UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 01-60378

TWIN CITY FIRE INSURANCE COMPANY,

Plaintiff-Counter Defendant-Appellee,

VERSUS

CITY OF MADISON, MISSISSIPPI,

Defendant-Counter Claimant-Third Party Plaintiff-Appellant,

HARTFORD FIRE INSURANCE COMPANY; HARTFORD FINANCIAL SERVICES

GROUP, INC.; SPECIALTY RISK SERVICES, INC.; MICHAEL P. DANDINI; 

KIMBERLY J. CHABERT,

Third-Party Defendants-Appellees.

Appeals from the United States District Court

For the Southern District of Mississippi

 

October 28, 2002

Before DUHÉ, DeMOSS and CLEMENT, Circuit Judges.

DUHÉ, Circuit Judge:

Plaintiff Twin City Fire Insurance Company sued its insured,

the City of Madison, Mississippi, for a declaratory judgment

denying coverage under a policy issued to Madison and for

reimbursement of defense costs concerning two lawsuits brought

against Madison. After settlement of the underlying claims for
2

$250,000, Twin City dropped its claim for defense costs and added

a claim herein for reimbursement of the settlement amount. Madison

counter-claimed asserting coverage under the policy and liability

based on estoppel. Madison also asserted third-party tort claims

against affiliates of Twin City involved in adjusting Madison’s

claims.

The district court granted summary judgment to Twin City,

holding that a policy exclusion applied so that Twin City was

entitled to reimbursement from its insured of the amount paid in

settlement of the underlying claims. On the City’s counterclaim

the court ruled that estoppel cannot create or expand coverage.

Granting summary judgment to third-party defendants, the court

ruled that Madison failed to show a genuine issue of material fact

regarding its third party claims. Madison timely appeals. Finding

fact questions material to the issue of estoppel and the thirdparty claims, except concerning Hartford Financial Services Group,

we affirm in part, reverse in part, and remand.

I.

The Public Official Errors and Omissions Liability Insurance

Policy issued to Madison covers damages that the City becomes

legally obligated to pay because of errors or omissions of public

officials. The underlying damage claim was based on the City’s

1986 impact fee ordinance (“IFO”), which required housing

developers, in order to obtain a building permit, to pay per-lot

fees upon filing a preliminary subdivision plat and upon plat
3

approval. Twin City provided Madison a defense under its errors

and omissions policy against the claims, with a reservation of

rights.

Several developers sued the City in federal district court,

asserting various claims pertaining to the IFO. Upon a finding

that IFO was a tax, the matter was dismissed for lack of

jurisdiction under the Tax Injunction Act. This Court affirmed the

dismissal on the jurisdictional ground that the IFO was a tax, not

a fee. Home Builders Assoc. of Mississippi, Inc. v. City of

Madison, 143 F.3d 1006 (5th Cir. 1998). The developers then sued

Madison in state court contending that the IFO violated state law

and comprised an unconstitutional taking. 

The developers settled their claims with Madison for $250,000.

In a separate agreement with Madison, Twin City agreed to pay the

settlement amount to the developers, reserving its right to seek

recoupment from Madison in this declaratory judgment action.

Twin City contends that the claims are excluded, relying on

exclusion 3(h) for “Liability arising out of any insured obtaining

remuneration or financial gain to which such insured was not

legally entitled.” The district court held that the IFO

constituted a tax, following the analysis of Home Builders.

Further, it found no legislative authority for the tax, and held

that the IFO funds were illegal tax revenues. It therefore applied

exclusion 3(h) regarding financial gain to which the City was not

legally entitled.
1 Madison contends that if estoppel applies, we do not need to

address the coverage issue, because the insurer’s liability will be

a foregone conclusion. While this may be true in principle, it is

not true on summary judgment, because we are not asked to determine

whether estoppel applies, but only whether a genuine issue of fact

exists pertaining to the question of estoppel. As discussed later

in Part III, we disagree with the district court and find that fact

issues do exist which are material to the question of estoppel. If

upon remand a fact finder determines that the insurer is not

estopped, however, the district court will be faced with the same

question on the exclusion it has already decided. For this reason,

we will review its decision on the exclusion issue as well. 

4

II.

This court reviews the grant of summary judgment motion de

novo, using the same criteria as the district court, reviewing the

evidence and inferences to be drawn therefrom in the light most

favorable to the nonmoving party. Hanks v. Transcontinental Gas

Pipe Line Corp., 953 F.2d 996, 997 (5th Cir. 1992).

