5th Cir. 1993).
The Insurance Policy. In the instant case, the four corners
of the insurance policy provide:
ERRORS AND OMISSIONS.
To pay on behalf of the Insured all sums which the
Insured shall become legally obligated to pay as
Damages resulting from any claim or claims first made
against the Insured and reported to the Company during
the Policy Period for any Wrongful Act of the Insured
or of any other person for whose actions the Insured is
legally responsible, but only if such Wrongful Act
first occurs during the Policy Period and solely in the
conduct of the Insured’s Profession as stated in Item 6
of the Declarations.
Policy at ¶ 1 (emphasis added). The italicized language is
important in interpreting the contract.
The policy also provides that the insurer will “[d]efend any
4
action or suit brought against the Insured alleging a Wrongful
Act, even if such action is groundless, false or fraudulent . . .
.” Id. at ¶ 2(a). The policy defines Wrongful Act as “any
actual or alleged breach of duty, neglect, error, misstatement,
misleading statement or omission solely in the conduct of the
Insured’s Profession as stated in Item 6 of the Declarations.”
Policy at Definition #3 (emphasis added). Item 6 defines
“Insured’s Profession” as:
Soley [sic] in the performance of recruiting and
selection, outplacement services, employer liability
management and assistance, related government and
compliance, owner support, performance management,
training and development, benefit management, HR
consulting, permanent placement services, insurance
agent and broker services, risk management services,
employer liability management services and accounting
and book keeping services including related data
processing services for others for a fee.
Policy at Item 6 (emphasis added). Under this language, the
insurer has a duty to defend the insured if Aetna’s counterclaim
alleged a Wrongful Act that occurred in the conduct of the
Insured’s Profession.
Aetna’s counterclaim. Aetna’s counterclaim alleged ERISA
violations, breach of contract and misrepresentation, and asked
for declaratory judgment. The misrepresentation cause of action
lies at the center of the parties’ dispute about whether a duty
of defend exists. The four corners of that allegation claim:
Administaff, through its authorized agents and vice
principals, made material misrepresentations or failed
5
to disclose material information when there was a duty
to speak. . . . Administaff failed to exercise due care
and/or acted recklessly or with knowledge that its
statements were false.
Counterclaim at ¶ 37 & 38. Although the parties do not seriously
dispute whether this language alleges a Wrongful Act, the
appellee-insurer maintains these allegations did not occur in the
conduct of the Insured’s Profession. Instead, the appellee-
insurer characterizes the alleged acts and omissions as
management tasks of a nonprofessional nature and not professional
services on behalf of clients.
Whether the Wrongful Act Occurred in the Conduct of the
Insured’s Profession. Although the district court did not
prepare a written legal analysis in support of its judgment, the
transcript of the hearing conducted on the motion for summary
judgment indicates the district court analogized the insurance
policy to a professional liability policy for doctors and
lawyers. The district court reasoned that because a doctor’s or
lawyer’s malpractice policy was designed to protect the doctor or
lawyer from lawsuits by patients or clients, the appellant’s
policy was designed to protect the appellant from lawsuits by its
employee-clients.
The district court focused on the title of the policy,
“Miscellaneous Professional Liability Policy.” The district
court reasoned that “the nature of even a miscellaneous
professional liability policy, is protecting the consumer,” and
6
concluded accordingly that the policy is “an Administaff-to-
consumer policy because that’s what [a] professional liability
policy covers.” The district court explained that
if you say you’re going to go out and get a
professional liability policy, you’re talking about
people who are hurt by your practicing your profession,
not your creditors, not those whom you trespass upon on
the way to work; and this is on the way to providing
the service. . . . But regardless of the label we stick
on it, what Administaff does in acquiring things and to
third parties is not covered[,] just as a lawyer who
hires a secretary away from the law office next door
would not be covered under his professional liability
policy because they are not essential to the provision
of services.
Notably, the district court did not address the language of
the policy quoted above. Had the district court considered that
language, it should have first concluded that Aetna had alleged a
Wrongful Act. The language of the Aetna allegations almost
mirrors the policy’s definition of Wrongful Act. The policy
defines Wrongful Act, in part, as “any actual or alleged . . .
misstatement, misleading statement or omission,” and Aetna
alleged “material misrepresentations” and “failure to disclose
material information when there was a duty to speak.” Thus, a
comparison of the four corners of the contract with the four
corners of the factual allegations of the counterclaim indicates
a Wrongful Act under the policy. Because Aetna alleged a
Wrongful Act, the next question is whether the Wrongful Act
occurred in the conduct of the Insured’s Profession.
