Court Opinion

ID: 9393225
Source: CourtListenerOpinion
Date Created: 2023-05-09 18:00:23.502041+00
Date Added: 2024-06-11T17:18:51.653359
License: Public Domain

Case: 22-50218      Document: 00516743514         Page: 1     Date Filed: 05/09/2023

            United States Court of Appeals
                 for the Fifth Circuit                                 United States Court of Appeals
                                                                                Fifth Circuit

                                 ____________                                 FILED
                                                                           May 9, 2023
                                  No. 22-50218                           Lyle W. Cayce
                                 ____________                                 Clerk

   Windermere Oaks Water Supply Corporation; Dana
   Martin; William Earnest; Thomas Michael Madden;
   Robert Mebane; Patrick Mulligan; Joe Gimenez; David
   Bertino; Mike Nelson; Dorothy Taylor; Norman Morse,

                                                            Plaintiffs—Appellees,

                                       versus

   Allied World Specialty Insurance Company,

                                            Defendant—Appellant.
                   ______________________________

                   Appeal from the United States District Court
                        for the Western District of Texas
                             USDC No. 1:21-CV-258
                   ______________________________

   Before Ho, Oldham, and Douglas, Circuit Judges.
   James C. Ho, Circuit Judge:
          This insurance dispute turns on a simple principle of law: A claim for
   breach of fiduciary duty is not a claim for breach of contract, and is therefore
   not subject to exclusion from coverage under a contractual liability exclusion.
   That’s what the district court found here in granting summary judgment in
   favor of the insured. We accordingly affirm.
Case: 22-50218      Document: 00516743514           Page: 2     Date Filed: 05/09/2023

                                     No. 22-50218

                                           I.
          Allied World Specialty Insurance Company issued a WaterPlus
   Package Insurance Policy to the Windermere Oaks Water Supply
   Corporation.     That policy includes coverage for Public Officials and
   Management Liability. But it also includes various exclusions from coverage.
          At issue in this appeal is the exclusion for contractual liability. That
   provision states that coverage excludes:
          “[d]amages,” “defense expenses,” costs or loss based upon,
          attributed to, arising out of, in consequence of, or in any way
          related to any contract or agreement to which the insured is a
          party or a third-party beneficiary, including, but not limited to,
          any representations made in anticipation of a contract or any
          interference with the performance of a contract.
          Three individual members and partial owners of Windermere brought
   a suit (the “Underlying Suit”) against it, its various officials, and relevant
   others. This suit alleges that Windermere sold a valuable tract of land at
   Spicewood Airport to a commercial entity controlled by Windermere board
   member Dana Martin “for pennies on the dollar.” Because of this sale—as
   well as a subsequent settlement that “left the . . . fire sale transaction largely
   intact and gave Martin even more valuable W[indermere] property for no
   consideration”—the suit contends that Windermere’s losses have exceeded
   $1,000,000, resulting in rate hikes and fee increases. In doing so, the suit
   claims that Windermere “exceeded its powers” and the board of directors
   “exceeded their authority and breached their duties,” specifically alleging
   various ultra vires acts committed in violation of Section 20.002(c) of the
   Texas Business Organizations Code. These included: the unauthorized
   conveyance of property; improper use of the cooperative’s assets; improper

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Case: 22-50218         Document: 00516743514               Page: 3      Date Filed: 05/09/2023

                                          No. 22-50218

   disbursement of the cooperative’s assets to benefit the directors; and failure
   to recover loss, as well as for breach of fiduciary duty.
           Plaintiffs in this case subsequently brought suit against Allied World
   for its failure to defend them in the Underlying Lawsuit. After both sides
   sought summary judgment on the issue of the duty to defend, the district
   court granted Plaintiffs’ motion and denied Allied World’s motion. Allied
   World subsequently sought entry of judgment under Federal Rule of Civil
   Procedure 54(b), which the district court granted. Allied World then filed its
   timely notice of appeal. 1
                                                II.
           Summary judgment is appropriate when “the movant shows that
   there is no genuine dispute as to any material fact and the movant is entitled
   to judgment as a matter of law.” Fed. R. Civ. P. 56(a). We review a grant
   of summary judgment de novo. Bradley v. Viking Ins. Co. of Wis., 56 F.4th
   1011, 1014 (5th Cir. 2023). See also L & A Contracting Co. v. S. Concrete Servs.,
   Inc., 17 F.3d 106, 109 (5th Cir. 1994) (“We review de novo questions involving
   the construction or interpretation of contracts.”).
                                               III.
                                                A.
           “In a diversity case involving the interpretation of a contract, we apply
   the substantive law of the forum state.” McLane Foodservice, Inc. v. Table
   Rock Restaurants, L.L.C., 736 F.3d 375, 377 (5th Cir. 2013). “Under Texas
   law, insurance policies are interpreted in accordance with the rules of

           _____________________
           1
             Allied World argued before the district court that two other exclusions applied—
   those for criminal acts and for violation of law. The district court rejected these arguments,
   and Allied World does not raise them on appeal.

