Canutillo Independent School District v. National Union Fire Insurance Co. of Pittsburgh

United States Court of Appeals,
Fifth Circuit.

No. 95-50924.

CANUTILLO INDEPENDENT SCHOOL DISTRICT, Plaintiff-Appellee,

v.

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA,
Defendant-Appellant.

Nov. 13, 1996.

Appeal from the United States District Court for the Western
District of Texas.

Before DUHÉ, JONES and EMILIO M. GARZA, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

National Union Fire Insurance Company ("National Union")

sought a declaratory judgment that it had no duty under a contract

of insurance to defend or indemnify Canutillo Independent School

District ("Canutillo") against certain claims brought by third

parties. Canutillo counterclaimed for breach of those duties,

breach of the duty of good faith and fair dealing, gross

negligence, and violations of the Texas Insurance Code and the

Texas Deceptive Trade Practices Act ("DTPA"). After realigning the

parties, the district court granted partial summary judgment in

favor of Canutillo on the duties to defend and indemnify, and a

jury awarded damages in favor of Canutillo on the remaining claims.

National Union now appeals. We reverse both the district court's

grant of summary judgment and the jury award and render judgment in

favor of National Union.

I

1
 Canutillo purchased a School Leaders Errors and Omissions

Policy ("Policy") from National Union. Under the Policy, National

Union agreed to indemnify Canutillo for damages resulting from

certain legal claims against it and to defend any action or suit

against Canutillo covered by the Policy.

In 1991, the parents of five second-grade girls alleged that

their children had been sexually abused by Tony Perales

("Perales"), a health and physical education teacher at Canutillo

Elementary School. Perales was later tried and convicted for his

offenses. The fact of Perales's sexual molestation is undisputed

in this appeal.

Canutillo notified National Union of the abuse and requested

that it defend Canutillo against any potential lawsuits by the

families of the victims. Prior to the onset of litigation, the

families offered to settle all claims against Canutillo for $30,000

per family, or a total of $150,000. Canutillo rejected the

settlement, and the families filed suit against the school district

in the Western District of Texas asserting claims under state law

and 42 U.S.C. § 1983. The lawsuit was styled Mendoza v. Canutillo

I.S.D., Civil Action No. EP-91-CA-322 (W.D.Tex.) ("Mendoza ").

Canutillo then contacted National Union and again demanded that

National Union defend it under the Policy. National Union,

however, denied coverage and refused to assume representation,

expressly relying on the Policy's exclusions for claims arising out

of criminal conduct, assault, battery, and bodily injury.

National Union consulted attorney James L. Gallagher

2
("Gallagher") for an expert opinion as to whether the Policy

covered the Mendoza claims. Gallagher concluded that National

Union did not have a duty to defend Canutillo under the Policy and

recommended that National Union file a declaratory judgment action.

Rather than file such an action immediately, however, National

Union offered to defend Canutillo, provided that Canutillo waive

any bad faith claims against it. Canutillo, however, declined the

offer and proceeded to defend the litigation without National

Union's representation.

The Mendoza plaintiffs twice amended their complaint during

the course of the litigation. The second amended complaint

abandoned the state law tort claims and the § 1983 claim against

Canutillo, asserted a § 1983 claim against Perales, and sought

damages as well as declaratory and injunctive relief against

Canutillo under Title IX of the Education Amendments of 1972, 20

U.S.C. §§ 1681-1688.1 Given the substantial differences between

the first and second amended complaints, National Union again

consulted Gallagher concerning its duties and liabilities under the

Policy. Gallagher concluded that while the Policy did not cover

suits for money damages arising out of Perales's sexual abuse,

National Union had a duty to defend Canutillo on the basis of the

1
During the pendency of the Mendoza litigation, the Supreme
Court in Franklin v. Gwinnett County Public Schools, 503 U.S. 60,
112 S.Ct. 1028, 117 L.Ed.2d 208 (1992), ruled that a plaintiff may
recover money damages for a teacher's sexual abuse of a student in
a private cause of action under Title IX.

3
nonpecuniary claims asserted under Title IX.2 National Union

therefore assumed Canutillo's defense for the remainder of the

litigation, but reserved its right to seek a declaratory judgment

with respect to its duty to indemnify Canutillo.

Canutillo settled the Mendoza claims on the eve of trial for

a total of $1,040,000. Canutillo paid $40,000 in partial

satisfaction of the judgment, and National Union purchased the

remainder of the judgment from the Mendoza plaintiffs for $1

million. National Union thus stepped into the shoes of the Mendoza

plaintiffs and became a judgment creditor of Canutillo. The

settlement agreement conditioned National Union's right to recover

the $1 million paid in purchase of the judgment on the outcome of

a subsequent declaratory judgment action.

National Union exercised its right under the settlement

agreement and filed a declaratory judgment action against

Canutillo. Canutillo counterclaimed seeking (1) a judgment

declaring that the Policy covers the Mendoza claims; (2) contract

damages, including both the costs of defending the Mendoza claims

before National Union assumed Canutillo's defense and the $40,000

paid in partial satisfaction of the settlement; and (3) money

damages for National Union's alleged breach of the duty of good

faith and fair dealing and violations of the DTPA and article 21.21

2
Endorsement 41267 to the Policy expanded Canutillo's coverage
by deleting exclusion (d) of the standard printed policy.
Exclusion (d) provided that the Policy "does not apply to any
claims for nonpecuniary relief; however, the Company shall defend
such claims in accordance with Insuring Agreement 2 subject to an
aggregate limit of $100,000."

4
of the Texas Insurance Code. The district court realigned the

parties, casting Canutillo as plaintiff and National Union as

defendant.

Both parties moved for summary judgment on the issues of

whether National Union had a duty to defend Canutillo prior to the

filing of the second amended complaint and whether National Union

had a duty to indemnify the school district for damages paid in

settlement of the action. One week before trial, the district

court, without opinion, entered partial summary judgment in favor

of Canutillo on both issues.

