Court Opinion

ID: 9490781
Source: CourtListenerOpinion
Date Created: 2023-08-05 13:54:42.204847+00
Date Added: 2024-06-11T17:54:19.090531
License: Public Domain

REAVLEY, Circuit Judge,
dissenting:
I respectfully dissent. In this diversity suit, our task is not to decide whether the exclusion in issue is against public policy. ‘We are emphatically not permitted to do merely what we think best; we must do that which we think the [State] Supreme Court would deem best.”1
I do not believe the Texas Supreme Court would rule the exclusion void as against public policy. The general rule in Texas is that parties are free to contract as they wish, and the court will enforce the terms of their contract as written. Only in the rare case does Texas law deem a contract term void on public policy grounds. “Public policy permits the utmost freedom of contract ... and this freedom should not lightly be interfered with by holding that a contract is contrary to public policy.”2 “The courts do not lightly interfere with freedom of contract, and the principle that contracts in contravention of public policy are not enforceable should be applied with caution and only in cases plainly within the reasons on which the doctrine rests.”3 “In doubtful cases the presumption is in favor of the validity of the transaction; and where public policy is not settled by recognized principles, a contract will be declared to be in contravention of it only in cases in which the injury to the public is clear.”4
*129I am further of the view that Texas courts should show an even greater than ordinary reluctance to declare a contract term in an insurance policy void as against public policy, even though insurance contracts are usually contracts of adhesion. The Texas Legislature has provided for extensive regulation of insurance policies by the Texas Department of Insurance. Article 5.13-2 of the Texas Insurance Code regulates medical professional liability policies.5 Under this article insurance policies cannot be issued unless approved by the Commissioner of the Texas Department of Insurance.6 The Commissioner may also issue standard insurance policy forms to be used in lieu of the insurer’s own forms.7 The article states that its purposes are, inter alia, to “promote the public welfare,” “promote availability of insurance,” and “promote price competition among insurers.” 8
Against this regulatory backdrop, the Texas Supreme Court has expressed reluctance to alter the terms of an insurance contract. In Members Mutual Insurance Co. v. Cutaia,9 the court considered whether a prejudice requirement should be implied in a policy provision excluding coverage if the insured fails to provide notice of suit to the insurer. The court recognized that “[wjhile an injustice has apparently resulted in this particular case, the matter of rewriting the insurance provisions in question is properly within the prerogative of the State Board of Insurance or the Legislature.”10 It concluded “that on balance it is better policy for the contracts of insurance to be changed by the public body charged with their supervision, the State Board of Insur-anee, or by the Legislature, rather than for this Court to insert a provision____”11
I would hold that the exclusion in issue does not so plainly disserve the public interest that we should conclude that the Texas Supreme Court would hold it void. The exclusion discourages disclosure of sexual misconduct, which is surely against the public interest, as the majority notes. However, as the majority concedes, it might also discourage the conduct itself. The exclusion may sweep more broadly than required to discourage sexual misconduct, since it limits coverage if sexual misconduct is even alleged. Nevertheless, the exclusion surely serves to discourage the conduct itself.
Further, the exclusion serves the express statutory goal of promoting availability of insurance, by limiting coverage on a class of claims which can easily result in large judgments. In upholding an identical exclusion, the Seventh Circuit explained:
American Home’s Professional Liability insurance policy ... was issued for a premium charge of $209.00 per year. The “Sexual Misconduct” provision can be considered a legitimate effort by American Home to offer a reasonably priced insurance policy and at the same time limit its exposure to a substantial hazard or risk of loss. This is true especially in light of the potentially large jury verdicts that often result from suits involving the emotionally charged subject of sexual exploitation by a psychotherapist____ For the vast majority of mental health professionals who never engage in sexual exploitation of their patients, this kind of insurance policy fills an important gap in the marketplace. Voiding the “Sexual Misconduct” provision *130may produce the unintended result of requiring the well-behaving majority to subsidize the misconduct of a few, and increasing health care cost.... Indeed, a number of studies have reported that psychotherapists’ sexual involvement with patients is a leading cause of all private psychotherapist malpractice claims and is the most frequent source of litigation against psychologists insured through the American Psychological Association.12
The majority suggests that the exclusion creates a perverse incentive for the insurer to interject sexual misconduct into the suit, for the purpose of triggering the $25,000 limit on coverage. I cannot disagree that an unscrupulous insurer might be so inclined. However, I have no doubt that the Texas courts would view such a maneuver as a bad faith denial of coverage, actionable under Texas common law,13 or an unfair claim settlement practice, actionable under Texas statute,14 or both. When an insurer provides counsel under its duty to defend, Texas law is clear that counsel’s duty of loyalty is owed to the insured, not the insurer.15
There are always such perverse incentives where coverage is limited, as it always is. For example, standard homeowner, automobile, and comprehensive general liability policies provide coverage for an “accident” or “occurrence,” and contain an exclusion for intentional injury. The Texas courts, in a long line of cases which do not submit to simple analysis, construe such policies to exclude coverage for certain types of intentional wrongdoing,16 including sexual misconduct.17 Under such policies, the insured (and any party injured by the insured) has an incentive to characterize the event giving rise to the claim as accidental, negligent or otherwise within the policy’s coverage, while the insurer has an incentive to characterize the event as resulting from intentional misconduct outside the coverage. Such incentives, however, have not led the Texas courts to declare the standard policies void as against public policy.
The district court addressed the case carefully and correctly. I would affirm the judgment.

