Quorum Health Resources, L.L.C. v. Maverick County Hospital District , 308 F.3d 451 ( 2002 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
____________________
No. 00-50699
____________________
QUORUM HEALTH RESOURCES, L.L.C.,
Plaintiff/Appellee/Cross-Appellant,
V.
MAVERICK COUNTY HOSPITAL DISTRICT
d/b/a FORT DUNCAN MEDICAL CENTER,
Defendant/Appellant/Cross-Appellee,
AND
TEXAS HOSPITAL INSURANCE NETWORK, INC.,
TEXAS HOSPITAL INSURANCE EXCHANGE,
Defendants/Cross-Appellees.
Appeals from the United States District Court
for the Western District of Texas
September 30, 2002
Before BARKSDALE and STEWART, Circuit Judges, and ROSENTHAL,*
District Judge.
ROSENTHAL, District Judge:
*
District Judge of the Southern District of Texas, sitting
by designation.
1
The primary issue in this appeal is whether a contractual
indemnity provision meets the requirements of the Texas express
negligence rule, entitling the indemnitee to relief from a judgment
based on its own negligence. By cross-appeal, the indemnitee
challenges its insurer’s compliance with the duty to defend. The
insurer, in turn, challenges the insured’s compliance with the
cooperation clause in the insurance policy.
This court concludes that, as a matter of law, the
contract does not meet the Texas express negligence rule’s
requirements for indemnification of losses arising from the
indemnitee’s own negligence. As to the insurance issues, the
record discloses genuine issues of fact material to determining
whether the insurer breached its duty to defend. We reverse the
district court’s grant of summary judgment, rendering as to the
indemnification issue and remanding as to the duty to defend
issues. The reasons are explained below.
I. Background
In 1990, Quorum Health Resources, L.L.C. (“Quorum”), a
hospital management company, entered into a Management Agreement
with the Maverick County Hospital District d/b/a Fort Duncan
Medical Center (the “Hospital”).1 The Hospital was insured by the
1
The Hospital entered into a five-year Management
Agreement in 1990 with HCA Management Company, Quorum’s
predecessor, with effective dates from May 14, 1990 to May 14,
1995. The Hospital and Quorum renewed the Management Agreement in
May 1995, with effective dates from May 14, 1995 to May 13, 2000.
The provisions in the Agreements setting out the Hospital’s
2
Texas Hospital Insurance Exchange and Texas Hospital Insurance
Network, Inc. (collectively, “THIE”). Quorum was an additional
named insured on the Hospital’s policy.2
In June 1996, David and Veronica Rodriguez filed suit in
state court in Maverick County, Texas, on behalf of themselves and
their minor daughter, Cristina. The Rodriguez family sued the
Hospital and the obstetrician, three registered nurses, and the
nurse practitioner present at Cristina’s birth. The Rodriguez
plaintiffs alleged medical malpractice during the delivery that
left Cristina with severe mental and physical disabilities.3 The
Hospital timely notified THIE of the lawsuit. THIE assigned a law
firm to represent all the defendants.
In March 1997, the Rodriguez plaintiffs joined the
Hospital’s management company, Quorum, as an additional defendant.
THIE assigned the same lawyer to represent Quorum, along with the
previously named defendants. The joint representation proceeded
until April 13, 1998, when Quorum asserted a conflict of interest
obligation to indemnify Quorum are identical. The reciprocal
indemnity provisions, setting out Quorum’s obligation to indemnify
the Hospital, are slightly different in the two Agreements.
2
The Hospital and THIE submitted insurance policy No. CG
00 25 42 as part of the summary judgment record. The policy
provides for coverage of $100,000 per medical incident and $300,000
aggregate. Quorum is listed as an additional insured under the
policy.
3
David X. and Veronica Rodriguez, as Next Friends to
Christina Rodriguez, a Minor, v. Quorum Health Resources, L.L.C.
f/k/a Quorum Health Resources, Inc., Cause No. 96-06-13873-CV,
365th District Court of Maverick County, Texas.
3
and requested separate counsel. The parties dispute what happened
next. THIE asserts that it offered Quorum separate counsel from
its list of approved attorneys, but Quorum rejected the lawyer
offered and insisted on an attorney who was not on THIE’s list.
Quorum agrees that THIE offered a lawyer, but asserts that this
lawyer declined the representation and that THIE failed to offer a
replacement.
The Rodriguez suit proceeded to trial in Eagle Pass,
Texas, in November 1999. Quorum was represented by counsel it had
selected without THIE’s participation or involvement. Quorum’s
excess insurer, American Continental Insurance Co., paid the costs
of Quorum’s defense. Before trial began, the Rodriguez plaintiffs
nonsuited all the defendants except Quorum. The parents, David and
Veronica Rodriguez, nonsuited their individual claims against
Quorum. The trial proceeded with Quorum as the only defendant, on
claims for actual and exemplary damages for simple and gross
negligence, on behalf of the minor child.
Plaintiffs tried the case on the basis of the Ninth
Amended Petition, which alleged that Quorum committed twenty-four
separate acts of negligence. The allegations included negligent
hiring of untrained nursing personnel, failing properly to train
nursing personnel, failing to enforce the Hospital’s personnel
policies, and negligently hiring and training the Quorum employees
who managed the Hospital. The petition did not allege that Quorum
was vicariously liable for the acts or omissions of the Hospital’s
4
medical staff or the obstetrician who attended the delivery, but
who was not a Hospital employee. The petition did allege that
Quorum was vicariously liable for the negligence of two of Quorum’s
own employees working at the Hospital under the Management
Agreement: the Hospital Administrator and the Controller.4
The jury found that Quorum negligently performed services
to the Hospital that “increased the risk of injury or harm to a
patient of The Hospital” and proximately caused injury or harm to
a patient “by reliance of The Hospital upon Quorum’s undertaking to
perform such services.” The jury found Quorum 65 percent
responsible for Cristina Rodriguez’s injuries. The jury also found
the attending obstetrician negligent and assessed comparative
causation at 35 percent. The jury awarded $52 million in actual
damages and, finding malice on the part of Quorum, awarded an
additional $7.5 million in exemplary damages.
Plaintiffs settled with the obstetrician before the
verdict. In an Amended Final Judgment, the trial court deducted
the amount of the settlement and added prejudgment interest,
awarding actual damages of approximately $57 million before
postjudgment interest. The trial court disregarded the jury’s
finding of malice and ordered that plaintiffs not recover exemplary
damages against Quorum.
4
The jury found that the Administrator and Controller, who
were Quorum employees, were acting as Quorum’s employees at the
relevant times and not as the Hospital’s “borrowed employees.”
5
Quorum filed a declaratory judgment suit in federal
district court, alleging that the indemnity provision in its
Management Agreement required the Hospital to indemnify Quorum for
the Rodriguez judgment and required the Hospital to defend Quorum
in the Rodriguez suit. Quorum also sought a declaratory judgment
that THIE had breached its duty to defend Quorum under the
insurance policy and owed Quorum a duty to indemnify for the
resulting judgment, up to the policy limits.
