1 United States Court of Appeals,

Fifth Circuit.

No. 95-50924.

CANUTILLO INDEPENDENT SCHOOL DISTRICT, Plaintiff-Appellee,

v.

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA,

Defendant-Appellant.

Nov. 13, 1996.

App eal from the United States District Court for the Western

District of Texas.

Before DUHÉ, JONES and EMILIO M. GARZA, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

National Union Fire Insurance Company ("National Union")

sought a declaratory judgment that it had no duty under a contract

of insurance to defend or indemnify Canutillo Independent School

District ("Canutillo") against certain claims bro ught by third

parties. Canutillo counterclaimed for breach of those duties,

breach of the duty of good faith and fair dealing, gross

negligence, and violations of the Texas Insurance Code and the

Texas Deceptive Trade Practices Act ("DTPA"). After realigning the

parties, the district court granted partial summary judgment in

favor of Canutillo on the duties to defend and ind emnify, and a

jury awarded damages in favor of Canutillo on the remaining claims.

National Union now appeals. We reverse both the district court's

grant of summary judgment and the jury award and render judgment in

favor of National Union.

I2

Canuti llo purchased a School Leaders Errors and Omissions

Policy ("Policy") from National Union. Under the Policy, National

Union agreed to indemnify C anutillo for damages resulting from

certain legal claims against it and t o defend any action or suit

against Canutillo covered by the Policy.

In 1991, the parents of five second-grade girls alleged that

their children had been sexually abused by Tony Perales

("Perales"), a health and physical education teacher at Canutillo

Elementary School. Perales was later tried and convicted for his

offenses. The fact of Perales's sexual molestation is undisputed

in this appeal.

Canutillo notified National Union of the abuse and requested

that it defend Canutillo against any potential lawsuits by the

families of the victims. Prior to the onset of litigation, the

families offered to settle all claims against Canutillo for $30,000

per family, or a total of $150,000. Canutillo rejected the

settlement, and the families filed suit against the school district

in the Western District of Texas asserting claims under state law

and 42 U.S.C. § 1983. The lawsuit was styled M endoza v. Canutillo

I.S.D., Civil Action No. EP-91-CA-322 (W.D.Tex.) (" Me ndoza ").

Canutillo then contacted National Union and again demanded that

National Union defend it under the Policy. National Union,

however, denied coverage and refused to ass ume representation,

expressly relying on the Policy's exclusions for claims arising out

of criminal conduct, assault, battery, and bodily injury.

National Union consulted attorney James L. Gallagher1 During the pendency of the Mendoz a litigation, the Supreme

Court in Franklin v. Gwinnett County Public Schools, 503 U.S. 60,

112 S.Ct. 1028, 117 L.Ed.2d 208 (1992), ruled that a plaintiff may

recover money damages for a teacher's sexual abuse of a student in

a private cause of action under Title IX.

3 ("Gallagher") for an expert opini on as to whether the Policy

covered the Mendoza claims. Gallagher concluded that National

Union did not have a duty to defend Canutillo under the Policy and

recommended that National Union file a declaratory judgment action.

Rather than file such an action immediate ly, however, National

Union offered to defend Canutillo, provided t hat Canutillo waive

any bad faith claims against it. Canutillo, however, declined the

offer and proceeded to defend the litigation without National

Union's representation.

T he Mendoza plaintiffs twice amended their complaint durin g

the course of the litigation. The second amended complaint

aband oned the state law tort claims and the § 1983 claim against

Canutillo, asserted a § 1983 claim against Perales, and sought

damages as we ll as declaratory and injunctive relief against

Canutillo under Title IX of the Education Amendments of 1972, 20

U.S.C. §§ 1681-1688. 1 Given the substantial differences between

the first and second amended complaints, National Union again

consulted Gallagher concerning its duties and liabilities under the

Policy. Gallagher concluded that while the Policy did not cover

suits for money damages arising out of Perales's sexual abuse,

National Union had a duty to defend Canutillo on the basis of the2 Endorsement 41267 to the Policy expanded Canutillo's coverage

by deleting exclusion (d) of the standard printed policy.

Exclusion (d) provided that the Policy "does not apply to any

claims for nonpecuniary relief; however, the Company shall defend

such claims in accordance with Insuring Agreement 2 subject to an

aggregate limit of $100,000."

4 nonpecuniary claims ass erted under Title IX. 2 National Union

therefore assumed Canutillo's defense for the remai nder of the

litigation, but reserved its right to seek a declaratory judgment

with respect to its duty to indemnify Canutillo.

Canutillo settled the Mendoza claims on the eve of trial for

a total of $1,040,000. Canutillo paid $40,000 in partial

satisfaction of the judgment, and National Union purcha sed the

remainder of the judgment from the M endoza plaintiffs for $1

million. National Union thus stepped into the shoes of the M endoza

plaintiffs and became a judgment creditor of Canutillo. The

settlement agreement conditioned National Union's right to recover

the $1 million paid in purchase of the judgment on the outcome of

a subsequent declaratory judgment action.

National Union exercised its right under the settlement

agreement and filed a declaratory judg ment action against

Canutillo . Canutillo counterclaimed seeking (1) a judgment

declaring that the Policy covers the Mendoza claims; (2) contract

damages, including both the costs of defending the Mendoza claims

before National Union assumed Canutillo's defense and the $40,000

paid in partial satisfaction of the settlement; and (3) money

damages for National Union's alleged breach of the duty of good

faith and fair dealing and violations of the DTPA and article 21.215

of the Texas Insurance Code. The district court realigned the

parties, casting Canutillo as plaintiff and National Union as

defendant.

Both parties moved for summary judgme nt on the issues of

whether National Union had a duty to defend Canutillo prior to the

filing of the second amended complaint and whether National Union

had a duty to indemnify the school d istrict for damages paid in

settlement of the action. One week before trial, the district

court, without opinion, entered partial summary judgment in favor

of Canutillo on both issues.

