1

United States Court of Appeals,

Fifth Circuit.

No. 95-31078.

The SOCIETY OF THE ROMAN CATHOLIC CHURCH OF THE DIOCESE OF

LAFAYETTE, INC. and The Diocese of Lake Charles, Inc., PlaintiffsAppellees,

v.

INTERSTATE FIRE & CASUALTY CO., et al., Defendants,

Interstate Fire and Casualty Co., Defendant-Appellant,

Arthur J. Gallagher & Co., Defendant-Appellant-Appellee,

PACIFIC EMPLOYERS INSURANCE CO., Third Party Plaintiff-Appellee,

v.

LOUISIANA COMPANIES INC., Third Party Defendant-Appellant,

St. Paul Fire and Marine Insurance Co., Appellant.

Oct. 30, 1997.

Appeals from the United States District Court for the Western

District of Louisiana.

Before HIGGINBOTHAM, EMILIO M. GARZA and DeMOSS, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

Fifteen years ago, defendant Arthur J. Gallagher & Co.

("Gallagher"), an insurance broker, presented a proposed insurance

coverage plan to The Society of the Roman Catholic Church of the

Diocese of Lafayette, Inc. and the Diocese of Lake Charles, Inc.

("the Diocese"), under which, it represented, the Diocese would not

be liable for any losses above $400,000 each policy year. The

Diocese agreed to the plan. Later, the Diocese faced numerous

claims from boys who were molested by pedophilic Diocese priests as

well as claims from the boys' parents. These claims resulted in
2

millions of dollars of losses for the first two years of the plan,

1981-82 and 1982-83. Unfortunately for the Diocese, though, there

was a gap in the plan's excess coverage that resulted in some

$4,500,000 in uninsured losses. The Diocese sued Gallagher to

recover this amount, alleging that Gallagher had expressly

warranted that the Diocese was fully insured above the $400,000

loss fund each policy year, and had breached a contract with the

Diocese to provide full insurance over the loss fund. The district

court granted summary judgment for the Diocese against Gallagher

for the $4,500,000 plus interest. Gallagher appeals. We determine

that the district court correctly granted summary judgment to the

Diocese against Gallagher for breach of contract with regard to the

first year of the plan, but erred in granting summary judgment for

breach of contract with regard to the second year.

Meanwhile, Preferred Risk Insurance Co. ("Preferred Risk") and

Pacific Employers Insurance Co. ("PEIC") had settled with two of

the molested boys for about $1,532,000. Under its three-year

primary policy, Preferred Risk paid $1,000,000 of this amount—its

policy had a limit of $500,000 per occurrence (which, in this case,

meant per molested boy) for the three years—and PEIC, as the excess

carrier, had to pay the rest. However, the Preferred Risk policy

was nonstandard. A standard three-year insurance policy would have

been annualized and provided a policy limit of $1,500,000 for each

boy (i.e., the $500,000 policy limit per occurrence would have been

"refreshed" each year)—which would have meant that PEIC would have

escaped paying any of the $1,532,000 settlement. Not surprisingly,
3

PEIC sued third-party defendant Louisiana Companies, Inc.

("LACOS"), an insurance agent to the Diocese, for $532,000,

alleging that LACOS had negligently misrepresented (1) the date of

expiration of the Preferred Risk policy, (2) the scope of the

coverage of this policy, and (3) that this policy was standard.

After a bench trial, the district court agreed with PEIC and

granted final judgment to PEIC against LACOS for $532,000 plus

interest. LACOS appeals. We find that the district court did not

err in granting final judgment for PEIC against LACOS.

Also in its final judgment, the district court equitably

subrogated to Gallagher the Diocese's rights against its excess

carriers. Defendant Interstate Fire & Casualty Co. ("Interstate"),

one of the excess carriers, challenges this ruling on the grounds

that Louisiana does not permit equitable subrogation. We agree

with Interstate.

In deciding this appeal, we will first examine the

Gallagher/Diocese dispute, then the Preferred Risk/PEIC conflict,

and lastly Interstate's argument about equitable subrogation.

I

We review a district court's grant of summary judgment de

novo. New York Life Ins. Co. v. The Travelers Ins. Co., 92 F.3d

336, 338 (5th Cir.1996). In doing so, we employ the same criteria

as the district court, and construe all facts and inferences in the

light most favorable to the nonmoving party. LeJeune v. Shell Oil

Co., 950 F.2d 267, 268 (5th Cir.1992). Summary judgment is

appropriate where the moving party establishes that "there is no
4

genuine issue of material fact and that [it] is entitled to a

judgment as a matter of law." FED. R. CIV. P. 56(c). The moving

party must show that if the evidentiary material of record were

reduced to admissible evidence in court, it would be insufficient

to permit the nonmoving party to carry its burden of proof.

Celotex v. Catrett, 477 U.S. 317, 327, 106 S.Ct. 2548, 2554, 91

L.Ed.2d 265 (1986).

Once the moving party has carried its burden under Rule 56,

"its opponent must do more than simply show that there is some

metaphysical doubt as to the material facts." Matsushita Electric

Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586, 106

S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986) (citations omitted). The

opposing party must set forth specific facts showing a genuine

issue for trial and may not rest upon the mere allegations or

denials of its pleadings. FED. R. CIV. P. 56(e); Anderson v.

Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 2511, 91

L.Ed.2d 202 (1986).

II

In late 1980, the Diocese decided to save money by opting for

a partial self-insurance plan, rather than a traditional

full-coverage plan. It formed a task force to look into this idea.

In 1981, Gallagher met with the task force and offered the Diocese

the so-called Bishop's Program ("the plan"). Under this plan, the

Diocese would establish a loss fund each policy year. If an

"occurrence" happened under the plan (i.e., if an event triggered

plan coverage), the Diocese would pay up to $100,000 from this fund
 

1Specifically, the plan states that

[a]t no time will the Bishops be exposing the

Diocese to unlimited self-insurance.... If the

Loss Fund is exhausted, the Dioceses [sic] becomes

fully insured and losses are paid as they would be

under a conventional insurance program.... The

plan is designed so that no single loss can use up

the Loss Fund. The Dioceses would pay only the

first $50,000 [changed to $100,000] of each loss,

over which there will be full insurance coverage.

The plan also notes:

Loss Fund—$375,000 [changed to $400,000]

This fund represents the maximum loss payments the

diocese would be exposed to in the coming year.

Stop Loss —

No loss in excess of $50,000 [changed to $100,000]

(Combined Perils) will be charged to the Loss Fund;

therefore, one catastrophe claim could not wipe out

the entire fund. 

5

for the loss resulting from the occurrence. The Diocese would only

have to use money from the fund to pay for occurrence losses.

Excess insurance carriers would be responsible for (1) any amounts

owed above the $100,000 the Diocese had to pay for each occurrence

loss and (2) any amounts owed after the fund was exhausted. In

short, the plan expressly warrants that the Diocese would be fully

insured for all losses above the loss fund.1

Gallagher and the Diocese agreed to the original plan as

proposed, except that they increased the Diocese's "deductible"

from $50,000 to $100,000 and the amount of the loss fund from

$375,000 to $400,000.

Unfortunately, the plan operated differently than Gallagher

had represented at the meeting. If the Diocese exhausted the
 

2There were also other layers, but they are not relevant in

this case. 