The case therefore proceeded to trial on the remaining issues

of contract damages, alleged breaches of the duty of good faith and

fair dealing, and for violations of the Insurance Code and the

DTPA. The jury found against National Union on every issue and

found that the insurer had acted with gross negligence in refusing

to represent to the school district. The jury awarded actual

damages of $33,162 for Canutillo's defense costs, $40,000 for its

share of the Mendoza settlement, and more than $7 million in

punitive damages.

After the verdict, National Union moved for reconsideration of

the district court's summary judgment rulings. The court withdrew

its earlier orders and issued an opinion that again granted summary

judgment in Canutillo's favor on the duty-to-defend issue. Noting

that the duty to indemnify, unlike the duty to defend, is

determined by the actual facts that underlie and result in

liability, the court reopened the record and ordered the parties to

5
submit further evidence and briefing. After consideration of the

parties' submissions, the court issued a second opinion granting

summary judgment in favor of Canutillo on the issue of National

Union's duty to indemnify. Canutillo Indep. School Dist. v.

National Union Fire Ins. Co., 900 F.Supp. 844 (W.D.Tex.1995). The

court then entered judgment in favor of Canutillo for

$7,173,791.51, plus attorneys' fees. National Union filed motions

for judgment as a matter of law and for a new trial, both of which

the court denied. National Union now appeals.

II

National Union first contends that the district court

improperly granted Canutillo's motions for partial summary judgment

on the duty to defend and the duty to indemnify.

A

We review a grant of summary judgment de novo. Hanks v.

Transcontinental Gas Pipe Line Corp., 953 F.2d 996, 997 (5th

Cir.1993). The district court's interpretation of an insurance

contract is a question of law that we also review de novo.

Principal Health Care of La., Inc. v. Lewer Agency, Inc., 38 F.3d

240, 242 (5th Cir.1994); F.D.I.C. v. Mijalis, 15 F.3d 1314, 1319

(5th Cir.1994).

Texas rules of contract interpretation control in this

diversity case. See Amica Mut. Ins. Co. v. Hoak, 55 F.3d 1093,

1095 (5th Cir.1995); Matter of Haber Oil Co., Inc., 12 F.3d 426,

443 (5th Cir.1994); TEX.INS.CODE ANN. art. 21.42 (West 1981). Under

Texas law, the interpretation of insurance contracts is governed by

6
the same rules that apply to contracts generally. Forbau v. Aetna

Life Ins. Co., 876 S.W.2d 132, 133 (Tex.1994). The terms used in

an insurance policy are to be given their ordinary and generally

accepted meaning, unless the policy shows that the words were meant

in a technical or different sense. Security Mut. Cas. Co. v.

Johnson, 584 S.W.2d 703, 704 (Tex.1979). The contract is to be

considered as a whole, with each part given effect and meaning.

Forbau, 876 S.W.2d at 133.

When considering the propriety of a grant of summary judgment

in a case involving the construction of an insurance policy, we

must determine whether the applicable terms of the policy are

ambiguous. Yancey v. Floyd West & Co., 755 S.W.2d 914, 917

(Tex.App.—Fort Worth 1988, writ denied). The determination of

ambiguity is a question of law; "it is only through resolution of

ambiguities through the resort to extrinsic evidence which creates

a question of fact." Brooks, Tarlton, Gilbert, Douglas & Kressler

v. United States Fire Ins. Co., 832 F.2d 1358, 1364 (5th Cir.1987).

A contract is ambiguous if it is reasonably susceptible of two

different meanings. Coker v. Coker, 650 S.W.2d 391, 393

(Tex.1983). When the terms of an insurance policy are clear and

unambiguous a court may not vary those terms. Royal Indem. Co. v.

Marshall, 388 S.W.2d 176, 181 (Tex.1965).

Although the insured bears the burden of showing that the

claim against it is potentially within the policy's coverage,

Sentry Ins. v. R.J. Weber, 2 F.3d 554, 556 (5th Cir.1993), the

insurer bears the burden of establishing that an exclusion in the

7
policy constitutes an avoidance of or affirmative defense to

coverage. TEX.INS.CODE art. 21.58(b). Exceptions and limitations

in an insurance policy are strictly construed against the insurer.

Kelly Assoc., Ltd. v. Aetna Cas. & Sur. Co., 681 S.W.2d 593, 596

(Tex.1984). Therefore, "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 v. Aetna Life

Ins. Co., 723 S.W.2d 663, 666 (Tex.1987) (quoting Glover v.

National Ins. Underwriters, 545 S.W.2d 755, 761 (Tex.1977)). These

special rules favoring the insured, however, are applicable only

when there is an ambiguity in the policy; if the exclusions in

question are susceptible to only one reasonable construction, these

rules do not apply. Puckett v. United States Fire Ins. Co., 978

S.W.2d 936, 938 (Tex.1984); National Union Fire Ins. Co. v. Hudson

Energy Co., Inc., 811 S.W.2d 552, 555 (Tex.1991).

B

In determining whether an insurer has a duty to defend an

insured against a third-party complaint, Texas courts follow the

"eight corners" or "complaint allegation" rule. Gulf Chem. &

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

365, 369 (5th Cir.1993). This rule "requires the trier of fact to

examine only the allegations in the [underlying] complaint and the

insurance policy in determining whether a duty to defend exists."

Id. It is inappropriate to consider "facts ascertained before the

8
suit, developed in the process of the litigation, or by the

ultimate outcome of the suit." Id. (quoting American Alliance Ins.

Co. v. Frito-Lay, Inc., 788 S.W.2d 152, 153-54 (Tex.App.—Dallas

1990, writ dism'd)).

The duty to defend arises only when the facts alleged in the

complaint, if taken as true, "potentially state a cause of action

within the terms of the policy." Id. (quoting Continental Sav.

Ass'n v. United States Fidelity & Guar. Co., 762 F.2d 1239, 1243

(5th Cir.) (emphasis in original), opinion amended on other

grounds, 768 F.2d 89 (5th Cir.1985)). An insurer is obligated to

defend an insured as long as the complaint alleges at least one

cause of action within the policy's coverage. Rhodes v. Chicago

Ins. Co., 719 F.2d 116, 119 (5th Cir.1983).