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Case: 22-50218      Document: 00516743514          Page: 4   Date Filed: 05/09/2023

                                    No. 22-50218

   construction that apply to all contracts generally.” Sharp v. State Farm Fire
   & Cas. Ins. Co., 115 F.3d 1258, 1260 (5th Cir. 1997) (citing Nat’l Union Fire
   Ins. Co. of Pittsburgh, Pa. v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex.
   1995)).
          “The insured bears the initial burden of showing that there is
   coverage, while the insurer bears the burden of proving the applicability of
   any exclusions in the policy.” Guar. Nat’l Ins. Co. v. Vic Mfg. Co., 143 F.3d
   192, 193 (5th Cir. 1998). “In construing a contract, a court’s primary concern
   is to ascertain the intentions of the parties as expressed in the instrument.”
   Amedisys, Inc. v. Kingwood Home Health Care, LLC, 437 S.W.3d 507, 514
   (Tex. 2014). “As with any other contract, the parties’ intent is governed by
   what they said.” Fiess v. State Farm Lloyds, 202 S.W.3d 744, 746 (Tex. 2006).
   See also Gilbert Texas Constr., L.P. v. Underwriters at Lloyd’s London, 327
   S.W.3d 118, 126 (Tex. 2010) (“[W]e look at the language of the policy
   because we presume parties intend what the words of their contract say.”).
          Under Texas’s so-called “eight-corners rule, the insurer’s duty to
   defend is determined by comparing the allegations in the plaintiff’s
   [complaint] to the policy provisions, without regard to the truth or falsity of
   those allegations and without reference to facts otherwise known or
   ultimately proven.” Monroe Guar. Ins. Co. v. BITCO Gen. Ins. Corp., 640
   S.W.3d 195, 199 (Tex. 2022). When applying the rule, “we give the
   allegations in the [complaint] a liberal interpretation.” Nat’l Union Fire Ins.
   Co. of Pittsburgh, Pa. v. Merchants Fast Motor Lines, Inc., 939 S.W.2d 139, 141
   (Tex. 1997). “[I]n case of doubt as to whether or not the allegations of a
   complaint against the insured state a cause of action within the coverage of a
   liability policy sufficient to compel the insurer to defend the action, such
   doubt will be resolved in insured’s favor.” Id. (quotations omitted).

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Case: 22-50218      Document: 00516743514           Page: 5     Date Filed: 05/09/2023

                                     No. 22-50218

          Or as this court has previously summed it up: “When in doubt,
   defend.” Gore Design Completions, Ltd. v. Hartford Fire Ins. Co., 538 F.3d
   365, 369 (5th Cir. 2008).
                                          B.
          Allied World contends that the district court was wrong to decline to
   apply the contractual liability exclusion to this case—and that the Underlying
   Lawsuit is indeed “based upon, attributed to, arising out of, in consequence
   of, or in any way related to [the] contract or agreement.”
          But the Underlying Lawsuit is not a suit for breach of contract. As
   Plaintiffs rightly point out, “the focus of the Underlying Lawsuit is, in fact,
   on the purported breach by . . . Plaintiffs of [their] fiduciary duties, by way of
   ultra vires acts and other misdeeds that gave rise to harm without regard to
   the ultimate contract.” These are claims that are “established at law”—not
   by contract—and “that could stand alone even if no contract ever existed.”
   See, e.g., Ewing Const. Co. v. Amerisure Ins. Co., 420 S.W.3d 30, 37 (Tex. 2014)
   (holding that a contractual liability exclusion did not apply to a claim based
   on a common-law duty to perform work with care and skill). The district
   court did not err in declining to apply the contractual exclusion.
                                          IV.
          Under the Texas Prompt Payment of Claims Act, Tex. Ins. Code
   § 542.060, an insurer’s breach of the duty to defend constitutes a per se
   violation. See, e.g., Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co., 279
   S.W.3d 650, 652 (Tex. 2009). Allied World’s only arguments rely on the
   application of the contractual exclusion. We therefore agree with Plaintiffs
   and the district court that Allied World is liable under the Act. We affirm.

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