6

$400,000 loss fund, a Lloyd's excess insurance package provided as

much as $100,000 of coverage per occurrence, up to an aggregate of

$450,000 (the parties refer to this layer of coverage as "the

excess aggregate"). After that, a $5,000,000 Interstate excess

policy covered additional losses from occurrences.2 The Interstate

policy, however, did not "drop down" to pick up losses exceeding

$100,000 per occurrence once the Lloyd's package had reached its

aggregate limit of $450,000. Assume, for example, that the Diocese

faced fifty occurrences resulting in losses of $100,000 each. If

so, the Diocese would not only pay out the $400,000 in the loss

fund, but also $50,000 for the ninth occurrence and $100,000 for

each of occurrences ten through fifty (a total of $4,550,000).

The record includes a number of documents indicating that, at

the meeting, Gallagher did not inform the Diocese about the excess

aggregate or that the Diocese would not be fully insured once the

excess aggregate was exhausted. These documents were written by

Ben Schull, Gallagher sales representative, to Tom O'Connell,

Gallagher sales manager. The documents include the following

statements regarding the plan:

M "You have reviewed the initial proposal and have seen that there

are multiple references to totally insured once you have

exceed the loss fund, and you have also seen that there is no

mention of any excess aggregate."

M "All parties stated that they voted for the bishop's program

because there was total insurance after the loss fund was

exceeded."

M "[The Dioceses'] understanding was that as soon as they exceeded
 

3These statements are (1) offered against a party and (2) are

by the party's agents or servants concerning a matter within the

scope of the agency or employment and made during the existence of

the relationship. Thus, the statements are nonhearsay, and

admissible against Gallagher under Rule 801(d)(2) of the Federal

Rules of Evidence.

In determining the statements' admissibility, the fact

that Schull may have had no "personal knowledge" of the actual

negotiations over the contract or its final execution is

irrelevant. See State Farm Mut. Auto. Ins. Co. v. Porter, 186

F.2d 834, 842 (9th Cir.1951) ("The rule is that personal

knowledge of the person making an admission is immaterial.");

4 JOHN HENRY WIGMORE, WIGMORE ON EVIDENCE, § 1053, at 16 (noting

that personal knowledge is not required for admissions). 

7

the loss fund, they were totally insured."

M "The only mention of the $450,000 excess aggregate is on the

premium page and is unintelligible to the unknowing client.

Our worst fears are realized:

1. The original program was oversold in the written proposal and in

verbal presentation."

M "How do we respond to the fully insured misrepresentation?"3

Besides these documents, there was also relevant deposition

testimony regarding the plan. The members of the Diocese task

force all testified that, at the time the Diocese entered into the

plan, they believed that the Diocese would be fully insured under

the plan after the exhaustion of the loss fund. Moreover, James

Helouin, who worked for a Gallagher affiliate and who accompanied

Gerald Lillis (Schull's predecessor as sales representative) to the

meeting at which Lillis explained the plan, testified that he left

the meeting with the same impression. The task members and Helouin

also testified that they did not remember any mention of a $450,000

excess aggregate at the meeting. Even Lillis conceded in his

deposition that he could not remember whether he referred to any
8

excess aggregate. Certainly, there is nothing in the written plan

itself regarding such an aggregate.

According to Gallagher's written proposal, the plan was to

have a three-year term, with adjustments for the second and third

annual periods to premiums, the service fee, and the loss fund.

After the parties had agreed to the plan and about two months

before it became effective on September 1, 1981, Lillis brought

James R. Oliver, one of the task force members, binders providing

details about the various insurance policies underlying the plan.

Shortly after he received the binders, Oliver forwarded copies of

them to another task force member, Harry Wagner. The binders make

an oblique reference to the excess aggregate. One sheet, for

instance, notes the following after the words "Amount or Limit":

$400,000 Each and Every Loss and/or Occurrence

$450,000 In the Aggregate annually in respect of the Assured's

Retention.

EXCESS OF:

$100,000 Each and Every Loss and/or Occurrence

$400,000 In the Aggregare [sic] annually in respect of the

Assured's Retention.

This sheet is dated June 22, 1981 and states that the insurance

policy runs from July 1, 1981 to October 1, 1982.

During the first six months of the plan, the Diocese suffered

from a rash of mysterious arson fires. Lillis and O'Connell

testified that they spoke to two task force members, Harry Benefiel

and H.A. Larroque, about how liability from the fires might exhaust

the loss fund and about how the Diocese might need a second layer
9

of excess aggregate insurance. Lillis and certain task force

members also stated that the Diocese was concerned that its

insurers might not renew the plan policies on July 1, 1982. In

addition, Wagner testified that around the time of the fires, he

realized that the Diocese might face insurance liability exceeding

the amount of the loss fund. Apparently, as a result of these

concerns, in March 1982 the Diocese agreed to create a separate

loss fund of $200,000 (in addition to the existing $400,000 loss

fund) and also made an additional premium payment. The additional

$200,000 loss fund remained in effect from April 1, 1982 to July 1,

1982. Confirming this change, Gallagher executed an endorsement,

dated August 19, 1982 and effective April 1, 1982, which reads that

"[i]t is hereby noted and agreed that the aggregate sum insured

hereon in respect of the first period of insurance, from July 1,

1981 to July 1, 1982, is amended...." The endorsement then refers

to an excess aggregate of $400,000 and notes the creation of the

$200,000 loss fund. The endorsement also states that "ALL OTHER

TERMS AND CONDITIONS REMAIN UNCHANGED."

Sometime before July 1, 1982 (the one-year anniversary date of

the effective date of the plan), Gallagher presented the Diocese

with a renewal proposal. This renewal proposal differed from the

original plan in two main ways. First, unlike the original

proposal, the renewal proposal was not accompanied with written

explanatory material assuring the Diocese that it was "fully

insured" over the loss fund. Second, the renewal proposal

mentioned the excess aggregate, though it did not illustrate how
10

the excess aggregate worked. The proposal simply noted:

"Lloyd's—Excess Package ... $450,000 Aggregate excess Loss Fund."

While the renewal proposal suggested a $400,000 loss fund, just

like the contract covering the first year of the plan, the parties

ended up agreeing to a $475,000 loss fund; however, the parties

also retained a $450,000 excess aggregate. Gallagher then executed

an endorsement, dated August 19, 1982 and effective July 1, 1982,

noting that the parties agreed to these amounts and that "ALL OTHER

TERMS AND CONDITIONS REMAIN UNCHANGED."

Around July 26, 1982, Lillis sent a letter to Benefiel

explaining how the $450,000 excess aggregate affected the two loss

funds that existed from April 1, 1982 to July 1, 1982. As Lillis

stated, "The Lloyd's of London policy provides a $450,000 aggregate

limit that will apply over these two loss funds. To clarify, this

aggregate limit applies up to $450,000 in total and does not apply

separately and distinctly to each of the loss funds. Any residual

over the first nine month period of the $450,000 aggregate limit

would apply to the second fund." However, Lillis did not attempt

to show how the Lloyd's excess aggregate interacted with the

Interstate excess policy.

Before July 1, 1983, Gallagher gave the Diocese a renewal

proposal similar to that of the previous year. This proposal

suggested a $400,000 loss fund and $450,000 excess aggregate. The

successor to Gallagher then executed an endorsement, dated July 19,

1983 and effective July 1, 1983, noting that the parties agreed to

a loss fund of $475,000 and an excess aggregate of $450,000. Also,
11

"all other terms and conditions remain unchanged."

