Quorum Health Resources, L.L.C. v. Maverick County Hospital District

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

____________________

No. 00-50699
____________________

QUORUM HEALTH RESOURCES, L.L.C.,

Plaintiff/Appellee/Cross-Appellant,

V.

MAVERICK COUNTY HOSPITAL DISTRICT
d/b/a FORT DUNCAN MEDICAL CENTER,

Defendant/Appellant/Cross-Appellee,

AND

TEXAS HOSPITAL INSURANCE NETWORK, INC.,
TEXAS HOSPITAL INSURANCE EXCHANGE,

Defendants/Cross-Appellees.

Appeals from the United States District Court
for the Western District of Texas

September 30, 2002

Before BARKSDALE and STEWART, Circuit Judges, and ROSENTHAL,*

District Judge.

ROSENTHAL, District Judge:

*
District Judge of the Southern District of Texas, sitting
by designation.

1
 The primary issue in this appeal is whether a contractual

indemnity provision meets the requirements of the Texas express

negligence rule, entitling the indemnitee to relief from a judgment

based on its own negligence. By cross-appeal, the indemnitee

challenges its insurer’s compliance with the duty to defend. The

insurer, in turn, challenges the insured’s compliance with the

cooperation clause in the insurance policy.

This court concludes that, as a matter of law, the

contract does not meet the Texas express negligence rule’s

requirements for indemnification of losses arising from the

indemnitee’s own negligence. As to the insurance issues, the

record discloses genuine issues of fact material to determining

whether the insurer breached its duty to defend. We reverse the

district court’s grant of summary judgment, rendering as to the

indemnification issue and remanding as to the duty to defend

issues. The reasons are explained below.

I. Background

In 1990, Quorum Health Resources, L.L.C. (“Quorum”), a

hospital management company, entered into a Management Agreement

with the Maverick County Hospital District d/b/a Fort Duncan

Medical Center (the “Hospital”).1 The Hospital was insured by the

1
The Hospital entered into a five-year Management
Agreement in 1990 with HCA Management Company, Quorum’s
predecessor, with effective dates from May 14, 1990 to May 14,
1995. The Hospital and Quorum renewed the Management Agreement in
May 1995, with effective dates from May 14, 1995 to May 13, 2000.
The provisions in the Agreements setting out the Hospital’s

2
Texas Hospital Insurance Exchange and Texas Hospital Insurance

Network, Inc. (collectively, “THIE”). Quorum was an additional

named insured on the Hospital’s policy.2

In June 1996, David and Veronica Rodriguez filed suit in

state court in Maverick County, Texas, on behalf of themselves and

their minor daughter, Cristina. The Rodriguez family sued the

Hospital and the obstetrician, three registered nurses, and the

nurse practitioner present at Cristina’s birth. The Rodriguez

plaintiffs alleged medical malpractice during the delivery that

left Cristina with severe mental and physical disabilities.3 The

Hospital timely notified THIE of the lawsuit. THIE assigned a law

firm to represent all the defendants.

In March 1997, the Rodriguez plaintiffs joined the

Hospital’s management company, Quorum, as an additional defendant.

THIE assigned the same lawyer to represent Quorum, along with the

previously named defendants. The joint representation proceeded

until April 13, 1998, when Quorum asserted a conflict of interest

obligation to indemnify Quorum are identical. The reciprocal
indemnity provisions, setting out Quorum’s obligation to indemnify
the Hospital, are slightly different in the two Agreements.
2
The Hospital and THIE submitted insurance policy No. CG
00 25 42 as part of the summary judgment record. The policy
provides for coverage of $100,000 per medical incident and $300,000
aggregate. Quorum is listed as an additional insured under the
policy.
3
David X. and Veronica Rodriguez, as Next Friends to
Christina Rodriguez, a Minor, v. Quorum Health Resources, L.L.C.
f/k/a Quorum Health Resources, Inc., Cause No. 96-06-13873-CV,
365th District Court of Maverick County, Texas.

3
and requested separate counsel. The parties dispute what happened

next. THIE asserts that it offered Quorum separate counsel from

its list of approved attorneys, but Quorum rejected the lawyer

offered and insisted on an attorney who was not on THIE’s list.

