Interstate Fire & Casualty Co. v. 1218 Wisconsin, Inc. , 136 F.3d 830 ( 1998 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued November 19, 1997 Decided March 13, 1998
Nos. 97-7046 & 97-7050
Interstate Fire & Casualty Company, Incorporated,
an Illinois Corporation,
Appellant/Cross-Appellee
v.
1218 Wisconsin, Inc., t/a The Third Edition,
a District Corporation,
Appellee/Cross-Appellant
Appeals from the United States District Court
for the District of Columbia
(No. 95cv00549)
Douglas M. Coleman argued the cause for Interstate Fire
& Casualty Co., appellant/cross-appellee. David D. Hudgins
and James P. Bobotek were on the briefs.
Michael J. Jack argued the cause and filed the brief for
The Third Edition, appellee/cross-appellant.
Before Edwards, Chief Judge, Tatel, Circuit Judge, and
Buckley, Senior Circuit Judge.
Opinion for the court filed by Senior Judge Buckley.
Buckley, Senior Judge: In this diversity case, we consider
whether, notwithstanding "assault and battery" and "liquor
liability" exclusions in its insurance contracts, an insurer may
have a duty to defend a client sued by a patron who was
injured by another who was intoxicated. We also address an
insured's obligation to indemnify its insurer when, in return
for a release from all liability, the insured assigns its claim
against its insurer to a third party with whom the insurer
then settles.
I. Background
On February 11, 1993, Teresa Williams, a resident of
Virginia, was viciously beaten outside The Third Edition, a
District of Columbia bar where she and her attacker had been
patrons. The Third Edition is owned and operated by 1218
Wisconsin, Inc., a D.C. corporation. Because The Third
Edition's employees had allegedly observed the attack with-
out intervening and had allegedly served the attacker sub-
stantial amounts of alcohol, Ms. Williams sued both her
attacker and The Third Edition. In her complaint, she
charged the latter with (1) negligent provision of alcohol to an
intoxicated patron, (2) failure to protect a patron, (3) failure
to discharge a voluntarily assumed obligation to protect its
patrons, and (4) the negligent hiring, supervision, and/or
training of employees. As for her attacker, Ms. Williams
alleged (1) assault and battery, (2) intentional infliction of
emotional distress, and in the event he did not have the intent
necessary to support these charges, (3) gross negligence in
disregarding the possible consequences of his actions, and (4)
negligent intoxication.
At the time of the attack, The Third Edition was insured by
Interstate Fire & Casualty Company ("Interstate"). The
parties agree on appeal that at all relevant times Interstate's
contract with The Third Edition included "assault and bat-
tery" and "liquor liability" exclusions. These exclusions bar
coverage for personal injury claims arising respectively from
"assault and/or battery; or ... any act or omission connected
directly or indirectly with the prevention or suppression of an
assault and/or battery" and from "[c]ausing or contributing to
the intoxication of any person."
On the basis of those exclusions, Interstate declined to
defend The Third Edition against Ms. Williams' suit. Just
prior to trial, The Third Edition reached a settlement with
Ms. Williams. In exchange for being released from all liabili-
ty, The Third Edition stipulated to a $1 million judgment and
assigned its entire interest in the Interstate policy to Ms.
Williams. The district court, which was not apprised that Ms.
Williams was foregoing her right to enforce the judgment
directly against The Third Edition, approved the settlement,
and, in February 1995, entered a consent judgment against
The Third Edition in the amount of $1 million. Interstate
sought to intervene after entry of the judgment, but its
motion was denied.
Interstate then filed a declaratory judgment action against
The Third Edition, Ms. Williams, and the agent who had
negotiated the original insurance contract on behalf of The
Third Edition, seeking, in relevant part, to be absolved of all
liability and to be indemnified for all legal fees and costs
incurred as a result of the allegedly collusive settlement
between The Third Edition and Ms. Williams. Ms. Williams
filed a counterclaim against Interstate, seeking enforcement
of the $1 million judgment. Because Interstate had refused
to defend it against her claims, The Third Edition filed a
counterclaim against the insurer for indemnification of the
legal costs incurred in defending itself against Ms. Williams'
suit.
