Court Opinion

ID: 40985
Source: CourtListenerOpinion
Date Created: 2010-04-25 20:57:23+00
Date Added: 2024-06-11T17:16:37.375840
License: Public Domain

United States Court of Appeals
                                                                      Fifth Circuit
                                                                   F I L E D
                IN THE UNITED STATES COURT OF APPEALS
                        FOR THE FIFTH CIRCUIT                       March 2, 2006

                                                               Charles R. Fulbruge III
                                                                       Clerk
                               No. 04-51223

AMERICAN STATES INSURANCE COMPANY; ET AL,

                                               Plaintiffs,

AMERICAN ECONOMY INSURANCE COMPANY,

                                               Plaintiff-Appellant,

versus

SYNOD OF THE RUSSIAN ORTHODOX CHURCH OUTSIDE OF RUSSIA; ET AL,

                                               Defendants,

SYNOD OF THE RUSSIAN ORTHODOX CHURCH OUTSIDE OF RUSSIA,

                                               Defendant-Appellee.

                       _________________________

            Appeal from the United States District Court
                  for the Western District of Texas
                        USDC No. 1:00-CV-824
                      _________________________

Before REAVLEY, HIGGINBOTHAM, and GARZA, Circuit Judges.

PER CURIAM:*

     American Economy Insurance Co. (“American Economy”) appeals

the district court’s judgment, entered on remand from this Court,

declaring that American Economy has a duty to indemnify the Synod

of Bishops of the Russian Orthodox Church Outside of Russia (the

“Church”) for the costs of the settlement and attendant litigation

     *
         Pursuant to the 5TH CIR. R. 47.5, the court has determined that this
opinion should not be published and is not precedent except under limited
circumstances set forth in 5TH CIR. R. 47.5.4.
of a separate lawsuit.      We affirm.

                                        I

     In August 2000, the Church was sued in Texas state court on

behalf of a minor, SSG, who alleged that he had been molested by

two monks at a monastery in Blanco County, Texas.                       The Church

promptly notified American Economy, its then insurer, of the suit.

American   Economy   agreed     to    defend    the     Church,      subject   to   a

reservation of its right to contest coverage. Mr. Jacobs, hired by

American Economy,     and     Ms.    Hughes,    hired     by   the   Church,    both

represented the Church in the underlying suit.

     The Church then sought a declaratory judgment in Texas state

court to clarify American Economy’s obligations to the Church under

the insurance policy.         Among other things, the Church sought a

declaration   that   American        Economy    had   a   duty    to   defend    and

indemnify it in the underlying lawsuit.               American Economy removed

the case to federal court.          Both parties moved for partial summary

judgment on    the   issues     of    defense   and     indemnification.        The

district court granted partial summary judgment in favor of the

Church and ordered that American Economy defend and indemnify the

Church.    American Economy filed a motion for reconsideration.

     The   parties   in   the    underlying      suit     commenced     settlement

negotiations, for which American Economy assigned Ms. Fowler as

claim adjuster.      The underlying lawsuit by the minor was then

settled.    As a result, the parties to the federal district court

                                        2
case agreed to dismiss as moot all issues related to the duty to

defend while reserving rights to contest indemnification.                     The

district court denied the motion for reconsideration, concluding

that American Economy had a duty to indemnify.                  American Economy

appealed.

      This      Court,   in   Bishops   I,    vacated   the   district   court’s

judgment with respect to the duty to indemnify and remanded the

case, finding that the district court “erred when it incorrectly

assumed that [American Economy] had a duty to indemnify the Church

based solely on its duty to defend.”1            This Court further held that

the duty to indemnify is measured against the actual basis for an

insured’s liability and that “[t]he district court should have

determined whether the Church had shown that the settled claim was

a covered loss under the insurance policy” in order for the Church

to be indemnified.2         In footnote four, this Court explained that it

was unable to make the determination itself based on the record,

for   lack      of   evidence   proving   that    the   dates    of   molestation

coincided with the term of coverage under the insurance policy.3

      On remand, the district court found that SSG’s claim was a

covered loss under the policy and that American Economy had a duty

to indemnify the Church because the incidents leading up to the

      1
         Am. States Ins. Co. v. Synod of the Russian Orthodox Church Outside of
Russia, 335 F.3d 493, 496 (5th Cir. 2003) (“Bishops I”).
      2
          Id.