The duty to defend is determined by examining the latest

amended pleading upon which the insurer based its refusal to defend

the action. Rhodes, 719 F.2d at 120. In the instant case, the

relevant pleading is the first amended complaint because National

Union assumed Canutillo's representation after the second amended

complaint was filed.

In contrast to the duty to defend, the duty to indemnify is

not based on the third party's allegations, but upon the actual

facts that underlie the cause of action and result in liability.

Heyden Newport Chem. Corp. v. Southern Gen. Ins. Co., 387 S.W.2d

22, 25 (Tex.1965); American Alliance, 788 S.W.2d at 153-54. In

this case, because the parties settled the Mendoza litigation out

of court, the actual facts resulting in liability were not

9
ascertained. Therefore, to provide a record for the court, the

parties stipulated that the facts as alleged in the second amended

complaint were those upon which the district court was to base its

determination on the duty to indemnify. We, too, must limit our

inquiry to the facts as alleged in the complaint. With these rules

in mind, we now turn to the Policy and the pleadings.

The general coverage provision of the Policy (the "Errors and

Omissions" clause) obligates National Union to indemnify Canutillo

for any damages for which Canutillo may become legally obligated to

pay as a result of claims brought against it by third parties for

any "Wrongful Act ... of the Insured or of any other person for

whose actions the Insured is legally responsible...." The Policy,

however,

does not apply: (a) to any claim involving allegations of ...
criminal acts or omissions; ... (b) to any claims arising out
of (1) false arrest, detention or imprisonment; ... [or] (3)
assault or battery; ... [and] (c) to any claim arising out of
bodily injury to, or sickness, disease or death of any
person....

(emphasis added).

The Mendoza plaintiffs' original amended complaint alleged

five causes of action against the school district and against

individual employees other than Perales:

(1) a 42 U.S.C. § 1983 claim alleging violations of various
Fourteenth Amendment rights based on the defendants' failure
to prevent Perales' sexual abuse;

(2) negligence and gross negligence in failing to prevent Perales'
sexual abuse;

(3) breach of an affirmative duty to provide for the protection of
the children;

(4) intentional infliction of emotional distress; and

10
(5) the tort of detention, based on allegations that the school
district held the children against their will and prevented
their escape from the sexual abuse by Perales.3

The plaintiffs' second amended complaint dropped the state law tort

claims and the § 1983 claim against Canutillo. Instead, they

asserted a Title IX claim against the school district based on its

failure to prevent Perales's abuse and its failure to implement

grievance policies and procedures as required under the regulations

implementing Title IX. 34 C.F.R. § 106.8(b) ("A recipient shall

adopt and publish grievance procedures providing for prompt and

equitable resolution of student and employee complaints alleging

any action which would be prohibited by this part").

In its motions for summary judgment, National Union asserted

that each of the cited policy exclusions supported its refusal to

defend Canutillo and obviated its duty to indemnify it for damages

paid in settlement of the Title IX claim. The district court,

however, held that National Union was obligated to defend Canutillo

based on the fourth cause of action—intentional infliction of

emotional distress—because (a) a claim for intentional infliction

of emotional distress does not allege criminal conduct; (b) it is

unclear under Texas law whether mental anguish constitutes bodily

injury, and any doubt must be construed against the insurer; and

(c) the actions of the other teachers against whom the claim of

intentional infliction of emotional distress was asserted did not

"arise out of" the conduct of Perales for the purposes of the

3
The parties do not dispute that exclusion (b)(1) precludes
coverage for the Mendoza plaintiffs' fifth cause of action for
detention.

11
assault and battery exclusion. In its second summary judgment

opinion, the court held that National Union must indemnify

Canutillo because the Title IX claim asserted against it arises out

of the omissions of the school district, not Perales's sexual

assaults.

At the outset, we note that the sexual assaults constitute

criminal acts under Texas law. Under the plain language of the

policy, any claim "involving" allegations of Perales's criminal

acts is therefore excluded under exclusion (a). Because Perales's

acts also constitute assault and battery,4 any claim "arising out

of" his actions is excluded under exclusion (b)(3). Furthermore,

both complaints allege that the children suffered physical injury

as a result of the sexual molestation; any claim "arising out of"

that physical injury is also excluded under exclusion (c).5 The

4
A person commits assault and battery when he "intentionally
or knowingly causes physical contact with another when the person
knows or should reasonably believe that the other will regard the
contact as offensive or provocative." TEX.PENAL CODE ANN. § 22.01(a)
(West 1994); Childers v. A.S., 909 S.W.2d 282, 292-293
(Tex.App.—Fort Worth 1995, no writ). "The definition of an assault
is the same whether it is the subject of a criminal prosecution or
a civil suit for damages." Hogenson v. Williams, 542 S.W.2d 456,
457 (Tex.App.—Texarkana 1976, no writ).
5
The parties dispute whether mental anguish constitutes
"bodily injury" for the purposes of the bodily injury exclusion.
The district court focused on the fact that mental anguish does not
constitute "bodily injury" when it held that exclusion (c) did not
apply to the claim for intentional infliction of emotional
distress. The court relied on our decision in Travelers Indem. Co.
v. Holloway, 17 F.3d 113, 115 (5th Cir.1994), in which we held that
mental anguish alone does not constitute "bodily injury" under
Texas law. Holloway, however, is inapposite in that the complaint
at issue intimated no allegation whatsoever of physical injury, but
only allegations of emotional anguish and trauma. Id.; see also
Miller v. Windsor Ins. Co., 923 S.W.2d 91, 97 (Tex.App.—Fort Worth
1996, writ requested) ("It is well established that mental anguish

12
complaints are replete with explicit allegations of Perales's

sexual molestation; our inquiry therefore focuses solely on the

import of the nexus phrases in the exclusions.

