*District Judge for the Eastern District of Louisiana,

sitting by designation. 

1

United States Court of Appeals,

Fifth Circuit.

No. 94-60136.

WESTERN HERITAGE INSURANCE COMPANY, Plaintiff-Appellant,

v.

MAGIC YEARS LEARNING CENTERS AND CHILD CARE, INC., et al.,

Defendants,

Magic Years Learning Centers and Child Care, Inc., Charles R.

Wilson, and Doris J. Wilson, Defendants-Appellees.

Feb. 16, 1995.

Appeal from the United States District Court for the Southern

District of Texas.

Before JONES and STEWART, Circuit Judges, and DUPLANTIER,* District

Judge.

DUPLANTIER, District Judge:

Charles R. Wilson and his wife Doris J. Wilson operate Magic

Years Learning Centers and Child Care, Inc. (Magic Years), a child

day care center. Mr. Wilson serves as president of Magic Years,

and his wife is its secretary and treasurer. Theresa L. Alexander,

a former employee of Magic Years, and her husband filed suit in

state court against Magic Years and Mr. and Mrs. Wilson, claiming

that Mr. Wilson sexually harassed Mrs. Alexander. Western Heritage

Insurance Company (Western Heritage) insured Magic Years and Mr.

and Mrs. Wilson during the period of Mrs. Alexander's employment.

In this suit for declaratory judgment, the district court decreed

that Western Heritage must defend its insureds, Magic Years and Mr.
 

1The Alexanders also sought exemplary damages in their state

court suit. Magic Years and the Wilsons do not dispute the

district court's declaration that exemplary damages are

specifically excluded by the insurance policy and hence not

covered. 

2

and Mrs. Wilson, in the underlying state court action brought by

the Alexanders and pay any judgment rendered against them. Western

Heritage appealed.1 We AFFIRM the judgment in favor of Mr. and

Mrs. Wilson, but we REVERSE the judgment in favor of Magic Years.

Mrs. Alexander was an employee of Magic Years for slightly

over sixteen months. During that time, the Western Heritage

comprehensive general liability insurance policy at issue listed

"Charles & Doris Wilson dba Magic Years Learning Center and Child

Care, Inc." as the named insured. All the parties treat this

strange designation as referring to three insureds: Mr. Wilson,

Mrs. Wilson and the corporation.

The state court suit by the Alexanders alleged that Mr. Wilson

sexually harassed Mrs. Alexander at work and under other

circumstances, that such harassment led to her constructive

discharge, that he invaded her right to privacy by asking probing

questions about her personal life and sexual activities, that he

unlawfully imprisoned her, that the harassment and her constructive

discharge violated her federal and state civil rights, that he

committed assault and battery by touching her in an offensive,

unwelcome manner, and that he acted with such want of care and

conscious indifference as to warrant punitive damages. The

Alexanders claimed that Mrs. Wilson and Magic Years were

responsible under the doctrine of respondeat superior for Mr.
3

Wilson's conduct and that they were grossly negligent in entrusting

him with supervisory responsibility, in not providing a workplace

free of sexual harassment, and in not providing an adequate avenue

for redress. They also alleged that Magic Years and the Wilsons

intentionally inflicted severe emotional distress upon Mrs.

Alexander. Mr. Alexander asserted a claim for loss of consortium.

Magic Years and the Wilsons made demand upon Western Heritage to

defend them in the state court suit and to pay any judgment arising

out of it.

Western Heritage filed this action seeking a declaration that

it owed no duty to defend or indemnify Magic Years or the Wilsons

in the underlying state court suit; in a counterclaim Magic Years

and the Wilsons sought a declaration that Western Heritage must

defend and indemnify them. The parties filed cross motions for

summary judgment with a stipulation that the policy and the

Alexanders' pleadings in the underlying state court suit

constituted the relevant evidence.

The district court held that the policy covered the

Alexanders' state court claim and that the employer exclusion

clause did not exclude coverage, because some of the allegations

concerned conduct that occurred outside the course of Mrs.

Alexander's employment.

Western Heritage contends that the policy's definition of

occurrence does not cover sexual harassment, and, even if it does,

the allegations in the Alexanders' suit are excluded from coverage

by the assault and battery exclusion endorsement. Western Heritage
4

further contends that if the state court claims are otherwise

covered, they are excluded by the employer liability exclusion

clause.

TEXAS LAW

Texas substantive law controls this diversity jurisdiction

case. Under Texas insurance law, an insurer is required to defend

any case in which at least some of the allegations in the pleadings

present a claim covered by the policy. See Gulf Chem. &

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

365, 369 (5th Cir.1993). In determining whether the policy covers

the allegations, the court must enforce the policy as written if it

can be given only one reasonable construction. Nat'l Union Fire

Ins. Co. v. Hudson Energy Co., Inc., 811 S.W.2d 552, 555

(Tex.1991). However, if the insurance policy is ambiguous,

susceptible of more than one reasonable interpretation, the court

must adopt the construction that most favors the insured. Id.;

Barnett v. Aetna Life Ins. Co., 723 S.W.2d 663, 665 (Tex.1987).