Both the 1990 and 1995 Management Agreements between the
Hospital and Quorum contained the following indemnity provision:
Hospital agrees to indemnify and hold harmless
Quorum, its Affiliates, and each of their
shareholders, directors, officers, employees,
and agents (“Quorum Indemnified Party”) from
and against any and all losses, claims,
damages, liabilities, costs and expenses
(including reasonable attorneys’ fees and
expenses related to the defense of any
claims), joint or several, which may be
asserted against any of the Quorum Indemnified
Parties or for which they may now or hereafter
become subject arising in connection with the
activity of the Hospital (“Quorum Claim”),
including but not limited to: (i) alleged or
actual failure by the Board to perform any of
its duties hereunder, (ii) any pending or
threatened medical malpractice or other tort
claims asserted against Quorum; (iii) any
action against Quorum brought by any of the
Hospital’s current or former employees or
Medical Staff members; (iv) any act or
omission by any Hospital employee, Medical
Staff member, or other personnel; and (v) any
violation of any requirement applicable to the
Hospital under any federal, state or local
environmental, hazardous waste or similar law
or regulation; provided that such claims have
not been caused by the gross negligence or
willful or wanton misconduct of the Quorum
6
Indemnified Party seeking indemnification
pursuant to this Agreement.
The 1990 Management Agreement contained the following
provision setting out Quorum’s reciprocal indemnity obligation to
the Hospital:
[Quorum] agrees to indemnify and hold harmless
the Hospital and its shareholders, directors,
officers or trustees (“Hospital Indemnified
Party”) from and against all losses, claims,
damages, liabilities, costs and expenses
(including reasonable attorney’s fees and
expenses related to the defense of any
claims), joint or several, which may be
asserted against any Hospital Indemnified
Party (“Hospital claim”), as a result of any
personnel or other action brought against the
Hospital Indemnified Party by any Key Person
[the Administrator and Controller] relating to
any acts performed by such Key Person within
the scope of his or her employment by
[Quorum]; provided that such Hospital Claims
have not been caused by the gross negligence
or willful or wanton misconduct of the
Hospital Indemnified Party seeking
indemnification pursuant to this Agreement.
The 1995 Management Agreement contained this same provision, with
one change. The 1995 Agreement contained the provision stating
that Quorum would indemnify the Hospital for “losses, claims,
damages, liabilities, costs and expenses” as a result of actions
brought by a “Key Person.” However, the 1995 Agreement added that
Quorum would indemnify the Hospital for “losses, claims, damages,
liabilities, costs and expenses” from claims asserted against the
Hospital “as a result of . . . the sole negligence of Quorum
outside the scope of its employment; provided that such Hospital
Claims have not been caused by the gross negligence or willful or
7
wanton misconduct of the Hospital Indemnified Party seeking
indemnification pursuant to this Agreement.”
The insurance policy THIE issued to the Hospital
provided, in relevant part, as follows:
[THIE] shall have the right and duty to defend
any suit against the insured seeking damages
because of such injury even if any of the
allegations of the suit are groundless, false,
or fraudulent. The company may make such
investigation and, with the written consent of
the insured, such settlement of any claim or
suit as it deems expedient. The company shall
not be obligated to pay any claim or judgment
or to defend any suit after the applicable
limit of the company’s liability has been
exhausted by payment of the judgment or
settlements.
The policy further provided that
the insured and each of its employees shall
cooperate with the company and, upon the
company’s request, assist . . . in the conduct
of suits . . . . No action shall lie against
the company unless, as a condition precedent
thereto, there shall have been full compliance
with all the terms of this policy . . . .
Quorum and the Hospital filed cross-motions for summary
judgment as to the enforceability of the Hospital’s obligation to
indemnify Quorum for the $52 million judgment. Quorum and THIE
filed cross-motions for summary judgment as to whether THIE had
breached its duty to defend and whether Quorum had breached its
duty of cooperation. The district court held that: (1) the
indemnity provision in the Management Agreement between the
Hospital and Quorum met the Texas express negligence rule and
required the Hospital to indemnify Quorum for the damages resulting
8
from Quorum’s own negligence, making the Hospital liable for the
amount Quorum paid to settle the Rodriguez judgment, approximately
$31 million; (2) the Hospital did not owe Quorum common law
indemnification under Texas law; (3) the $100,000 statutory damage
cap applicable to the Hospital as a governmental unit of the State
of Texas under the Texas Tort Claims Act5 did not limit the
Hospital’s obligation to indemnify Quorum; (4) the Hospital did not
owe Quorum a duty to defend because the Management Agreement
permitted, but did not require, the Hospital to participate in the
defense of any action against Quorum; (5) THIE did not breach its
duty to defend Quorum under the insurance policy; and (6) THIE was
not obligated to indemnify Quorum for the Rodriguez judgment
because Quorum breached its duty to cooperate with the insurer
under the policy by rejecting the defense counsel THIE offered.
All parties appealed.
The Hospital appeals on two grounds: the indemnity
provision in the Management Agreement fails the express negligence
test under Texas law and is unenforceable as to losses resulting
from Quorum’s own negligence; and the Hospital’s indemnity
obligations to Quorum, if any, are limited by the statutory cap
limiting tort damages against a State hospital district. Quorum
asserts it is entitled to contractual indemnity from the Hospital
for the $31 million that Quorum paid to settle with the Rodriguez
5
TEX. CIV. PRAC. & REM. CODE ANN. §§ 101.001-.109 (Vernon 1997
& Supp. 2002).
9
family. Quorum and the Hospital agree that the indemnification
issues between them are properly decided as a matter of law.
Quorum cross-appeals from the district court’s grant of
summary judgment, holding that THIE did not breach its duty to
defend Quorum and that Quorum did breach its duty to cooperate with
THIE. Quorum argues that there are genuine issues of fact material
to determining whether THIE satisfied its obligation to provide
counsel to Quorum or whether Quorum rejected the lawyer THIE
provided. Quorum argues that the evidence in the record either
negated THIE’s claim that Quorum breached the cooperation clause
or, at least, raised genuine factual disputes that precluded
summary judgment. Quorum also asserts that the record contains no
evidence that THIE suffered prejudice as a result of Quorum’s
actions or, at least, raised genuine factual disputes as to whether
THIE lost any right under its policy, precluding summary judgment.
Quorum argues that the district court’s ruling on these issues
should be reversed and remanded for trial.
Because of our resolution of the Hospital’s first ground
for appeal, we do not decide whether the Hospital’s indemnity
obligations to Quorum are limited by the Texas statutory cap on
tort damages against a State hospital district. The other bases
for appeal and cross-appeal are examined below.
II. The Standards of Review
10
A grant of summary judgment is reviewed de novo. See
Dallas County Hosp. Dist. v. Associates’ Health and Welfare Plan,
293 F.3d 282, 285 (5th Cir. 2002). The interpretation of a
contract is a question of law, subject to de novo review. Fina,
Inc. v. ARCO, 200 F.3d 266, 268 (5th Cir. 2000); Am. States Ins.
Co. v. Bailey, 133 F.3d 363, 369 (5th Cir. 1998); Canutillo Indep.
Sch. Dist. v. Nat’l Union Fire Ins., 99 F.3d 695, 700 (5th Cir.
1996). Summary judgment is appropriate when there “is no genuine
issue as to any material fact and the moving party is entitled to
a judgment as a matter of law.” Conoco, Inc. v. Medic Systems,
Inc., 259 F.3d 369, 371 (5th Cir. 2001). The court must view facts
and inferences in the light most favorable to the party opposing
the motion. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248
(1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S.
574, 587-88 (1986). A factual dispute precludes a grant of summary
judgment if the evidence would permit a reasonable jury to return
a verdict for the nonmoving party. See Liberty Lobby, 477 U.S. at
248; Merritt-Campbell, Inc. v. RxP Prods., Inc., 164 F.3d 957, 961
(5th Cir. 1999). Credibility determinations are not part of the
summary judgment analysis. Liberty Lobby, 477 U.S. at 247-49.
Texas law applies in this diversity case, requiring this
court to consider the Texas express negligence rule for indemnity
contracts. “‘[I]n the absence of explicit guidance from the state
courts, [this court] must attempt to predict state law, not to
create or modify it.’” Assoc. Int’l Ins. Co. v. Blythe, 286 F.3d
11
780, 783 (5th Cir. 2002) (quoting United Parcel Serv., Inc. v.