The claims between Ms. Williams and Interstate were
voluntarily dismissed after Interstate agreed to pay her
$275,000. Interstate and The Third Edition then filed com-
peting summary judgment motions, each seeking indemnifica-
tion. The court granted summary judgment to Interstate on
the duty to defend, holding that the insurance policy did not
cover Ms. Williams' claim against The Third Edition, but
otherwise denied the motion. The court denied The Third
Edition's counterclaim in its entirety. Interstate now appeals
the district court's holding that it is not entitled to indemnifi-
cation for the amount of the settlement and for the attendant
legal costs. The Third Edition cross-appeals the court's
decision that Interstate had no duty to defend it against Ms.
Williams' suit.
The district court had diversity jurisdiction over this claim
under 28 U.S.C. s 1332 (1994), and we have jurisdiction
pursuant to 28 U.S.C. s 1291 (1994). Because the District of
Columbia is the only jurisdiction with any significant interest
in the outcome of this suit, the case is governed by District
law. See District of Columbia v. Coleman, 667 A.2d 811, 816-
18 (D.C. 1995) (discussing "governmental interests" analysis
in choice of law). We review the district court's judgment de
novo. See Tao v. Freeh, 27 F.3d 635, 638 (D.C. Cir. 1994).
Because the outcome of Interstate's claim is in part contin-
gent on the resolution of certain issues that arise in The
Third Edition's cross-appeal, we first consider the latter.
II. Duty to Defend
The Third Edition asserts that Ms. Williams' allegations in
her original complaint fall within the scope of the insurance
contract's duty to defend and that Interstate should now
indemnify it for the funds it expended in defending against
Ms. Williams' suit. Under District of Columbia law, "if it is
possible that the allegations of a complaint would bring it
within coverage of the policy, the insurer is obligated to
defend, even if it ultimately is not required to pay a judg-
ment." American Continental Ins. Co. v. Pooya, 666 A.2d
1193, 1198 (D.C. 1995). Thus in the District, as in most
states, the duty to defend is broader than the duty to
indemnify. S. Freedman & Sons, Inc. v. Hartford Fire Ins.
Co., 396 A.2d 195, 197 (D.C. 1978). Although Interstate is
obliged to defend The Third Edition against any claims that
arguably are covered by the policy, it has no duty to defend
claims arising from conduct that falls within the terms of
either the assault and battery or the liquor liability exclusion.
Ms. Williams' first claim against The Third Edition and
part of her fourth claim allege affirmative conduct on the part
of The Third Edition that is plainly covered by the terms of
the liquor liability exclusion, which exempts from coverage
any injury resulting from The Third Edition's "[c]ausing or
contributing to the intoxication of any person." The first
claim seeks compensation for The Third Edition's negligent
provision of drinks to Ms. Williams' attacker after he was
already intoxicated; the fourth claim alleges, in part, the
negligent hiring, training, and supervision of those who
served her attacker excessive amounts of alcohol. Neither
the remaining causes of action nor the remainder of the
fourth claim, which concerns the negligent hiring, training,
and supervision of security personnel, alleges conduct on the
part of The Third Edition that is subject on its face to the
exclusions. Interstate therefore had a duty to defend against
those claims unless they were premised upon conduct by
some third party that was otherwise subject to the exclusions.
As against her attacker, Ms. Williams alleges assault and
battery, intentional infliction of emotional distress, and in the
alternative, gross negligence and negligence. Any claim
against The Third Edition derived from the assault and
battery claim plainly "ar[ose] out of ... assault and/or bat-
tery" and therefore is subject to the assault and battery
exclusion. The intentional infliction charge similarly alleges
that her attacker's "brutal and vicious assault," Williams'
Compl. at 5, caused her severe emotional injury. Thus, any
claim against The Third Edition derived from that count is
also subject to the assault and battery exclusion.
In its briefs, The Third Edition appears to argue that
neither the gross negligence claim, which alleges that the
attacker "acted in a wanton manner and with reckless disre-
gard of the possibility that his conduct would cause severe
harm to Williams," id. at 6, nor the negligence claim, which
states that the attacker was negligent "in becoming so intoxi-
cated that he lost control of his conduct and caused severe
harm to Williams," id. at 7, fits within either exclusion.
Because we find that the negligence count is dispositive, we
need not decide whether a claim of gross negligence premised
upon the facts alleged here could compel a duty to defend.