. Jackson v. Johns-Manville Sales Corp., 781 F.2d 394, 397 (5th Cir.1986) (en banc) (emphasis in original).

. Huey v. Brand, 92 S.W.2d 505, 508 (Tex.Civ. App.—Amarillo 1936), aff'd, 131 Tex. 614, 118 S.W.2d 303 (1938).

. Yancey v. Floyd West & Co., 755 S.W.2d 914, 924 (Tex.App.—Fort Worth 1988, writ denied). Accord Hirsch v. Texas Lawyers’ Ins. Exchange, 808 S.W.2d 561, 564 (Tex.App.—El Paso 1991, writ denied).

. Huey, 92 S.W.2d at 508.

. Tex.InsCode Ann art. 5.13-2, §§ 1-2 (Vernon Supp.1998).

. Id. § 8(a).

. Id. § 8(e).

. Id. § 1.

. 476 S.W.2d 278 (Tex.1972).

. Id. 476 S.W.2d at 278.

. Id. 476 S.W.2d at 281. The result in Cutaia was in fact changed by action of the State Board of Insurance, which subsequently required a mandatory endorsement stating that failure to give notice under the policy does not bar coverage absent prejudice to the insurer. See Hanson Production Co. v. Americas Ins. Co., 108 F.3d 627, 629 (5th Cir.1997). We recognized in Hanson that the Texas Supreme Court’s analysis in Hernandez v. Gulf Group Lloyds, 875 S.W.2d 691 (Tex.1994), does not square with the analysis offered in Cutaia. Hanson, 108 F.3d at 630. However, I do not read Hernandez as casting doubt on Cutaia's recognition that, as a general matter, the terms of insurance contracts are best left to the Board of Insurance or the Legislature.

. American Home Assurance Co. v. Stone, 61 F.3d 1321, 1326, 1331 (7th Cir.1995).

. See Arnold v. National County Mut. Fire Ins. Co., 725 S.W.2d 165, 167 (Tex.1987).

. Tex. Ins.Code Ann. arts. 21.21, 21.21-2 (Vernon 1981 & Supp. 1998).

. Employers Cas. Co. v. Tilley, 496 S.W.2d 552, 558 (Tex.1973). The sweeping statement of the majority, saying that “[n]o attorney may represent both the insured and the insurer ...” where an issue of coverage may exist, is unwarranted. Admittedly, this is a situation requiring care, but we and the Texas courts can deal with it without a "drop dead" rule.

. See, e.g., Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d 819 (Tex.1997); State Farm Fire & Cos. Co. v. S.S., 858 S.W.2d 374 (Tex.1993); Argonaut Southwest Ins. Co. v. Maupin, 500 S.W.2d 633 (Tex.1973).

. J.E.M. v. Fidelity & Cas. Co. of New York, 928 S.W.2d 668, 674-75 (Tex.App.—Houston [1st Dist] 1996, no writ).