Weben Indus., Inc., 794 F.2d 1005, 1008 (5th Cir. 1986)). Although
there is no Texas Supreme Court case involving the exact contract
language at issue here, Texas Supreme Court cases applying the
applicable rules of contract construction to similar indemnity
provisions provide ample guidance for this court to “substitute
[an] informed judgment for [an] informed guess[]” as to how a
Texas court would rule if presented with these facts. Nat’l Educ.
Assoc., Inc. v. Lee County Bd. of Public Instruction, 467 F.2d 447,
449 (5th Cir. 1972); Erie R.R. Co. v. Tompkins, 304 U.S. 64, 79-80
(1938); Harris v. Parker College of Chiropractic, 286 F.3d 790, 793
(5th Cir. 2002).
III. Analysis
A. The Texas Express Negligence Rule
The express negligence rule is a rule of contract
interpretation that applies specifically to agreements to indemnify
another party for the consequences of that party’s own negligence.
Under the express negligence rule, contracting parties seeking to
indemnify one party from the consequences of its own negligence
must express that intent in specific terms, within the four corners
of the document. Ethyl Corp. v. Daniel Const. Co., 725 S.W.2d 705,
707-08 (Tex. 1987). The Texas Supreme Court adopted this rule in
the Ethyl case, rejecting the less stringent “clear and
unequivocal” test, in recognition of the fact that “indemnification
12
of a party for its own negligence is an extraordinary shifting of
risk.”6 Id.; Dresser Industries, Inc. v. Page Petroleum, Inc., 853
S.W.2d 505, 508 (Tex. 1993). The express negligence rule is based
on a requirement of fair notice. Dresser, 853 S.W.2d at 506.
In Ethyl, a third party successfully sued Ethyl, the
premises owner, for injuries occurring during the performance of
Ethyl’s contract with Daniel, the contractor. 725 S.W.2d at 706-
07. Ethyl then sued Daniel, seeking contractual indemnity. The
jury found both Ethyl and Daniel negligent, apportioning liability
for the third party’s injuries ninety percent to Ethyl and ten
percent to Daniel. The contractual indemnity provision stated as
follows:
[Daniel] shall indemnify and hold [Ethyl]
harmless against any loss or damage to persons
or property as a result of operations growing
out of the performance of this contract and
caused by the negligence or carelessness of
[Daniel], [Daniel’s] employees,
Subcontractors, and agents and licensees.
Id. at 707. The Texas Supreme Court held that this contractual
language did not meet the express negligence test. Ethyl argued
that it was entitled to indemnification from Daniel. The Court
held that the language providing indemnification for “any loss . .
6
Under the “clear and unequivocal” test, a court examines
“whether the contract between the parties expresses in clear and
unequivocal language the intent of the indemnitor to indemnify the
indemnitee against the consequences of the indemnitee’s own
negligence whether such negligence was the sole proximate cause of
the injury or a proximate cause jointly and concurrently with the
indemnitor’s negligence.” 725 S.W.2d at 707.
13
. as a result of operations” did not expressly state that the
indemnity obligation included losses resulting from Ethyl’s own
negligence. The Texas Supreme Court held that under the express
negligence rule, “[i]ndemnitees seeking indemnity for the
consequences of their own negligence which proximately causes
injury jointly or concurrently with the indemnitor’s negligence
must also meet the express negligence test.” Id. at 708. The
contract contained “no provision for contractual comparative
indemnity,” id., and the Texas Supreme Court refused to imply such
an obligation from the contract language.
The Texas Supreme Court explained the need for the strict
requirements of the express negligence doctrine:
As we have moved closer to the express
negligence doctrine, the scriveners of
indemnity agreements have devised novel ways
of writing provisions which fail to expressly
state the true intent of those provisions.
The intent of the scriveners is to indemnify
the indemnitee for its negligence, yet be just
ambiguous enough to conceal that intent from
the indemnitor. The result has been a
plethora of law suits to construe those
ambiguous contracts. We hold the better
policy is to cut through the ambiguity of
those provisions and adopt the express
negligence doctrine.
Id. at 708-09. Whether a contractual indemnity provision complies
with the express negligence doctrine is a question of law for the
court. See Dresser, 853 S.W.2d at 509; Fisk Elec. Co. v.
Constructors & Assocs., Inc., 888 S.W.2d 813, 814 (Tex. 1994).
1. Does the Express Negligence Rule Apply?
14
The express negligence rule applies if Quorum seeks
indemnification for its own acts of negligence or for the joint or
concurrent negligence of Quorum and the Hospital. “Indemnitees
seeking indemnity for the consequences of their own negligence
which proximately causes injury jointly or concurrently with the
indemnitor’s negligence must also meet the express negligence
test.” Ethyl, 725 S.W.2d at 708. If Quorum is seeking
indemnification for the consequences of the Hospital’s negligence,
the express negligence doctrine does not apply. See id.; Gulf Ins.
Co. v. Burns Motors, Inc., 22 S.W.3d 417, 423-24 (Tex. 2000);
Boston Old Colony Ins. Co. v. Tiner Assocs. Inc., 288 F.3d 222, 230
(5th Cir. 2002).
Quorum argues that the judgment in the Rodriguez suit is
not based on Quorum’s own negligence, but rather solely on the
negligence of the Hospital Board and the Hospital personnel who
attended Cristina Rodriguez’s delivery. The Rodriguez plaintiffs
nonsuited the Hospital and its employees before trial. The
Rodriguez jury answered questions only as to the negligence of
Quorum and the obstetrician, who was not a Hospital employee. The
jury found that Quorum negligently fulfilled duties it owed to the
patients of the Hospital. The jury answered the comparative
causation issue by finding Quorum 65 percent at fault and the
obstetrician 35 percent at fault. The jury answered questions
finding that Quorum was liable for the negligence of the Quorum
15
Administrator and Controller, Quorum employees provided to the
Hospital under the Management Agreement.
The record does not support Quorum’s argument that the
damages awarded resulted from the sole negligence of the Hospital
and its employees and staff members, not Quorum’s employees. The
express negligence rule applies.
2. Does the Contract Language Satisfy the Express Negligence
Rule?
Quorum argues that the language of the indemnity
provision satisfies the Texas express negligence rule, so as to
require the Hospital to indemnify Quorum from the consequences of
Quorum’s own negligence. Quorum relies on one general provision
and two more specific provisions of the Management Agreement
paragraph entitled “Indemnification by Hospital.”
The first provision Quorum invokes is the statement that
the Hospital will indemnify Quorum from “losses, claims, damages,
liabilities, costs, and expenses . . . arising in connection with
the activity of the Hospital (‘Quorum Claim’).” The second
provision is the definition of “Quorum Claim” as “including but not
limited to . . . any pending or threatened medical malpractice or
other tort claims asserted against Quorum.” The third provision
is the statement that the Hospital will not indemnify Quorum for
claims caused by Quorum’s “gross negligence or willful or wanton
misconduct.” As to the second and third provisions, Quorum argues
that because a medical malpractice claim is a negligence claim, and
16
because the express exclusion for gross negligence is “tantamount
to the express inclusion of ordinary negligence,” the contract,
construed as a whole, sufficiently expressed the parties’ intent to
require the Hospital to indemnify Quorum for its own ordinary
negligence.7 The Hospital argues that the contract language fails
to meet the stringent requirements of the Texas express negligence
rule.