Interstate asserts that the negligence claim is indistin-
guishable from the alleged assault and battery and that
recharacterization of the attacker's conduct as "negligent"
does not change the nature of the underlying cause of action.
Nevertheless, even assuming that the complaint's description
of the attack can only be read to allege an assault and
battery, cf. Watwood v. Credit Bureau, Inc., 97 A.2d 460, 462
(D.C. 1953) (stating that "a party should be bound by state-
ments made in formal pleadings, even if they are not sworn
to"), should intoxication be recognized in the District of
Columbia as an affirmative defense to a charge of civil assault
and battery, Ms. Williams' negligence claim would be distin-
guishable from one of assault and battery.
Because intent is a necessary element of civil assault and
battery, see Madden v. D.C. Transit System, Inc., 307 A.2d
756, 757 (D.C. 1973), a finding that the defendant did not have
the requisite intent would dispose of any cause of action
alleging assault and battery. Interstate's insurance contract
only excluded conduct pertaining to "the prevention or sup-
pression of an assault and/or battery." Because insurance
contracts are read narrowly against the interests of the
insurer, see First Nat'l Bank of Decatur v. Insurance Co. of
North America, 424 F.2d 312, 317 (7th Cir. 1970), the phrase
"assault and/or battery" must be presumed to have its strict
legal definition. Therefore, if it should be the law of the
District of Columbia that an intoxicated person does not have
the intent necessary to support such a cause of action, the
attack on Ms. Williams would not fall within the scope of the
assault and battery exclusion and Interstate would be obliged
to defend any action seeking redress for any injury resulting
from it.
A number of state courts have held that an alleged tortfea-
sor's intoxication will negate the intent necessary to invoke
the "intentional acts" exclusion in insurance policies. See,
e.g., Parkinson v. Farmers Ins. Co., 594 P.2d 1039, 1041
(Ariz. Ct. App. 1979) (stating in dicta that proof of intoxi-
cation could negate capacity to form intent); State Farm Fire
& Cas. Co. v. Morgan, 364 S.E.2d 62, 64 (Ga. Ct. App. 1987)
(agreeing with "the majority view in other jurisdictions ...
that voluntary intoxication may destroy the capacity to form
the intent required to invoke a policy exclusion for acts
'intended or expected' by the insured"), aff'd, 368 S.E.2d 509 (Ga. 1988); Hanover Ins. Co. v. Talhouni, 604 N.E.2d 689,
692 (Mass. 1992) ("The majority rule is consistent with our
prior decisions on the subject which hold that evidence of
voluntary intoxication is relevant to determining the presence
or absence of intent with reference to an exclusion clause.");
Burd v. Sussex Mut. Ins. Co., 267 A.2d 7, 15 (N.J. 1970)
("With respect to voluntary intoxication, the public policy
considerations applicable to a criminal prosecution are not
decisive as to liability insurance coverage."); Safeco Ins. Co.
v. McGrath, 817 P.2d 861, 864 (Wash. Ct. App. 1991) ("An
insured may be so intoxicated as to be unable to form an
intent to commit an act, but this is a question for the trier of
fact."); see also James L. Rigelhaupt, Jr., Annotation, Liabil-
ity Insurance: Intoxication or Other Mental Incapacity
Avoiding Application of Clause in Liability Policy Specifi-
cally Exempting Coverage of Injury or Damage Caused
Intentionally by or at Direction of Insured, 33 A.L.R. 4th 983,
s 4 (1984). A similar number of courts have gone the other
way. See, e.g., Allstate Ins. Co. v. Sherrill, 566 F. Supp.
1286, 1288 (E.D. Mich. 1983) ("To allow such a defense would
create an intolerable precedent of self-immunity."), aff'd, 735
F.2d 1363 (6th Cir. 1984) (table); Prudential Property & Cas.
Co. v. Kerwin, 576 N.E.2d 94, 97 (Ill. App. Ct. 1991) ("We
reject the Kerwins' attempted transition of an affirmative
defense of criminal law to civil law."); American Family
Mut. Ins. Co. v. Peterson, 405 N.W.2d 418, 422 (Minn. 1987)
(construing language of policy to exclude intoxication as an
affirmative defense); Travelers Ins. Co. v. Cole, 631 S.W.2d
661, 664 (Mo. Ct. App. 1982) (holding that intoxication does
not negate intent because public policy cannot countenance
such a defense).