The case therefore proceeded to trial on the remaining issues

of contract damages, alleged breaches of the duty of good faith and

fair dealing, and for violations of the Insurance Code and the

DTPA. The jury found against National Union on every issue and

found that the insurer had acted with gross negligence in refusing

to represent to the school district. The jury awarded actual

damages of $33,162 for Canutillo's defense costs, $40,000 for its

share of the Mendoza settlement, and more than $7 million in

punitive damages.

After the verdict, National Union moved for reconsideration of

the district court's summary judgment rulings. The court withdrew

its earlier orders and issued an opinion that again granted summary

judgment in Canutillo's favor on the duty-to-defend issue. Noting

that the duty to indemnify, unlike the duty to defend, is

determined by the actual facts that underlie and result in

liability, the court reopened the record and ordered the parties to6

submit further evidence and briefing. After consideration of the

parties' submissions, the cou rt issued a second opinion granting

summary judgment in favor of Canutillo on the issue of National

Union's duty to indemnify. C anut illo Indep. School Dist. v.

National Union Fire Ins. Co., 900 F.Supp. 844 (W.D.Tex.1995). The

court then entered judgment in favor of Canutillo for

$7,173,791.51, plus attorneys' fees. National Union filed motions

for judgment as a matter of law and for a new trial, both of which

the court denied. National Union now appeals.

II

National Union first contends that the district court

improperly granted Canutillo's motions for partial summary judgment

on the duty to defend and the duty to indemnify.

A

We review a grant of summary judgment de novo. H anks v.

Transcontinental Gas Pipe Line Co rp., 953 F.2d 996, 997 (5th

Cir.1993). The district court's interpretation of an insurance

contract is a question of law that we also review de novo.

Principal Health Care of La., Inc. v. Lewer Agency, Inc., 38 F.3d

240, 242 (5th Cir.1994); F.D.I.C. v. Mijalis, 15 F.3d 1314, 1319

(5th Cir.1994).

Texas rules of contract interpretatio n control in this

diversity case. S ee Amica Mut. Ins. Co. v. Hoak, 55 F.3d 1093,

1095 (5th Cir.1995); Matter of Haber Oil Co., Inc., 12 F.3d 426,

443 (5th Cir.1994); T E X .I NS .C ODE A NN

. art. 21.42 (West 1981). Under

Texas law, the interpretation of insurance contracts is governed by7

the same rules that apply to contracts generally. F orbau v. Aetna

Life Ins. Co., 876 S.W.2d 132, 133 (Tex.1994). The terms used in

an insurance policy are to be given their ordinary and generally

accepted meaning, unless the policy shows that the words were meant

in a technical or different sense. S ecurity Mut. Cas. Co . v.

Johnson, 584 S.W.2d 703, 704 (Tex.1979). The contract is to be

considered as a whole, with each part given effect and meaning.

Forbau, 876 S.W.2d at 133.

When considering the propriety of a grant of summary judgment

in a case involving the construction of an insurance policy, we

must determine whether the applicable terms of the policy are

ambiguous. Y ancey v. Floyd West & Co., 755 S.W.2d 914, 917

(Tex.App.—Fort Worth 1988, writ den ied). The determination of

ambiguity is a question of law; "it is only through resolution of

ambiguities through the resort to extrinsic evidence which creates

a question of fact." B rooks, Tarlton, Gilbert, Douglas & Kressler

v. United States Fire Ins. Co., 832 F.2d 1358, 1364 (5th Cir.1987).

A contract is ambiguous if it is reasonably susceptible of two

different meanings. C oker v. Coker, 650 S.W.2d 391, 393

(Tex.1983). When the terms of an insurance policy are clear and

unambiguous a court may not vary those terms. R oyal Indem. Co. v.

Marshall, 388 S.W.2d 176, 181 (Tex.1965).

Although the insured bears the burden of showing that the

claim against it is potentially within the policy's coverage,

Sentry Ins. v. R.J. Weber, 2 F.3d 554, 556 (5th Cir.1993) , the

insurer bears the burden of establishing that an exclusion in the8

policy constitutes an avoidance o f or affirmative defense to

coverag e. T E X .I NS .C ODE art. 21.58(b). Exceptions and limitations

in an insurance policy are strictly construed against the insurer.

Kelly Assoc., Ltd. v. Aetna Cas. & Su r. Co., 681 S.W.2d 593, 596

(Tex.1984). Therefore, "we must adopt the construction of an

exclusionary clause urged by the insured as long as that

construction is not itself unreasonable, even if the construction

urged by the insurer appears to be more reasonable or a more

accurate reflection of the parties' intent." B arnett v. Aetna Life

Ins. Co., 723 S.W.2d 663, 666 (Tex.1987) (quoting Glover v.

National Ins. Underwriters, 545 S.W.2d 755, 761 (Tex.1977)). These

speci al rules favoring the insured, however, are applicable only

when there is an ambiguity in the policy; if the exclusions in

question are susceptible to only one reasonable construction, these

rules do not apply. P uckett v. United States Fir e Ins. Co., 978

S.W.2d 936, 938 (Tex.1984); N ational Union Fire Ins. Co. v. Hudson

Energy Co., Inc., 811 S.W.2d 552, 555 (Tex.1991).

B

In determining whether an insurer has a duty to defend an

insured against a third-party complai nt, Texas courts follow the

"eight cor ners" or "complaint allegation" rule. G ulf Chem. &

Metallurgical Corp. v. Associated Metals & Minerals Corp., 1 F.3d

365, 369 (5th Cir.1993). This rule "requires the trier of fact to

examine only the allegations in the [underlying] complaint and the

insurance policy in determining whether a duty to defend exists."

Id. It is inappropriate to consider "facts ascertained before the9

suit, developed in the process of the litigation, or by the

ultimate outcome of the suit." I d. (quoting American Alliance Ins.

Co. v. Frito-L ay, Inc., 788 S.W.2d 152, 153-54 (Tex.App.—Dallas

1990, writ dism'd)).

The duty to defend arises only when the facts alleged in the

complaint, if taken as true, " potentially state a cause of action

within the terms of the policy." I d. (quoting Continental Sav.