The district court held that the nexus phrases do not preclude

coverage for claims against the school district and persons other

than Perales. We disagree. The district court erred in focusing

on the formal causes of action asserted rather than upon the

factual allegations supporting the claims.

Relying on Truman v. United States, 26 F.3d 592 (5th

Cir.1994), the court reasoned in its first summary judgment opinion

as follows:

In Truman, the court considered "arising out of" language [in
the assault and battery exclusion to the United States's
waiver of sovereign immunity in the Federal Torts Claims Act
("FTCA") ] similar to that contained in the insurance policy
in the case at bar. There the court found that because the
claim for intentional infliction of emotional distress is not

and loss of consortium damages suffered by one not involved in an
actual accident are not bodily injuries."). The original Mendoza
complaint does, in fact, claim physical injuries sustained by the
children. Texas law subsequent to our holding in Holloway suggests
that when emotional distress is concomitant with manifestations of
physical injury, "an allegation of mental anguish implicitly raises
a claim for the resulting physical manifestations." See Trinity
Universal Ins. Co. v. Cowan, 906 S.W.2d 124, 130-31
(Tex.App.—Austin 1995, writ granted).

Cowan, however, offered an expansive interpretation of
"bodily injury" to provide coverage for the insured, not to
exclude it. Moreover, the mental anguish in Cowan was itself
the source of the physical injuries, causing "headaches,
stomachaches, and loss of sleep as a result of [the] emotional
distress." We consequently decline to extend Cowan to the
facts in this case, especially where to do so is unnecessary
to the disposition of the appeal. Even if mental anguish is
not "bodily injury" such that a claim "for" mental anguish is
not excluded, the Policy is broader, precluding coverage for
a claim for intentional infliction of emotional distress if it
merely "aris[es] out of" bodily injury.

13
 a claim for assault, battery or slander the claim was not
excluded by the FTCA.

Thus, the court concluded that the Mendoza plaintiffs' claim was

likewise not excluded under the Policy.

Our holding in Truman, however, does not stand for the

proposition that a claim for intentional infliction of emotional

distress can never "arise out of" an assault and battery. On the

contrary, we emphasized the need to examine the underlying conduct

alleged in the petition; "[e]ven if a plaintiff styles a claim so

that it is not one that is enumerated in [the exclusions], the

plaintiff's claim is still barred "when the underlying ... conduct

"essential" to the plaintiff's claim can fairly be read to "arise

out of" conduct that would establish an excepted cause of action.'

" Id. at 594 (citing McNeily v. United States, 6 F.3d 343, 347

(5th Cir.1993)); cf. Garcia v. United States, 776 F.2d 116 (5th

Cir.1985) (barring FTCA claim against the government for negligent

supervision of military recruiter who sexually assaulted

plaintiff). In Truman, the plaintiff's claim for intentional

infliction of emotional distress did not "arise out of" an assault

and battery because the plaintiff had never been assaulted. By

contrast, the first amended Mendoza complaint clearly and

repeatedly alleges that the plaintiffs were sexually assaulted and

physically abused by Perales. The district court nonetheless

asserted that

there were allegations of facts that might give rise to the
conclusion that assault, battery or bodily injury may have
occurred, but not at the hands of other teachers, on whom the
claim of intentional infliction of emotional distress is laid.
What Perales did or did not do is not relevant in any way to

14
 the conduct of the other teachers. There is no indication of
any physical contact by other teachers that might give rise to
one of the exclusions.... [T]he pleadings stated a cause of
action based on the conduct of other teachers separate from
the actions of Perales; the conduct of other teachers was not
excluded by the plain language of the policy.

Order at 7 (emphasis added).

Texas courts, however, when determining whether an exclusion

in an insurance contract applies, examine the factual allegations

showing the origin of the damages rather than the legal theories

asserted by the plaintiff. Duncanville Diagnostic Ctr., Inc. v.

Atlantic Lloyds Ins. Co. of Tex., 875 S.W.2d 788, 789

(Tex.App.—Eastland 1994, writ denied); Adamo v. State Farm Lloyds

Co., 853 S.W.2d 673, 676 (Tex.App.—Houston [14th Dist.] 1993, writ

denied), cert. denied, --- U.S. ----, 114 S.Ct. 1613, 128 L.Ed.2d

340 (1994) (same); Burlington Ins. Co. v. Mexican American Unity

Council, Inc., 905 S.W.2d 359, 360 (Tex.App.—San Antonio 1995, no

writ) (same). Where the legal claims asserted by the plaintiffs

are not independent and mutually exclusive, but rather related to

and dependent upon excluded conduct, the claims are not covered,

even if asserted against an insured who did not himself engage in

the prohibited conduct. Burlington Ins. Co., 905 S.W.2d at 362.

For example, in Fidelity & Guaranty Insurance Underwriters,

Inc. v. McManus, 633 S.W.2d 787 (Tex.1982), the Texas Supreme Court

held that a claim for negligent entrustment of a vehicle arose out

of the "use ... of any recreational motor vehicle owned by the

insured" and was therefore excluded from coverage, even though the

insured was not himself using the vehicle at the time the accident

occurred. "Essential to recovery ... is negligent entrustment by

15
the owner or custodian of the instrumentality, plus its negligent

operation or use by the entrustee. Whether the entrustment is to

an insured or non-insured, the plaintiff must still show negligent

operation or use ... as an element of the cause of action." Id. at

790.

Similarly, in Garrison v. Fielding Reinsurance, Inc., 765

S.W.2d 536, 537 (Tex.App.—Dallas 1989, writ denied), the court

rejected the contention that because the underlying complaint

alleged negligence on the part of the insured rather than assault

and battery, the suit did not involve a "claim arising out of

assault and battery" for the purposes of the exclusion at issue.

The court held that the claims for negligence were excluded from

coverage under the unambiguous terms of the policy where the

plaintiffs "would never have brought a lawsuit against [the

insured] absent the assault and battery committed by the unknown

assailant." Id. at 538.