Because exceptions and limitations of liability are even more

strictly construed against the insurer, " "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.' " Barnett, 723

S.W.2d at 666 (quoting Glover v. Nat'l Ins. Underwriters, 545

S.W.2d 755, 761 (Tex.1977)). Therefore, we must read the

allegations of the underlying state court suit in light of the
 

2The policy defines bodily injury as "physical injury,

sickness or disease sustained by any person which occurs during

the policy period...." 

5

policy's insuring provisions and exclusions to determine whether

there is coverage, bearing in mind these liberal rules of

construction in favor of the insured.

"OCCURRENCE"

 The insuring provision in the policy reads as follows:

The company will pay on behalf of the insured all sums which

the insured shall become legally obligated to pay as damages

because of

(a) bodily injury or

(b) property damage

to which this insurance applies, caused by an occurrence, and

the company shall have the right and duty to defend any suit

against the insured seeking damages on account of such bodily

injury....

Therefore, to trigger the duty to defend, the pleadings in the

underlying state court suit must allege facts which constitute

bodily injury caused by an occurrence that the policy does not

exclude.

The policy defines an occurrence as "an accident, including

continuous or repeated exposure to conditions, which results in

bodily injury or property damage neither expected nor intended from

the standpoint of the insured."2 Western Heritage contends that

the definition of occurrence excludes intentionally inflicted

injuries and therefore excludes the allegations which arise out of

sexual harassment because Mr. Wilson intended or expected to injure

Mrs. Alexander when he harassed her and touched her in an
6

offensive, unwelcome manner. With respect to the Alexanders' state

court suit, the general policy definition of occurrence is trumped

by the following special endorsement:

Physical and/or Mental Abuse Limitation Endorsement

In consideration of the premium charged, it is hereby

understood and agreed that Bodily Injury and Property Damage

includes any act, which may be considered sexual in nature and

could be classified as an Abuse, Harassment, Molestation,

Corporal Punishment or an Invasion of an individual's right of

Privacy or control over their physical and/or mental

properties by or at the direction of an Insured, an Insured's

employee or any other person involved in any capacity of the

Insured's operation....

 * * * * * *

Severability of Insurance

This insurance applies separately to each Insured....

(underlining emphasis added).

Regardless of whether the general definition of occurrence

would exclude allegations of sexual harassment by the insured, the

endorsement expressly provides for coverage of such claims. To

hold otherwise would render the endorsement meaningless. See

Barnett, 723 S.W.2d at 666 (stating that a court should read a

contract, including an insurance policy, to give effect to each

part of the contract unless doing so would do violence to the rules

of law or construction).

The alleged acts of Mr. Wilson complained of in the underlying

state court suit are covered by the endorsement because they all

"may be considered sexual in nature and could be classified as an

Abuse, Harassment, Molestation, Corporal Punishment or an Invasion

of an individual's right of Privacy." Alternatively, from the
 

3The endorsement, which contains a severability of insurance

clause, must be applied separately to each insured. 

7

standpoint of Magic Years and Mrs. Wilson,3 not only do the

allegations in the underlying state court suit fall within the

endorsement, but the alleged acts or omissions are within the

general definition of occurrence, because there is no contention

that Mrs. Wilson or Magic Years expected or intended to injure the

Alexanders. See Walker v. Lumbermens Mut. Casualty Co., 491 S.W.2d

696 (Tex.Civ.App.1973) (holding that exclusion of intentional acts

in homeowner's policy does not apply to parent who is being held

liable for son's intentional acts).

ASSAULT AND BATTERY EXCLUSION

Western Heritage also contends that the allegations involving

assault and battery and offensive touching are excluded from

coverage by the following assault and battery exclusion

endorsement:

It is agreed that the insurance does not apply to bodily

injury or property damage arising out of assault and battery

or out of any act or omission in connection with the

prevention or suppression of such acts, whether caused by or

at the instigation or direction of the insured, his employees,

patrons or any other person.

The underlying state court suit is based upon alleged sexual

harassment, expressly covered by the policy's "physical and/or

mental abuse limitation endorsement." The allegations of assault

and battery, unlawful imprisonment, and intentional infliction of

emotional distress are alternative legal theories of liability for

the alleged sexual harassment. The physical/mental abuse

endorsement would be meaningless with respect to claims of physical
8

abuse if the assault and battery exclusion were applicable. The

assault and battery exclusion is trumped by this special

endorsement, just as is the definition of occurrence.