Ass'n v. United States Fidelity & Guar. Co., 762 F.2d 1239, 1243

(5th Cir.) (empha sis in original), o pinion amended on other

grounds, 768 F.2d 89 (5th Cir.1985)). An insurer is obligated to

d efend an insured as long as the complaint alleges at leas t one

cause of action within the policy's coverage. R hodes v. Chicago

Ins. Co., 719 F.2d 116, 119 (5th Cir.1983).

The duty to defend is determined by examining the latest

amended pleading upon which the insurer based its refusal to defend

the action. R hodes, 719 F.2d at 120. In the instant case, the

relevant pleading is the first amended complaint because National

Union assumed Canutillo's representation after the second amended

complaint was filed.

In contrast to the duty to defend, the duty to indemnify is

not based on the third party's allegations, but upon the actual

facts that underlie the cause of action and result in liability.

Heyden Newport Chem. Corp. v. Southern Gen. Ins. Co., 387 S.W.2d

22, 25 (Tex.1965); A merican Alliance, 788 S.W.2d at 153-54. In

this case, because the parties settled the Mendoza litigation out

o f court, the actual facts resulting in liability were not10

ascertained. Therefore, to provide a record for the court, the

parties stipulated that the facts as alleged in the second amended

complaint were those upon which the district court was to base its

determination on the duty to indemnif y. We, too, must limit our

inquiry to the facts as alleged in the complaint. With these rules

in mind, we now turn to the Policy and the pleadings.

The general coverage provision of the Policy (the "Errors and

Omissions" clause) obligates National Union to indemnify Canutillo

for any damages for which Canutillo may become legally obligated to

pay as a result of claims brought against it by third parties for

any "Wrongful Act

... of the Insured or of any other person for

whose actions the Insured is legally responsible...." The Policy,

however,

does not apply: (a) to any claim i nvolving allegations of

... criminal acts or omissions; ... (b) to any claims a rising out

of (1) false arrest, detention or imprisonment; ... [or] (3)

assault or battery; ... [and] (c) to any claim a rising out of

bodily injury to, or sickness, disease or death of any

person....

(emphasis added).

The Mendoza plaintiffs' original amended complaint alleged

five causes of action against the school di strict and against

individual employees other than Perales:

(1) a 42 U.S.C. § 1983 claim alleging violations of various

Fourteenth Amendment rights based on the defendants' failure

to prevent Perales' sexual abuse;

(2) negligence and gross negligence in failing to prevent Perales'

sexual abuse;

(3) breach of an affirmative duty to provide for the protection of

the children;

(4) intentional infliction of emotional distress; and3 The p arties do not dispute that exclusion (b)(1) precludes

coverage for the Mendoza plaintiffs' fifth cause of action for

detention.

11 (5) the tort of detention, based on allegations that the school

distric t held the children against their will and prevented

their escape from the sexual abuse by Perales. 3

The plaintiffs' second amended complaint dropped the state law tort

claims and the § 1983 claim against Canutillo. Instead, they

asserted a Title IX claim against the school district based on its

failure to prevent Perales's abuse and its failure to implement

grievance policies and procedures as required under the regulations

implementing Title IX. 34 C.F.R. § 106.8(b) ("A recipient shall

adopt and publish grievance procedures providin g for prompt and

equitable resolution of student and employee complaints alleg ing

any action which would be prohibited by this part").

In its motions for summary judgment, National Union asserted

that each of the cited policy exclusions supported its refusal to

defend Canutillo and obviated its duty to indemnify it for damages

paid in settlement of the Title IX claim. The district court,

however, held that National Union was obligated to defend Canutillo

based on the fourth cause of action—intentional infliction of

emotional distress—because (a) a claim for intentional infliction

of emotional distress does not allege criminal conduct; (b) it is

unclear under Texas law whether mental anguish constitutes bodily

injury, and any doubt must be construed against the insurer; and

(c) the actions of the o ther teachers against whom the claim of

intentional infliction of emotional distress was asserted did not

"aris e out of" the conduct of Perales for the purposes of the4 A person commits assault and battery when he "intentionally

or knowingly causes physical contact with another when the person

knows or should reasonably believe that the other will regard the

contact as offensive or provocative." T E X .P ENAL C ODE A NN

. § 22.01(a)

(West 1994); C hilders v. A. S., 909 S.W.2d 282, 292-293

(Tex.App.—Fort Worth 1995, no writ). "The definition of an assault

is the same whether it is the subject of a criminal prosecution or a civil suit for damages." Hogenson v. Williams, 542 S.W.2d 456,

457 (Tex.App.—Texarkana 1976, no writ).

5 The parties dispute whether mental anguish constitutes

"bodily i njury" for the purposes of the bodily injury exclusion.

The district court focused on the fact that mental anguish does not

constitute "bodily injury" when it held that exclusion (c) did not

a pply to the claim for intentional infliction of emotiona l

distress. The court relied on our decision in T ravelers Indem. Co.

v. Holloway, 17 F.3d 113, 115 (5th Cir.1994), in which we held that

mental anguish alon e does not constitute "bodily injury" under

Texas law. H olloway, however, is inapposite in that the complaint

at issue intimated no allegation whatsoever of physical injury, but

only allegations of emotional anguish and trauma. Id.; see also

Miller v. Windsor Ins. Co., 923 S.W.2d 91, 97 (Tex.App.—Fort Worth

1996, writ requested) ("It is well established that mental anguish

12 assault and battery exclusion. In its second summary judgment

opinion, the court held that National Union must indemnify

Canutillo because the Title IX claim asserted against it arises out

of the omissions o f the school district, not Perales's sexual

assaults.

At the outset, we note that the sexual assaults constitute

criminal acts under Texas law. Under the plain language of the

policy, an y claim "involving" allegations of Perales's criminal

acts is therefore excluded under exclusion (a). Because Perales's

acts also constitute assault and batte ry, 4 any claim "arising out

of" his actions is excluded under exclusion (b)(3). Furthermore,

both complaints allege that the children suffered physical injury

as a result of the sexual molestation; any claim "arising out of"

that physical injury is also excluded under exclusion (c). 5 Theand loss of consortium damages suffered by one not involved in an

actual accident are not bodily injuries."). The original Mendoza

complaint does, in fact, claim physical injuries sustained by the

children. Texas law subsequent to our holding in H olloway suggests

that when emotional distress is concomitant with manifestations of

physical injury, "an allegation of mental anguish implicitly raises

a claim for the resulting physical manifestations." S ee Trinity

Universal Ins. Co. v. Cowan, 906 S. W.2d 124, 130-31

(Tex.App.—Austin 1995, writ granted).