      3
          Id. at 497 n.4.

                                          3
underlying lawsuit occurred during the coverage term.                    American

Economy appealed, claiming that the district court erred by failing

to   follow    this   Court’s   mandate    that   it   consider       whether   the

settlement represented a potentially covered loss under the policy.

Specifically, American Economy argued that the district court

failed to examine whether the settlement award represented punitive

damages which are not insurable under controlling New York law.4

      This Court reversed in Bishops II, finding a justiciable issue

of   fact     regarding   whether    some    portion    of      the    settlement

represented     uninsurable     punitive    damages.5      We    described      the

relevant New York law as requiring an insurer “to indemnify an

insured for a settlement when the settlement is made to settle a

suit which involved a potential liability based on the facts known

to the insured, and the settlement was reasonable in light of the

size of possible recovery and the likelihood that the insured would

have been found liable at trial.”6             We also noted the lack of

evidence demonstrating what percent of the award was punitive and,

therefore, reversed the judgment declaring American Economy liable

      4
        See Public Service Mut. Ins. Co. v. Goldfarb, 425 N.E.2d 810, 814 (N.Y.
1981). While New York law initially governs, the settlement agreement contains
an unambiguous choice of law provision, selecting Texas law as the controlling
jurisprudence.

      5
         Am. States Ins. Co. v. Synod of the Russian Orthodox Church Outside of
Russia, 2004 U.S. App. LEXIS 18310 (“Bishops II”) (citing National Union Fire
Ins. Co. of Pittsburgh Pa. v. Ambassador Group, Inc., 556 N.Y.S.2d 549, 553 (App.
Div. 1990).
      6
        Am. States Ins. Co., 2004 U.S. App. LEXIS 18310 (citing Luria Bros & Co.
v. Alliance Insurance Co., 780 F.2d 1082, 1091 (2d Cir. 1986)).

                                       4
for indemnification of the Church for all settlement expenses.7 We

remanded the case to the district court for a determination of the

amount of any punitive damages impermissibly included in the

settlement award.

      On remand, following a bench trial, the district court found

that the settlement award did not contain an award of punitive

damages. American Economy now argues that the district court erred

on remand by limiting the inquiry to only the possibility of

punitive damages in the settlement award and challenges whether the

record supports a finding that the Church fully met its burden of

proof to show coverage under Luria Bros. & Co.8                Specifically,

American Economy contends that the Church has not established that

the settlement derives from covered losses under the policy and

that the settlement amount was reasonable in view of the potential

liability and the probability of recovery.

                                      II

      On appeal from judgment after a bench trial, we review the

district court’s findings of fact for clear error and questions of

law de novo.9       A finding of fact is clearly erroneous “when,

      7
          Id.
      8
        Luria Bros & Co., 780 F.2d at 1091; Employers Casualty Co. v. Block, 744
S.W.2d 940, 943-44 (Tex. 1988) (stating the insured has the burden to prove
insurance coverage), cited in Am. States Ins. Co., 335 F.3d at 496.
      9
        Houston Exploration Co. v. Halliburton Energy Serv. Inc., 359 F.3d 777,
779-780 (5th Cir. 2004) (citing Gebreyesus v. F.C. Schaffer & Assoc. Inc., 204
F.3d 639, 642 (5th Cir. 2000)).

                                       5
although there is evidence to support it, the reviewing court,

based on all evidence, is left with the definitive and firm

conviction that a mistake has been committed.”10           However, findings

induced by, or resulting from, a misapprehension of controlling

substantive principles of law lose that insulation of the clearly

erroneous standard.11       We review de novo whether a district court

faithfully and accurately followed our mandate on remand.12

                                      III

     Under governing New York law,13 the Church has the burden of

demonstrating two elements, in order to establish that American

Economy has a duty to pay for the settlement.           The Church must show

(A) that “the settlement [was] made to settle a suit which involved

a potential liability       based on the facts known to the insured” and

(B) that “the settlement was reasonable in light of the size of

possible recovery and the likelihood that the insured would have

been found liable at trial.”14

A.