We agree with the district court that the underlying claim

falls under policy exclusion 3(h),1 as the IFO was an unauthorized

tax and illegal “financial gain.” While Mississippi’s Home Rule

statute provides municipalities discretion in managing municipal

affairs, it also addresses the limited power of a city to tax: 

(1) The governing authorities of every municipality of

this state shall have the care, management and control of

the municipal affairs and its property and finances. In

addition to those powers granted by specific provisions

of general law, the governing authorities of

municipalities shall have the power to adopt any . . .

ordinances with respect to such municipal affairs,

property and finances which are not inconsistent with the

Mississippi Constitution . . . Code . . . or any other

statute . . . . Except as otherwise provided in

subsection (2) of this section, the powers granted to

governing authorities of municipalities in this section
2 This Court denied the City’s motion to certify the question

whether a Mississippi municipality can lawfully enact and enforce

a developmental impact fee ordinance.

5

are complete without the existence of or reference to any

specific authority granted in any other statute or law of

the State of Mississippi. . . . 

(2) Unless such actions are specifically authorized by

another statute or law of the State of Mississippi, this

section shall not authorize the governing authorities of

a municipality to (a) levy taxes of any kind or increase

the levy of any authorized tax . . . .

Miss. Code Ann. § 21-17-5 (West 2001) (emphasis added).

Even though under subsection (1) the City’s powers of selfgovernance concerning municipal finances do not depend on any other

statutory grant of authority, subsection (2) provides the

exception: a municipality’s power to levy a tax requires a

“specific[] authoriz[ation] by another statute or law.” Miss. Code

Ann. § 21-17-5. None existed for this IFO. Under a plain reading

of this statute, we reject the City’s contention that it had

authority to enact an IFO as part of the Home Rule Act. 

We reject the City’s further contention that the power to

enact the IFO is impliedly granted by the legislation as a means to

an end, or is incident to specific grants of authority to provide

services, hospitals, and the like.2 The power to levy taxes is not

embraced in a general grant of power such as police power. Pitts

v. Mayor of Vicksburg, 72 Miss. 181, 16 So. 418, 419 (1894). Nor

will we characterize the impact fees as a regulatory fee rather

than a tax, as Madison urges us to do, to avoid application of the
3 As part of a settlement, Madison waived all extra-contractual

damages against Twin City (but not third-party defendants,

discussed later). The only issue on the counterclaim is whether

the offending actions estop Twin City from denying liability under

the policy. 

 

6

plain terms of the Home Rule Act. Madison has not challenged the

factual basis for the district court’s characterization of this IFO

as a classic tax. 

Since the ordinance created a tax, and the City lacked

specific authority to impose such a tax, the collection of monies

thereunder fits squarely within exclusion 3(h).

III.

Madison contends in its counterclaim that Twin City should be

estopped from denying liability under the policy because of various

claims handling violations and breach of the duty to defend.3 When

sued by Home Builders for the underlying claims, Madison made a

demand upon Twin City for defense and indemnity, assuming the suits

were covered under the errors and omissions liability policy. Upon

notification of the claims, Twin City appointed Daniel, Coker law

firm as counsel for Madison, with a reservation of rights. Terry

Levy of Daniel, Coker defended the claims by Home Builders against

the City in both the federal and state actions. When an insurer is

defending under a reservation of rights, “a special obligation is

placed upon the insurance carrier” because of the built-in conflict

of interests. Moeller v. American Guar. & Liab. Ins. Co., 707 So.

2d 1062, 1069 (Miss. 1996). 
4 Appleman discusses a number of concepts of waiver and estoppel

in the context of insurance policies, see generally 8 Eric Mills

7

In support its estoppel claim, Madison points out the conflict

of interests between itself and the insurer, in that Levy wanted

coverage for his client the City, and Twin City seeks to avoid

coverage. Levy reported to both Madison and Twin City’s claims

adjusters about defense of the matter. Madison contends that Twin

City improperly utilized privileged information from Levy’s claim

file to develop Twin City’s position of non-coverage. 

The district court concluded that, as a matter of law,

estoppel cannot expand coverage in the face of an otherwise

applicable policy exclusion. We disagree. When the alleged

misconduct of the insurer concerns the duty to defend, the insurer

may be liable despite an exclusion otherwise applicable. Upon

withdrawal from the defense of an action, for example, an insurer

may be estopped from denying liability under a policy, if its

conduct results in prejudice to the insured. Southern Farm Bureau

Cas. Ins. Co. v. Logan, 238 Miss. 580, 119 So. 2d 268, 272 (1960).