This court compares the language of the Management
Agreement indemnity provision to similar provisions that courts
have examined under the Texas express negligence standard. The
comparison reveals that the Management Agreement provision does not
meet the Texas express negligence rule and cannot be the basis for
requiring the Hospital to indemnify Quorum for the judgment
resulting from its own negligence or the concurrent negligence of
the indemnitor and indemnitee.
The Texas Supreme Court has consistently refused to
enforce indemnity agreements that do not expressly and specifically
provide for indemnification for the indemnitee’s own negligence.
General, broad statements of indemnity are not effective to shift
the consequences of the indemnitee’s own negligence to the
indemnitor. The indemnity provision that the Court found
7
Although the district court found that general principles
of contract construction supported Quorum’s argument, the court
accurately noted that “[i]t is absurd that a county hospital
district, which has a $100,000.00 statutory cap on its liability,
would intentionally agree to indemnify another party for an
unspecified amount.”
17
ineffective in Ethyl, the case in which Texas adopted the express
negligence rule, provided that the contractor would indemnify the
owner against "any loss . . . [incurred] as a result of operations
growing out of the performance of this contract and caused by the
negligence or carelessness of Contractor [indemnitor] . . . ." 725
S.W.2d at 708. The Texas Supreme Court rejected the argument that
this broad language sufficiently expressed the intent that the
contractor/indemnitor would absorb the consequences of the
owner/indemnitee’s negligence, including joint negligence. Id.
The Texas courts have rigorously applied the express
negligence rule since Ethyl was decided. In Gulf Coast Masonry,
Inc. v. Owens-Illinois, Inc., 739 S.W.2d 239 (Tex. 1987), a
contractor agreed to indemnify the plant owner for losses "arising
out of or in any way connected with or attributable to the
performance or non-performance of work hereunder by
contractor. . . ." Id. at 240. The Texas Supreme Court held that
the clause failed the express negligence test because the language
did not specifically and expressly state that the losses included
those resulting from the owner’s own negligence. Id. In Fisk
Elec. Co. v. Constructors & Assoc. Inc., the indemnity clause
provided that "[t]o the fullest extent permitted by law, [Fisk]
shall indemnify, hold harmless, and defend [Constructors] ... from
and against all claims, damages, losses, and expenses, including
but not limited to attorney's fees..." arising out of or resulting
from the performance of Fisk's work. 888 S.W.2d at 814. The Texas
18
Supreme Court held that language insufficiently specific to provide
“fair notice” that Fisk was obligated to indemnify Constructors for
its own negligence. Id. at 815-16; see also DDD Energy, Inc. v.
Veritas DGC Land, Inc., 60 S.W.3d 880, 883 (Tex. App.–Houston [14th
Dist.] 2001, n.p.h.) (holding that the following clause did not
expressly state that Veritas would indemnify DDD for DDD’s own
negligence: “Veritas shall indemnify, defend, . . . [DDD] for all
claims, damages, causes of actions, and liabilities resulting from
Veritas' failure to conduct seismic operations in an orderly and
workmanlike manner . . . ”).
The Texas Supreme Court has applied the express
negligence rule so strictly that contracts defining what is
included in an indemnity obligation by stating what is excluded
fail the rule’s requirements. In Singleton v. Crown Cent.
Petroleum Corp., 729 S.W.2d 690 (Tex. 1987), the plaintiff sued
the premises owner and the contractor, for injuries caused by the
contractor’s employee. The jury found that the owner and
contractor were concurrently negligent. The trial court required
the contractor to indemnify the owner based on an indemnity
agreement that provided as follows:
Contractor agrees to . . . indemnify . . .
owner . . . from and against any and all
claims . . . of every kind and character
whatsoever, . . . for or in connection with
loss of life or personal injury . . . directly
or indirectly arising out of . . . the
activities of contractor . . . excepting only
19
claims arising out of accidents resulting from
the sole negligence of owner.
713 S.W.2d 115, 118 (Tex. App. – Houston [1st Dist.] 1986)
(emphasis added). The Texas Supreme Court held that the indemnity
agreement did not satisfy the express negligence rule. Singleton,
729 S.W.2d at 691. The Court explained this result more fully in
a later opinion:
The indemnity contract in Singleton did not
specifically state that [Contractor] was
obligated to indemnify [Owner] for [Owner’s]
own negligence. Rather, it specifically
stated what was not to be indemnified, “claims
resulting from the sole negligence of the
owner.” The agreement was an implicit
indemnity agreement requiring [Owner] to
deduce his full obligation from the sole
negligence exception.
Atlantic Richfield Co. v. Petroleum Personnel, Inc., 768 S.W.2d
724, 725 (Tex. 1989).
Under these Texas Supreme Court cases, a contract subject
to the express negligence rule cannot define what is included in an
indemnity provision by stating what obligations are outside that
indemnity agreement. Such implicit agreements to require an
indemnitor to indemnify against the indemnitee’s own negligence are
not express and, therefore, not enforceable. Id.
By contrast, Texas courts have enforced indemnity
agreements that state, in clear, express, and specific terms, the
extent of the obligation to indemnify. In Atlantic Richfield, the
Court considered an indemnity clause providing that the indemnitor
would indemnify the indemnitee for “any negligent act or omission
20
of [the indemnitee], its officers, agents or employees. . . .” 768
S.W.2d at 726. The Texas Supreme Court held that this language met
the requirements of the express negligence rule. Id. In Enserch
Corp. v. Parker, 794 S.W.2d 2, 6-7 (Tex. 1990), the Court
considered a clause providing that the indemnitor would indemnify
for any claims “regardless of whether such claims are founded in
whole or in part upon alleged negligence of [the indemnitee]” and
that the indemnitor “further agrees to indemnify and hold harmless
[the indemnitee] . . . in respect to such matters.” The Court held
that the contract defined the parties’ intent to indemnify for the
consequences of the indemnitee’s own negligence. Id. at 8. In
Maxus Exploration, Co. v. Moran Brothers, Inc., 817 S.W.2d 50, 56
(Tex. 1991), the court found that the following provision met the
express negligence test: "Diamond Shamrock agree[s] to indemnify
Moran against all bodily injury, death and property claims by its
employees or the employees of its contractors 'without limit and
without regard to the cause or causes thereof or the negligence of
any party or parties, . . . .’” Id.; see also Permian Corp. v.
Union Texas Petroleum Corp., 770 S.W.2d 928, 929-930 (Tex. App.-El
Paso 1989, no writ)(clause providing "Contractor hereby
indemnifies and agrees to protect, hold and save Union Texas . . .
harmless from and against all claims, . . . including but not
limited to injuries to employees of Contractor, . . . on account
of, arising from or resulting, directly or indirectly, from the
work and/or services performed by Contractor . . . and whether the
21
same is caused or contributed to by the negligence of Union Texas,
its agent or employees, . . . " met the express negligence test).
At one end of the spectrum, general statements providing
for indemnification for a type of activity from which losses or
claims arise do not satisfy the express negligence doctrine. See,
e.g., Fisk Elec., 888 S.W.2d at 814; Gulf Coast Masonry, 739 S.W.2d
at 240; Ethyl, 725 S.W.2d at 708. Statements that require
inference or extension to impose an indemnification obligation for
the indemnitee’s own negligence do not satisfy the express
negligence doctrine. See, e.g., Singleton, 729 S.W.2d at 690;
Houston Lighting & Power v. Atchison, Topeka, & Santa Fe Rwy. Co.,
890 S.W.2d 455, 458 (Tex. 1994) (provision expressly providing
indemnification for indemnitee’s own negligence could not be
inferentially extended to include indemnification for strict
liability claims against indemnitee); see also Glendale Constr.