     American Economy argues that our opinion on remand did not

     10
         Id.; Canal Barge Co. Inc., v. Torco Oil Co., 220 F.3d 370, 375 (5th
Cir. 2000).
     11
          U.S. v. Richberg, 398 F.2d 523, 530 (5th Cir. 1968).
     12
          Sobley v. Southern Natural Gas Co., 302 F.3d 325, 332 (5th Cir. 1998).
     13
          Am. States Ins. Co., 335 F.3d at 495.
     14
         Am. States Ins. Co., 2004 U.S. App. LEXIS 18310 (citing Luria Bros &
Co., 780 F.2d at 1091).

                                       6
imply that the Church had answered the larger question of whether

the settlement represents payment solely for covered claims, that

the district court incorrectly limited the inquiry on remand to

determining the amount of any punitive damages included in the

settlement, and that, ultimately, the Church did not meet its

burden     of    proving   the   settlement   amounts    allocatable    to    the

policy.15       Specifically, American Economy presently contends that

the settlement award impermissibly includes reparation for the

intentional conduct of the monks, not covered under the insurance

policy,16 which inflates the settlement award beyond that for which

American Economy is responsible.

      On the first appeal to this Court, Bishops I, American Economy

refuted the district court’s holding that the duty to defend was

commensurate with the duty to indemnify.              Relying on Servidone,17

American Economy, though admitting a duty to defend, contended that

it did not owe a duty to indemnify.                Arguing that the district

court applied       the    wrong   standard   in   determining   its   duty    to

      15
           Am. States Ins. Co., 335 F.3d at 497 n. 3.
      16
          The monks do not qualify as insureds because clergy are considered
insureds under the policy only “with respect to their duties as such;” their
intentional misconduct does not constitute an occurrence as required by the
policy because sexual molestation is intentional (Public Service Mut. Ins. Co.
v. Camp Raleigh, Inc., 650 N.Y.S.2d 136, 137 (1996)). Furthermore, intentional
criminal conduct is uninsurable under New York law (Goldfarb, 425 N.E.2d at 813).

      17
         Servidone Construction Corp. v. Security Insurance Co. of Hartford, 64
N.Y.2d 419 (1985) (“The duty to defend is measured against the allegations of
pleadings but the duty to pay is determined by the actual basis for the insured’s
liability to a third party.”), cited in Am. States Ins. Co., 335 F.3d at 496.

                                        7
indemnify the Church, American Economy asserted that it owed no

duty because the church had not proved that it faced actual

liability. We rejected that argument, holding that the Church need

not prove its own liability.18        Rather, it need only show that the

claims     would   be   covered   under    the   terms    of   the   insurance

agreement–-a showing that the district court on remand found the

Church made by demonstrating an occurrence of bodily injury during

the policy period in the coverage territory.                   Therefore, the

district court ruled, as a matter of law, that the Church met its

burden of proving that the claims against the Church would be

covered under the policy agreement.

      On the second appeal to this Court, Bishops II, American

Economy, citing Luria Bros & Co.,19 urged that the district court

failed to determine properly if the settlement represented a

covered loss.       Specifically, American Economy argued that the

settlement award impermissibly included punitive damages.                     We

agreed and remanded for a lack of evidence allocating funds within

      18
         Luria Bros & Co., 780 F.2d at 1091; see Uniroyal v. Home Insurance Co.,
707 F.Supp. 1368, 1379 (E.D.N.Y. 1998) (stating “an otherwise covered claim, once
settled, [need not] be proven anew by the insured”), cited in Am. States Ins.
Co., 335 F.3d at 496.
      19
          Id. (stating the insured need not establish actual liability to the
party with whom it has settled "so long as...a potential liability on the facts
known to the [insured is] shown to exist, culminating in a settlement in an
amount reasonable in view of the size of possible recovery and degree of
probability of claimant's success against the [insured]" (quoting Damanti v. A/S
Inger, 314 F.2d 395, 397 (2d Cir. 1963), cert. denied, 375 U.S. 834 (1963)),
cited in Am. States Ins. Co., 2004 U.S. App. LEXIS 18310).