Cowan, however, offered an expansive interpretation of

" bodily injury" to provide coverage for the insured, not to

exclude it. Moreover, the mental anguish in C owan was itself

the source of the phy s ical injuries, causing "headaches,

stomachaches, and loss of sleep as a result of [the] emotional

distress." We consequently decline to extend C owan to the

facts in this case, especially where to do so is unnecessary

to the disposition of the appeal. Even if mental anguish is

not "bodily injury" such that a claim "for" mental anguish is

not excluded, the Policy is broader, precluding coverage for

a claim for intentional infliction of emotional distress if it

merely "aris[es] out of" bodily injury.

13 complaints are replete with explicit allegations of Perales's

sexual molestation; our inquiry therefore focuses solely on the

import of the nexus phrases in the exclusions.

The district court held that the nexus phrases do not preclude

coverage for claims against the school district and persons other

than Perales. We disagree. The district court erred in focusing

on the formal causes of action asserted rather than upon the

factual allegations supporting the claims.

Relying on Truman v. United S tates, 26 F.3d 592 (5th

Cir.1994), the court reasoned in its first summary judgment opinion

as follows:

In Truman, the court considered "arising out of" language [in

the assault and battery exclusion to the United States's

waiver of sovereign immunity in the Federal Torts Claims Act

("FTCA") ] similar to that contained in the insurance policy

in the case at bar . There the court found that because the

claim for intentional infliction of emotional distress is not14

a claim for assault, battery or slander the claim was not

excluded by the FTCA.

Thus, the court concluded that the M endoza plaintiffs' claim was

likewise not excluded under the Policy.

Our holding in Truman, however, does not stand for the

proposition that a claim for intentional infliction of emotional

distress can never "arise out of" an assault and battery. On the

contrary, we emphasized the need to examine the underlying conduct

alleged in the petition; "[e]ven if a plaintiff styles a claim so

that it is not one that is enumerated in [the exclusions] , the

plaintiff's claim is still barred "when the underlying

... conduct

"essential" to the plaintiff's claim can fairly be read to "arise

out of" conduct that would establish an excepted cause of action.'

" I d. at 594 (citing McNeily v. United States, 6 F.3d 3 43, 347

(5th Cir.1993)); c f. Garcia v. United States, 776 F.2d 116 (5t h

Cir.1985) (barring FTCA claim against the government for negligent

supervision of military recruiter who sexually assaulted

plaintiff). In T ruman, the plaintiff's claim for intentional

infliction of emotional distress did not "arise out of" an assault

and battery because the plaintiff had never been assaulted. By

contrast, the firs t amended M endoza complaint clearly and

repeatedly alleges that the plaintiffs were sexually assaulted and

physically abused by Perales. The district court nonetheless

asserted that

there were allegations of facts that might give rise to the

conclusion that assault, battery or bodily injury m ay have

occurred, but not at the hands of other teachers, on whom the

claim of intentional infliction of emotional distress is laid.

What Perales did or did not do is not relevant in any way to15

the conduct of the other teachers. There is no indication of

any physical contact by other teachers that might give rise to

one of the exclusions.... [T]he pleadings stated a cause of

action based on the conduct of other teachers se parate from

the actions of Perales; the conduct of other teachers was not

excluded by the plain language of the policy.

Order at 7 (emphasis added).

Texas courts, however, when determining whether an exclusion

in an insurance contract applies, examine the factual allegations

showing the origin of the damages rather than the legal theories

asserted by the plaintiff. D uncanville Diagnostic Ctr., Inc. v.

Atlantic Lloyds Ins. Co. of Tex., 875 S.W.2d 788, 789

(Tex.App.—Eastland 1994, writ denied); A damo v. State Farm Lloyds

Co., 853 S.W.2d 673, 676 (Tex.App.—Houston [14th Dist.] 1993, writ

denied), cert. denied, --- U.S. ----, 114 S.Ct. 1613, 128 L.Ed.2d

340 (1994) (same); Burlington Ins. Co. v. Mexican American Unity

Council, Inc., 905 S.W.2d 359, 360 (Tex.App.—San Antonio 1995, no

writ) (same). Where the legal claims asserted by the plaintiffs

are not independent and mutually exclusive, but rather related to

and dependent upon excluded conduct, the cl aims are not covered,

even if asserted against an insured who did not himself engage in

the prohibited conduct. Burlington Ins. Co., 905 S.W.2d at 362.

For example, in Fidelity & Guaranty Insurance Underwriters,

Inc. v. McManus, 633 S.W.2d 787 (Tex.1982), the Texas Supreme Court

held that a claim for negligent entrustment of a vehicle arose out

of the "use

... of any recreati onal motor vehicle owned by the

insured" and was therefore excluded from coverage, even though the

insured was not himself using the vehicle at the time the accident

occurred. "Essential to recovery ... is negligent entrustment by16

the owner or custodian of the instrumentality, plus its negligent

operation or use by the entrustee. Whether the entrustment is to

an insured or non-insured, the plaintiff must still show negligent

operation or use

... as an element of the cause of action." I d. at

790.

Similarly, in Garrison v. Fielding Reinsurance, In c., 765

S.W.2d 536, 537 (Tex.App.—Dallas 1989, writ denied), th e court

rejected the contention that because the underlying complaint

alleged negligence on the part of the insured rather than assault

and batt ery, the suit did not involve a "claim arising out of

assault and battery" for the purposes of the exclusion at issue.

The court held that the claims for negligence were excluded from

coverage under the unambiguous te rms of the policy where the

plaintiffs "would never have brought a lawsui t against [the

insured] absent the assault and battery committed by the unknown

assailant." Id. at 538.