Servs., Inc. v. Accurate Air Sys., Inc., 902 S.W.2d 536, 538-39
(Tex. App.–Houston [1st Dist.] 1995, writ denied) (indemnification
clause applying to loss “regardless of whether it was caused in
part by a party indemnified hereunder” does not expressly include
loss from negligence); Lee Lewis Constr., Inc. v. Harrison, 64
S.W.3d 1, 20-22 (Tex. App.–Amarillo 1999), aff’d on other grounds,
70 S.W.3d 778 (Tex. 2001) (same). At the other end of the
spectrum, indemnity provisions explicitly and affirmatively stating
that the parties intend to provide indemnification for the
indemnitee’s own negligence provide fair notice under the express
22
negligence doctrine. See, e.g., Maxus Exploration, 817 S.W.2d at
56; Atlantic Richfield, 768 S.W.2d at 726; Enserch, 794 S.W.2d at
8.
Quorum essentially argues that the indemnity provisions
in the Management Agreement place it at the enforceable end of the
spectrum, allowing the district court to use general contract
construction principles to view the contract as a whole and
conclude that the indemnity clauses were sufficiently specific to
give the Hospital fair notice of its obligation to indemnify Quorum
for losses resulting from Quorum’s own negligence. Quorum’s
argument fails under the Texas cases on which it relies.
Quorum first relies on the general statement in the
“Indemnification by Hospital” provision, stating that the Hospital
“agrees to indemnify and hold harmless Quorum . . . for any and all
losses, claims, damages, liabilities, costs, and expenses . . .
joint or several . . . arising in connection with the activity of
the Hospital . . . .” Under clear Texas Supreme Court precedent,
this language is insufficient to establish, in the required express
terms, that the parties intended that the Hospital would indemnify
Quorum for its own negligence. See, e.g., Ethyl, 725 S.W.2d at 708
(“any loss” arising as “a result of operations” does not convey
intent to cover the indemnitee’s own negligence).
Quorum argues that indemnity provision’s definition of
the losses, claims, and damages for which the Hospital must
indemnify Quorum provides the necessary specificity. The
23
Management Agreement defines the losses, claims, and damages
covered by the Hospital’s indemnification obligation as “including,
but not limited to . . . medical malpractice and other tort claims
asserted against Quorum.” Quorum argues that “medical malpractice
or other tort claims asserted against Quorum” includes claims based
on Quorum’s own negligence. However, not all “losses, claims,
damages, [or] liabilities” arising in connection with a medical
malpractice or other tort claim asserted against Quorum are
necessarily based on Quorum’s own negligence. A statement that
indemnification applies to certain types of claims does not extend
the obligation to the indemnitee’s own negligence, even if the
types of claims specified could include claims based on the
indemnitee’s negligence. In Ethyl, for example, the contract
provided indemnity for losses “as a result of the operations
growing out of the performance of this contract.” 725 S.W.2d at
707. Ethyl, the indemnitee, argued that this language was so broad
that it covered all losses resulting from contract performance,
including losses caused by Ethyl’s own negligence. The Texas
Supreme Court held that such a broad statement of indemnity did not
meet the express negligence test. Id.; accord Gulf Coast Masonry,
739 S.W.2d at 239-40 (claims “arising out of or in any way
connected with or attributable to” a list of specified items did
not state with sufficient specificity the parties’ intent to
indemnify for the party’s own negligent performance of the
described items); DDD Energy, 60 S.W.3d at 883 (“all claims”
24
asserted “on account of . . . damage to property” insufficient to
establish intent to indemnify for the indemnitee’s own negligence
that caused damage to property).
The language in the Management Agreement provision
setting out the Hospital’s obligation to indemnify Quorum does not
expressly and specifically state that the Hospital must indemnify
Quorum for losses, damages, liabilities, and costs of defense,
arising in connection with medical malpractice or other tort claims
asserted against Quorum and resulting from Quorum’s negligence.
The language in the provision does not satisfy the requirements of
the express negligence rule.
Quorum also argues, and the district court concluded,
that the language excluding losses or claims caused by Quorum’s
gross negligence from the Hospital’s obligation to indemnify Quorum
meant that the parties intended to include losses, damages, and
claims caused by Quorum’s simple negligence within the Hospital’s
indemnity obligation. Quorum cites “established principles” of
contract construction and interpretation to support this result.
However, the express negligence doctrine is a rule of contract
construction that imposes requirements beyond the “established
principles” of construction on which Quorum relies. See Dresser,
853 S.W.2d at 508. The express negligence rule requires an
explicit statement of the parties’ intention to require the
Hospital to indemnify Quorum for the consequences of its own simple
negligence. Ethyl, 725 S.W.2d at 707-08.
25
The Texas Supreme Court has held that an indemnity
agreement that implies an obligation to indemnify for the
indemnitee’s own negligence as to one category or type of liability
by excluding it for a different category or type of liability is
not enforceable under the express negligence doctrine. The Texas
Supreme Court held in Singleton, 729 S.W.2d at 691, and Atlantic
Richfield, 768 S.W.2d at 725, that an agreement that implies an
obligation to indemnify for the indemnitee’s own negligence as to
one degree or type of liability - concurrent negligence - by
excluding it for a different degree or type of liability - sole
negligence - is not enforceable under the express negligence
doctrine. Under that holding, the language in the Management
Agreement requiring deduction to determine what is included in the
indemnity obligation – indemnity for Quorum’s simple negligence –
from the description of what is excluded – indemnity for Quorum’s
gross negligence – does not meet the “explicit” requirement of the
Texas express negligence rule.
Texas cases decided since Singleton and Atlantic
Richfield have reached similar results. In Texas Utils. Elec. Co.
v. Babcock & Wilcox Co., Inc., 893 S.W.2d 739, 740 (Tex. App. –
Texarkana 1995, no writ), Texas Utilities sought indemnification
from Babcock & Wilcox for a claim that Texas Utilities had settled
with a third party arising from the use of equipment sold by
Babcock & Wilcox to Texas Utilities. Texas Utilities, the
purchaser, asserted that it and Babcock & Wilcox, the seller, were
26
concurrently negligent in causing the injury that formed the basis
of the claim. Id. The indemnity provision in the contract between
the parties provided that
[Seller] shall . . . indemnify . . .
[Purchaser] . . . from and against any and
all claims . . . of every kind and character
whatsoever arising in favor of any person or
entity . . . with the only exception being
that . . . [Purchaser] shall not be entitled
to indemnification for claims, demands,
expenses, judgments, and causes of action
resulting from [Purchaser’s] sole negligence.
Id. at 741-42. The court held that, as in Singleton, the
contract’s exclusion of the purchaser/indemnitee’s sole negligence
from the indemnity obligation failed the express negligence test
because it did not affirmatively state that the parties intended to
include indemnity for concurrent negligence. Id. Similarly, in
Houston Lighting & Power, 890 S.W.2d at 458, the Texas Supreme
Court held that a contract provision expressly providing
indemnification for the indemnitee’s own negligence could not be
extended by inference to require indemnification for the
indemnitee’s losses resulting from strict liability.
These results are consistent with Ethyl itself, the
opinion in which the Texas Supreme Court adopted the express
negligence test as the Texas rule. In Ethyl, the court first
considered whether the contractor was required to indemnify the
owner for the damages based on a broad provision providing
indemnity for “losses as a result of the operations growing out of
the performance of this contract.” 725 S.W.2d at 707. The court
27
held that the indemnity obligation did not extend to the owner’s
own negligence. The indemnity provision also explicitly stated
that the contractor would indemnify the owner for damages “caused
by the negligence or carelessness of Contractor.” Ethyl argued it
was entitled to indemnification because the jury found the damages
were proximately caused by both the owner and contractor. 725
S.W.2d at 707. The court held, however, that this provision,
requiring indemnification for losses caused by the indemnitor’s
negligence, did not include indemnification for the concurrent
negligence of both the indemnitee and indemnitor. The contract did
not explicitly include concurrent negligence within the indemnity
obligation and the court declined to find it by deduction or
inference. Id.