Before July 1, 1984, Gallagher furnished the Diocese with a

renewal proposal that, for the first time, actually explained how

the excess aggregate worked and explicitly stated that the Diocese

was not fully insured above the loss fund. The renewal proposal,

under the subheading "operation of the plan," declares that "IF THE

[LOSS] FUND IS EXHAUSTED, THE DIOCESAN [SIC] BECOMES FULLY INSURED

UP TO THE LEVEL OF THE EXCESS AGGREGATE COVERAGE SELECTED." The

renewal proposal then notes that "[i]n the event the loss fund

amount of $550,000 is exhausted, the London Package policy provides

an additional limit of $450,000 to pay losses up to the $100,000

stop-loss limit. If this aggregate loss fund protection limit is

exhausted, then the diocese would be required to pay losses up to

$100,000 for each occurrence thereafter."

While the plan extended through 1984, only the first two years

of the plan, 1981-82 and 1982-83, are at issue in this appeal.

During these two years, there were dozens and dozens of occurrences

of molestation of boys. After various molested boys and their

parents began filing suits in 1984 against the Diocese, payments to

these individuals quickly exhausted the Diocese's $400,000 loss

fund, the $200,000 loss fund, and the Lloyd's package aggregate of

$450,000. A portion of the $5,000,000 Interstate coverage was also

used. However, at least forty-five occurrence losses fell in the

gap between the Lloyd's package aggregate and the Interstate policy

(i.e., arose in the first year after the $400,000 loss fund had

been exhausted and $450,000 excess aggregate had been reached or
12

arose in the second year after the $600,000 loss funds had been

exhausted and the $450,000 excess aggregate had been reached);

this amounted to about $4,500,000 of uninsured losses. Obviously,

the Diocese had not been fully insured for all losses above the

loss fund.

A

 The Diocese argues that the law of the case bars Gallagher

from arguing that Gallagher did not expressly warrant that the

Diocese was fully insured. Specifically, the Diocese points to

this court's previous decision in this matter in The Society of the

Roman Catholic Church of the Diocese of Lafayette and Lake Charles,

Inc. v. Interstate Fire & Casualty Co., 26 F.3d 1359 (5th Cir.1994)

("Society I "). In that opinion, we ruled that:

The Diocese argues that Gallagher warranted a specific result

when it told the Diocese: "If the [Loss] Fund is exhausted,

the Diocese[ ] becomes fully insured." Following [the] lead

[of Roger v. Dufrene, 613 So.2d 947 (La.1993) ], the issue is

whether Gallagher specifically warranted the amount of the

Diocese's coverage, and we conclude that it did. Indeed, we

find it difficult to see how Gallagher could have been more

specific. The Diocese's claim is contractual because

Gallagher specifically stated that the loss fund capped the

Diocese's potential yearly exposure, which it certainly did

not.

Society I, 26 F.3d at 1367.

The law of the case doctrine was developed to "maintain

consistency and avoid [needless] reconsideration of matters once

decided during the course of a single lawsuit." Royal Ins. Co. of

Am. v. Quinn-L Capital Corp., 3 F.3d 877, 881 (5th Cir.1993)

(citation omitted), cert. denied, 511 U.S. 1032, 114 S.Ct. 1541,

128 L.Ed.2d 193 (1994). Under this doctrine, we will follow one of
13

our prior decisions without reexamination in a subsequent appeal

unless the evidence in a subsequent trial was substantially

different, controlling authority has since made a contrary decision

of the law applicable to such issues, or the decision was clearly

erroneous and would work manifest injustice. Id.

The language in the Society I opinion quoted above is somewhat

imprecise. First, the issue of whether the Diocese's claim against

Gallagher is contractual or delictual is a largely factual one—it

hinges on a question of fact: did the insured's agent or broker

expressly warrant a specific result? Roger, 613 So.2d at 949. The

Diocese was appealing the district court's grant of summary

judgment to Gallagher. Thus, what the panel really meant in the

text quoted above was that there was a genuine dispute of material

fact over whether the Diocese's claim is contractual; and, so, the

panel simply held that the Diocese's claim was not delictual as a

matter of law and thus the district court wrongly granted Gallagher

summary judgment (and this is the most the panel could have held).

To that extent the panel's statement was pure dicta. Gallagher

pointed out in a motion for rehearing to the panel that the

language quoted above could be erroneously interpreted as a factual

finding, but, alas, the panel did not alter its opinion. However,

the fact that the panel did not correct the quoted language does

not mean that dicta somehow becomes the law of the case.

Significantly, after the Society I panel remanded the case,

the district court granted the Diocese summary judgment on the

basis that the Diocese's claim against Gallagher was contractual.
14

This time around, the summary judgment burden was on the Diocese,

rather than Gallagher. Moreover, the district court considered

additional evidence in granting the Diocese summary judgment,

evidence that it did not have the opportunity to consider when it

erroneously granted Gallagher summary judgment on the same issue.

The Diocese even emphasizes this point in its brief: "On remand,

the trial court was presented with even stronger evidence than

before on the issue of Gallagher's liability."

This court will not apply the law of the case to factual

determinations if there is a different standard of review in the

two appeals. See Royal, 3 F.3d at 881 (holding that "[b]ecause the

standard of review for factual determinations on direct appeal is

higher than the standard applied during an interlocutory appeal of

a preliminary injunction, the interlocutory appeal normally will

not establish law of the case on factual matters"). This court has

also held that the law of the case does not apply where the first

appellate ruling transpired before the parties had the opportunity

to present all their evidence to the district court. See Enlow v.

Tishomingo County, Mississippi, 45 F.3d 885, 888 n. 8 (5th

Cir.1995) (holding that, under law of the case, appellate decision

that material factual issues precluded summary judgment on

plaintiff's claims did not preclude district court from later

granting defendants' motion for a directed verdict because, by

then, the parties had presented all of their evidence).

Given this authority, the law of the case would not apply

here. There is a different standard of review in Society I and
15

this appeal. In Society I, the summary judgment burden was on

Gallagher; this court, for instance, construed the facts in favor

of the Diocese. Now, in this appeal, the summary judgment burden

is on the Diocese. Moreover, the parties presented additional

evidence in the district court after Society I. Thus, now, there is

a different record on appeal.

Therefore, the law of the case does not bar Gallagher from

contending that there is a triable issue over whether it expressly

warranted that the Diocese was fully insured. Accordingly, we will

next consider Gallagher's argument to that effect.

B

Gallagher maintains that there is a genuine dispute of

material fact over whether it expressly warranted that the Diocese

would be fully insured for all losses above the loss fund. If it

is correct, a jury question exists whether the Diocese's claim is

contractual or delictual. If the claim is contractual, then the

Diocese had a ten-year prescriptive period in which to file its

action. If the claim is delictual, it had a one-year prescriptive

period. The Diocese filed this action several years after it knew

or should have known of Gallagher's alleged negligent acts, that

is, several years after the one-year prescriptive period began to

run.

Gallagher first asserts that there can only be an express

warranty if there is a contract. In this regard, it contends that

there is material evidence that the plan was not a contract and

that the Diocese knew of the excess aggregate limit before the
 

4The Civil Code articles dealing with obligations were

extensively revised in 1984. The articles in effect before the

1984 revisions apply here. We will apply them throughout this

opinion. 

16

second year of the plan. Second, Gallagher avers that a vice of

consent prevented the plan from becoming a contract.

Clearly, there can only be an express warranty for purpose of

determining whether the Diocese's claim is contractual if that

express warranty was part of some sort of contract. See Harrison

v. Gore, 660 So.2d 563, 568 (La.App.) (suggesting that, under

Roger, the ten-year prescriptive period applies only if the

plaintiff's claim is grounded in "a special obligation

contractually assumed by the obligor"), writ denied, 664 So.2d 426

(La.1995). In other words, at a minimum, there must be no genuine

dispute of material fact that there was a contract that contained

the express warranty. At the time of the events in dispute, a

contract was an agreement, in which one person obligates himself to

another, to give, to do or permit, or not to do something, express

or implied by the agreement.4 Julius Cohen Jeweler, Inc. v.

