Liberty Mutual Fire v. Canal Insurance

Revised June 14, 1999

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

_____________________

No. 98-60236

_____________________

LIBERTY MUTUAL FIRE INSURANCE COMPANY,

Plaintiff-Appellee,

versus

CANAL INSURANCE COMPANY,

Defendant-Appellant.

_______________________________________________________

Appeal from the United States District Court for
the Southern District of Mississippi
_______________________________________________________
May 26, 1999

Before KING, Chief Judge, REAVLEY and BENAVIDES, Circuit Judges.

REAVLEY, Circuit Judge:

In this insurance coverage dispute, plaintiff-appellee Liberty Mutual Fire Insurance

Company (“Liberty Mutual”) sued defendant-appellant Canal Insurance Company (“Canal”)

seeking, inter alia, (1) a declaratory judgment that Canal breached its duty to defend Anderson-

Tully Company (“ATCO”) in an underlying lawsuit arising from an automobile accident, and (2)

recovery of the reasonable attorneys’ fees and expenses incurred in defending ATCO in the

underlying litigation, the amount paid to settle the claims against ATCO before trial, and
prejudgment interest. Canal responded by (1) asserting that ATCO was not an insured under the

Canal policy, alternatively, that any coverage for ATCO was excess to the primary coverage

provided by Liberty Mutual, and that the Liberty Mutual policy provided primary or co-primary

coverage for J. W. McConnell (“McConnell”)1 and Wilmer D. Wilson (“Wilson”), the two other

defendants in the underlying lawsuit, and (2) seeking recovery of the attorneys’ fees and expenses

incurred in the defense of McConnell and Wilson in the underlying suit, the amount of the

judgment paid by Canal on behalf of McConnell and Wilson, and prejudgment interest.

Considering cross-motions for summary judgment, the district court granted summary judgment

for Liberty Mutual and against Canal on all issues and awarded damages to Liberty Mutual, which

included the attorneys’ fees and expenses incurred to defend ATCO, the settlement amount paid

on behalf of ATCO, and prejudgment interest thereon from the date of each payment. We agree

with the holdings on the policy coverages and affirm Liberty Mutual’s recovery of its fees and

expenses paid to defend ATCO. We modify the judgment, however, to eliminate the recovery by

Liberty Mutual of the amount it paid to settle the claims against ATCO, because that settlement

was not causally connected to Canal’s breach of its duty to defend ATCO.

I. FACTUAL & PROCEDURAL BACKGROUND

McConnell is a contract logger whose business entails cutting trees, converting them into

forest products, and transporting logs to his customers’ sawmills. ATCO is in the business of

lumber production and operates several sawmills. In April 1993, McConnell and ATCO entered

into a Cutting and Hauling Agreement (the “Agreement”), whereby McConnell agreed to “furnish

1
J. W. McConnell is also known as Billy McConnell and has done business as Billy
McConnell Trucking Company and McConnell Logging. He will be referred to throughout this
opinion as simply “McConnell.”

2
and provide all labor, tools, materials and equipment for the cutting and converting in[to]

sawtimber and other products, all trees that have been designated by Anderson-Tully for such

purposes” and “to cut, process, load, transport and deliver” such products to ATCO sawmills or

log dumps. Under the terms of the Agreement, ATCO had the right to inspect McConnell’s

operations to ensure compliance with the Agreement; but ATCO had no right to control the time,

manner, or method by which McConnell fulfilled his obligations under the contract and had no

right to select or control the activities of McConnell’s employees. The Agreement did not require

McConnell to use any particular vehicle to fulfill the contractual transportation and delivery

obligations. Nor did it entitle ATCO to use or operate any vehicles owned by McConnell or to

select the delivery routes taken by McConnell or his employees. During the relevant time period,

Canal provided $300,000 of primary and excess automobile liability insurance to McConnell in

connection with McConnell’s logging business. Likewise, Liberty Mutual provided ATCO with

$1,000,000 of business automobile liability coverage.

This dispute stems from an August 1993 accident in which Wilson, a McConnell

employee, negligently collided with a vehicle driven by Jane Love (“Love”), killing Love and

seriously injuring her husband Homer Love. At the time of the accident, Wilson was driving a

McConnell truck hauling an empty trailer on his way to pick up a load of timber to deliver to

ATCO’s sawmill pursuant to the Agreement. Love’s beneficiaries and Homer Love filed a

wrongful death and negligence suit against Wilson, McConnell, and ATCO (the “Carlock

litigation” or the “Carlock plaintiffs”). The Carlock plaintiffs alleged that both McConnell and

ATCO had a master-servant relationship with Wilson and were therefore liable for Wilson’s

negligence. Liberty Mutual demanded that Canal defend and indemnify ATCO under the Canal

3
policy asserting that the claim brought ATCO under the policy’s definition of an “insured”

because the Carlock complaint alleged that ATCO was vicariously liable for Wilson’s negligence.