Even if the insurer would not have been liable had it not assumed

the defense in the first instance, it may become liable for

withdrawing, because the assumption of the defense may give rise to

a duty to continue with the defense. Id., 119 So.2d at 272.

Additionally, a breach of the duty to defend renders the insurer

liable to the insured for all damages, including in a proper case

the amount of the judgment rendered against the insured.4 
Holmes, Holmes’ Appleman on Insurance 2d § 50.9 (1998), and it is

true that some if applied will not expand coverage in the face of

a clear exclusion. Id. at 242 (“The doctrine of equitable estoppel

is not available to bring within the coverage of an insurance

policy risks that are not covered by its terms or that are

expressly excluded therefrom.”); see also Gilley v. Protective Life

Ins. Co., 17 F.3d 775 (5th Cir. 1994) (insurer’s letter to an

insured that coverage would begin for her son does not waive or

enlarge the policy which under its terms does not contemplate such

coverage). 

The Mississippi Supreme Court provided a useful comparison of two

different analyses of waiver in Hartford Accident & Indemnity Co.

v. Lockard, 239 Miss. 644, 124 So.2d 849 (1960). For waiver based

on an agent’s alleged knowledge that the insured used his truck

with a trailer, the insurer was not estopped to deny coverage and

did not “waive” the clear exclusion of the trailer in the policy.

124 So.2d at 852-55. However, for waiver under the very same

policy based on different alleged conduct — refusal to defend — a

different analysis applies. Despite the express policy exclusion,

the insurer may become liable if the insured was “misled to his

hurt or prejudice” by the conduct or representations of the insurer

on which he relied. 124 So.2d at 856.

8

Madison’s claim about conflict of interests may give rise to

estoppel or liability for breach because it concerns the duty to

defend. “A law firm which cannot be one hundred percent faithful

to the interests of its clients offers no defense at all.”

Moeller, 707 So.2d at 1071.

The City of Madison complains that the reservation-of-rights

letters were insufficient. Twin City’s first two letters to

Madison did not identify Twin City at all but reserved rights to

“Hartford Insurance Co.” While the letters recited certain

allegations of the complaint and a number of policy exclusions, the

only remark about exclusion 3(h) among the list of exclusions in

the letters was: “to the extent which the complaint asserts unjust

enrichment by the defendants at the expense of the plaintiffs,
9

Section 3h would serve to exclude coverage for such allegations.”

The reservation of rights was “as to the issues of coverage

identified as well as any other issues which we may become aware of

or which may come into existence at a later date.”

Although these first two reservation-of-rights letters were

delivered shortly after the Home Builders filed the two lawsuits

against Madison (November 1995 and October 1998), it was January

2000, with the Home Builders’ trial less than a month away, when

Twin City sent a third reservation-of-rights letter which

identified Twin City as the party reserving rights and informed the

insured of its position. This letter stated, “The policy does not

provide coverage . . . if Madison enacted the [IFO] without proper

authority, or if Madison obtained remuneration or financial gain to

which it was not legally entitled. Consequently, Twin City

reserves its right to deny coverage under Paragraph 3(h) of the

policy.” Further, this letter stated that “based on our present

understanding of the claims, we believe that in the event of an

adverse judgment against Madison, any award of damages likely would

not be covered by the policy.” 

A fact finder might conclude that Twin City did not

effectively advise Madison of its opinion that any damages

recovered by the Home Builders would not be covered until it sent

this letter. If an insurer is defending under a reservation of

rights, “the insured should be immediately notified of a possible

conflict of interest between his interests and the interests of his
5 A letter of 27 April 1999 from Levy to the Mayor of Madison

stated: “As we discussed, under the Moeller descision

[sic], since your insurer, is providing the

City a defense but reserving its rights to pay

any indemnity for the claim, the City has the

option to designate its own counsel to defend

the suit at the carrier’s expense. However,

it is our understanding that the City believes

it is in its best interest for Daniel, Coker .

. . to continue the defense of this action.

In light of such, we do not believe there is

any conflict of interest in our firm

representing the City in this action. If you

ever believe that a conflict does exist in our

10

insurance company so as to enable him to give informed

consideration to the retention of other counsel.” 7C John Alan

Appleman, Appleman Insurance Law & Practice § 4694 at 365 (1979).