Succession Jumonville, 506 So.2d 535, 538 (La.App.) (applying pre1984 law), writ denied, 511 So.2d 1155 (La.1987). The Civil Code

required four elements for a valid contract: (1) the parties must

have the capacity to contract; (2) the parties' mutual consent

must be freely given; (3) there must be a certain object for the

contract; and (4) the contract must have a lawful purpose. Id.

Gallagher contends that triable issues exist on the second and

third elements here—the existence of consent and a certain object.
17

In response, the Diocese generally cites Roger and claims that

there was a unilateral or gratuitous contract.

The Diocese's reply is totally inadequate. For one thing,

there was no unilateral contract. Obviously, if the Diocese

consented to the plan, it would be obligated to pay

premiums/commissions in return for brokerage services. In other

words, assuming there was a contract, it imposed obligations on

both the Diocese and Gallagher. Therefore, any contract would be

synallagmatic. Bullock v. Louisiana Indus., 370 So.2d 148, 149

(La.App.1979); Kaplan v. Whitworth, 116 La. 337, 40 So. 723, 724

(1905). The Diocese is also wrong to say that the alleged contract

was gratuitous. Gallagher was demanding a price for its services

(i.e., premiums/commissions). So, the contract cannot be

gratuitous. Armour v. Shongaloo Lodge No. 352, Free and Accepted

Masons, 330 So.2d 341, 345 (La.App.1976), judgment rev'd for other

reasons, 342 So.2d 600 (La.1977).

The gist of Gallagher's argument here is that the document

containing the "fully insured" language was just a proposal, that

some terms were changed during negotiations, and that the parties

never actually entered into a contract (or, if they did enter a

contract, it is unclear what that contract really included).

However, there is much evidence that, except for slight alterations

in the dollar amounts, the proposal was Gallagher's offer and the

Diocese agreed to it; there is really no material proof to the

contrary. To win a reversal on this point, Gallagher must

demonstrate a jury question on the following: that sometime after
18

Gallagher presented the plan to the Diocese and before the Diocese

agreed to it (with a few changes in dollar amounts), Gallagher

withdrew its representation that the Diocese was fully insured.

But Gallagher cannot. The record plainly indicates that both

Gallagher and the Diocese consented to the plan (with the dollar

changes) and that there was a certain object to the plan (i.e., the

provision of full insurance coverage above the loss fund).

Therefore, the Diocese and Gallagher had a valid contract, and

Gallagher expressly warranted a specific result. Accordingly, the

Diocese's claims against Gallagher, at least with regard to the

first year of the plan, are contractual and thus timely filed.

Next, Gallagher contends in the alternative that, even if it

expressly warranted that the Diocese would be fully insured for the

first year of the plan, it specifically explained the $450,000

aggregate limit to the Diocese before the beginning of the second

year of the plan, and the Diocese chose not to purchase additional

coverage. The contract between the Diocese and Gallagher was for

a three-year term and provided for adjustments to premiums, the

service fee, and the loss fund for the second and third annual

periods. The "renewal proposals" Gallagher provided to the Diocese

for the second year presented such adjustments. In agreeing to a

change in terms, parties may intend to make a new and separate

contract rather than modify an existing contract. See Ketteringham

v. Eureka Homestead Soc., 140 La. 176, 72 So. 916, 917 (1916).

However, we do not see the changes made pursuant to the renewal

proposals as creating new contracts. The summary judgment record
 

5Nine months into the first year of the plan, the Diocese and

Gallagher modified the contract by agreeing that the Diocese would

establish an additional loss fund of $200,000 and pay an extra

premium. However, we do not see the parties' modification here as

a new contract. As Gallagher stated in its endorsement, the

parties here merely agreed to "amend[ ]" the "aggregate sum agreed

hereon in respect of the first period of insurance, from July 1,

1981 to July 1, 1982." Because this amendment did not create a new

contract, it did not discharge Gallagher's original express

warranty. See Ketteringham v. Eureka Homestead Soc'y (In re Salzer

), 140 La. 176, 72 So. 916 (1916) (holding that parties, who agreed

to substitute a hot-water heating system for the hot-air system

stipulated in contract, did not make a new contract but only

amended the existing contract). 

19

does not present evidence that there were three separate one-year

contracts, and Gallagher does not argue that in its brief.

Therefore, Gallagher must demonstrate that it and the Diocese

modified their contract to discharge Gallagher from the warranty.5

Under Louisiana law, contracts may be modified only by mutual

consent of the parties to the contract. See Williams Eng'g, Inc.

v. Goodyear, 480 So.2d 772, 778 (La.Ct.App.1985), aff'd, 496 So.2d

1012 (La.1986). In order to constitute a valid modification, an

agreement must be clearly defined, and the party sought to be held

to the modification must have in fact actually agreed to and

authorized the modification. See Cardos v. Cristadoro, 228 La.

975, 84 So.2d 606, 610 (1955) (holding that there was no evidence

that parties actually agreed to modify stock purchase agreement and

thus contract was effective as originally written); see also Wise

v. Lapworth, 614 So.2d 728, 731 (La.Ct.App.1993) (holding that

subsequent modifications to a written proposal, which constituted

a contract upon oral acceptance, were not part of the contract

because they were done without the knowledge or consent of other
20

party). Modifications may, however, be effected by implication,

silence, or inaction. See, e.g., W.R. Aldrich & Co. v. Spalitta,

285 So.2d 835, 836-37 (La.Ct.App.1973) (holding that although

person who hired an excavating company did not expressly consent to

a modification in the cost of the contract, he did consent by

implication when he asked for location of excavation to be changed,

was advised that the cost would be greater, and made no objection).

A modification will, however, not be effected when there is no

meeting of the minds regarding the modification, such as when the

parties did not discuss or agree to the change. See Williams

Eng'g, 480 So.2d at 776 (holding that because there was no

discussion or agreement regarding change in engineer's method of

providing cost estimates to company that hired him, there was no

meeting of the minds and thus no modification as to how the

engineer should provide cost estimates).

The issue, then, becomes whether the Diocese consented, either

expressly or impliedly, to the discharge of Gallagher's warranty

that the Diocese was fully insured. On the one hand, members of

the Diocese task force generally testified that they believed until

1984 that the Diocese was fully insured over the loss fund. Also,

the record indicates that Gallagher did not fully illustrate how

the excess aggregate operated in any of its proposals until 1984.

On the other hand, some evidence exists that Gallagher alluded to

and even explained the excess aggregate to members of the task

force before the parties entered into the 1982-83 plan year. For

instance, the plan binders and first renewal proposal mentioned the
21

excess aggregate. Also, Wagner testified that he knew during the

first year of the plan that the Diocese might face insurance

liability over the amount of the loss fund. Finally, Lillis and

O'Connell testified that they spoke to two task force members

around the time of the arson fires about how the Diocese might need

another layer of excess aggregate insurance. Thus, a genuine

dispute of material fact exists as to whether the Diocese impliedly

consented to discharge Gallagher's warranty by continuing the

program in the second year knowing the risk of inadequate coverage.

Consequently, a genuine dispute of material fact exists as to

whether the Diocese's claims arising out of the second year of the

plan are delictual, and thus time barred.

Gallagher also argues that a "vice of consent" exists that

precludes the formation of a contract under Louisiana law, and that

the contract must be annulled because of unilateral error.