Canal refused, asserting that ATCO was using the McConnell truck pursuant to a lease or

contract of hire, and therefore the E-45 Truckman’s Endorsement attached to the Canal policy

excluded coverage for ATCO. Additionally, Canal asserted that the Liberty Mutual policy

provided coverage for McConnell and Wilson and demanded that Liberty Mutual provide their

defense. Liberty Mutual denied Canal’s request.

Canal defended McConnell and Wilson in the Carlock litigation and attempted to settle the

suit by offering its combined $300,000 policy limit. The Carlock plaintiffs, however, were

unwilling to settle the suit for this amount. Liberty Mutual undertook ATCO’s defense and

moved for summary judgment, asserting that McConnell was an independent contractor and

therefore ATCO was not liable for the negligence of Wilson, McConnell’s employee, because

there was no master-servant relationship. After the motion for summary judgment was denied,

Liberty Mutual negotiated and settled the claims against ATCO for $112,500 in order to reduce

its potential liability for a verdict in excess of Canal’s $300,000 policy limit. The parties agree

that, even assuming the Canal policy provided primary coverage for ATCO, the Liberty Mutual

policy provided excess coverage and consequently, Liberty Mutual would be obligated to pay on

behalf of ATCO any adverse judgment in excess of $300,000, up to the stated Liberty Mutual

policy limit. McConnell and Wilson proceeded to trial and were found liable for damages in

excess of $513,000, for which Canal paid its full policy limits, leaving those defendants liable for

the excess.

Liberty Mutual, as equitable subrogee, filed the instant action against Canal for breach of

4
its duty to defend ATCO, seeking, inter alia, the attorneys’ fees and expenses incurred in the

defense of ATCO, the $112,500 it paid to settle the Carlock litigation, and prejudgment interest

thereon from the date each payment was made. Canal counter-claimed, asserting that Liberty had

breached its duty to defend McConnell and Wilson and sought to recover, inter alia, the

attorneys’ fees and expenses incurred in the defense of McConnell and Wilson, the amount paid as

a result of the judgment against McConnell and Wilson, and prejudgment interest thereon.

Considering cross-motions for summary judgment, the district court held that (1) ATCO was

insured under the Canal policy and was not using the McConnell truck pursuant to a lease,

contract of hire, or similar agreement; (2) Liberty Mutual had no duty to defend McConnell and

Wilson under its policy; (3) as a result of its breach of the duty to defend ATCO, Canal was liable

for the attorneys’ fees and defense costs incurred by Liberty Mutual, as well as the $112,500 paid

to settle the claims against ATCO; and (4) Liberty Mutual was entitled to prejudgment interest

from the date each payment was made. Canal appeals each of these rulings. For the reasons

discussed below, we reverse that portion of the judgment awarding the $112,500 to Liberty

Mutual and affirm the judgment as modified.

II. ANALYSIS

A. Standard of Review

We review the district court’s summary judgment ruling de novo, applying the same

standard as the district court.2 Summary judgment is proper if, viewing the summary judgment

record in the light most favorable to the nonmovant, there is no genuine issue of material fact and

2
See Davidson v. Glickman, 169 F.3d 996, 998 (5th Cir. 1999).

5
the moving party is entitled to judgment as a matter of law.3 In this case, there are no disputed

factual issues, only questions of law concerning the interpretation of the Canal and Liberty Mutual

insurance contracts, which we review de novo.4

In this diversity action, we look to Mississippi law for the legal standards governing

insurance contract interpretation. The applicable principles are succinctly set forth in Canal

Insurance Company v. T.L. James & Company, Inc. 5

Mississippi’s law recognizes the general rule that provisions of an insurance
cont[r]act are construed strongly against the drafter. Consistent with this
principle, insuring clauses are construed broadly to effect coverage, and
exclusionary clauses that restrict coverage are construed narrowly against the
insurer. So, to benefit from an exclusionary provision in an insurance contract, the
insurer must show that the exclusion applies and that it is not subject to any other
reasonable interpretation that would afford coverage. Nationwide Mut. Ins. Co. v.
Garriga, 636 So. 2d 658 (Miss. 1994). The court must strive to give effect to the
parties’ intention, as expressed by the plain language of the policy, but where
the[re] are two or more reasonable interpretations of a clause, the court will adopt
the interpretation that provides coverage. Nationwide Mut. Ins. Co. v. Garriga,
636 So. 2d 658 (Miss. 1994). Moreover, any doubt as to the existence of a
defense obligation is likewise resolved in favor of the insured. Rhodes v. Chicago
Ins. Co., 719 F.2d 116 (5th Cir. 1983).6

B. Canal’s Duty to Defend ATCO

Canal had a duty to defend ATCO in the Carlock litigation under the terms of the policy

issued to McConnell. Under the general insuring provision, Canal is obligated to defend an

insured against suits arising from the ownership, maintenance, or use of a covered automobile

3
See FED. R. CIV. PROC. 56(c); Davidson, 169 F.3d at 998.
4
See Gulf States Ins. Co. v. Alamo Carriage Serv., 22 F.3d 88, 90 (5th Cir. 1994).
5
911 F. Supp. 225 (S.D. Miss. 1995).
6
Id. at 228; see also Centennial Ins. Co. v. Ryder Truck Rental, Inc., 149 F.3d 378, 382-
83 (5th Cir. 1998).