When an insurer is defending under a reservation of rights, the

carrier “should afford the insured ample opportunity to select his

own independent counsel to look after his interest.” Moeller, 707

So. 2d at 1070. Here, the reservation-of-rights letters offered no

opportunity to the insured to select its own independent counsel.

Rather, they referred the “defense of this entire matter” to Levy’s

firm. With this evidence Madison demonstrates an issue for trial,

i.e., whether the notice to the insured of the conflict of

interests was adequate, clear, and timely. 

The evidence leaves room for conflicting inferences regarding

not only notice to Madison of the conflict of interests and the

right to select its own counsel, but also its alleged consent to

continue with Terry Levy as its defense counsel. Twin City asks us

to hold, based on Levy’s 27 April 1999 letter5 and evidence that
firms representation of you or you believe we

are not representing the City’s interest

regarding this lawsuit to the City’s

satisfaction, please advise us of such

immediately so we can make sure that the

City’s interest is being properly protected.”

Sealed ex. N.

6 We also reject the notion that Madison’s city attorney bore

responsibility for discerning whether a conflict existed. It was

the insurer’s choice to defend under a reservation of rights, and

by choosing to furnish legal representation for the claims with the

single law firm, it created a conflict of interest. See Moeller,

707 So. 2d at 1071. The duty is on the insurer, not the insured,

to determine whether a conflict exists and to notify the insured.

11

Levy conferred with Madison’s city attorney about Moeller, that

Madison made an informed decision to continue with Levy despite the

conflict. Levy’s 27 April 1999 letter leaves fact questions about

the adequacy of the Moeller notice, because Levy gave his client an

opinion that no conflict existed when a bona fide conflict did

exist. Further, a fact finder might conclude from Levy’s testimony

that he was not aware of the conflict himself. Accordingly, the

inference could still be drawn that Madison did not give informed

consent under those circumstances.6

The foregoing might also support an inference that Twin City

effectively withdrew the defense or breached the duty to defend.

Such conduct could give rise to application of equitable estoppel,

preventing the insurer from denying liability under the policy, if

Madison can show that the conduct resulted in prejudice to the

insured. Southern Farm Bureau, 119 So. 2d at 272. 

The evidence presents a genuine issue of fact regarding
7 Twin City dropped its claim for the cost of defense early in

these proceedings.

12

prejudice, because the very ruling obtained by Levy in favor of the

City in Home Builders (that the IFO was a tax) was used against the

City in this coverage dispute. Had it known earlier, the City

could have hired its own attorney who might have foregone the

jurisdictional tax argument. A reasonable fact finder might

believe that Madison relied on Twin City’s conduct in assuming the

defense and did not know until three weeks before trial that it had

no truly independent counsel. One might find that Madison learned

only within that month before trial that its insurer had hired

counsel to defeat coverage, was using Levy’s work product against

Madison, and was suing Madison for the costs of defense7 over the

past five years. Moeller recognized that allowing an insured the

opportunity to select its own counsel to defend the claim at the

insurer’s expense can prevent such prejudice as the insurer gaining

“‘access to confidential or privileged information in the process

of the defense which it might later use to its advantage in

litigation concerning coverage.’” Moeller, 707 So. 2d at 1069

(quoting CHI of Alaska, Inc. v. Employers Reinsurance Corp., 844

P.2d 1113, 1116 (Alaska 1993)). 

The facts could permit the inference that Madison relied on

Twin City’s appointment of Levy as counsel, was prejudiced, and has
8 As for the contention that Madison cannot show a genuine issue

of fact material to damages, Madison’s potential liability herein

for reimbursement of the $250,000 paid in settlement to the Home

Builders constitutes damage enough to defeat summary judgment. On

the verge of trial Madison asked its insurer to settle within the

policy limits; had it had the confidence in having an independent

attorney, it might have proceeded to trial and obtained a victory.

13

compensable damages.8 Viewing the summary judgment evidence

favorably to Madison, we see the need for a trial, because there

are “genuine factual issues that properly can be resolved only by

a finder of fact because they may reasonably be resolved in favor

of either party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242,

250, 106 S. Ct. 2505, 2511 (U.S. 1986). Because these fact issues

are germane to the question whether Twin City discharged its duty

to defend or mishandled the claim, they may provide grounds to

estop Twin City from denying liability. Accordingly, we find

summary judgment inappropriate on the counterclaim by Madison.