EMPLOYER LIABILITY EXCLUSION

Western Heritage also argues that the allegations in the

state court suit are excluded by the following employer liability

exclusion clause:

This insurance does not apply:

(i) to bodily injury to any employee of the insured arising

out of and in the course of his employment by the insured for

which the insured may be held liable as an employer or in any

other capacity; * * * or

(iii) to bodily injury sustained by the spouse, child, parent,

brother, or sister of an employee of the insured as a

consequence of bodily injury to such employee arising out of

and in the course of his employment by the insured.

The policy defines an "insured" as:

any person or organization qualifying as an insured in the

"Persons Insured' provision.... The insurance afforded

applies separately to each Insured against whom claim is made

or suit is brought, except with respect to the limits of the

Company's liability.

By this employer liability exclusion, Western Heritage may have

intended to exclude coverage of claims by "any employee" of any

insured, but it did not do so. Instead, the policy excludes

coverage of claims by "any employee of the insured." (emphasis

added). The author of the policy knew how to write the word "any",

for he used it to modify "employee", but not "insured."

The definition of an "insured" in the policy provides that

"[t]he insurance afforded applies separately to each Insured

against whom claim is made or suit is brought." The "physical
 

4Two recent decisions, one by a Texas Court of Appeals and

one by this circuit, apply an employer liability exclusion clause

to exclude coverage of both a corporate employer and an

individual. In the Texas case, Aberdeen Insurance Company v.

Bovee, the individual was apparently a co-employee. 777 S.W.2d

442 (Tex.Ct.App.1989). In the federal case, Pennsylvania

National Mutual Casualty Insurance Co. v. Kitty Hawk Airways,

Inc., the individual was the vice-president and "co-owner" of the

corporate defendant. 964 F.2d 478, 479 (5th Cir.1992). In

contrast with the instant Western Heritage policy, apparently

neither the Aberdeen nor the Pennsylvania National policy

contained a "severability of insurance" clause, and therefore

neither of those decisions consider the relationship between the

term "employer" and an individual who is not an employer but is

an insured. 

9

and/or mental abuse limitation endorsement," which provides for

coverage of the claims at issue, states that "[t]his insurance

applies separately to each Insured." Thus a claim against one

insured may be covered, even though the same claim against another

insured is excluded. See Commercial Standard Ins. Co. v. Am. Gen.

Ins. Co., 455 S.W.2d 714 (Tex.1970) (holding that the employee

exclusion clause is to be applied separately to each insured who

may be entitled to coverage whenever the policy contains a

severability of interests clause). Mindful that we must adopt any

construction of an exclusionary clause urged by the insured as long

as it is not unreasonable, Barnett, 723 S.W.2d at 666, we must read

the employer liability exclusion as applying separately to each

insured, excluding coverage of an insured only if that insured is

the employer of the injured party or the party's spouse.4

The employer liability exclusion does not apply to Mr. and

Mrs. Wilson, neither of whom was Mrs. Alexander's employer, but it

does apply to Magic Years, which was her employer. See Guaranty

Nat'l Ins. Co. v. Marshall County Bd. of Educ., 540 So.2d 745, 749
10

(Ala.1989) (holding that employer liability exclusion clause does

not exclude coverage of claim of deceased employee against his

supervisors); Great S.W. Fire Ins. Co. v. Hercules Bldg. &

Wrecking Co., Inc., 35 Mass.App.Ct. 298, 619 N.E.2d 353 (1993)

(holding that general comprehensive liability insurance policy with

employer liability exclusion clause covered claims by an employee

against the owner/president/manager but not those against the

company), review denied, 416 Mass. 1106, 622 N.E.2d 1364 (1993).

All of the claims against Magic Years are excluded by the

employer liability exclusion clause, because Magic Years employed

Mrs. Alexander, the claims arose out of the course of her

employment, and the exclusion specifically applies to the

derivative claims of the injured employee's spouse. See Old

Republic Ins. Co. v. Comprehensive Health Care Assoc., Inc., 2 F.3d

105, 109 (5th Cir.1993) (stating that the employment-related

exclusion "broadly covers virtually any claim arising out of the

employment relationship").

Unlike the limiting language in the definition of "occurrence"

and the assault and battery exclusion, either of which if

applicable here would render the policy's "physical and/or mental

abuse limitation endorsement" meaningless, the employer liability

exclusion can be read together with the sexual claim endorsement.

Claims by a non-employee of an insured "which may be considered

sexual in nature" are covered by the policy, e.g., the claims

against Mr. and Mrs. Wilson; such claims by an employee of an

insured are excluded from coverage.
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For the foregoing reasons, we AFFIRM the district court's

judgment in favor of Mr. and Mrs. Wilson, REVERSE the judgment in

favor of Magic Years, and REMAND with instructions to enter

judgment in favor of Western Heritage declaring that Western

Heritage is not obligated to defend or indemnify Magic Years in the

underlying state court suit.