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Parties Involved:
1218 Wisconsin, Inc.
Appellee
Interstate Fire & Casualty Company, Incorporated
Appellant

Document Text:

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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.

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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 without intervening and had allegedly served the attacker substantial 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 

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parties agree on appeal that at all relevant times Interstate's 

contract with The Third Edition included "assault and battery" 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 liability, 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 competing summary judgment motions, each seeking indemnificaUSCA Case #97-7046 Document #337423 Filed: 03/13/1998 Page 3 of 12
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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 indemnification 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. § 1332 (1994), and we have jurisdiction 

pursuant to 28 U.S.C. § 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 contingent 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 judgment." 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 

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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 battery" 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 disregard 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 intoxiUSCA Case #97-7046 Document #337423 Filed: 03/13/1998 Page 5 of 12
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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 indistinguishable 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 statements 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 distinguishable 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 suppression 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 tortfeasor's intoxication will negate the intent necessary to invoke 

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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 intoxication 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, Liability Insurance: Intoxication or Other Mental Incapacity 

Avoiding Application of Clause in Liability Policy Specifically Exempting Coverage of Injury or Damage Caused 

Intentionally by or at Direction of Insured, 33 A.L.R.4th 983, 

§ 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 

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not negate intent because public policy cannot countenance 

such a defense).

Although District of Columbia courts have held that intoxication 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 District 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 negligent 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 exclusion 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 

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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 compensation 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 indemnification 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 

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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 judgment 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 

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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 plaintiff 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 Interstate 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 entangled it in litigation: The Third Edition entered into a collusive 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 tortious, 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 tortious only if plaintiff's being haled into court "flow[ed] from 

the defendant's malfeasance"). Interstate could have anticipated 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 

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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 involvement 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.

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