Gallagher claims that the Diocese knew that it would be liable for

pedophilic acts by its priests and failed to inform Gallagher of

this before entering into the plan. Gallagher also suggests that

the Diocese breached its duty under agency law by failing to

disclose that it knew some of its priests had molested boys.

To show vice of consent on the basis of unilateral error,

Gallagher must show that (1) the Diocese made misrepresentations,

(2) Gallagher justifiably relied on these misrepresentations, (3)

the error bears upon the principal cause of the contract, and (4)

the Diocese knew or should have known that its misrepresentations

would be relied upon. McCarty Corp. v. Pullman-Kellogg, Div. of
22

Pullman, Inc., 751 F.2d 750, 755 (5th Cir.1985).

Gallagher has gathered evidence that, before the Diocese

entered into the plan, Larroque and Bishop Gerald L. Frey knew

about incidents of priestly pedophilia. There is at least a

triable issue that the Diocese made material omissions.

The biggest obstacle here for Gallagher, though, is the

principal cause element. With regard to errors of fact, article

1823 provides that "a principal cause for making the contract ...

may be either as to the motive for making the contract, to the

person with whom it is made, or to the subject matter of the

contract itself." There is no alleged unilateral error here with

regard to the subject matter of the plan; both the Diocese and

Gallagher knew what the plan principally covered. True, the

Diocese did not specifically know about the excess aggregate before

entering into the 1981-82 plan year. However, even if the excess

aggregate was a principal cause of the making of the contract,

there is no indication that the Diocese knew or should have known

about it; the record indicates that Gallagher did not provide any

information to the Diocese about the excess aggregate until after

the parties entered into the 1981-82 plan year and that Gallagher

had in fact expressly warranted that the Diocese was fully insured

over the loss fund. Hence, the contract cannot be annulled. See

Carpenter v. Christian, 496 So.2d 1364, 1368 (La.App.1986) (ruling

that "a contract may be invalidated for unilateral error as to a

fact which was the principal cause for making the contract only

when the other party knew or should have known it was the principal
23

cause").

The only issue left regarding the principal cause element,

then, is motive, that is, whether the Diocese entered into the plan

for the purpose of having Gallagher cover some of its expected

losses from claims arising from pedophilic Diocese priests. See

Savoie v. Bills, 317 So.2d 249, 255 (La.App.) (finding that

"defendants knew that these errors were the principal cause for the

signing of the contract by the two landowners. The

misrepresentations ... were for the very purpose of securing the

signatures."), writ dismissed, 320 So.2d 554 (1975). There is

absolutely no evidence of such a motive; in fact, Gallagher's

argument here is implausible. If the Diocese really intended to

avoid large losses that it expected from pedophilia claims it would

hardly have tried to pass these losses along to Gallagher—its

insurance agent. Instead, it would have tried to slough the losses

off on some insurer. Moreover, the Diocese would not have entered

an insurance coverage plan that contained a large coverage gap,

such as the one at issue here. Rather, it would have entered into

a conventional insurance scheme, one that ensured that the

insurance companies would pay the maximum amount of the anticipated

liability tab. There is certainly no genuine dispute of material

fact on whether the Diocese entered into the plan with the primary

purpose of making Gallagher pay for uninsured losses.

Lastly, Gallagher makes an agency argument. It contends that

it was the agent of the Diocese, and the Diocese had the duty to

inform it of the risk of pecuniary loss that existed in the
24

performance of its duties in brokering the plan. Gallagher avers

that the Diocese breached its fiduciary duty by failing to inform

it that Gallagher might be liable to cover certain losses incurred

from the activities of pedophilic priests. This breach, Gallagher

claims, precludes the Diocese from relying on the express warranty

to argue that Gallagher is liable for the Diocese's uninsured

losses.

Gallagher is correct that it was the agent of the Diocese.

See Motors Ins. Co. v. Bud's Boat Rental, Inc., 917 F.2d 199, 204

(5th Cir.1990) (noting that under Louisiana law, an insurance

broker is generally deemed to be the agent of the insured rather

than the insurer); Tassin v. Golden Rule Ins. Co., 649 So.2d 1050,

1054 (La.App.1994) (holding that insurance broker is generally

agent of insured). Its agency argument fails, though—at least with

regard to the first year of the plan. The Diocese had no duty to

provide Gallagher with any information about possible future losses

either when the parties entered the plan or during the plan's

initial year. First, at the time the Diocese agreed to the plan,

it reasonably believed (given Gallagher's express warranty) that

the plan would cover all losses over the loss fund. Hence, even

assuming that a task force member knew before 1981 that the Diocese

might face losses resulting from priestly molestations, this person

would have thought that the insurance companies underwriting the

plan—not Gallagher—would cover the losses. Second, during the

first year of the plan, Gallagher was contractually bound to ensure

that the Diocese remained fully insured over the loss fund. This
25

contractual obligation would have stayed unchanged even if the

Diocese had learned about the excess aggregate during this period

and told Gallagher that it might be liable for the Diocese's

uninsured losses. Hence, the Diocese had no duty during the first

year of the plan to share any information it had with Gallagher

about pedophilic priests.

In addition, even if the Diocese did have a duty to inform

Gallagher about possible future losses and breached that duty

during the first year of the plan, this would not be grounds for

preventing the Diocese from relying on the express warranty.

Absent an explicit agreement to the contrary, a principal has no

duty to indemnify an agent for losses incurred due to the agent's

fault. Shair-A-Plane v. Harrison, 291 Minn. 500, 189 N.W.2d 25,

27-28 (1971) (citing RESTATEMENT (SECOND) OF AGENCY §§ 438 & 440(a) and

accompanying cmts.). Here, Gallagher's liability to the Diocese

stems from the fact that Gallagher made an express warranty that

was flatly incorrect. Refusing to recognize that liability would

force the Diocese to indemnify Gallagher for losses that resulted

from Gallagher's own error. Therefore, the Diocese is not barred

from using the express warranty to hold Gallagher responsible for

the Diocese's uninsured losses during the first year of the plan.

Accordingly, we determine that, with regard to the first year

of plan coverage, there is no genuine dispute of material fact over

whether Gallagher expressly warranted that the Diocese would be

fully insured for all losses above the loss fund. However, with

regard to the second year of plan coverage, we conclude that a
26

genuine dispute of material fact exists over whether Gallagher made

such an express warranty.

C

Gallagher maintains that a triable issue exists on whether it

breached a contract with the Diocese. As demonstrated above,

Gallagher and the Diocese had a contract, and as part of that

contract, Gallagher expressly warranted that the Diocese was fully

insured above its loss fund. It is undisputed that the Diocese was

not fully insured above its loss fund. Hence, no jury question

exists over whether Gallagher breached this contract with the

Diocese for the first year.

D

Gallagher contends that the parties did not reasonably

contemplate as a matter of law that Gallagher (as opposed to the

insurance companies providing the Diocese with coverage) would be

liable for damages arising from child molestation by pedophilic

Diocese priests.

Absent fraud or bad faith, a party in breach of contract is

"liable only for such damages as were contemplated, or may

reasonably be supposed to have entered into the contemplation of

the parties at the time of the contract." L.S.A.-C.C. art.1934(1).

At the time they entered into the plan, the parties reasonably

contemplated that Gallagher would be liable for damages that arose

if, contrary to Gallagher's express warranty, the Diocese was not

fully insured above its loss fund. Therefore, Gallagher's

contention here has no merit.
27

E

Gallagher asserts that a genuine dispute of material fact

exists on whether its express warranty caused the Diocese damages.