6
during the policy term and to pay damages on the insured’s behalf up to the stated policy limits.7

There is no dispute that the truck driven by Wilson was a covered automobile under the Canal

policy or that the suit arose from the use of a covered automobile. ATCO also falls within the

policy’s definition of an insured. Section III defines the “PERSONS INSURED” to include the

named insured—i.e., McConnell—and those employees using a covered auto with

permission—e.g., Wilson—as well as “[a]ny other person or organization but only with respect to

his or its liability because of acts or omissions” of the named insured, partners or executives, or

permissive users.8 Because the Carlock complaint alleged that ATCO was liable for the

7
The Canal policy provides in relevant part:

[Canal] will pay on behalf of the insured all sums which the insured shall become
legally obligated to pay as damages because of bodily injury or property damage to
which this insurance applies, caused by an occurrence and arising out of the
ownership, maintenance or use . . . of an owned automobile . . . and the company
shall have the right and duty to defend any suit against the insured seeking
damages on account of such bodily injury or property damage . . . , but the
company shall not be obligated to pay any claim or judgment or to defend any suit
after the applicable limit of the company’s liability has been exhausted by payment
of judgments or settlements.

R. Vol. I at 8.
8
The relevant policy provision states:

III. PERSON INSURED. Each of the following is an insured under this insurance
to the extent set forth below:
(a) the named insured;
(b) any partner or executive officer thereof . . .;
(c) any other person while using an owned automobile . . . with the permission
of the named insured . . . ;
(d) any other person or organization but only with respect to his or its liability
because of acts or omissions of an insured under (a), (b) or (c) above.

R. Vol. I at 8.

7
negligence of Wilson—a permissive user—ATCO clearly falls within the last category of persons

insured.

Canal, however, asserts that an exclusionary endorsement, the E-45 Truckman’s

Endorsement, applies to exclude coverage for ATCO. The Truckman’s Endorsement excludes

coverage for “any person, firm or organization using the described motor vehicle pursuant to any

lease, contract of hire, bailment, rental agreement or similar contract or agreement.”9 According

to Canal, ATCO was “using” the truck driven by Wilson pursuant to the Cutting and Hauling

Agreement, which Canal contends is a “contract of hire” or similar agreement within the meaning

of the Truckman’s Endorsement.10 Because the term “contract of hire” is not defined in the

9
The full text of the E-45 Truckman’s Endorsement attached to the Canal Policy
provides:

In consideration of the premium charged for the policy to which this endorsement
is attached, it is understood and agreed that no coverage is extended to any
person, firm or organization using the described automobile pursuant to any
lease, contract of hire, bailment, rental agreement, or any similar contract or
agreement either written or oral, expressed or implied, the terms and provisions of
the Insuring Agreement of Section A, entitled “Persons Insured” notwithstanding.

In the event the automobile described in this policy is being used or maintained
pursuant to any lease, contract of hire, bailment, rental agreement or any similar
contract or agreement, either written or oral, expressed or implied, the insurance
afforded the named insured shall be excess insurance over any other insurance.

R. Vol. I at 14 (emphasis added).
10
Because we conclude that the Cutting and Hauling Agreement was not a contract of
hire within the meaning of the Truckman’s Endorsement, we need not and do not address Canal’s
argument that the district court erred in concluding that ATCO was not “using” the McConnell
truck pursuant to a contract of hire or similar agreement. Additionally, although Canal also
argued to the district court that the Cutting and Hauling Agreement constituted a “lease” of the
McConnell truck, Canal has since abandoned that argument on appeal.

8
policy, under Mississippi law the term must be given its plain and common, everyday meaning.11

To support its argument, Canal relies on the dictionary definition of the word “hire” and

essentially asserts that the term “contract of hire” as used in the endorsement, includes any

contract for labor or services. For example, Black’s Law Dictionary defines the word “hire” to

mean “to arrange for the labor or services of another for a stipulated compensation.”12

Accordingly, Canal urges that because ATCO arranged for the services of McConnell for a

stipulated compensation, the Cutting and Hauling Agreement constitutes a “contract of hire”

within the meaning of the E-45 endorsement, thereby triggering the exclusion. The district court

rejected such a broad interpretation relying on Canal Insurance Company v. T.L. James &

Company, Inc., 911 F. Supp. 225 (S.D. Miss. 1995); Canal Insurance Company v. Liberty

Mutual Insurance, 395 F. Supp. 962 (N.D. Ga. 1975); and Casino Air Charter, Inc. v. Sierra

Pacific Power Company, 596 P.2d 496 (Nev. 1979). We agree with the holdings of those courts

and of the district court here.