Furthermore, in Duncanville Diagnostic Center, 875 S.W.2d at

792, the parents of a girl who died after receiving negligent

medical treatment sued the insured medical center for negligent

hiring, training, supervision, and failure to institute adequate

policies and procedures. A professional services exclusion to a

general liability policy precluded coverage for the actual acts of

malpractice. The Texas appellate court held that where the

injuries alleged in the complaint would not have occurred but for

the malpractice, the derivative claims against the insured were

also excluded. Accord Burlington Ins. Co., 905 S.W.2d at 362

16
(barring coverage for negligence claim under assault and battery

exclusion where there would have been no basis for suit absent

assault and battery); Centennial Ins. Co. v. Hartford Accident and

Indem. Co., 821 S.W.2d 192, 194 (Tex.App.—Houston [14th Dist.]

1991) (finding no coverage for claim of negligent hiring where

negligent hiring, by itself and without excluded conduct of

employee, would not give rise to cause of action against employer);

see also Old Republic Ins. Co. v. Comprehensive Healthcare Assoc.,

Inc., 2 F.3d 105, 109 (5th Cir.1993) (holding that negligence and

slander claims against insured were not covered where underlying

intentional sexual harassment by insured's agent was excluded);

Columbia Mut. Ins. Co. v. Fiesta Mart, Inc., 987 F.2d 1124, 1128

(5th Cir.1993) (holding that where liability of insured and

liability of its agent were "related and interdependent," court

must look to whether agent's fraud was covered by policy); cf.

Commercial Union Ins. Co. v. Roberts, 7 F.3d 86, 89-90 (5th

Cir.1993) (holding that claim against doctor for failing to take

precautions against his own pedophilia was excluded where there

would have been no injury absent underlying sexual molestation).

We find that Texas law is clear: where a claim against an

insured would not exist "but for" conduct explicitly excluded by

the policy, the dependent claims are also not covered under the

policy, regardless of whether the insured against whom the

derivative claims are directed actually engaged in the excluded

acts. The language in the exclusions at issue in this appeal do

17
not warrant limiting the application of this rule.6

When we examine the factual allegations giving rise to the

damages in this case, we find that they clearly contradict the

district court's holding that the claims alleged in the first

Mendoza complaint are independent of Perales's actions. The

gravamen of the first three causes of action in the first complaint

is that the school district and the individual defendants were

negligent in their supervision of Perales, that they failed to

protect the children from Perales's actions, and that they failed

to implement policies and procedures that would have prevented or

detected Perales's conduct.7 The negligence and failure to protect

6
We recognize that the policy provision in this case differs
in varying degrees from the provisions construed in the cases cited
above; some of the provisions are arguably broader, some are
certainly narrower. The exclusion construed in McManus, for
example, was narrower, stating simply that coverage "shall not
apply ... to the ... use [of] any recreational motor vehicle,"
rather than to any claim "arising out of" such use. The words
"arising out of" are not "words of narrow and specific limitation,
but are broad, general, and comprehensive terms.... They are
ordinarily understood to mean "originating from,' "having its
origin in,' "growing out of,' or "flowing from,' or in short,
"incident to,' or "having connection with'...." Red Ball Motor
Freight v. Employers Mut. Liab. Ins. Co., 189 F.2d 374, 378 (5th
Cir.1951).
7
The fact that the Mendoza plaintiffs alleged a cause of
action under § 1983 does not change the character of the claim;
the factual allegations underlying the damages control, not the
formal cause of action asserted. See, e.g., Burlington Ins. Co.,
905 S.W.2d at 360. At its core, § 1983 is a statutory means of
holding governmental entities legally responsible for the actions
of their employees where the governmental entity somehow "caused"
the employee to harm another. Monell v. Department of Social
Serv., 436 U.S. 658, 691-692, 98 S.Ct. 2018, 2036, 56 L.Ed.2d 611
(1978). The Mendoza plaintiffs sought to satisfy the causation
element of the cause of action by asserting that Canutillo "failed
to develop and maintain a complete program of detection and
prevention of child abuse." While there are certainly vast
differences between a § 1983 claim and a common law claim for

18
would not themselves have been actionable where the only damages

alleged stem from Perales's sexual abuse. Furthermore, with

respect to the claim for intentional infliction of emotional

distress, the Mendoza plaintiffs specifically alleged that

"Defendants' conduct was the proximate cause of serious harm to the

children as specified above in paragraph 25." Paragraph 25 states

that "Defendants' actions and inactions have caused plaintiffs to

be assaulted and harmed...." Moreover, the complaint sets forth in

graphic detail the sexual assaults committed by Perales and alleges

that the other teacher-defendants "creat[ed] a hostile and

threatening atmosphere discouraging the children from making

complaints of the abuse they suffered...." While the teachers'

failure to adequately respond to the children's complaints of abuse

may have exacerbated the emotional injuries of the children, there

clearly would have been no injury at all absent that abuse.

Therefore, under Texas law, Perales's abuse and the claims asserted

in the first amended complaint are not independent and mutually

exclusive but rather related and interdependent.

With respect to the Mendoza plaintiffs' second amended

complaint, we find that the Title IX claim asserted against

Canutillo is likewise related to, and dependent upon, Perales's

criminal sexual assault.8 The basic thrust of the plaintiffs'

negligent failure to establish policies and procedures such as that
excluded in Duncanville Diagnostic Center, none are relevant to the
interpretation of the Policy. In both cases, but for the excluded
conduct, there would have been no basis for liability.
8
Title IX states, in relevant part, that "[n]o person in the
United States shall, on the basis of sex, be excluded from

19
claim was that the school district failed to prevent Perales's

abuse and failed to implement grievance policies and procedures as

required under the regulations implementing Title IX. 34 C.F.R. §

106.8(b).