First, it avers that the district court did not determine how the

insurance policies interrelated. However, the interrelation of the

insurance policies is clear from the record. As discussed earlier,

from the Diocese's perspective, the primary problem with the plan

was that the Interstate policy did not "drop down" to pick up

losses exceeding $100,000 per occurrence once the Lloyd's excess

package had reached its aggregate limit of $450,000. This resulted

in some $4,500,000 in uncovered losses. Obviously, if the Diocese

was fully insured beyond the loss fund, which Gallagher had

expressly warranted, it would not have incurred these losses.

Hence, the Diocese is entitled to compensatory damages of about

$4,500,000. As the breaching party, Gallagher must put the Diocese

in as good a position as it would have been had Gallagher fulfilled

its express warranty.

Second, Gallagher claims that there is a jury issue on

whether the Diocese committed criminal acts, which would be

excluded from coverage. Apparently, Gallagher maintains that

various Diocese officials violated § 14:403 of the Louisiana

Statutes and thus committed the misdemeanor of failing to report

child abuse. However, it is only a crime in Louisiana for certain

persons to fail to report child abuse; the Diocese officials here

are not such persons. La. Stat. § 14:403; L.S.A.-Ch. C. art. 609.

Gallagher also suggests that Diocese officials aided and abetted
 

6Gallagher also claims that there is a triable issue on

whether the Diocese's losses would have been covered by a

"conventional" insurance plan (i.e., whether, but for entering the

flawed Bishop's Program, the Diocese would have sustained damages).

This cause-in-fact argument, though, is inappropriate for a breach

of contract action. Hence, we do not discuss it. 

28

child molestation. There is no evidence of this.

In conclusion, Gallagher has failed to show a genuine dispute

of material fact on the express warranty issue with regard to the

first year of the plan. No rational jury could find for Gallagher

on the express warranty issue. BMG Music v. Martinez, 74 F.3d 87,

91 (5th Cir.1996). However, Gallagher has succeeded in

demonstrating a triable issue over whether it made an express

warranty with regard to the second year of the plan.6

III

The issue raised on appeal by LACOS arises out of lawsuits by

two children molested by a pedophilic priest in the Diocese. One

child's suit was settled for about $900,000 and the other child's

suit for about $632,000.

Preferred Risk provided the primary insurance for the Diocese

from July 1978 to July 1981 through a three-year policy with a

limit of $500,000. This policy did not contain an annualization

clause, that is, it provided a policy limit of $500,000 for the

three years together rather than a policy limit of $500,000 for

each of the three years. In other words, the policy suggested that

Preferred Risk only offered $500,000 of coverage, not $1,500,000.

Houston General Insurance Co. ("Houston") and PEIC provided

excess coverage for the Diocese. Houston furnished a one-year
29

excess policy from July 1978 to July 1979, and PEIC provided a

one-year excess policy from July 1979 to July 1980 and a one-year

excess policy from July 1980 to July 1981.

To obtain excess coverage from PEIC during the 1979-80 and

1980-81 periods, LACOS mailed applications to an agent of PEIC.

These applications allegedly contain materially false information.

First, the 1979-80 application states that the Preferred Risk

policy period runs from July 1, 1979 to July 1, 1980 and that the

policy provides $500,000 of coverage per occurrence. In turn, the

1980-81 application states that the Preferred Risk policy period

runs from July 1, 1980 to July 1, 1981 and that the policy provides

$500,000 of coverage per occurrence. However, as this court ruled

in Society I, the Preferred Risk policy only furnished a total of

$500,000 of coverage for the period from July 1, 1978 to July 1,

1981. Second, the statement in the 1979-80 application that the

Preferred Risk policy expired on July 1, 1980 was false—the policy

in fact did not expire until July 1, 1981. Third, each application

states that the Preferred Risk policy does not "afford coverage

less than standard in any respect." However, the district court

found that the insurance industry at the time the applications were

sent regarded three-year policies that were not annualized as

"nonstandard."

In Society I, this court adopted an "exposure rule" to

allocate losses stemming from the molestations. This rule defined

what an "occurrence" would be under the insurance policies. We

held that there was an occurrence when a child was first molested
30

during a policy period, and that all subsequent molestations of a

particular child during the policy period, as well as any resulting

injury to the child's parents, arose out of the same occurrence.

We also ruled that a loss due to an occurrence would be allocated

among the insurers according to the percentage of the time or

period that each occurrence happened during an insurer's policy

period.

Under this rule, Preferred Risk had to contribute $500,000 for

each of the two settlements. PEIC then had to pay the remaining

$532,000. Obviously, if the policy limit for each occurrence under

the Preferred Risk was $1,500,000, rather than $500,000, then PEIC

would have had to pay nothing.

PEIC then sued LACOS to recover the $532,000. It alleged that

LACOS was liable for negligent misrepresentation. Specifically, it

asserted (1) that LACOS had failed to disclose that its primary

policy was for three years, rather than one; (2) that LACOS

misrepresented that the primary policy had policy limits of

$500,000 for each year; and (3) that LACOS failed to disclose that

the primary policy was "substandard" in that it did not have an

annualization clause.

PEIC and LACOS submitted this issue to the district court for

a bench trial. The district court relied entirely on trial briefs,

depositions, and documentary evidence. The district court

determined that a legal duty exists between LACOS and PEIC because

"[c]ommon sense dictates that the excess carrier or its agent must

know the material details of the underlying policy." The district
31

court then found that LACOS breached this duty by "misstating the

expiration of the policy and by misrepresenting the scope of the

underlying coverage." The court also appears to have implicitly

found that LACOS misrepresented the coverage as standard when it

was in fact substandard. Finally, the district court ruled that

PEIC had suffered damages because, if the Preferred Risk policy

provided annualized coverage, as LACOS had suggested, then PEIC

would not have had to pay $532,000.

 LACOS alleges that the district court erred in finding that

it had negligently misrepresented the terms of the policy. A

person commits the tort of negligent misrepresentation when (1) he

has a legal duty to supply correct information; (2) he breaches

that duty; and (3) his breach causes damages to the plaintiff.

Barrie v. V.P. Exterminators, Inc., 625 So.2d 1007 (La.1993);

L.S.A.-C.C. arts. 2315 & 2216. This tort applies in both

nondisclosure and misinformation cases. Nesbitt v. Dunn, 672 So.2d

226, 231 (La.App.1996).

LACOS avers that all three of these elements are lacking.

First, LACOS asserts that it had no "duty to read the Preferred

Risk Policy and identify the lack of "annualization' language

therein." Second, LACOS concedes that it misstated the expiration

of the policy, but asserts that this was not a material

misrepresentation. Similarly, it avers that, at the time of the

policies in question, the insurance industry treated three-year

policies as one-year policies. Therefore, LACOS asserts that it

did not breach any duty to PEIC. Third, it claims that PEIC would
32

have written the excess coverage even in the absence of LACOS'

alleged misrepresentations and omissions, and thus it was not the

cause in fact of PEIC's damages.

We disagree with LACOS' first contention. LACOS clearly had

a legal duty to provide correct information to the Diocese. It was

the Diocese's insurance agent.