In T.L. James & Company, Canal provided automobile liability insurance to Grinston Sand

and Gravel Company (“Grinston”). Grinston entered into a subcontract with T.L. James &

Company (“James”), the general contractor on a highway project, whereby Grinston agreed to

furnish sand and gravel for the project. An adjacent business owner sued Grinston and James for

property damage caused by Grinston’s trucks. Because Canal refused to defend James, The

Highlands Insurance Group (“Highlands”), James’s automobile liability insurance carrier,

11
See Aero Int’l, Inc. v. United States Fire Ins. Co., 713 F.2d 1106, 1109 (5th Cir.
1983); McFarland v. Utica Fire Ins. Co., 814 F. Supp. 518, 525 (S.D. Miss. 1992), aff’d, 14
F.3d 55 (5th Cir. 1994); Benton v. Canal Ins. Co., 130 So. 2d 840, 846 (Miss. 1961).
12
BLACK’S LAW DICTIONARY 729 (6th ed. 1990).

9
defended James. After the trial, Canal brought a declaratory action against Highlands, asserting

that an identical E-45 Truckman’s Endorsement excluded coverage for James because the

subcontract with Grinston constituted a “contract of hire.” Highlands counter-claimed, asserting

that Canal breached its duty to defend James. The court agreed with Highlands and rejected

Canal’s argument that the subcontract was a “contract of hire” of Grinston’s trucks, which

triggered the E-45 exclusion. The court explained:

Canal asserts, without explication, that the agreement between James and
Grinston, “although styled as a subcontract, appears to contemplate merely the use
of Grinston’s vehicles for the purposes of hauling sand and gravel to the project.”
The court, however, finds no support for this position in the terms of the
subcontract. To the contrary, the agreement, by its terms, appears, instead, to
contemplate James’ purchase of sand and gravel from Grinston, and the delivery
thereof. Thus, James did not lease Grinston’s trucks. Moreover, James did not
contract to hire Grinston’s drivers. It simply subcontracted with Grinston to do its
own work in performance of its subcontract, and which operated its own trucks at
all times by its own employees. Clearly, this endorsement was not intended to
apply to situations when the named insured is using its own trucks in furtherance
of its own business, providing its own drivers and materials. For these reasons, the
endorsement is inapplicable.13

Other jurisdictions have also rejected Canal’s broad interpretation. In Canal Insurance

Company v. Liberty Mutual Insurance,14 the same parties disputed whether a harvesting contract

similar to the Cutting and Hauling Agreement at issue here constituted a “contract of hire”

triggering the E-45 exclusionary endorsement. In that case, Townsend had a service contract

with Union Camp, whereby Townsend agreed to harvest and cut pulpwood on Union Camp’s

land and to deliver it to Union Camp’s plant. West, a Townsend employee, was involved in a car

accident while driving a Townsend truck and performing under the agreement. Canal provided

13
T.L. James & Co., Inc., 911 F. Supp. at 228-29.
14
395 F. Supp. 962 (N.D. Ga. 1975).

10
automobile liability insurance to Townsend and Liberty Mutual insured Union Camp. Canal

refused to defend Union Camp based on the E-45 endorsement and defended Townsend and West

under a reservation of rights. At issue was whether Canal or Liberty Mutual was liable for the

coverage and defense of the driver West. Canal argued that West was not insured under its policy

because he was using the truck pursuant to a “contract of hire.” The court rejected this argument

and instead embraced Liberty Mutual’s position that “the E-45 endorsement refers only to a

contract or agreement which relates specifically to the ‘described automobile’ in question.”15

Noting that, among other things, the contract at issue was for labor and services in which the

Townsend truck was used only incidentally, Townsend had total control over his employees and

the equipment used to fulfill the contract, and Union Camp paid no fees for the truck, the court

held that the harvesting agreement between Townsend and Union Camp was not a contract of

hire.16

Casino Air Charter, Inc. v. Sierra Pacific Power Company,17 in the context of an airplane

crash, considered whether a charter service had “hired” the aircraft. In that case, Sierra Pacific

Power Company (“Sierra”) arranged a charter flight with Casino Air Charter for a government

employee. During the flight, the plane crashed, killing the pilot and passenger. The passenger’s

estate sued Sierra, Casino Air Charter, and the pilot’s estate. Casino Air Charter demanded

coverage under Sierra’s liability policy as an additional insured, asserting that Sierra had “hired”

the airplane. The court rejected this argument, stating:

15
Id. at 971; see id. at 974.
16
See id. at 972-74.
17
596 P.2d 496 (Nev. 1979).

11
 In the instant case, there was no hiring of an aircraft. Instead, Sierra contracted
for the transportation services of an airplane and a qualified pilot. Sierra neither
designated a particular aircraft nor took any part in the preparation of a flight
plan.18