These Texas cases make it clear that an indemnity
provision excluding one degree or type of liability does not permit
a Texas court to find that the parties implicitly intended to
include indemnification for a different degree or type of
liability. This result applies even if excluding the specified
type or degree of liability appears, by deduction, to leave only
the type or degree of liability for which indemnity is sought.
Excluding sole negligence from an indemnity obligation would appear
to leave concurrent negligence within the indemnity obligation, but
the Texas Supreme Court in Singleton and Atlantic Richfield held
that a contract cannot implicitly include an obligation to
indemnify for the indemnitee’s concurrent negligence by explicitly
28
excluding the obligation to indemnify for the indemnitee’s sole
negligence. Singleton, 729 S.W.2d at 691; Atlantic Richfield, 768
S.W.2d at 725.
A provision excluding the indemnitee’s gross negligence
from the losses, damages, or claims covered by the indemnity
obligation appears, by deduction, to leave the indemnitee’s simple
negligence within the indemnity obligation. However, just as a
provision explicitly excluding indemnification for the indemnitee’s
sole negligence is insufficient to establish inclusion of
indemnification for the indemnitee’s concurrent negligence, so the
provision in the Management Agreement explicitly excluding Quorum’s
gross negligence from the Hospital’s indemnification obligation is
insufficient to require the Hospital to indemnify Quorum for
Quorum’s simple negligence. The indemnity provision’s exclusion of
losses, damages, and claims caused by Quorum’s gross negligence
from the Hospital’s indemnity obligation does not explicitly state
that the Hospital is obligated to indemnify Quorum for losses,
damages, or claims caused by Quorum’s simple negligence. Rather,
the exclusion of gross negligence creates an implicit agreement to
indemnify for simple negligence, requiring the Hospital to deduce
its full obligation from the gross negligence exception. An
implicit indemnity agreement does not pass the Texas express
negligence test. Singleton, 729 S.W.2d at 691; Atlantic Richfield,
768 S.W.2d at 725; Houston Lighting & Power, 890 S.W.2d at 458.
29
Quorum cites Fina, Inc. v. ARCO, 200 F.3d 266 (5th Cir.
2000), to support its argument that the indemnity provision is
sufficient to meet the express negligence test. In Fina, the court
held that an indemnity provision excluding claims caused by the
indemnitee’s “gross negligence” did not expressly state the
parties’ intent to indemnity against strict liability claims. In
reaching this conclusion, the court in Fina stated: “Even if the
exclusion of gross negligence from the indemnity’s coverage is
interpreted as indicating that [the indemnitor] intended to
indemnify [the indemnitee] for ordinary negligence,[] claims based
on strict liability are of quite a different nature.” 200 F.3d at
273 (citing Rizzo v. John E. Healy and Sons, Inc., 1990 WL 18378,
at *2 (Del. Super. Feb.16, 1990); Laws v. Ayre Leasing, 1995 WL
465334, at *2 (Del. Super. July 31, 1995)). Quorum argues that
this sentence permits a court to find that a contract excluding
gross negligence from indemnification shows the parties’ intent to
include simple negligence.
Fina involved contracts governed by both Texas and
Delaware law. Although the court made the statement Quorum cites
in analyzing whether the indemnity provision was enforceable under
Texas law, the only authorities the court cited in support are
unpublished Delaware cases. Delaware follows the more permissive
“clear and unequivocal” test. As the court in Fina noted, when the
Texas Supreme Court adopted the express negligence standard, it
rejected the “clear and unequivocal” test. In Fina, the court
30
concluded that under Texas law, an indemnity provision expressly
excluding gross negligence claims could not be enforced as applied
to a strict liability claim. The dicta in Fina does not make the
indemnification provision at issue here enforceable.
Quorum also relies on Banzhaf v. ADT Sec. Sys. Southwest,
Inc., 28 S.W.3d 180, 189 (Tex. App. – Eastland 2000, pet. denied),
involving an indemnity provision in a security alarm installation
contract. The contract provided that the store would indemnify the
alarm company, ADT, for claims against ADT “for failure of its
equipment or service in any respect.” Id. The court stated that
the provision met the express negligence rule and required
indemnification of ADT for claims based on “failure of [ADT’s]
equipment or service in any respect.” Id. Banzhaf does not lead
to the conclusion that the Hospital must indemnify Quorum for its
sole negligence under the Management Agreement. In Banzhaf,
another section of the indemnity provision made it clear that the
parties intended to indemnify ADT “if loss, damage or injury”
resulted from “performance or nonperformance of obligations imposed
by this contract or from negligence, active or otherwise, of ADT,
its agents or employees,” a statement which clearly did satisfy the
express negligence rule. Id. at 189-90.
The Banzhaf court cited Arthur’s Garage, Inc. v. Racal-
Chubb Sec. Sys., 997 S.W.2d 803, 814 (Tex. App. – Dallas 1999, no
pet.), in support of its statement that a contract does not have to
31
include the word “negligence” to satisfy the express negligence
doctrine. Arthur’s Garage does not support this statement because
the indemnity clause in that case did include the word
“negligence.” In Arthur’s Garage, the indemnity clause in the
alarm installation contract provided that the purchaser would
indemnify the seller for claims brought by third parties
regardless of cause, including [seller’s]
performance or failure to perform, and
including defects in products, design,
installation, maintenance, operation or non-
operation of the system, whether based upon
negligence, active or passive, warranty, or
strict product liability on the part of
[seller], its employees or agents . . . .
Id. at 815. The court concluded that because “this provision
clearly and specifically provides that it covers any negligence .
. . on the part of the [security alarm seller and installer],” it
met the express negligence test. Id.8
In contrast to Banzhaf, other Texas courts of appeals
have held that an indemnity provision must specifically refer to
the indemnitee’s own negligence to meet the express negligence
test. In Monsanto Co. v. Owens-Corning Fiberglass, 764 S.W.2d 293,
295 (Tex. App. - Houston [1st Dist.] 1988, no writ), the Houston
8
The Texas Supreme Court denied the petition for review of
the Banzhaf decision with the notation “petition denied,”
indicating that “[t]he supreme court is not satisfied that the
opinion of the court of appeals has correctly declared the law in
all respects, but determines that the petition presents no error
that requires reversal or that is of such importance to the
jurisprudence of the state as to require correction.” TEXAS RULES OF
FORM 88 (9th ed. 1998).
32
Court of Appeals held that the contract did not meet the express
negligence test, in part because the agreement did not use the word
“negligence." In Lee Lewis Constr., 64 S.W.3d at 21 n.13, the
court interpreted Ethyl and its progeny as explicitly requiring the
parties to use the word “negligence” in stating the indemnitor’s
obligation to indemnify the indemnitee for the indemnitee’s own
negligence.
In the cases in which the Texas Supreme Court has allowed
indemnification of a party for its own negligence, the contracts
contained language that expressly referred to the type of the
indemnified party’s negligence covered by the indemnity obligation.
Atlantic Richfield, 768 S.W.2d 724; Enserch, 794 S.W.2d 2; Maxus
Exploration, 817 S.W.2d at 56; Payne & Keller, Inc. v. P.P.G.