Furthermore, in Duncanville Diagnostic Center, 875 S.W.2d at

792, the parents of a girl who died after receiving negligent

medical treatment sued the insured medi cal center for negligent

hiring, training, supervision, and fa ilure to institute adequate

policies and procedures. A professional services exclusion to a

general liability policy precluded coverage for the actual acts of

malpractice. The Texas appellate court held that where the

injuries alleged in the complaint would not have occurred but for

the malpr actice, the derivative claims against the insured were

also excluded. A ccord Burlington Ins. Co., 905 S.W.2d at 36217

(barring coverage for negligence claim under assault and battery

exclusion where there would have been no basis for suit absent

assault and battery); C entennial Ins. Co. v. Hartford Accident and

Ind em. Co., 821 S.W.2d 192, 194 (Tex.App.—Houston [14th Dist.]

1991) (finding no coverage for claim of negligent hiring where

negligent hi ring, by itself and without excluded conduct of

employee, would not give rise to cause of action against employer);

see also Old Republic Ins. Co. v. Comprehensive Healthcare Assoc.,

Inc., 2 F.3d 105, 109 (5th Cir.1993) (holding that negligence and

slander claims against insured were not covered where underlying

intentional sexual harassment by insured's agent was exclu ded);

Colum bia Mut. Ins. Co. v. Fiesta Mart, Inc., 987 F.2d 1124, 1128

(5th Cir.1993) (holding that where liability of insured and

liability of its agent were "related and in terdependent," court

must look to whet her agent's fraud was covered by policy); c f.

Commercial Union Ins. Co. v. Roberts, 7 F.3d 86, 89-90 (5th

Cir.1993) (holding that claim against doctor for failing to take

pr ecautions against his own pedophilia was excluded where there

would have been no injury absent underlying sexual molestation).

We find that Texas law is clear: where a claim against an

insured w ould not exist "but for" conduct explicitly excluded by

the policy, the dependent claims are also not covered under the

policy, regardless of whether the insured against whom the

derivative claims are directed actu ally engaged in the excluded

acts. The language in the exclusions at issue in this appeal do6 We recognize that the policy provision in this case differs

in varying degrees from the provisions construed in the cases cited

above; some of the provisions are arguably broader, some are

certainly nar rower. The exclusion construed in M cManus, for

e xample, was narrower, stating simply that coverage "shall no t

apply

... to the

... use [of] any recreational motor vehicle,"

rather than to any claim "arising out of" such use. The words

"arising out of" are not "words of narrow and specific limitation,

but are broad, general, and comprehensive terms. ... They are

ordinarily understood to mean "origin a ting from,' "having its

origin in,' "growing out of,' or "flowing from,' or in short,

"i ncident to,' or "having connection with'...." R ed Ball Motor

Freight v. Empl oyers Mut. Liab. Ins. Co., 189 F.2d 374, 378 (5th

Cir.1951).

7 The fact that the Mendoza plaintiffs alleged a cause of

action under § 1983 does not change the character of the claim;

the factual allegations underlying the damages con trol, not the

formal cause of action asserted. See, e.g., Burlington Ins. Co.,

905 S.W.2d at 360. At its core, § 1983 is a statutory means of

holding governmental entities legally responsible for the actions

of their employees where the governmental entity somehow "caused"

the employee to harm another. M onell v. Department of Social

Serv., 436 U.S. 658, 691-692, 98 S.Ct. 2018, 2036, 56 L.Ed.2d 611

(1978). The M

endoza p laintiffs sought to satisfy the causation

element of the cause of action by asserting that Canutillo "failed

to develop and maintain a complete program of detection and

prevention of child abuse." While there are certainly vast

differences between a § 1983 claim and a common law claim for

18 not warrant limiting the application of this rule. 6

When we examine the factual allegations giving rise to the

damages in this case, we find that they clearly contradict the

district court's h olding that the claims alleged in the first

Mendoza compl aint are independent of Perales's actions. The

gravamen of the first three causes of action in the first complaint

is that the school district and the individual defendants were

negligent in their supervision of Perales, that they failed to

protect the children from Perales's actions, and that they failed

to implement policies and procedures that would have prevented or

detected Perales's conduct. 7 The negligence and failure to protectnegligent failure to establish policies and procedures such as that

excluded in Duncanville Diagnostic Center, none are relevant to the

interpretation of the Policy. In both cases, but for the excluded

conduct, there would have been no basis for liability.

8 Title IX states, in relevant part, that "[n]o person in the

United States shall, on the basis of sex, be excluded from

19 would not themselves have been actionable where the only damages

alleged stemfrom Perales's sexual abuse. Furthermore, with

respect to the claim for intentional infliction of em otional

distress, the Mendoza plaintiffs specifically alleged that

"Defendants' conduct was the proximate cause of serious harm to the

children as specified above in paragraph 25." Paragraph 25 states

that "Defendants' actions and inactions have caused plaintiffs to

be assaulted and harmed...." Moreover, the complaint sets forth in

graphic detail the sexual assaults committed by Perales and alleges

that the other teacher-defendants "creat[ed] a hostile and

threatening atmosphere discouraging the children from making

complaints of the abuse they suf fered...." While the teachers'

failure to adequately respond to the children's complaints of abuse

may have exacerbated the emotional injuries of the children, there

clearly would have been no injury at all absent that abuse.

Therefore, under Texas law, Perales's abuse and the claims asserted

in the first amended complai nt are not independent and mutually

exclusive but rather related and interdependent.

With respect to the M endoza plaintiffs' second amended

complaint, we find that the Title IX claim asserted against

Canutillo is likewise related to, and dependent up on, Perales's

crimi nal sexual assault. 8 The basic thrust of the plaintiffs'participation in, be denied the benefits of, or be subjected to

discrimination under any educational program or activity receiving

Federal financial assistance...." 20 U.S.C. § 1681(a) (1990). The

Supreme Court has determined that a private right of action is

implied under Title IX, and a private plaintiff may receive

monetary damages as well as injunctive and declaratory relief.

Franklin, 503 U.S. at 75, 112 S.Ct. at 1037-38.