IV.

Madison also asserted bad faith claims handling and tort

claims against third-party defendants involved in adjusting

Madison’s claims, namely, Hartford Fire Insurance Company (Twin

City’s parent corporation), Hartford Financial Services Group,

Inc., Specialty Risk Services, Inc. (“SRS”) (a Hartford

subsidiary), Michael P. Dandini (a Hartford claims consultant), and

Kimberly J. Chabert (an SRS claims consultant). Madison sued these

affiliates of Twin City for grossly negligent claims handling,

tortious interference with contract, misrepresentation, fraud, and
9 As appellees point out, Madison waived any claim against this

defendant by not arguing in its opening brief that it has

demonstrated an issue for trial concerning this defendant.

14

breach of fiduciary duty. 

These claims depend in part on the same evidence Madison

presents against Twin City on the counterclaim discussed above.

Because issues of fact remain, we find summary judgment

inappropriate for these defendants as well, excepting Hartford

Financial Services Group.9 

In addition to the issues of fact concerning breach of the

duty to defend discussed above, Madison has demonstrated a number

of other issues of fact: whether Chabert was involved in both

claims analysis and coverage analysis, prejudicing the insured with

a conflict of interests; whether Hartford Fire adequately separated

claim-handling responsibility from coverage analysis; whether

Chabert remained silent about a conflict of interests while

developing a strategy of noncoverage; whether Chabert ever told

Levy that she and Dandini were involved in coverage, though she

instructed him to send them both status reports containing

confidential information received from the client, detrimental to

coverage; whether Dandini relied on confidential information from

Levy’s status reports to develop a coverage defense or in deciding

to hire independent coverage counsel; whether coverage counsel

conducted any investigation besides the one performed by Levy;

whether the entire claims file was forwarded to Phelps Dunbar to
10 Twin City specifically challenges Madison’s ability to show

a genuine issue of fact that anyone relied on Levy’s status report

or defense strategy. Levy argued in Home Builders that the IFO was

a tax rather than a fee for federal jurisdictional purposes under

the Tax Injunction Act and won a dismissal on jurisdictional

grounds. On appeal from that dismissal, this Court noted Madison’s

contention that the ordinance fit squarely within the meaning of

“tax” as contemplated by the Tax Injunction Act. Home Builders,

143 F.3d at 1010. Although this Court noted that we were not

deciding for purposes of other statutes or litigation whether the

IFO constituted a tax or fee, 143 F.3d at 1011 n.12, it is

abundantly clear that the district court found the tax/fee

distinction in Home Builders instructive for state law purposes,

and concluded, like Home Builders, that the IFO was a tax not a

fee. To that extent a fact finder might conclude that Madison’s

very argument in those proceedings became the basis for a ruling

against it in this coverage dispute. 

15

formulate its non-coverage position; whether third-party defendants

relied on Levy’s legal defense against the underlying claims10 to

formulate a strategy to defeat coverage in this action; and whether

the timing and content of the commencement of this action

demonstrated bad faith (claiming defense costs when Moeller plainly

precludes such recovery). 

These facts in dispute leave a question regarding third

parties’ gross negligence in claim handling. A fact finder might

consider that coverage analysts having unfettered access to

privileged information from appointed defense counsel in the

presence of an undisclosed conflict support the tort claims

asserted herein. Finding no fact issue suggested as to the

liability of Hartford Financial Services Group, however, we affirm

the summary judgment in favor of that third-party defendant. 

V.
16

The City’s motion to recuse having been filed in the district

court after this appeal was noticed, the question of recusal is not

before this Court.

VI.

Fact issues surround the questions whether Twin City and

affiliates notified Madison of the conflict of interests,

sufficiently offered Madison the right to Moeller counsel, or used

confidential information or Levy’s arguments (made earlier on

behalf of Madison) against Madison in this action. Summary

judgment is not appropriate on the liability issue, because Twin

City may be estopped by its conduct from denying liability.

Factual issues preclude summary judgment on the claims against

third-party defendants as well, with the exception of Hartford

Financial Services Group. Accordingly, the judgment of the

district court is affirmed in part as to the exclusion and summary

judgment in favor of Hartford Financial Services Group, reversed in

part, and the matter is remanded.

AFFIRMED IN PART, REVERSED IN PART, and REMANDED.