Quorum agrees that THIE offered a lawyer, but asserts that this

lawyer declined the representation and that THIE failed to offer a

replacement.

The Rodriguez suit proceeded to trial in Eagle Pass,

Texas, in November 1999. Quorum was represented by counsel it had

selected without THIE’s participation or involvement. Quorum’s

excess insurer, American Continental Insurance Co., paid the costs

of Quorum’s defense. Before trial began, the Rodriguez plaintiffs

nonsuited all the defendants except Quorum. The parents, David and

Veronica Rodriguez, nonsuited their individual claims against

Quorum. The trial proceeded with Quorum as the only defendant, on

claims for actual and exemplary damages for simple and gross

negligence, on behalf of the minor child.

Plaintiffs tried the case on the basis of the Ninth

Amended Petition, which alleged that Quorum committed twenty-four

separate acts of negligence. The allegations included negligent

hiring of untrained nursing personnel, failing properly to train

nursing personnel, failing to enforce the Hospital’s personnel

policies, and negligently hiring and training the Quorum employees

who managed the Hospital. The petition did not allege that Quorum

was vicariously liable for the acts or omissions of the Hospital’s

4
medical staff or the obstetrician who attended the delivery, but

who was not a Hospital employee. The petition did allege that

Quorum was vicariously liable for the negligence of two of Quorum’s

own employees working at the Hospital under the Management

Agreement: the Hospital Administrator and the Controller.4

The jury found that Quorum negligently performed services

to the Hospital that “increased the risk of injury or harm to a

patient of The Hospital” and proximately caused injury or harm to

a patient “by reliance of The Hospital upon Quorum’s undertaking to

perform such services.” The jury found Quorum 65 percent

responsible for Cristina Rodriguez’s injuries. The jury also found

the attending obstetrician negligent and assessed comparative

causation at 35 percent. The jury awarded $52 million in actual

damages and, finding malice on the part of Quorum, awarded an

additional $7.5 million in exemplary damages.

Plaintiffs settled with the obstetrician before the

verdict. In an Amended Final Judgment, the trial court deducted

the amount of the settlement and added prejudgment interest,

awarding actual damages of approximately $57 million before

postjudgment interest. The trial court disregarded the jury’s

finding of malice and ordered that plaintiffs not recover exemplary

damages against Quorum.

4
The jury found that the Administrator and Controller, who
were Quorum employees, were acting as Quorum’s employees at the
relevant times and not as the Hospital’s “borrowed employees.”

5
 Quorum filed a declaratory judgment suit in federal

district court, alleging that the indemnity provision in its

Management Agreement required the Hospital to indemnify Quorum for

the Rodriguez judgment and required the Hospital to defend Quorum

in the Rodriguez suit. Quorum also sought a declaratory judgment

that THIE had breached its duty to defend Quorum under the

insurance policy and owed Quorum a duty to indemnify for the

resulting judgment, up to the policy limits.

Both the 1990 and 1995 Management Agreements between the

Hospital and Quorum contained the following indemnity provision:

Hospital agrees to indemnify and hold harmless
Quorum, its Affiliates, and each of their
shareholders, directors, officers, employees,
and agents (“Quorum Indemnified Party”) from
and against any and all losses, claims,
damages, liabilities, costs and expenses
(including reasonable attorneys’ fees and
expenses related to the defense of any
claims), joint or several, which may be
asserted against any of the Quorum Indemnified
Parties or for which they may now or hereafter
become subject arising in connection with the
activity of the Hospital (“Quorum Claim”),
including but not limited to: (i) alleged or
actual failure by the Board to perform any of
its duties hereunder, (ii) any pending or
threatened medical malpractice or other tort
claims asserted against Quorum; (iii) any
action against Quorum brought by any of the
Hospital’s current or former employees or
Medical Staff members; (iv) any act or
omission by any Hospital employee, Medical
Staff member, or other personnel; and (v) any
violation of any requirement applicable to the
Hospital under any federal, state or local
environmental, hazardous waste or similar law
or regulation; provided that such claims have
not been caused by the gross negligence or
willful or wanton misconduct of the Quorum