                                       8
the settlement payment.20

     On remand, the district court determined that the total

settlement amount represented only compensatory damages.           American

Economy does not now object to this determination but, on this, the

third appeal to this Court, contends that the ruling as to punitive

damages still does not answer the question of coverage; removing

punitive damages still leaves the possibility that a portion of the

compensatory damages may have been negotiated in satisfaction of

the monks’ intentional conduct, also prohibited from inclusion in

the settlement payment under the insurance policy.

     The Church answers that American Economy has waived the

argument by not raising it earlier.          We agree.     It did not raise

the issue of intentional criminal conduct as a bar to coverage on

the first appeal of the same legal question.           American Economy had

the opportunity to argue that some portion of the settlement was

not covered, and it did–concerning punitive damages.             It should

have raised the intentional conduct argument then, where we could

have addressed it and instructed the lower court accordingly.

American Economy, however, did not.           The contention was waived,

and, thus, the district court did not err in limiting its inquiry

only to the allocation of compensatory and punitive damages in the

settlement.

B.

     20
          See Am. States Ins. Co., 2004 U.S. App. LEXIS 18310.

                                       9
      Again relying on Luria Bros & Co.,21 American Economy urges

that the Church failed to meet its burden of proof concerning the

reasonableness of the settlement amount, given the limited size of

the potential recovery and the unlikelihood of success. Though the

district court did not expressly address the reasonableness issue

apart from the issue of whether punitive damages were included in

the settlement agreement, the district court appropriately relied

on Certain Underwriters, which holds that a reservation of rights

agreement between the insurer and the insured “merely preserves

procedural avenues.         It does not articulate any agreement or

substantive position that could be read to conflict with the

express language [of the settlement agreement].”22               The district

court held, and it is uncontested, that the settlement agreement

unambiguously excludes punitive damages.            Where the insurer has a

reservation of rights agreement and is involved in the settlement

negotiations, as the district court found,23 the insurer has no

right to challenge the allocation between parties and claims of a

clearly apportioned settlement amount.24

      We are persuaded that this also rings true for protestations

      21
         Luria Bros. & Co., 780 F.2d at 1091., cited in Am. States Ins. Co., 335
F.3d at 496.

      22
          Certain Underwriters at Lloyd’s, London v. Oryx Energy Company, 203
F.3d 898, 901 (5th Cir. 2000).
      23
         The district court expressly found that “the insurer was not absent
from the negotiating table.”

      24
           Certain Underwriters at Lloyd’s, London, 203 F.3d at 901.

                                       10
over the reasonableness of the settlement.25             If American Economy

participated in the settlement process, it may not now challenge

the reasonableness of the settlement amount.                  American Economy

denies its participation.

     American     Economy     received      and    rejected    the    first     two

settlement    demands.       Though    American      Economy    downplays       its

significance, American Economy’s own hire, Mr. Jacobs, represented

the Church in the underlying lawsuit and set a range of the

Church’s potential liability at $300,000-$900,000–-a range that

American Economy acknowledged includes the settlement amount of

$787,500.     American      Economy   made    the   first     counteroffer,     in

response to the settlement demand.           Ms. Fowler, American Economy’s

adjuster,    requested    updates     and    was    habitually       informed    of

negotiation     progress,     including      the    subsequent       offers     and

counteroffers.    Also, it was Mr. Jacobs who drafted the settlement

agreement that memorializes the parties’ intentions.                 We conclude

that the district court did not clearly err in findings that

American Economy participated in the settlement negotiations.

     The district court appropriately resolved the viable issues on

remand, regarding the potential liability under the policy and the

reasonableness of the settlement.

     AFFIRMED.

      25
          Id. (“...having participated fully in the settlement...the district
court did not err in focusing on the Release as the embodiment of the parties’
intent and declining to consider...other proposed factors.”).

                                      11
     Judge Garza concurs in the opinion except for Part III-B, and

in the judgment.

                                12