The district court, citing Rosa H. v. San Elizario Independent

School District, 887 F.Supp. 140 (W.D.Tex.1995), held that although

liability under Title IX for sexual misconduct by a teacher

requires two distinct actions, one on the part of the employee and

one on the part of the school district, "it is the conduct of the

school district which gives rise to the cause of action and is at

the heart of any Title IX claim." 900 F.Supp. at 847.9 The court

continued:

A suit under Title IX alleges that the school district has
failed to implement policies or procedures to prevent or
discover incidents of sexual discrimination or, as in Rosa H.,
that once the discrimination has been discovered [it] failed
to act in an appropriate manner. In other words, the suit
alleges that Canutillo made an error or omission by failing to
comply with Title IX. Tony Perales did not violate Title IX.
While his conduct was certainly discriminatory, without some
action by Canutillo the cause of action under Title IX cannot
be sustained.... The Title IX claim does not "arise out of"

participation in, be denied the benefits of, or be subjected to
discrimination under any educational program or activity receiving
Federal financial assistance...." 20 U.S.C. § 1681(a) (1990). The
Supreme Court has determined that a private right of action is
implied under Title IX, and a private plaintiff may receive
monetary damages as well as injunctive and declaratory relief.
Franklin, 503 U.S. at 75, 112 S.Ct. at 1037-38.
9
The court in Rosa H. correctly noted that this court has yet
to address the proper standard for imputed liability under Title
IX. Cf. Leija v. Canutillo I.S.D., 887 F.Supp. 947 (W.D.Tex.1995)
(imposing strict liability on the school district for teacher's
sexual abuse of student). We need not determine the proper
standard here since under either a negligence or strict liability
regime, the Mendoza plaintiffs' Title IX claims "arises out of"
Perales's sexual assaults.

20
 the conduct of Tony Perales, it arises out of the inactions of
Canutillo, thus the exclusion does not apply.

Id. at 847-48.

When we look past the formal cause of action asserted to the

factual allegations of the complaint, however, we again fail to

discern a relevant difference between a statutory Title IX cause of

action in this instance and the common law claim for negligent

failure to institute adequate policies and procedures excluded from

coverage in Duncanville Diagnostic Center. Moreover, we note that

although a separate act or omission on the part of Canutillo may be

necessary for liability under Title IX, it is not sufficient for

recovery under the statute. There must have been some

discriminatory act on the part of the school district or its

agents. Rowinsky v. Bryan Ind. Sch. Dist., 80 F.3d 1006, 1008 (5th

Cir.1996), cert. denied, --- U.S. ----, 117 S.Ct. 165, --- L.Ed.2d

---- (1996). In Rowinsky, we held that allegations of peer sexual

harassment were insufficient to form the basis of a cause of action

under Title IX absent allegations that the school district itself

or one of its employees discriminated on the basis of sex.

Allegations that the school district condoned the harassment by

failing to respond to the victim's complaints were not themselves

acts of discrimination absent a showing that the school district

responded to complaints of harassment differently on the basis of

sex. Id. at 1016. The Mendoza complaint alleges no act of sexual

discrimination on the part of the school district other than

Perales's acts. The complaint does not allege that the school

district responded to complaints of sexual abuse from girls any

21
differently than claims from boys. Furthermore, we note that while

injunctive relief may be available for failure to adopt Title IX's

grievance policies and procedures, such a failure is not itself an

act of discrimination that may form the basis of an award of

damages. Seamons v. Snow, 84 F.3d 1226, 1233 (10th Cir.1996).

Therefore, "but for" Perales's actions, there would have been no

basis for damages under Title IX.

Canutillo nonetheless defends the district court's decisions

on two distinct grounds. First, it contends that National Union's

interpretation of the Policy would render the Errors and Omissions

clause meaningless because National Union would never be obligated

to pay damages on behalf of its insured.

We agree that an interpretation is unreasonable if it would

strip a provision of meaning. Lafarge Corp. v. Hartford Casualty

Ins. Co., 61 F.3d 389, 396 (5th Cir.1995); Ideal Mut. Ins. Co. v.

Last Days Evangelical Assoc., 783 F.2d 1234, 1238 (5th Cir.1986).

National Union, however, offers several examples of claims for

which it would be liable to indemnify Canutillo. For example,

wrongful termination claims seeking compensatory damages would fall

within the Errors and Omissions clause of the Policy,10 as would

Title IX claims seeking monetary damages that do not arise out of

10
Claims for backpay are specifically excluded under exclusion
(f). Claims for compensatory damages for reputational harm,
however, would be covered by the Policy. We disagree with
Canutillo's assertion made at oral argument that reputational harm
constitutes "bodily injury" under National Union's interpretation
of the Policy.

22
a sexual assault or other criminal act.11 Other examples include

claims for damages under the Americans with Disabilities Act, 20

U.S.C. §§ 1400 et seq., claims for copyright infringement, and

constitutional claims for discrimination other than on the basis of

race or national origin.12 We need not set forth an exhaustive list

of hypotheticals to conclude that the Errors and Omissions clause

is still meaningful under National Union's interpretation. See

Celestino v. Mid-American Indem. Ins. Co., 883 S.W.2d 310, 313

(Tex.App.—Corpus Christi 1994, writ denied) (stating that

unambiguous exclusion must be given effect unless it wholly repugns

more general provision). We therefore find National Union's

interpretation reasonable.

Second, Canutillo asserts that even if National Union's

interpretation is a reasonable one, its own interpretation is also

reasonable, thus demonstrating that the Policy is ambiguous.

Therefore, the district court properly construed the exclusions in

its favor. We disagree.

Canutillo proffers an alternative construction of the Policy's

exclusions that would preclude coverage only when the acts subject

11
For example, the Policy would cover damages paid as a result
of Title IX claims based on non-assaultive sexual harassment or
exclusion from sports programs on the basis of sex.
12
Exclusion (j) excepts claims "arising out of discrimination
because of race or national origin, or failure to integrate or
desegregate," but provides for defense of such claims up to
$50,000. We note that a later endorsement, however, provides that
the exclusion will not apply to claims of discrimination on the
basis of race or national origin brought by or on behalf of an
employee. Therefore, compensatory damages paid as a result of such
claims may also be covered.