9 The court in Rosa H. correctly noted that this court has yet

to address the proper standard for imputed liability under Title

IX. C f. Leija v. Canutillo I.S.D., 887 F.Supp. 947 (W.D.Tex.1995)

(imposing strict liabi lity on the school district for teacher's

sexual abuse of student). We need not determine the proper

standard here since under either a negligence or strict liability

regime, the Mendoza plaintiffs' Title IX claim s "arises out of"

Perales's sexual assaults.

20 claim was that the school district failed to prevent Perales's

abuse and failed to implement grievance policies and procedures as

required under the regulations implementing Title IX. 34 C.F.R. §

106.8(b).

The district court, citing Rosa H. v. San Elizario Independent

School District, 887 F.Supp. 140 (W.D.Tex.1995), held that although

liability under Title IX for sexual misconduct by a teacher

requires two distinct actions, one on the part of the employee and

one on the part of the school district, "it is the conduct of the

school district which gives rise to the cause of action and is at

the heart of any Title IX claim." 900 F.Supp. at 847. 9 The court

continued:

A suit under Title IX alleges that the school district has

failed to implement policies or procedures to prevent or

discover incidents of sexual discrimination or, as in Rosa H.,

that once the discrimination has been discovered [it] failed

to act in an appropriate manner. In other words, the suit

alleges that Canutillo made an error or omission by failing to

comply with Title IX. Tony Perales did not violate Title IX.

While his conduct was certainly discriminatory, without some

action by Canutillo the cause of action under Title IX cannot

be sustained.... The Title IX claim does not "arise out of"21

the conduct of Tony Perales, it arises out of the inactions of

Canutillo, thus the exclusion does not apply.

Id. at 847-48.

When we look past the formal cause of action asserted to the

factual allegations of the complaint, however, we again fail to

discern a relevant difference between a statutory Title IX cause of

action in this instance and the common law claim for negligent

failure to institute adequate policies and procedures excluded from

coverage in Duncanville Diagnostic Center. Moreover, we note that

although a separate act or omission on the part of Canutillo may be

necessary for liability under Title IX, it is not sufficient for

recovery under the statute. There must have been some

discriminatory act on the part of the school district or its

agents. R owinsky v. Bryan Ind. Sch. Dist., 80 F.3d 1006, 1008 (5th

Cir.1996), cert. denied,

--- U.S. ----, 117 S.Ct. 165,

--- L.Ed.2d

---- (1996). In R owinsky, we held that allegations of peer sexual

harassment were insufficient to form the basis of a cause of action

under Title IX absent allegations that the school district itself

or one of its employees discriminated on the basis of sex.

Allegations that the schoo l district condoned the harassment by

failing to respond to the victim's complaints were not themselves

acts of discrimination absent a showing that the school dis trict

responded to complaints of harassment differently on the basis of

sex. I d. at 1016. The M endoza complaint alleges no act of sexual

discrimination on the part of the school di strict other than

Perales's acts. The complaint does not allege that the school

district responded to complaints of sexual abuse from girls any1 0 Claims for backpay are specifically excluded under exclusion

(f). Claims for compensatory damages for reputational harm,

however, would be covered by the Policy. We disagree with

Canutillo's assertion made at oral argument that reputational harm

constitutes "bodily injury" under National Union's interpretation

of the Policy.

22 differently than claims from boys. Furthermore, we note that while

injunctive relief may be available for failure to adopt Title IX's

grievance policies and procedures, such a failure is not itself an

act of discrimination that may fo rm the basis of an award of

damages. S eamons v. Snow, 84 F.3d 1226, 1233 (10th Cir.1996).

Therefore, "but for" Perales's actions, there would have been no

basis for damages under Title IX.

Canutillo nonetheless defends the district court's decisions

on two distinct grounds. First, it contends that National Union's

interpretation of the Policy would render the Errors and Omissions

clause meaningless because National Union would never be obligated

to pay damages on behalf of its insured.

We agree that an interpretation is unreasonable if it would

strip a provision of meaning. Lafarge Corp. v. Hartford Casualty

Ins. Co., 61 F.3d 389, 396 (5th Cir.1995); I deal Mut. Ins. Co. v.

Last Days Evangelical Assoc., 783 F.2d 1234, 1238 (5th Cir.1986).

N ational Union, however, offers several examples of claims for

which it would be liable to indemnify Canutillo. For example,

wrongful termination claims seeking compensatory damages would fall

within the Errors and Omissions claus e of the Policy, 1 0 as would

Title IX claims seeking monetary damages that do not arise out of1 1 For example, the Policy would cover damages paid as a result

of Title IX claims based on non-assau ltive sexual harassment or

exclusion from sports programs on the basis of sex.

1 2 Exclusion (j) excepts claims "arising out of discrimination

because of race or national origin, or failure to integrate or

desegregate," but provides for defense of such claims up to

$50,000. We note that a later endorsement, however, provides that

the exclusion will not apply to claims of discrimination on the

basis of race or national origin brought by o r on behalf of an

employee. Therefore, compensatory damages paid as a result of such

claims may also be covered.

23 a sexual assault or other criminal act. 11 Other examples include

claims for damages under the Americans with Disabilities Act, 20

U.S.C. §§ 1400 et seq., claims for copyright infringement, and

constitutional claims for discrimination other than on the basis of

race or national origin. 12 We need not set forth an exhaustive list

of hypotheticals to conclude that the Errors and Omissions clause

is still meaningful under National U nion's interpretation. S ee

Celestino v. Mid-American Indem. Ins. Co., 883 S.W.2d 310, 313

(Tex.App.—Corpus Christi 1994, writ denied) (stating that

unambiguous exclusion must be given effect unless it wholly repugns

more general provision). We therefore find National Union's

interpretation reasonable.

Second, Canutillo asserts that even if National Union's

interpretation is a reasonable one, its own interpretation is also

reasonable, thus demonstrating that the Policy is amb iguous.

Therefore, the district court properly construed the exclusions in

its favor. We disagree.