Although District of Columbia courts have held that intoxi-
cation is not a defense to criminal assault, see Parker v.
United States, 359 F.2d 1009, 1012 (D.C. Cir. 1966), they have
not yet addressed the specific issue that is before us. They
have held, however, that "[i]n case of doubt [over whether the
allegations in a complaint state a cause of action within the
terms of the insurance contract] such doubt ought to be
resolved in the insured's favor." Boyle v. National Cas. Co.,
84 A.2d 614, 616 (D.C. 1951). Doubt, of course, may be legal
as well as factual. Although California distinguishes between
the two, holding that "[t]here is no duty where the only
potential for liability turns on resolution of a legal question,"
McLaughlin v. National Union Fire Ins. Co., 29 Cal. Rptr.
2d 559, 570 (Cal. Ct. App. 1994) (internal quotation marks and
citation omitted), no other state has so held. Because Dis-
trict of Columbia law states a broad presumption in favor of
the insured, we decline to assume that the D.C. Court of
Appeals would follow California's lead. Thus, unless another
exclusion applies, Interstate had a duty to defend The Third
Edition against any claim arising from the attacker's negli-
gent intoxication.
We now consider whether the liquor liability exclusion,
whose relevance to two of the claims against The Third
Edition we discussed earlier, applies to any claim derived
from the conduct of the attacker. The liquor liability exclu-
sion applies only to injuries for which the insured is
held liable by reason of:
(1)Causing or contributing to the intoxication of any
person;
(2)The furnishing of alcoholic beverages to a person
under the legal drinking age or under the influence of
alcohol; or
(3)Any statute, ordinance or regulation relating to the
sale, gift, distribution or use of alcoholic beverages.
Neither the third clause nor the first half of the second clause
applies to Ms. Williams' claims. While the first clause and
the second half of the second clause apply to her charge that
The Third Edition had negligently contributed to her attack-
er's intoxication, neither reaches her claim that The Third
Edition failed to protect her from such an attack. Because
that claim was not contingent either on The Third Edition's
"[c]ausing or contributing" to the attacker's intoxication or on
its "furnishing alcoholic beverages to a person ... under the
influence of alcohol," Interstate had a duty to defend The
Third Edition against Ms. Williams' allegations that The
Third Edition's security personnel had failed to halt the
alcohol-induced attack.
III. The Third Edition's Obligation
to Indemnify Interstate
Interstate seeks indemnification from The Third Edition
for all costs incurred in defending against Ms. Williams' suit,
including $99,412 in attorneys' fees and the $275,000 paid in
settlement of her claim. Interstate claims it is entitled to
indemnification because it has satisfied the procedures set
forth in Central Armature Works, Inc. v. American Motorists
Ins. Co., 520 F. Supp. 283, 288 (D.D.C. 1980), which it asserts
an insurer must follow in order to contest its obligation to pay
a settlement reached between an insured and a third party.
In the alternative, Interstate claims that it is due compensa-
tion for the damages it incurred as a consequence of the
allegedly fraudulent settlement between Ms. Williams and
The Third Edition.
The procedures described in Central Armature are not
relevant to this case. Unlike the insurance company in
Central Armature, which was defending a claim for indemnifi-
cation and damages by its insured, see id. at 285, Interstate
was being sued by the third party, Ms. Williams, who was
seeking to collect the amount for which she had settled her
claim against The Third Edition. Because her claim was
entirely derivative, Interstate had no greater obligation to
pay Ms. Williams than it had to indemnify The Third Edition.
By the same token, because Ms. Williams stood in the place of
The Third Edition, Interstate's settlement of her derivative
claim was tantamount to a settlement with The Third Edition.
By settling the claim, Interstate extinguished its right to
challenge its contractual obligation to cover the settlement
between Ms. Williams and The Third Edition.
Interstate also advances two tort theories of recovery,
neither of which is availing. According to the first theory,
Interstate was entitled to indemnification because, in failing
to disclose to the district court that the settlement underlying
its $1 million consent judgment was entered collusively, The
Third Edition had committed a fraud upon the court. The
problem with that theory is that, even assuming that the
settlement was exorbitant and collusive, Interstate fails to
allege a tort. Upon a showing by an insurer that the
settlement for which a plaintiff is seeking to hold it liable is
exorbitant and was entered collusively, a court may vacate
the judgment into which the settlement was incorporated.