23
to the exclusion were committed by the insured.13 The policy

defines the "Insured" to include the school district, members of

the board of education, trustees, and persons who hold

administrative positions such as superintendent and principal. By

endorsement, the parties amended the definition of insured to

include "any employee of the School District while acting within

the scope of his or her duties as such." Canutillo contends that

because Perales was not acting within the scope of his duties when

he committed the sexual abuse, he was not an insured for the

purposes of the exclusion. Therefore, Canutillo asserts, claims

arising out of his actions are covered by the Policy and trigger a

duty to defend.

The plain language of the Policy, however, demonstrates that

Canutillo's construction of the Policy is unreasonable as a matter

of law. In Texas, "[i]t is a long-established rule that "[n]o one

phrase, sentence, or section [of a contract] should be isolated

from its setting and considered apart from the other provisions.'

" Forbau, 876 S.W.2d at 134 (quoting Guardian Trust Co. v.

13
Canutillo cites Southern Farm Bureau Casualty Co. v. Adams,
570 S.W.2d 567 (Tex.App.—Corpus Christi 1978, writ ref'd n.r.e.),
and Heyward v. Republic National Life Insurance Co., 527 S.W.2d 807
(Tex.App.—San Antonio 1975), aff'd, 536 S.W.2d 549 (Tex.1976), in
support of this construction. We find that Heyward is factually
distinguishable. Furthermore, the appeals court in Adams held that
an insurance policy provided coverage for a negligence claim
against the insured for damages caused by a crop duster hired by
the insured, notwithstanding a provision in the policy excluding
any loss "arising out of the ... use ... of any aircraft," since
the insured did not personally use the aircraft. We find that this
holding directly conflicts with the Texas Supreme Court's opinion
in McManus decided four years later, and find McManus and its
progeny controlling.

24
Bauereisen, 132 Tex. 396, 121 S.W.2d 579, 583 (1938)). Because the

exclusions expressly modify the Errors and Omissions clause, we

must look at the exclusions with reference to the more general

provision. The blanket coverage provision specifically states that

National Union will pay damages resulting from any wrongful act "of

the Insured or of any other person for whose actions the Insured is

legally responsible...." The exclusions do not otherwise limit

their effect to acts of the insured alone. Since National Union

indemnifies Canutillo for the acts of those persons for whom the

district is legally responsible, then in the absence of language

limiting the exclusions, the policy likewise precludes coverage for

excluded acts committed by such persons. See Tarrant County Ice

Sports v. Equitable Gen. Life Ins. Co. of Okla., 662 S.W.2d 129,

131-32 (Tex.App.—Fort Worth 1983, writ ref'd n.r.e.) (holding that

where general coverage provision of policy defined covered

"accident" to include assault and battery committed by third

parties, later endorsement excluding injuries caused by assault or

battery without reference to identity of assaultor necessarily

excluded assaults by third-parties as well as by insured).

Moreover, Canutillo's interpretation would render the assault

and battery exclusion meaningless. A school district can act only

through its agents. As Canutillo points out, however, no agent of

the school district will ever act within the scope of his or her

duties when committing an assault or battery. The district court

opined that if any named insured such as a principal or

administrator had committed the sexual abuse, the exclusion would

25
arguably apply. We disagree. The Errors and Omissions clause

affords coverage only for wrongful acts committed "in the

performance of duties for the School District ...," and a wrongful

act is defined as "any actual or alleged breach of duty, neglect,

error, misstatement, misleading statement or omission committed

solely in the performance of duties for the School District...."

Because no person commits assault and battery in the performance of

his duties, no claim for assault and battery would have been

covered by the Policy even absent the assault and battery

exclusion, unless it were a derivative claim such as those asserted

by the Mendoza plaintiffs.14 Canutillo's interpretation excepting

such derivative claims from the reach of the exclusions thus

renders the assault and battery clause meaningless and redundant.15

14
We recognize that this reasoning does not apply to the bodily
injury exclusion. It is possible that a school district employee
may inflict bodily injury in the negligent performance of his or
her duties for the school district and therefore may be an
"Insured" committing a "Wrongful Act" for which damages may be
recovered in the absence of exclusion (c). However, the fact that
an interpretation of identical language ("arising out of") does not
render all exclusions meaningless does not make the interpretation
any less unreasonable, nor do we find warrant to apply different
interpretations to the language depending upon the exclusion in
which they appear. At any rate, the assault and battery exclusion
alone is sufficient to preclude coverage for all claims asserted
against Canutillo, notwithstanding the effect of the bodily injury
exclusion.
15
We furthermore reject Canutillo's assertion that the policy
is somehow ambiguous because it conflicts with Canutillo's
expectation that the policy would cover this type of claim. "[N]ot
every difference in the interpretation of ... an insurance policy
amounts to an ambiguity. Both the insured and the insurer are
likely to take conflicting views of coverage, but neither
conflicting expectations nor disputation is sufficient to create an
ambiguity." Forbau, 876 S.W.2d at 134. The objective intent of
the parties as evidenced in the Policy, when examined under Texas
law, excludes from coverage all the claims asserted,

26
 We therefore find that the exclusions to the Policy relied

upon by National Union unambiguously preclude coverage for claims

that are related to and dependent upon allegations of Perales's

criminal sexual assaults. The district court erred in denying

National Union's motion for summary judgment and in granting

summary judgment in favor of Canutillo with respect to both the

duty to defend prior to the filing of the second amended complaint

and the duty to indemnify Canutillo for damages paid in settlement

notwithstanding Canutillo's subjective expectations. See Brooks,
Tarlton, Gilbert, Douglas & Kressler, 832 F.2d at 1364 (noting that
objective, not subjective, intent controls when the policy is
unambiguous).