Canutillo proffers an alternative construction of the Policy's

exclusions that would preclude coverage only when the acts subject1 3 Canutillo cites Southern Farm Bureau Casualty Co. v. Adams,

570 S.W.2d 567 (Tex.App.—Corpus Christi 1978, writ ref'd n.r.e.),

and Heyward v. Republic National Life Insurance Co., 527 S.W.2d 807

(Tex.App.—San Antonio 1975), aff'd, 536 S.W.2d 549 (Tex.1976), in

support of this construction. We find that H eyward is factually

distinguishable. Furthermore, the appeals court in A dams held that

an insurance policy provided coverage for a negligence claim

aga inst the insured for damages caused by a crop duster hired by

the insured, notwithstanding a provision in the polic y excluding

any loss "arising out of the

... use

.. . of any aircraft," since

the insured did not personally use the aircraft. We find that this

holding directly conflicts with the Texas Supreme Court's opinion

in McManus decided four years later, and find McManus and its

progeny controlling.

24 to the exclusion were c ommitted by the insured. 1 3 The policy

defines the "Insured" to incl ude the school district, members of

the board of education, trustees, and persons who hold

administrative positions such as superintendent and principal. By

endorsement, the parties amended the definition of insured to

include "any employee of the School District while acting within

the scope of his or her duties as such." Canutillo contends that

because Perales was not acting within the scope of his duties when

h e committed the sexual abuse, he was not an insured for the

purposes of the exclusion. Therefore, Canutillo asserts, claims

arising out of his actions are covered by the Policy and trigger a

duty to defend.

The plain language of the Policy, however, demonstrates that

Canutillo's construction of the Policy is unreasonable as a matter

of law. In Texas, "[i]t is a long-established rule that "[n]o one

phrase, sentence, or section [of a contract] should be isolated

from its setting and considered apart from the other provisions.'

" F orbau, 876 S.W.2d at 134 (qu oting G uardian Trust Co. v.25

Bauereisen, 132 Tex. 396, 121 S.W.2d 579, 583 (1938)). Because the

exclusions expressly modify the Errors a nd Omissions clause, we

must look at the exclusions with reference to the more general

provision. The blanket coverage provision specifically states that

National Union will pay damages resulting from any wrongful act "of

the Insured or of any other person for whose actions the Insured is

legally responsible ...." The exclusions do not otherwise limit

their effect to acts of the insured alone. Since National Union

indemnifies Canutillo for the acts of those persons for whom the

d istrict is legally responsible, then in the absence of langu age

limiting the exclusions, the policy likewise precludes coverage for

excluded acts committed by such persons. S ee Tarrant County Ice

Sports v. Equitable Gen. Life Ins. Co. of Okla., 662 S.W.2d 129,

131-32 (Tex.App.—Fort Worth 1983, writ ref'd n.r.e.) (holding that

where general coverage provision of policy defined covered

"accident" to include assault and battery committed by third

parties, later endorsement excluding injuries caused by assault or

battery without reference to identity o f assaultor necessarily

excluded assaults by third-parties as well as by insured).

Moreover, Canutillo's interpretation would render the assault

and battery exclusion meaningless. A school district can act only

through its agents. As Canutillo points out, however, no agent of

the school distri ct will ever act within the scope of his or her

duties when committing an assault or battery. The district court

opined that if any named insured such as a principal or

administrator had committed the sexual abuse, the exclusion would1 4 We recognize that this reasoning does not apply to the bodily

injury exclusion. It is possible that a school district employee

may inflict bodily injury in the negligent performance of his or

her duties for the school district and therefore may be an

"Insured" committing a "Wrongful Act" for which damages may be

recovered in the absence of exclusion (c). However, the fact that

an interpretation of identical language ("arising out of") does not

render all exclusions meaningless does not make the interpretation

any less unreasonable, nor do we find warrant to apply different

interpretations to the language dependi ng upon the exclusion in

which they appear. At any rate, the assault and battery exclusion

alone is sufficient to preclude cover age for all claims asserted

against Canutillo, notwithstanding the effect of the bodily injury

exclusion.

1 5 We furthermore reject Canutillo's assertion that the policy

is somehow ambiguous because it conflicts with Canutillo's

expectation that the policy would cover this type of claim. "[N]ot

every difference in the interpretation of ... an insurance policy

amounts to an ambig uity. Both the insured and the insurer are

likely to take conflicting views of coverage, but neither

conflicting expectations nor disputation is sufficient to create an ambiguity." Forbau, 876 S.W.2d at 134. The objective intent of

the parties as evidenced in the Policy, when examined under Texas

law, exclud es from coverage all the claims asserted,

26 arguably apply. We disagree. The Errors and Omissions clause

affords coverage only for wrongful acts committed "in the

performance of duties for the School District ...," and a wrongful

act is defined as "any actual or alleged breach of duty, neglect,

error, misstatement, misleading statement or omission committed

solely in the performance of duties for the S chool District...."

Because no person commits assault and battery in the performance of

his duties, no claim for assault and battery would have been

covered by the Policy even absent the assault and battery

exclusion, unless it were a derivative claim such as those asserted

by the Mendoza plaintiffs. 14 Canutillo's interpretation excepting

such derivative claims from the reach of the exclusio ns thus

renders the assault and battery clause meaningless and redundant. 15notwithstanding Canutillo's subjective expectations. See Brooks,

Tarlton, Gilbert, Douglas & Kressler, 832 F.2d at 1364 (noting that

objective, not subjective, intent controls when the policy is

unambiguous).

We also disagree that the interpr etation given the

identical exclusionary clauses by a North Carolina court in

Dur ham City Board of Education v. National Union Fire Ins.

Co., 109 N.C.App. 152, 426 S.E.2d 451 (1993, rev. den ied),

evidences ambiguity in the Policy. The Durham court did not

find these clauses to be ambiguous, but rather held that under

North C arolina law, claims against a school board for

negligent supervision of a coach who raped a student did not

"arise out of" the coach's assault. This interpretation,

however, directly contradicts settled law in T exas as set

forth in McMa nus and its progeny. Merely because North

Carolina law differs from that of Texas does not render the

policy exclusions ambiguous. S ee, e.g., T.C. Bateson Constr.