The above cases all support the conclusion that the Cutting and Hauling Agreement was

not a contract of hire of McConnell’s truck within the meaning of the E-45 Endorsement. This

contract for logging and transportation services is not a “contract of hire” of the McConnell truck

since it is not similar to a lease, bailment, or rental agreement of a vehicle as contemplated by the

endorsement. Although it incidentally contemplated the use of a vehicle in order for McConnell

to fulfill his contractual obligations, the Agreement does not require McConnell to use any

particular vehicle and did not entitle ATCO to operate, direct, or control any of McConnell’s

vehicles or drivers. And while ATCO selected the final delivery destinations, ATCO had no right

under the Agreement to select the route taken by McConnell or his employees to deliver the

timber products. We also reject Canal’s assertion that this case is analogous to Wallace v. Boyte

Enterprises, Inc,19 which held that an exclusionary provision essentially identical to the E-45

endorsement excluded coverage for Boyte, a materialman that contracted with a truck owner to

provide a truck and driver for an hourly fee. On the contrary, the Cutting and Hauling

Agreement at issue here was unlike an arrangement to provide a truck and driver to ATCO for an

hourly fee.

Finally, while we agree with the general proposition that words, terms and phrases that are

not expressly defined in insurance policies must be given their plain and common, everyday

18
Id. at 499.
19
385 So. 2d 916, 918 (La. Ct. App. 1980).

12
meanings, the interpretation urged by Canal myopically focuses on the word “hire” and takes the

term “contract of hire” completely out of context. The endorsement excludes coverage for any

person or business that uses “the described automobile pursuant to any lease, contract of hire,

bailment, rental agreement, or any similar contract or agreement.” When viewed in context, each

of these terms—lease, contract of hire, bailment, and rental agreement—plainly contemplates a

contract or agreement that specifically governs the described automobile. Hence, a “contract of

hire” as used here cannot be construed as a broad reference to any contract for labor or services.

Moreover, as noted above, we are required by Mississippi law to construe the Truckman’s

Endorsement narrowly against Canal.20 In sum, we agree with the district court’s conclusion that

the Cutting and Hauling Agreement simply does not constitute a contract of hire within the

meaning of the Truckman’s Endorsement.

C. Coverage for McConnell and Wilson under the Liberty Mutual Policy

We also agree with the district court’s ruling that Liberty Mutual had no duty to defend

McConnell and Wilson under the terms of the Liberty Mutual policy. The relevant insuring

provision is Section II - Liability Coverage, which provides:

A. COVERAGE
We will pay all sums an insured legally must pay as damages
because of bodily injury or property damage to which this
insurance applies, caused by an accident and resulting from the
ownership, maintenance or use of a covered auto.

* * *

1. WHO IS AN INSURED
The following are insureds:
a. You for any covered auto.

20
See Nationwide Mut. Ins. Co. v. Garriga, 636 So. 2d 658, 662 (Miss. 1994).

13
 b. Anyone else while using with your permission a covered auto you own,
hire or borrow . . . .
c. Anyone liable for the conduct of an insured described above but only to
the extent of that liability.21

Canal first asserts that the McConnell truck is a “covered auto” under the Liberty Mutual policy

because the policy defines covered autos to include “any auto.” Canal next contends that Wilson

qualifies as an insured under subsection 1(b) because he was using, with ATCO’s permission, a

covered auto hired by ATCO. As for McConnell, Canal claims that he is an insured under

subsection 1(c) because the Carlock plaintiffs sought to hold McConnell liable for the conduct of

Wilson, a Liberty Mutual insured under coverage 1(b). Whether or not the McConnell truck is a

“covered auto” under the Liberty Mutual policy, the dispositive issue is whether McConnell or

Wilson qualify as an “insured.” Because, as explained above, ATCO did not own, hire, or borrow

the McConnell truck, Wilson does not meet the definition of an insured under subsection 1(b).

Consequently, McConnell does not meet the definition of an insured under subsection 1(c).

Therefore, the district court properly concluded that the Liberty Mutual policy afforded no

coverage to Wilson or McConnell.22

Alternatively, Canal argues that, as to McConnell and Wilson, its policy is excess to or co-

21
R. Vol. I at 70-71.
22
Canal’s reliance on Taylor v. United States Fidelity & Guaranty Insurance Company,
630 So. 2d 237 (La. 1993), is misplaced. Taylor construed a similar policy provision, which
defined an “insured” to include anyone other than the named insured, who used a vehicle that was
owned, hired, or borrowed by the named insured with the named insured’s permission. In Taylor,
M-B Lumber Company hired a tractor that was owned and operated by Rollins. A coverage
dispute ensued after Rollins was involved in an accident. There was no dispute that M-B Lumber
Company had hired the Rollins tractor. The only issue was whether the tractor was a “covered
auto” under the policy. Because the policy defined a “covered auto” to include “any auto,” the
court held that Rollins was an insured under M-B Lumber Company’s policy. See id. at 240-41.
Taylor is inapposite to the instant case, however, since ATCO did not hire the McConnell truck.