 LACOS makes two arguments why it did not breach any duty it

had to the Diocese. First, LACOS alleges that it was industry

practice in the late 1970s and early 1980s to annualize three-year

insurance policies and that this was what Preferred Risk did to its

policy. Thus, LACOS avers that it did not make any

misrepresentations. There was much testimony in the district court

on industry practice at the time the policies were written. There

was no dispute that three-year insurance policies were generally

annualized. The only dispute was over whether three-year insurance

policies that lacked an annualization clause would typically be

annualized. The district court sided with the Diocese's expert on

this point. It believed that the most credible explanation of

industry practice was that three-year policies with annualization

clauses would be annualized, and three-year policies without such

clauses would not; otherwise, it reasoned, there was no reason to

have annualization clauses at all. We agree with the district

court's logic. Certainly, it is not clearly erroneous. Since the

Preferred Risk policy lacked an annualization clause, then, LACOS

negligently misrepresented that the Preferred Risk policy was

standard.
33

Second, LACOS claims that this court's adoption of the

"exposure rule" in Society I was a "watershed" decision that

created new law. Under the exposure rule, a three-year policy that

is not annualized provides less coverage in a situation where

children are repeatedly molested over several years than three

one-year policies (or a three-year policy that is annualized).

LACOS suggests that the claims it made to the Diocese about the

Preferred Risk policy predate Society I, and thus were not

misrepresentations at the time they were made. This contention is

a red herring. If industry practice was to include annualization

clauses in three-year policies, then LACOS breached its duty by

representing that the Preferred Risk policies were standard. The

"exposure rule" is irrelevant here.

In addition, we determine that LACOS was the cause in fact of

PEIC's damages. There was evidence that LACOS misled PEIC into

thinking that the Preferred Risk policy was not annualized. There

was also proof that PEIC would not have provided excess coverage if

it had known that the Preferred Risk policy was not annualized.

Therefore, PEIC would not have suffered injury if LACOS had not

negligently misrepresented the terms of the policy.

In conclusion, PEIC has demonstrated that LACOS negligently

misrepresented the Preferred Risk policy. Thus, the district court

did not err in granting final judgment to PEIC for $532,000.

IV

In its final judgment, the district court ruled that "[t]he

Diocese hereby expressly subrogates to ... Gallagher its rights
34

against the Diocese's excess carriers or other debtors."

Interstate alleges that the district court erred in including

the language quoted directly above. Interstate did not raise this

issue below. Thus, we review for plain error. Douglass v. United

Services Automobile Ass'n, 79 F.3d 1415, 1422 (5th Cir.1996).

Gallagher did not make a claim for subrogation in the

district court. Apparently, the district court added the

subrogation language at the Diocese's invitation. In any event,

though, the common-law theory of equitable subrogation does not

exist in Louisiana. Institute of London Underwriters v. First

Horizon Ins. Co., 972 F.2d 125, 127 (5th Cir.1992). Louisiana law

recognizes only conventional subrogation (i.e., subrogation by

contract) and legal subrogation (i.e., subrogation specifically

recognized by the Civil Code). Id. Under the Civil Code, legal

subrogation takes place in five instances:

(1) In favor of an obligee who pays another obligee whose

right is preferred to his because of a privilege, pledge, or

mortgage;

(2) In favor of a purchaser of movable or immovable property

who uses the purchase money to pay creditors holding any

privilege, pledge, or mortgage on the property;

(3) In favor of an obligor who pays a debt he owes with others

or for others and who has recourse against those others as a

result of the payment;

(4) In favor of an heir with benefit of inventory who pays

debts of the estate with his own funds;

(5) In the other cases provided by law.

L.S.A.-C.C. art. 1829. Comment (e) to article 1829 explains what

the "other cases provided by law" are. These other cases—all of

which are in the Louisiana statutes—include subrogation of a
 

7In response to Interstate's appeal, Gallagher argues that

this court lacks jurisdiction because Interstate's notice of appeal

is technically deficient. This argument is without merit.

Interstate stated that it was appealing "from the Final Judgment

entered on August 30, 1995, and from the March 10, 1995 Partial

Summary Judgment, if the August 30, 1995 Final Judgment is

interpreted to have modified or amended the judgment in favor of

Interstate Fire & Casualty Company in the March 10, 1995 Partial

Summary Judgment." Gallagher would have us read the conditional

35

state-supported charity hospital to the rights of a patient,

subrogation of an employer or insurer who pays an employee

workmen's compensation to the rights of that employee against a

third person under the Workmen's Compensation Act, and subrogation

of a taxpayer to the right of the collecting authorities.

In this case, neither conventional nor legal subrogation

exists. Therefore, the district court erred in providing for

equitable subrogation, which is not permitted under Louisiana law.

We, nevertheless, affirm the district court's transfer of rights

from the Diocese to Gallagher. In passing, Gallagher mentions that

only the Diocese has standing to challenge the court's transfer of

its right to Gallagher. And the Diocese did not object to the

court's subrogation. Obviously, Interstate has some reason to

think that the rights are more dangerous in the hands of Gallagher

than in the hands of the Diocese. But as far as the law is

concerned, the subrogation paragraph did not adversely affect

Interstate's rights. See Dairyland Ins. Co. v. Makover, 654 F.2d

1120, 1123 (5th Cir. Unit B Sept.1981) (applying the rule that

"ordinarily only a litigant who was a party below and who is

aggrieved by the judgment or order may appeal"). Accordingly, the

district court's ruling on subrogation must be affirmed.7
clause as applying to the entire sentence. But it applies only to

the phrase "from the March 10, 1995 Partial Summary Judgment."

Interstate's notice of appeal adequately indicated that it was

appealing the Final Judgment unconditionally. And according to

Interstate, Gallagher did not raise the issue of subrogation below,

so Interstate never had an opportunity to contest it. Thus,

Interstate has not waived its right to appeal the issue. 

36

V

For the foregoing reasons, we AFFIRM the district court's

judgment against Gallagher for occurrences during the first year of

plan coverage and REVERSE and REMAND as to this judgment for

occurrences during the second year of plan coverage; AFFIRM the

district court's judgment against LACOS; and AFFIRM paragraph four

of the district court's final judgment (which pertains to

subrogation). 

DeMOSS, Circuit Judge, concurring in part and dissenting in

part:

I concur in the analysis and holdings of parts II(A), II(E),

III, and IV of the majority opinion. I concur also as to certain

limited holdings in part II(B). I respectfully dissent, however,

as to the remainder of II(B) and as to parts II(C) and (D). I

write now to set forth my reasons for these positions.

I.

I concur in part II(A) of the majority opinion, which holds

that certain language from our Court's prior opinion in Society of

the Roman Catholic Church v. Interstate Fire & Casualty Co., 26

F.3d 1359 (5th Cir.1994) [hereinafter Society I ], does not bar

Gallagher from contending that there is a triable issue over

whether it expressly warranted that the Diocese was fully insured.
37

See ante, at 397 (quoting Society I, 26 F.3d at 1367). In essence,

the majority categorizes this quote as dicta, pointing out that

"what the [Society I ] panel really meant ... was that there was a

genuine dispute of material fact over whether the Diocese's claim

is contractual; and, so, the [Society I ] panel simply held that

the Diocese's claim was not delictual as a matter of law and thus

the district court wrongfully granted Gallagher summary judgment

(and this is the most the panel could have held)." Ante, at 397-

98.

While the majority does not discuss it, I am concerned by the

fact that the district court, in rendering summary judgment in

favor of the Diocese after remand, quoted the same Society I

language. I think it is therefore highly probable that the

district judge treated the statement in Society I not as dicta, but

rather as a ruling which dictated a grant of summary judgment in

favor of the Diocese after remand. I cannot fathom any other

reason why the district judge would have referred to it in his

summary judgment determination, and from my review of this record

I have serious doubts that the district judge would have granted

summary judgment in favor of the Diocese if the opinion in Society

I had not included the quoted language, but had instead said what

the majority opinion now says the panel in Society I "really meant"

to say.

II.

A.