We also disagree that the interpretation given the
identical exclusionary clauses by a North Carolina court in
Durham City Board of Education v. National Union Fire Ins.
Co., 109 N.C.App. 152, 426 S.E.2d 451 (1993, rev. denied),
evidences ambiguity in the Policy. The Durham court did not
find these clauses to be ambiguous, but rather held that under
North Carolina law, claims against a school board for
negligent supervision of a coach who raped a student did not
"arise out of" the coach's assault. This interpretation,
however, directly contradicts settled law in Texas as set
forth in McManus and its progeny. Merely because North
Carolina law differs from that of Texas does not render the
policy exclusions ambiguous. See, e.g., T.C. Bateson Constr.
Co. v. Lumbermans Mut. Cas. Co., 784 S.W.2d 692, 698
(Tex.App.—Houston [14th Dist.] 1989, writ denied) (rejecting
argument that exclusion is ambiguous as matter of law because
courts of different states have interpreted it differently);
Union Pacific Resources Co. v. Aetna Cas. & Sur. Co., 894
S.W.2d 401, 405 (Tex.App.—Fort Worth 1994, writ denied)
(noting split among courts but holding that "[n]either
conflicting views of coverage, nor disputation, is sufficient
to create an ambiguity"); Snydergeneral Corp. v. Century
Indem. Co., 907 F.Supp. 991, 997-98 (N.D.Tex.1995) (finding
that Texas courts do not hold policy terms to be ambiguous
each time there is split of authority). But see Pioneer Chlor
Alkali Co., Inc. v. Royal Indem. Co., 879 S.W.2d 920, 935
(Tex.App.—Houston [14th Dist.] 1994, no writ) (finding that
differing interpretations may evidence more than mere dispute
between insurer and insured).

27
of the Mendoza suit.

III

We furthermore find that Canutillo's claims for breach of the

duty of good faith and fair dealing and gross negligence fail as a

matter of law. One element of a bad faith claim is an absence of

a reasonable basis for denying or delaying payment of benefits.

Texas Farmers Ins. Co. v. Soriano, 881 S.W.2d 312, 317 (Tex.1994).

Because we find that National Union had no duty to defend or to

indemnify under the Policy, its denial of coverage for the Mendoza

claims was reasonable, and there can be no breach of the duty of

good faith and fair dealing as a matter of law. Republic Ins. Co.

v. Stoker, 903 S.W.2d 338, 341 (Tex.1995).16 Moreover, the gross

negligence claim is predicated on the alleged bad faith breach of

the contract; where there was no bad faith, there could be no

gross negligence to support an award of punitive damages.

Transportation Ins. Co. v. Moriel, 879 S.W.2d 10, 23 (Tex.1994).

Insofar as they are predicated on National Union's alleged bad

faith breach, Canutillo's claims under the DTPA and the Texas

Insurance Code are similarly meritless. Stoker, 903 S.W.2d at 341.

Canutillo, however, urges that the evidence was sufficient to

demonstrate that, at the time of purchase, National Union

misrepresented the scope of coverage, or at least made misleading

16
The parties dispute whether an insurer owes a duty of good
faith and fair dealing to its insured with respect to third-party
claims. See Soriano, 881 S.W.2d at 317 ("We have never held and do
not hold today that either of these two standards applies to
insurers in responding to third-party claims"). Because we find
that there is no breach, we need not reach this issue.

28
statements concerning the scope of coverage available under the

Policy in violation of § 17.46 of the DTPA and § 21.21 of the

Insurance Code. Our determination that National Union had no duty

to defend or to indemnify Canutillo is not dispositive of this

claim. Matthews v. Home Ins. Co., 916 S.W.2d 666, 670

(Tex.App.—Houston [1st Dist.] 1996, writ denied) (finding that

plaintiff's DTPA claims were not precluded by finding of no

coverage under policy where claims were "not for post-loss claims

handling, but for pre-loss misrepresentation of coverage").

When reviewing a denial of a motion for judgment as a matter

of law, we must use the same standard that the district court used

in first ruling on the motion—that is, whether there is a legally

sufficient evidentiary basis for a reasonable jury to find as it

did. FED.R.CIV.P. 50(a)(1); Hiltgen v. Sumrall, 47 F.3d 695, 699-

700 (5th Cir.1995). We must view the evidence and all reasonable

inferences in the light most favorable to the jury's determination.

Id.

The only claimed misrepresentation or misleading statement is

a letter from a representative of National Union sent to Canutillo

before it purchased the Policy. The letter stated that the Policy

covered, among other things, "[a]lleged violations of federal or

state constitutional civil rights." We find that this statement

cannot constitute a misrepresentation because, as we noted, the

Policy does in fact cover constitutional civil rights claims that

are not otherwise excluded, such as claims for sex discrimination

that do not arise out of assault, battery, bodily injury, or

29
involve criminal acts. Moreover, a reasonable jury could not find

that the statement was misleading where Canutillo was aware of the

Policy language at the time of purchase and Canutillo presented no

evidence that National Union ever assured it that civil rights

claims would be covered under the specific circumstances present

here. See Parkins v. Texas Farmers Ins. Co., 645 S.W.2d 775, 777

(Tex.1983) (holding that where insured was, in fact, covered for

some fire loss and insured presented no evidence that insurer ever

promised coverage against fire loss under circumstances at issue,

insured failed to prove misrepresentation); Matthews, 916 S.W.2d

at 670 (finding no misrepresentation where insured knew of

exclusion when he signed policy and alleged no oral

misrepresentations concerning coverage under policy for specific

loss incurred); Employers Cas. Co. v. Fambro, 694 S.W.2d 449, 451

(Tex.App.—Eastland 1985, error refused n.r.e.) (finding that mere

fact that insureds believed they were covered under all

circumstances in light of insurer's statement that coverage was

"adequate" or "sufficient" did not prove misrepresentation). We

therefore find that the district court erred in denying National

Union's motion for judgment as a matter of law with respect to

Canutillo's claims under the DTPA and § 21.21 of the Texas

Insurance Code.17

IV

For the foregoing reasons, we REVERSE the district court's

17
Because we find in favor of National Union on all claims, we
need not address National Union's contentions regarding evidentiary
points of error.

30
grant of partial summary judgment in favor of Canutillo on the duty

to defend and the duty to indemnify, REVERSE the jury's verdict and

damage award, and RENDER judgment in favor of National Union.

31