14
primary with the Liberty Mutual policy. Canal points to the “Other Insurance” clauses contained

in both policies and argues that because each policy absent the other would provide coverage to

McConnell and Wilson, the “rule of repugnancy” applies to negate both “other insurance” clauses

and consequently each policy must provide coverage on a pro-rata basis. The rule of repugnancy

provides that if there is a conflict in the “other insurance” or excess clauses of two policies, which

standing alone would provide primary coverage to the insured, the clauses are mutually repugnant

and are to be disregarded.23 As we have explained above, Wilson and McConnell were not

insureds under the Liberty Mutual policy, and it cannot be said that this policy, standing alone,

would provide primary coverage for Wilson and McConnell. We do not reach the rule of

repugnancy.

D. Recovery of Settlement Costs

After granting summary judgment in favor of Liberty Mutual, the district court awarded

Liberty Mutual not only its costs to defend ATCO in the Carlock litigation, but also the $112,500

paid to settle the claims against ATCO before trial, plus prejudgment interest thereon. The

district court rejected Canal’s argument that it was not liable for the settlement costs because it

had tendered its policy limits and because the settlement on behalf of ATCO was not proximately

caused by the breach of its duty to defend ATCO. We agree with Canal that Liberty Mutual’s

decision to settle on behalf of ATCO in order to avoid the risk of liability for an excess judgment

did not result from Canal’s breach. The district court erred in allowing Liberty Mutual to recover

the settlement costs.

In Mississippi, and as a general rule, an insurer’s wrongful refusal to defend an insured

23
See Allstate Ins. Co. v. Chicago Ins. Co., 676 So. 2d 271, 275 (Miss. 1996).

15
renders it liable for any damages sustained as a result of the breach of contract.24 These damages

include reasonable attorneys’ fees, costs, expenses, and the negotiated or adjudicated amount of

the claim.25 Generally, if the insurer has acted in good faith, it is not liable for any amount beyond

the stated policy limit. With respect to excess judgments, an insurer is not liable for the amount in

excess of the policy limit so long as the insurer has not acted in bad faith and has not wrongfully

refused to settle the claim within its policy limits.26 The rationale is that the excess judgment was

not caused by either a breach of the duty to defend or a breach of the duty to settle. That is, the

insurer’s defense of the insured would not have prevented a judgment in excess of the policy limit.

Similarly, if the claim cannot be settled within the policy limit, the insurer’s breach of its duty to

settle in good faith is not the cause of any excess judgment. The same general rule applies with

respect to settlements, i.e., in the absence of bad faith, an insurer is not liable for the amount of

any settlement by the insured beyond the stated policy limit.27 In the present case there are no

allegations that Canal acted in bad faith.

24
See, e.g., Brickell v. United States Fire Ins. Co., 436 So. 2d 797, 801 (Miss. 1983)
(citing Southern Farm Bureau Cas. Ins. Co. v. Logan, 119 So. 2d 268, 272 (Miss. 1960)); see
generally 7C JOHN ALAN APPLEMAN, INSURANCE LAW & PRACTICE § 4689 (1979 & Supp.
1998).
25
See Mavar v. Shrimp & Oyster Co. v. United States Fidelity & Guar. Co., 187 So. 2d
871, 875 (Miss. 1966) (holding breaching insurer liable not only for defense costs, but also for
settlement agreement made by the insured as a result of the breach); 7C APPLEMAN, supra note
24, § 4689, at 208-09.
26
See Employer’s Nat’l Ins. Corp. v. Zurich Am. Ins. Co., 792 F.2d 517, 520-21 (5th Cir.
1986) (applying Texas law and reasoning that there was no “causal connection between the action
of the insurer and . . . judgment in excess of policy limits”); Fidelity & Cas. Co. v. Gault, 196
F.2d 329, 330 (5th Cir. 1952) (applying Mississippi law); 1 ALLAN D. WINDT, INSURANCE
CLAIMS & DISPUTES § 4.36, at 264 (3d ed. 1995).
27
See generally 7C APPLEMAN, supra note 24, § 4690.

16
 There are a few limited exceptions where an insurer has been held liable for consequential

damages in excess of the stated policy limit where those damages resulted directly from the

insurer’s wrongful conduct.28 For example, if the insurer leads the insured to believe he will

provide a defense, but does not, the insurer may be liable for a default judgment entered in excess

of the policy limits.29 Also, if an insurer wrongfully withdraws from the defense too close to trial

such that the insured is precluded from providing an adequate defense, the insurer may be liable

for an excess judgment.30 The dispositive issue then is whether the settlement resulted from or

was caused by Canal’s breach of its duty to defend ATCO.