Indus., Inc., 793 S.W.2d 956, 957-59 (Tex. 1990) (indemnitor owed
indemnification for indemnitee’s concurrent negligence where
indemnity provision covered claims “arising out of . . . the acts
or omissions . . . of [indemnitor] . . . in the performance of the
work . . . irrespective of whether [indemnitee] was concurrently
negligent . . . but excepting [claims] caused by the sole
negligence of [indemnitee]”). In contrast, Texas courts do not
allow indemnification of a party for its own negligence when the
contract did not expressly identify the precise category of
liability for which indemnification was sought. Ethyl, 725 S.W.2d
at 708 (no indemnification for concurrent negligence when sole
negligence of indemnitor included); Singleton, 729 S.W.2d at 691
33
(no indemnification for concurrent negligence when sole negligence
of indemnitee excluded); Texas Utils., 893 S.W.2d at 741 (same);
see also Houston Lighting & Power, 890 S.W.2d at 458 (no
indemnification for strict liability when negligence of indemnitee
included); Fina, 200 F.3d at 273 (no indemnification for strict
liability when gross negligence of indemnitee excluded). The
exclusion of coverage for Quorum’s gross negligence falls into the
second category because it fails expressly to state the parties’
intent to require the Hospital to indemnify Quorum for losses,
claims or damages resulting from Quorum’s simple negligence.
The Management Agreement provision requiring the Hospital
to indemnify Quorum fails to satisfy the fair notice requirements
of the express negligence rule. As a matter of law, the provision
is not enforceable against the Hospital for claims based on
Quorum’s own negligence. Quorum is not entitled to indemnification
from the Hospital for the Rodriguez judgment.
B. The Insurer’s Duty to Defend and Indemnify
Texas law is clear that insurance policies are subject to
the same rules of construction generally applicable to contracts.
Kelley-Coppedge, Inc. v. Highlands Ins. Co., 980 S.W.2d 462, 464
(Tex. 1998)(citations omitted). If one party to an agreement
commits a material breach, the other party is discharged or excused
from any otherwise binding obligation to perform. See Hernandez v.
Gulf Group Lloyds, 875 S.W.2d 691, 693 (Tex. 1994); Mead v. Johnson
34
Group, Inc., 615 S.W.2d 685, 689 (Tex. 1981). An insurer’s duty to
defend and its duty to indemnify are distinct and separate.
Farmers Tex. County Mut. Ins. v. Griffin, 955 S.W.2d 81, 82 (Tex.
1997); E&L Chipping Co. v. Hanover Ins. Co., 962 S.W.2d 272, 274
(Tex. App. – Beaumont 1998, no pet.); Argonaut Southwest Ins. Co.
v. Maupin, 500 S.W.2d 633, 636 (Tex. 1973). The duty to defend is
based upon the factual allegations in the pleadings and the policy
language itself. See American Nat. Gen. Ins. Co. v. Ryan, 274
F.3d 319 (5th Cir. 2001); American Physicians Ins. Exch. v. Garcia,
876 S.W.2d 842, 847-48 (Tex. 1994). The duty to indemnify arises
from the actual facts that are developed to establish liability in
the underlying suit. See Trinity Univ. Ins. Co. v. Cowan, 945
S.W.2d 819, 821 (Tex. 1997) (citing Heyden Newport Chem. Corp. v.
Southern Gen. Ins. Co., 387 S.W.2d 22, 25 (Tex. 1965)). An insurer
may have a duty to defend but, eventually, not to indemnify.
Griffin, 955 S.W.2d at 82.
An insured has a duty to cooperate with its insurer in
the defense of claims for which the insurer has a duty to defend.
See State Farm & Cas. Co. v. S.S., 858 S.W.2d 374, 385 (Tex. 1993).
These “[c]ooperation clauses are intended to guarantee to insurers
the right to prepare adequately their defense on questions of
substantive liability.” Martin v. Travelers Indem. Co., 450 F.2d
542, 553 (5th Cir. 1971). To breach its duty to cooperate, an
insured’s conduct must materially prejudice the insurer’s ability
to defense the lawsuit on the insured’s behalf. Id. at 553;
35
Hernandez, 875 S.W.2d at 692-93; State Farm, 858 S.W.2d at 385; Oil
Ass’n v. Royal Indem. Co., 519 S.W.2d 148, 150 (Tex. App.– Houston
[14th Dist.] 1975, writ ref’d n.r.e.). However, an insurer who
first “wrongfully refuses to defend” an insured is precluded from
insisting on the insured’s compliance with other policy conditions.
See Employers Cas. Co. v. Block, 744 S.W.2d 940, 943 (Tex. 1988);
St. Paul Ins. Co. v. Rahn, 641 S.W.2d 276, 278 (Tex. App. - Corpus
Christi 1982, no writ); Enserch v. Shand Morahan & Co., Inc., 952
F.2d 1485, 1496 n.17 (5th Cir. 1992) (applying Texas law). Even if
an insurer wrongfully refuses to defend, it still has the right to
assert the policy defense of noncoverage and will only be liable to
indemnify the insured up to the policy limits. Western Alliance
Ins. Co. v. Northern Ins. Co. of New York, 176 F.3d 825, 830 (5th
Cir. 1999); Rhodes v. Chicago Ins. Co., 719 F.2d 116, 120 (5th Cir.
1983); Willcox v. American Home Assur. Co., 900 F. Supp. 850, 855-
57 (N.D. Tex. 1995) (citing Ideal Mutual Ins. Co. v. Myers, 789
F.2d 1196, 1200 (5th Cir. 1986)); Texas United Ins. Co. v. Burt
Ford Enterp., 703 S.W.2d 828, 834 (Tex. App.– Tyler 1986, no writ).
THIE concedes that, under the insurance policy, it had a
duty to defend Quorum in the Rodriguez litigation. The parties do
not dispute that, once Quorum was joined as a defendant in the
Rodriguez litigation, THIE fulfilled its duty to defend Quorum by
assigning a lawyer to handle its defense. The issue is whether
THIE met its duty to defend after Quorum sought separate counsel on
the basis of a conflict of interest, or whether Quorum breached its
36
duty to cooperate by rejecting the lawyer THIE offered and
insisting upon separate counsel.
The summary judgment evidence consisted of various
letters exchanged among the parties and their representatives, as
well as affidavits from the parties and their representatives. The
parties disputed the meaning and significance of the letters
exchanged between the parties and the events described in the
affidavits. This court must view facts and inferences in the light
most favorable to Quorum, the party opposing summary judgment. See
Liberty Lobby, 477 U.S. at 248; Matsushita, 475 U.S. at 587-88.
When Quorum was added as a party defendant to the
Rodriguez litigation, THIE assigned a lawyer to defend Quorum and
advised Quorum in writing of the policy limits of $100,000 per
occurrence and the policy exclusion for punitive damages. THIE
advised Quorum of its “right to consult with additional counsel, at
its own expense, to protect any uninsured interests.” In February
1998, Quorum told the attorney assigned by THIE that Quorum’s
excess insurer, American Continental Insurance Company (“ACIC”),
wished to play a “more active role in the case.” ACIC appointed a
lawyer “to work with [the THIE lawyer] on the case, especially to
assist in monitoring Quorum’s and ACIC’s interests.” A February
25, 1998 letter from ACIC to Quorum clarifies the role Quorum
expected the ACIC lawyer to take: “[He] shall be considered ‘co-
counsel’ to oversee and work with [the THIE lawyer] to protect
Quorum and ACIC’s interests. By copy of this letter to [the
37
lawyers], we look forward to their assistance in coordinating this
team.” Quorum did not ask THIE to pay for this “co-counsel.” In
late March or early April 1998, the ACIC lawyer arranged to visit
the offices of the THIE lawyer to review the claim file.