I concur with the language of part II(B) of the majority
38

opinion which disposes of the Diocese's contentions regarding

"unilateral" or "gratuitous" contracts. Likewise, I concur with

the majority's determination in part II(B) that the contractual

relationship between Gallagher and the Diocese was for a term of

one year only with the parties being able to renew and extend that

contractual relationship for subsequent years by making renewal

agreements each year. Finally, I also concur with the majority's

determination in part II(B) that, with regard to the "second year

of plan coverage," there was a genuine dispute of material fact as

to whether Gallagher made an express warranty.

B.

I cannot concur with and therefore dissent from the majority's

determination in part II(B) that, "with regard to the first year of

plan coverage, there is no genuine dispute of a material fact over

whether Gallagher expressly warranted that the Diocese would be

fully insured for all losses above the loss fund." Ante, at 403.

From my reading of the summary judgment record in this case, I

think there is sufficient evidence upon which a jury could

reasonably conclude that the "fully insured" language in the first

plan proposal did not create an express warranty by Gallagher that

the Diocese would be fully insured for all losses above the loss

fund.

The best example of the evidence upon which I think a jury

could so conclude is the parties' actions following the "rash of

mysterious arson fires" which occurred during the first year of the

plan. See ante, at 395-96. The losses sustained by the Diocese
39

from these arson fires were of such number and magnitude as to make

readily apparent that the loss fund of $400,000 for the first year

would not be adequate to absorb the losses involved and also pay

the other losses which the parties had estimated would need to be

covered by the loss fund. If the Diocese truly believed that the

"fully insured" language in the first-year proposal created an

express warranty by Gallagher that the Diocese would never have to

pay more than $400,000 on losses in the first year, then surely the

Diocese would have immediately asserted its rights under that

express warranty and called upon Gallagher to pay the losses

chargeable for the first year against the loss fund in excess of

the $400,000 upper limit. I could find absolutely nothing in the

summary judgment record which indicated that the Diocese ever

asserted such a right at that time; accordingly, I think a

reasonable jury could infer that at the time of the "rash of

mysterious arson fires" the parties did not construe the language

of the first-year proposal as creating such an obligation on the

part of Gallagher.

Likewise, when the parties addressed the task of entering into

the renewal agreement for the second year of the plan, the renewal

proposal did not include any "written explanatory material assuring

the Diocese that it was "fully insured' over the loss fund." Ante,

at 396. If the Diocese truly considered the "fully insured"

language in the first proposal as creating an express warranty on

the part of Gallagher, one would expect the Diocese to raise some

objection about the exclusion of this language in the second
40

proposal. From my examination of the summary judgment record, I

saw no indication that that was the position taken by the Diocese.

Consequently, I think a jury could reasonably infer that the

Diocese did not consider the "fully insured language" as an express

warranty on the part of Gallagher because (i) they did not insist

on compliance therewith during the first year of the plan, and (ii)

they did not raise any objection to the elimination of this

language in the proposal for the second year.

In reviewing a grant of summary judgment, we are required to

"construe all facts and inferences in the light most favorable to

the nonmoving party," see ante, at 393, which in this circumstance

is Gallagher. Consequently, I would not distinguish the first year

from the second year of the plan. I would simply send the whole

issue of what the parties intended by use of the "fully insured

language" for trial on the merits by the jury.

C.

I cannot concur with the majority's holding that "[t]he

Diocese had no duty to provide Gallagher with information about

possible future losses either when the parties entered the plan or

during the plan's initial year." Ante, at 402-03. The majority

cites no case law or statute to support that proposition regarding

the duty owed by a proposed insured to the agent who is going to

arrange insurance coverage for the insured. While I cannot cite

any Louisiana case which deals specifically with the situation of

proposed insured and its insurance agent, I read the opinion of the

Louisiana Supreme Court in Bunge Corp. v. GATX Corp., 557 So.2d
41

1376 (La.1990), as a broad overview of the circumstances in which

disclosure is required. In that opinion, the Louisiana Supreme

Court stated: "Modern law ... imposes on parties to a transaction

a duty to speak whenever justice, equity and fair dealing demand

it." Bunge, 557 So.2d at 1383 (quoting W. Page Keeton,

Fraud—Concealment and Non-Disclosure, 15 TEXAS L. REV. 1, 15 (1936)).

Furthermore, the Louisiana Supreme Court stated in that same

opinion:

It has long been held that the duty to disclose exists

where the parties stand in some confidential or fiduciary

relation to one another, such as that of principal and agent

or executor and beneficiary of an estate.

Id. 557 So.2d at 1383-84 (footnote omitted and emphasis supplied).

We are bound to apply Louisiana law in this diversity case, and I

think that under the language and philosophy of Bunge we should

hold that there is a duty upon a proposed insured to disclose to

the insurance agent all of the knowledge and awareness which the

insured might have as to possible claims and risks for which the

proposed insured wants to be protected by insurance. I think that

duty would be particularly applicable in the circumstances of the

present case where the Diocese now claims that Gallagher gave it an

express warranty that it would be fully insured and yet did not

tell Gallagher about the incidents of molestation which had already

occurred. There is sufficient summary judgment evidence of such

prior knowledge on the part of the Diocese as to raise a triable

issue that the Diocese had knowledge which was not disclosed.

The possible liability which the Diocese would face as a

result of sexual molestation of young boys by its priests is, in my
42

view, not the sort of standard or typical risk which a reasonably

prudent insurance agent would be expected to anticipate in

arranging for insurance coverage. If the Diocese wanted to be

"fully insured" as to that particular risk, it should have fully

disclosed the nature and extent of the prior incidences of sexual

molestation by its priests. The summary judgment record in this

case indicates that Gallagher made inquiries about the loss

experience of the Diocese in prior years and tailored its plan

based upon that prior loss experience. The task of an insurance

agent in designing the types and levels of insurance coverage so

that an insured may be "fully insured" cannot be done unless the

agent knows all of the types of risks and claims to which the

insured is exposed. In my view there is a triable jury issue as to

whether the phrase "fully insured" constituted an express warranty

by Gallagher, but even assuming it did, I think fairness and

justice and the language of Bunge would say that there is a

legitimate jury issue as to (i) whether the Diocese knew and failed

to disclose to Gallagher the risk of sexual molestation claims as

a result of the conduct of pedophilic priests and (ii) whether

Gallagher should be held for liability under its special warranty

as to a risk which was not a standard and ordinary risk and which

was a risk of which it had no prior knowledge.

D.

In my view, there are innumerable fact issues which a jury

should decide. Undoubtedly, Gallagher's sales representatives used

a lot of puffery in selling their program to the Diocese. The
43

Diocese demonstrated by its actions, however, that it recognized

that it was just puffery and not a special contractual warranty.

Everything was working fine until the landslide of the sexual

molestation cases hit. Because there were so many of these claims

and the dollar amount of each claim was so high, the layer of

Lloyd's excess coverage was burned up by the first few settlements

of the child molestation claims. As a consequence, the Diocese had

to pay the first $550,000 of each later claim rather than just the

first $100,000. A jury might find that at that point, the Diocese

decided that it would go back and change the puffery into a special

contractual warranty and shift the loss to Gallagher. Gallagher

responds that it was the Diocese's employee, the priest, who was

committing all of the acts of sexual molestation, and the Diocese

knew about it and did not tell Gallagher. How, Gallagher asks,

could it be expected to design an insurance plan that would

adequately cover a risk it did not know about? The place to sort

out all of these cross-currents of claims and factual disputes is

before the trial jury, and under the facts available in this case,

the jury could find either for the Diocese or for Gallagher and the

evidence would support either finding. Summary judgment in favor

of the Diocese was, therefore, error.