Canal argues that Liberty Mutual’s settlement of the claims against ATCO was not caused

by its breach. Accordingly, Canal asserts that even if it had defended ATCO, Liberty Mutual

would still have been faced with paying any judgment in excess of $300,000 if ATCO was found

liable to the Carlock plaintiffs. Essentially, Canal asserts that Liberty Mutual was simply

protecting its own interests by settling the claim because Liberty Mutual knew that the Carlock

plaintiffs would not accept Canal’s $300,000 policy limit to settle the suit and acknowledged that

it would be potentially liable for any excess judgment should its independent contractor defense

fail at trial. We agree. The fact that Liberty Mutual settled the claim to eliminate its exposure for

a potential excess judgment is evidenced by the February 9 letter from the Liberty Mutual claims

specialist to ATCO, which provides in pertinent part:

28
See generally 1 WINDT, supra note 26, § 4.36, at 264-67.
29
See id. (citing Gray v. Grain Dealers Mut. Ins. Co., 684 F. Supp. 1108, 1111-13
(D.D.C. 1988), aff’d, 871 F.2d 1128 (D.C. Cir. 1989)).
30
See id. (citing Leader Nat’l Ins. Co. v. Smith, 339 S.E.2d 321, 331 (Ga. Ct. App.
1985)).

17
 As you may know the automobile liability carrier for McConnell, Canal Insurance
Company, has tendered their [sic] $300,000 policy limits to the Court. However,
the plaintiffs are demanding an additional $350,000 for a total settlement of both
cases for $650,000, which is in my judgment, the top value of a jury verdict.

While we have maintained that McConnell was an independent contractor cutting
and hauling timber on behalf of [ATCO] in accordance with a written contract, the
plaintiffs have alleged that [ATCO] exercised control over McConnell’s timber
cutting operation and that McConnell was therefore acting in a master/servant
relationship as opposed to an independent contractor. Unfortunately, our
MOTION FOR SUMMARY JUDGMENT on this issue was overruled by Judge
Bramlette, which means that the matter becomes a fact issue to be decided by the
jury unless of course the judge reconsiders the matter at the end of the plaintiff’s
[sic] case and grants [ATCO] a directed verdict. It is my opinion that we do have
some exposure and we should negotiate a settlement if possible up to $150,000.

Within the next few days, I plan to negotiate up to $100,000 to determine if the
plaintiff will negotiate from his present demand of $350,000. If not, we will
proceed with the trial and continue to evaluate our position during the course of
the trial.31

It is clear from this letter that regardless of whether Canal undertook the defense of ATCO,

Liberty Mutual’s decision to settle was based upon its potential exposure for a judgment in excess

of $300,000 in the event ATCO’s independent contractor defense failed at trial. Even if Canal

had defended ATCO, it is undisputed that the Carlock plaintiffs were unwilling to settle within

Canal’s policy limit. Thus, the settlement costs were not caused by Canal’s refusal to defend

ATCO, and the district court erred in allowing Liberty Mutual to recover such costs.

In so holding, we reject Liberty Mutual’s argument that under Mississippi law, an insurer

that breaches its duty to defend is liable for any reasonable settlement, irrespective of the policy

limit. Liberty Mutual relies primarily on language from Mississippi Insurance Guaranty

31
R. Vol. II at 450 (emphasis added).

18
Association v. Byars,32 stating “it has long been established that when an insurer breaches its duty

to defend an insured, the insurer is liable and bound by any settlement agreement made by the

insured as a result of this breach.”33 In Liberty Mutual’s view, because Canal has not contended

that the settlement was unreasonable, it is entitled to full recovery. However, neither Byars nor

any of the other cases cited by Liberty Mutual considered the issue of an insurer’s liability for

settlement costs in excess of the applicable policy limit.34 Moreover, as recognized in Byars, it is

well established under Mississippi law that damages, including reasonable settlement costs, are

recoverable only if they are caused by or result from the insurer’s breach of its duty to defend.35

We are likewise unpersuaded by Liberty Mutual’s argument that once Canal breached the

insurance contract, it effectively waived its ability to invoke the policy limits provision. For this

32
614 So. 2d 959 (Miss. 1993).
33
Id. at 964 (emphasis added); see also Mavar Shrimp & Oyster Co. v. United States
Fidelity & Guar. Co., 187 So. 2d 871, 875 (Miss. 1996) (holding that an insurer that unjustifiably
refuses to defend a suit will be liable for a reasonable settlement made by the insured).
34
In addition to Byars, Liberty Mutual cites several cases for the proposition that
Mississippi law allows recovery of any reasonable settlement, regardless of the applicable policy
limit. See Liberty Mut. Ins. Co. v. United States Fid. & Guar. Ins. Co., 756 F. Supp. 953 (S.D.
Miss. 1990); State Farm Mut. Auto. Ins. Co. v. Universal Underwriters Ins. Co., 601 F. Supp.
286 (S.D. Miss. 1984); Mavar Shrimp & Oyster Co.,187 So. 2d at 875; Southern Farm Bureau
Cas. Ins. Co. v. Logan, 119 So. 2d 268 (Miss. 1960). However, none of these cases considered
an insurer’s liability for settlement costs in excess of its policy limits. Moreover, none of these
cases addressed the principal issue here—whether there is causal connection between Canal’s
breach and Liberty Mutual’s settlement on behalf of ATCO.
35
See, e.g., Byars, 614 So. 2d at 964 (“[I]t has long been established that when an insurer
breaches its duty to defend an insured, the insurer is liable and bound by any settlement
agreements made by the insured as a result of the breach.” (emphasis added) (citing Mavar
Shrimp & Oyster Co., 187 So. 2d at 875)); Logan, 119 So. 2d at 272 (stating that “the
unjustifiable refusal to defend . . . renders [the] insurer liable to the insured for all damages
resulting as a result of the breach” (emphasis added)).