See, e.g., Spence-Parker v. Maryland Ins. Group, 937
F. Supp. 551, 562-63 (E.D. Va. 1996) (holding that failure to
disclose collusive nature of settlement negotiations amounted
to constructive fraud on court and that consent judgment
must therefore be set aside). Such an action is premised
upon the insurer's proving a fraud upon the court. Although
the act complained of is styled a "fraud," the remedy lies
within the court's equitable discretion, see, e.g., Carlin v.
McKean, 823 F.2d 620, 624-25 (D.C. Cir. 1987) (stating that
"the 'historic power of equity' ... [is a] narrow[ ] power to
revise a judgment that was obtained by perpetrating a fraud
upon the court"); cf. Synanon Found., Inc. v. Bernstein, 503
A.2d 1254, 1264 (D.C. 1986) ("The claim of 'fraud on the court'
is similar in effect to the equitable defense of unclean
hands."). Because such an action does not sound in tort, the
only remedy available to an insurer is vacatur of the consent
judgment. In this case, Interstate's liquidation of that judg-
ment through its settlement with Ms. Williams moots its
present attack upon it.
Interstate's second theory is that The Third Edition's
misrepresentations to the trial court and its exorbitant and
collusive settlement with Ms. Williams tortiously embroiled
Interstate in litigation to which it otherwise would not have
been a party. In making its claim for indemnification, Inter-
state relies on the following dicta from Brem v. United States
Fidelity & Guaranty Co., 206 A.2d 404 (D.C. 1965):
[A] plaintiff [may] seek[ ] in a separate action to recover
attorney['s] fees incurred by him in earlier litigation with
a third person arising out of the tortious act of the
defendant, ... if the natural and proximate consequences
of the defendant's tortious act were to involve the plain-
tiff in litigation with a third person....
Id. at 407. Assuming that this rule is recognized in the
District of Columbia and that it is applicable here, it would
permit Interstate to recover its attorney's fees but not the
$275,000 it paid Ms. Williams. Although The Third Edition's
settlement agreement with Ms. Williams and the resulting
consent judgment caused Interstate to retain a lawyer to
defend against Ms. Williams' suit, they did not require Inter-
state to settle a derivative claim that it insists was worthless.
But regardless of the amount that Interstate reasonably
could anticipate securing were it to prevail on this theory, its
claim suffers a more fundamental inadequacy. Interstate
alleges that The Third Edition committed two predicate torts
which, considered alone or in conjunction, wrongfully entan-
gled it in litigation: The Third Edition entered into a collu-
sive and exorbitant settlement, and it fraudulently failed to
disclose the existence of the insurance contract's exclusion
clauses to Ms. Williams. Assuming, for the purposes of this
analysis, that The Third Edition's conduct was in fact tor-
tious, Interstate is entitled to a remedy only if The Third
Edition's wrongful acts caused Interstate to become a party
to litigation in which it otherwise would not have been
involved. See Nepera Chem., Inc. v. Sea-Land Serv., Inc.,
794 F.2d 688, 697 (D.C. Cir. 1986) (defendant's conduct tor-
tious only if plaintiff's being haled into court "flow[ed] from
the defendant's malfeasance"). Interstate could have antici-
pated defending this action either because it was actually
bound to indemnify The Third Edition or because it was
contractually obligated to defend it. Cf. Potomac Residence
Club v. Western World Ins. Co., __ A.2d ___, 1997 WL 746362 at *4-5 (D.C. Dec. 4, 1997) (holding that insured that prevails
in suit for reimbursement of legal expenses incurred in
defending claim for which insurer had duty to defend is
entitled to compensation for legal fees expended in suit
against insurer). Because Interstate was required to defend
The Third Edition, see supra Part II, Interstate's involve-
ment in the litigation did not "aris[e] out of the tortious act of
the defendant." Brem, 206 A.2d at 407.
IV. Conclusion
For the foregoing reasons, the district court judgment is
affirmed as to Interstate's claim for indemnification and
reversed as to The Third Edition's counterclaim.
So ordered.