On April 13, 1998, Quorum told THIE, in writing, that a
conflict of interest had arisen in the “co-counsel” arrangement and
that Quorum had retained the lawyer previously provided by ACIC to
represent its interests. Quorum demanded that THIE pay for this
lawyer as part of Quorum’s cost of defense. “[I]t is expected that
Texas Hospital Insurance Exchange will pay for the defense of this
matter for those additional insurance [sic], Quorum Health
Resources, Inc. and Quorum Health Group, Inc., through their new
counsel, [the ACIC lawyers].” On April 16, 1998, THIE responded to
Quorum’s letter, stating that while THIE was “willing to provide
Quorum Health Care with separate legal representation,” the law
firm retained by Quorum was not on THIE’s list of approved counsel.
THIE would “not be responsible for payment of any services provided
by the firm.”
On April 17, 1998, THIE assigned a lawyer from its
approved list to represent Quorum in the Rodriguez litigation and
notified Quorum of this assignment. Shortly after that date, Sally
Stewart of THIE had a telephone conference with Ann Peck of ACIC
and Elizabeth Berryman of Quorum. Stewart stated in her affidavit
that in this conversation, Peck or Berryman told her that “[the
ACIC lawyer] would be representing Quorum in this litigation
38
regardless of who paid for the defense costs, and I was also
informed that the issue of defense costs would simply have to be
resolved later.”
On April 21, 1998, the ACIC lawyer asked the THIE lawyer
to provide copies of the Rodriguez case files. In the letter, the
ACIC lawyer stated,
We need to make sure that these files are
copied as soon as possible as the clients have
requested that we enter an appearance on
behalf of Quorum and begin defending their
interest. Regardless of whether THIE steps
into this case and pays for the defense costs,
Quorum and American Continental Insurance have
asked that we provide services to them
regarding the defense of this particular
matter as it relates to Quorum.
The THIE lawyer responded that THIE had that day “authorized the
copying of the file for you [the ACIC lawyer’s] and Quorum’s new
[THIE] attorney . . . .” Neither Quorum nor its counsel objected
to copying the case file for the “new THIE attorney.” On that same
day, however, Stewart acknowledged that the new lawyer THIE had
assigned to the defense of Quorum in the Rodriguez case had
“declined the assignment.”
On April 28, 1998, THIE asked ACIC to send a firm resume
and fee billing schedule for the ACIC lawyers representing
Quorum’s interests. The record does not reveal that THIE received
a response or took further action. THIE did not offer further
representation to Quorum. On May 13, 1998, the Rodriguez court
allowed the ACIC lawyer to substitute in as counsel for Quorum.
39
Quorum proceeded to trial represented by this lawyer, as well as
two additional law firms. The trial transcripts reveal that the
two additional law firms played the major role at trial. The
parties have presented conflicting affidavits as to the
representation Quorum’s lawyers provided during the trial. The
lawyers who tried the case explained the circumstances that made it
challenging; the preparation and expertise they brought to the
trial; and the absence of any prejudice to THIE as a result of
their actions and decisions in defending Quorum. The lawyer who
was initially hired by THIE to represent Quorum, but whose
involvement ended after April 1998, criticized the trial strategy
that Quorum followed.
Quorum and THIE dispute the conclusions and inferences
that can be drawn from the summary judgment evidence. Quorum
asserts that because the lawyer THIE provided after Quorum asserted
a conflict of interest almost immediately declined the
representation, and THIE did not offer a replacement, the record
does not permit the conclusion that THIE met its duty to defend, as
a matter of law. THIE argues that the evidence shows that Quorum
unreasonably rejected the second lawyer THIE offered and took over
the defense, leading to the conclusions that THIE met its duty to
defend and that Quorum breached its duty to cooperate. As a
result, THIE contends that it is relieved of any duty to indemnify
Quorum for any part of the Rodriguez judgment. Quorum responds
that the evidence is insufficient to establish that Quorum rejected
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THIE’s offer of a lawyer or breached its duty to cooperate under
the policy. Quorum asserts that the evidence can reasonably be
interpreted as showing that Quorum wanted to retain the ACIC lawyer
in addition to the counsel THIE would provide, regardless of
whether THIE paid for all such costs of defense. Quorum points to
the absence of any evidence that it directly rejected THIE’s offer
of a lawyer and a defense.
The party moving for summary judgment must demonstrate
the absence of a genuine issue of material fact. See Little v.
Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) (en banc). If
the moving party fails to meet its initial burden, the motion for
summary judgment must be denied, regardless of the nonmovant’s
response. See id. The evidence in the present record shows that
until April 13, 1998, Quorum was represented by a lawyer THIE
assigned and for which it paid, and by a lawyer ACIC assigned and
for which it paid. When Quorum notified THIE of the conflict of
interest, Quorum told THIE that it expected THIE to continue to pay
for Quorum’s defense. THIE responded that it was willing to
provide Quorum with separate legal representation, but could not
approve the law firm Quorum had retained and would not pay for its
services. THIE asserts that Quorum made it clear that it would
reject any lawyer THIE provided; Quorum denies that it conveyed
such a position, pointing out that although THIE provided another
lawyer, that lawyer almost immediately declined the representation
and THIE did not provide other counsel.
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The evidence does not support the conclusion that, as a
matter of law, THIE met its duty to defend Quorum after the
conflict of interest arose. Nor does the evidence support the
conclusion that, as a matter of law, Quorum breached its duty of
cooperation after THIE’s second lawyer declined the representation.
Quorum points to summary judgment evidence showing that it did not
decline to accept the lawyer offered. Quorum also points to
summary judgment evidence showing that after THIE’s involvement in
the defense ceased, Quorum’s lawyers mounted a vigorous defense,
raising a fact issue as to whether THIE suffered prejudice, a
necessary component of a breach of the duty to cooperate.
Hernandez, 875 S.W.2d at 692-94.; State Farm, 858 S.W.2d at 385;
Oil Ass’n, 519 S.W.2d at 150.
In deciding a summary judgment motion, “[t]he evidence of
the nonmovant is to be believed, and all justifiable inferences are
to be drawn in his favor.” Liberty Lobby, 477 U.S. at 255. The
fact issues disclosed in the present record are genuine in that the
evidence would permit a reasonable factfinder to return a verdict
for the nonmoving party, and are material, in that resolution of
the issues might affect the outcome of the suit under governing
law. Merritt-Campbell, 164 F.3d at 961. The summary judgment
record is insufficient to demonstrate the absence of a genuine
issue of material fact as to whether THIE met its obligation to
defend Quorum after the second THIE lawyer declined the
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representation. The record is also insufficient to permit the
conclusion that, as a matter of law, Quorum breached its duty of
cooperation by rejecting THIE’s proffered representation, depriving
THIE of its ability to control Quorum’s defense. The evidence is
conflicting as to whether Quorum told THIE that it would reject any
lawyer THIE offered, but would insist on representation solely by
counsel ACIC provided. The evidence is conflicting as to whether
THIE met its obligation to provide a lawyer after the counsel it
did offer declined to proceed. The evidence is conflicting and
insufficient to support the conclusion that, as a matter of law,
Quorum breached its duty of cooperation once THIE’s involvement in
the defense ceased. The district court’s grant of summary judgment
is reversed and the case remanded for further proceedings on these
issues.
IV. Conclusion
This court holds that, as a matter of law, the Hospital
does not have a duty to indemnify Quorum for the Rodriguez verdict
because the contractual indemnity provision did not expressly state
the parties’ intention to indemnify Quorum for its own negligence.
The district court’s summary judgment ruling that the Hospital is
obligated to indemnify Quorum is REVERSED. This court concludes
that the evidence does not support summary disposition of THIE’s
satisfaction of its duty to defend and Quorum’s satisfaction of its
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duty to cooperate. As to these issues, this court REVERSES and
REMANDS to the district court.
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