19
proposition, Liberty quotes language from Jones v. Southern Marine & Aviation Underwriters,

Inc.,36 stating that insurers that breach their duty to defend waive their right to rely on policy

provisions that preclude liability for a settlement agreement. Neither Jones, nor any other

authority cited by Liberty Mutual has held that an insurer that wrongfully refuses to defend an

insured waives the policy limits provisions such that it would be liable for settlement costs or

other consequential damages that were not caused by its breach.

E. Prejudgment Interest

Canal also challenges the award of prejudgment interest to Liberty Mutual. The district

court awarded prejudgment interest on the attorneys’ fees, expenses, and settlement costs from

the date each payment was made. In diversity cases, issues of prejudgment interest are governed

by state law.37 We review the award of prejudgment interest for an abuse of discretion.38 “Under

Mississippi law, prejudgment interest may be allowed in cases where the amount due is liquidated

when the claim is originally made or where the denial of a claim is frivolous or in bad faith.”39 In

Canal Insurance Company v. First General Insurance Company,40 we held that a district court

has discretion under Mississippi law to award prejudgment interest to the prevailing insurer in a

coverage dispute on amounts paid on behalf of the insured for state court judgments and

36
888 F.2d 358, 363 (5th Cir. 1989).
37
Canal Ins. Co. v. First Gen. Ins. Co., 901 F.2d 45, 47 (5th Cir. 1990).
38
See Hans Constr. Co. v. Drummond, 653 So. 2d 253, 264 (Miss. 1995) (“An award of
prejudgment interest rests in the discretion of the awarding judge.” (quoting Warwick v.
Matheney, 603 So. 2d 330, 342 (Miss. 1992)).
39
Id. (quoting Warwick v. Matheney, 603 So. 2d 330, 342 (Miss. 1992)).
40
901 F.2d 45 (5th Cir. 1990).

20
settlements from the date those amounts were paid. We reasoned that “these sums were clearly

liquidated when paid” and although prejudgment interest is not mandated, “the district court

would be acting within the discretion contemplated by Mississippi law if it awarded interest on

such amounts from the dates they were paid.”41 Following First General Insurance Company, we

conclude that the district court did not abuse its discretion by awarding prejudgment interest on

amounts paid by Liberty Mutual on behalf of ATCO from the date the payments were made since

those sums were clearly liquidated when paid. Of course, in light of our holding that Liberty

Mutual is not entitled to recover its settlement payment, we affirm the award of prejudgment

interest only with respect to the award of attorneys’ fees and defense expenses.

F. Liberty Mutual’s Motion to Strike Certain Depositions

Also before this court is Liberty Mutual’s motion to strike the depositions of McConnell,

Wilson, and Mike Harrington (ATCO’s corporate designee), attached as exhibits to Canal’s

Motion for Summary Judgment, and all references to such depositions in Canal’s appellate brief.

These depositions were taken in connection with the Carlock litigation and concerned the

business relationship between McConnell and ATCO, McConnell’s description of his business,

and ATCO’s description of its business. Because we have ruled in favor of Liberty Mutual on all

issues other than the right to recover settlement costs paid on behalf of ATCO and because

Canal’s motion for summary judgment did not rely on these depositions with respect to that issue,

Liberty Mutual’s motion to strike is DENIED as moot.

III. CONCLUSION

For the foregoing reasons, we REVERSE only that portion of the judgment that awards

41
Id. at 47.

21
Liberty Mutual the $112,500.00 paid to settle the claims against ATCO in the underlying Carlock

litigation and prejudgment interest thereon of $27,594.54. Accordingly, we MODIFY 42 the

judgment to reduce Liberty Mutual’s damages award to $38,237.41 for attorneys’ fees and

expenses incurred in the defense of ATCO, and prejudgment interest of $10,230.47 calculated

from the date of each payment, for a total sum of $48,467.88, together with all costs of court and

interest until finally paid consistent with 28 U.S.C.A. § 1961.

AFFIRMED as MODIFIED.

42
See, e.g., Lowe v. Southmark Corp., 998 F.2d 335, 338 (5th Cir. 1993) (modifying
district court’s award of liquidated damages and affirming judgment as modified); Carroll v.
General Accident Ins. Co. of Am., 891 F.2d 1174, 1177 (5th Cir. 1990) (vacating award of pain
and suffering damages and punitive damages and affirming district court’s judgment as modified).

22