Under the policy, a covered act must have occurred “solely
7
in the conduct of the Insured’s Profession.” Understandably, the
district court may not have fully understood what functions
constituted the Insured’s Profession. That question created an
ambiguity in the contract. At one point, the district judge
recognized the ambiguity and ordered the appellant to “file a
one-page factual declaration of its business” in an order
directing the appellant to move for summary judgment. The one-
page declaration of Administaff’s business includes “providing
and managing all benefits, including health and dental
insurance.” The declaration went on to detail the functions
required to provide these services.3 Notably, Item 6 of the
policy defines the Insured’s Profession, in part, as “benefit
management.”
Under Texas law, ambiguity such as the ambiguity created by
the “solely in the conduct of the Insured’s Profession” language
must be resolved in favor of the insured. See Nat’l Union Fire
Ins. Co. of Pittsburgh, Pa. v. Hudson Energy Co., 811 S.W.2d 552,
555 (Tex. 1991); Puckett v. U.S. Fire Ins. Co., 678 S.W.2d 936,
938 (Tex. 1984) (stating that contracts are to be interpreted to
avoid exclusion of coverage). As a result, the question of
3
The declaration provided: “The management functions related
to the Health Plan include but are not limited to: implementing,
monitoring and maintaining an appropriate funding arrangement
with the health carrier; negotiating, reviewing and implementing
insurance rates on an on-going basis; and monitoring the
financial status of the funding arrangement with the carrier.”
8
whether the Wrongful Act occurred in the conduct of the Insured’s
Profession should have been answered “yes.” The next step would
have been to consider the appellee’s arguments that an exclusion
applied. The district court, however, did not reach the
exclusions because it read language into the policy that does not
exist.
The district court read the policy as if the duty to defend
applied only to claims made by consumers. Nothing in the policy
indicates the policy covers only Wrongful Acts alleged by
Administaff’s client-consumers. “An intent to exclude coverage
must be expressed in clear and unambiguous language.” Nat’l
Union Fire Ins. Co. of Pittsburgh, Pa., 811 S.W.2d at 555. Had
the appellee-insurer wanted to limit its duty to defend to claims
brought by consumers, it was incumbent upon the insurer to
expressly and clearly state the exclusion in the language of the
policy. See id. Because the appellee-insurer did not draft the
contract to expressly and clearly cover only claims brought by
consumers, it cannot complain now.
In its second issue, the appellant contends the district
court erred by finding the contract ambiguous and construing the
policy in contravention of Texas state law. Although the
appellee maintains the district court did not find the contract
was ambiguous, the transcript of the hearing shows that the
district court read the contract as having more than one reading.
9
At one point during the hearing on the motion for summary
judgment, the district court considered the appellant’s position
that the duty to defend was not limited to claims brought by
consumers and stated “I’m hesitant to say that your position is
unreasonable.” The district court also recognized that “there
are alternative interpretations” of the policy. Ultimately,
however, the district court concluded that “on its face, th[e]
policy has one compelling reading, and that is, to cover the
consumers of the services, not the vendors of the parts of the
services.” Without a written order clarifying the court’s
analysis, it is difficult to ascertain whether the district court
ultimately determined the contract was ambiguous. Albeit
unclear, the district court treated the contract as if it were
unambiguous–that is, the district court determined the face of
the contract indicated that it did not apply to claims brought by
non-clients and non-consumers. This Court, however, need not
determine this issue because the district court erred by failing
to interpret the contract language.
Whether Remand Is Appropriate
When the district court errs in its reason for granting
summary judgment, this Court can affirm the summary judgment
where other adequate grounds for granting summary judgment exist.
See Thompson v. Ga. Pacific Corp., 993 F.2d 1166, 1167-68 (5th
Cir. 1993). In this appeal, however, remand is appropriate
10
because the district court did not consider whether a policy
exclusion applied. The district court did not consider the
exclusions because it determined the policy did not apply to
claims brought by non-clients and non-consumers. As a result,
remand is appropriate for consideration of the exclusions. On
remand, the district court is bound under Texas law to strictly
construe exclusions against the insurer and in favor of the
insured. See Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 811
S.W.2d at 555.
Remand is also appropriate for reconsideration of the
appellee-insured’s argument that it had no duty to indemnify.
Unlike the duty to defend, the “duty to indemnify is triggered by
the actual facts establishing liability in the underlying suit.”
See Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d 819, 821
(Tex. 1997). The district court, however, did not reach those
facts. Instead, the district court based its determination on
its finding that the appellee-insurer had no duty to defend.
Conclusion
Having sustained the appellant’s first argument that the
district court erred in granting summary judgment in favor of the
appellee, the Court REVERSES the district court’s summary
judgment and REMANDS the case to the district court for further
proceedings consistent with this opinion.
REVERSED and REMANDED.
11