Co. v. Lumbermans Mut. Cas. Co., 78 4 S.W.2d 692, 698

(Tex.App.—Houston [14th Dist.] 1989, writ denied) (rejecting

argument that exclusion is ambiguous as matter of law because

courts of different states have interpreted it differently);

Union Pacific Resources Co. v. Aetna Cas. & Sur. Co., 894

S.W.2d 401, 405 (Tex.App.—Fo rt Worth 1994, writ denied)

(noting split among c ourts but holding that "[n]either

conflicting views of coverage, nor disputation, is sufficient

to create an ambigu ity"); S nydergeneral Corp. v. Century

Indem. Co., 907 F.Supp. 991, 997-98 (N.D.Tex.1995) (finding

that Texas courts do not hold policy terms to be ambiguous

each time there is split of authority). B ut see Pioneer Chlor

Alkali Co., Inc. v. Royal Indem. Co., 879 S.W.2d 920, 935

(Tex.App.—Houston [14th Dist.] 1994, no writ) ( finding that

differing interpretations may evidence more than mere dispute

between insurer and insured).

27 We therefore find that the exclusions to the Policy relied

upon by National Union unambiguously preclude coverage for claims

that are relat ed to and dependent upon allegations of Perales's

criminal sexual assaults. The district court erred in denying

National Unio n's motion for summary judgment and in granting

summary judgment in favor of Canutillo with respect to both the

duty to defend prior to the filing of the second amended complaint

and the duty to indemnify Canutillo for damages paid in settlement1 6 T he parties dispute whether an insurer owes a duty of good

faith and fair dealing to its insured with respect to third-party

claims. S ee Soriano, 881 S.W.2d at 317 ("We have never held and do

not hold today that either of these two standards applies to

i nsurers in responding to third-party claims"). Because we find

that there is no breach, we need not reach this issue.

28 of the Mendoza suit.

III

We furthermore find that Canutillo's claims for breach of the

duty of good faith and fair dealing and gross negligence fail as a

matter of law. One element of a bad faith claim is an absence of

a reasonable basis for denying or delaying payment of benefits.

Texas Farmers Ins. Co. v. Soriano, 881 S.W.2d 312, 317 (Tex.1994).

Because we find that National Union had no duty to defend or to

indemnify under the Policy, its denial of coverage for the Mendoza

claims was reasonable, and there can be no breach of the duty of

good faith and fair dealing as a matter of law. R epublic Ins. Co.

v. Stoker, 903 S.W.2d 338, 341 (Tex.1995). 1 6 Moreover, the gross

negligence claim is predicated on the alleged bad faith breach of

the contrac t; where there was no bad faith, there could be no

gross negligence to support an award of punitive damages.

Transportation Ins. C o. v. Moriel, 879 S.W.2d 10, 23 (Tex.1994).

Insofar as they are predicated on National Union's alleged bad

faith breach, C anutillo's claims under the DTPA and the Texas

Insurance Code are similarly meritless. S toker, 903 S.W.2d at 341.

Canutillo, however, urges that the evidence was sufficient to

demonstrate that, at the time of purchase, National Union

misrepresented the scope of coverage, or at least made misleading29

sta tements concerning the scope of coverage available under the

P olicy in violation of § 17.46 of the DTPA and § 21.21 of the

Insurance Code. Our determination that National Union had no duty

to defend or to indemnify Canutillo is not dispositive of this

claim. M atthews v. Home Ins. Co., 916 S.W.2d 666, 670

(Tex.App.—Houston [1st Dist.] 1996, writ denied) (finding that

plaintiff's DTPA claims were not precluded by finding of no

coverage under policy where claims were "not for post-loss claims

handling, but for pre-loss misrepresentation of coverage").

When reviewing a denial of a motion for judgment as a matter

of law, we must use the same standard that the district court used

in first ruling on the motion—that is, whether there is a legally

sufficient evidentiary basis for a reasonable jury to find as it

did. F E D .R.C IV .P. 50(a)(1); H iltgen v. Sumrall, 47 F.3d 695, 699-

700 (5th Cir.1995). We must view the evidence and all reasonable

inferences in the light most favorable to the jury's determination.

Id.

The only claimed misrepresentation or misleading statement is

a letter from a representative of National Union sent to Canutillo

before it purchased the Policy. The letter stated that the Policy

covered, among other things, "[a]lleged violations of federal or

state constitutional civil rights." We find that this statement

cannot constitute a misrepresentation because, as we noted, the

Policy does in fact cover constitutional civil rights claims that

are not otherwise excluded, such as claims for sex discrimination

that do not arise out of assault, battery, bodily injury, or1 7 Because we find in favor of National Union on all claims, we

need not address National Union's contentions regarding evidentiary

points of error.

30 involve criminal acts. Moreover, a reasonable jury could not find

that the statement was misleading where Canutillo was aware of the

Policy language at the time of purchase and Canutillo presented no

evidence that National Union ever assured it that civil rights

claims wo uld be covered under the specific circumstances present

here. See Parkins v. Texas Farmers Ins. Co., 645 S.W.2d 775, 777

(Tex.1983) (holdi ng that where insured was, in fact, covered for

some fire loss and insured presented no evidence that insurer ever

promised coverage against fire loss under circumstances at issue,

insured failed to prove misrepresentation); Matthews, 916 S.W.2d

at 670 (f inding no misrepresentation where insured knew of

exclusion when he signed policy and alleged no oral

misrepresentations concerning coverage under policy for specific

loss incurred); E mployers Cas. Co. v. Fambro, 694 S.W.2d 449, 451

(Tex.App.—Eastland 1985, error refused n.r.e.) (finding that mere

fact that insureds believed they were cover ed under all

circumstances in light of in surer's statement that coverage was

"adequate" or "sufficient" di d not prove misrepresentation). We

t herefore find that the district court erred in denying National

Union's motion for judgment as a matter of law with r espect to

Canutillo's claims under the DTPA and § 21.21 of the Texas

Insurance Code. 17

IV

For the foregoing reasons, we REV ERSE the district court's31

grant of partial summary judgment in favor of Canutillo on the duty

to defend and the duty to indemnify, REVERSE the jury's verdict and

damage award, and RENDER judgment in favor of National Union.