6
 Indemnified Party seeking indemnification
pursuant to this Agreement.

The 1990 Management Agreement contained the following

provision setting out Quorum’s reciprocal indemnity obligation to

the Hospital:

[Quorum] agrees to indemnify and hold harmless
the Hospital and its shareholders, directors,
officers or trustees (“Hospital Indemnified
Party”) from and against all losses, claims,
damages, liabilities, costs and expenses
(including reasonable attorney’s fees and
expenses related to the defense of any
claims), joint or several, which may be
asserted against any Hospital Indemnified
Party (“Hospital claim”), as a result of any
personnel or other action brought against the
Hospital Indemnified Party by any Key Person
[the Administrator and Controller] relating to
any acts performed by such Key Person within
the scope of his or her employment by
[Quorum]; provided that such Hospital Claims
have not been caused by the gross negligence
or willful or wanton misconduct of the
Hospital Indemnified Party seeking
indemnification pursuant to this Agreement.

The 1995 Management Agreement contained this same provision, with

one change. The 1995 Agreement contained the provision stating

that Quorum would indemnify the Hospital for “losses, claims,

damages, liabilities, costs and expenses” as a result of actions

brought by a “Key Person.” However, the 1995 Agreement added that

Quorum would indemnify the Hospital for “losses, claims, damages,

liabilities, costs and expenses” from claims asserted against the

Hospital “as a result of . . . the sole negligence of Quorum

outside the scope of its employment; provided that such Hospital

Claims have not been caused by the gross negligence or willful or

7
wanton misconduct of the Hospital Indemnified Party seeking

indemnification pursuant to this Agreement.”

The insurance policy THIE issued to the Hospital

provided, in relevant part, as follows:

[THIE] shall have the right and duty to defend
any suit against the insured seeking damages
because of such injury even if any of the
allegations of the suit are groundless, false,
or fraudulent. The company may make such
investigation and, with the written consent of
the insured, such settlement of any claim or
suit as it deems expedient. 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 the judgment or
settlements.

The policy further provided that

the insured and each of its employees shall
cooperate with the company and, upon the
company’s request, assist . . . in the conduct
of suits . . . . No action shall lie against
the company unless, as a condition precedent
thereto, there shall have been full compliance
with all the terms of this policy . . . .

Quorum and the Hospital filed cross-motions for summary

judgment as to the enforceability of the Hospital’s obligation to

indemnify Quorum for the $52 million judgment. Quorum and THIE

filed cross-motions for summary judgment as to whether THIE had

breached its duty to defend and whether Quorum had breached its

duty of cooperation. The district court held that: (1) the

indemnity provision in the Management Agreement between the

Hospital and Quorum met the Texas express negligence rule and

required the Hospital to indemnify Quorum for the damages resulting

8
from Quorum’s own negligence, making the Hospital liable for the

amount Quorum paid to settle the Rodriguez judgment, approximately

$31 million; (2) the Hospital did not owe Quorum common law

indemnification under Texas law; (3) the $100,000 statutory damage

cap applicable to the Hospital as a governmental unit of the State

of Texas under the Texas Tort Claims Act5 did not limit the

Hospital’s obligation to indemnify Quorum; (4) the Hospital did not

owe Quorum a duty to defend because the Management Agreement

permitted, but did not require, the Hospital to participate in the

defense of any action against Quorum; (5) THIE did not breach its

duty to defend Quorum under the insurance policy; and (6) THIE was

not obligated to indemnify Quorum for the Rodriguez judgment

because Quorum breached its duty to cooperate with the insurer

under the policy by rejecting the defense counsel THIE offered.

All parties appealed.

The Hospital appeals on two grounds: the indemnity

provision in the Management Agreement fails the express negligence

test under Texas law and is unenforceable as to losses resulting

from Quorum’s own negligence; and the Hospital’s indemnity

obligations to Quorum, if any, are limited by the statutory cap

limiting tort damages against a State hospital district. Quorum

asserts it is entitled to contractual indemnity from the Hospital

for the $31 million that Quorum paid to settle with the Rodriguez

5
TEX. CIV. PRAC. & REM. CODE ANN. §§ 101.001-.109 (Vernon 1997
& Supp. 2002).

9
family. Quorum and the Hospital agree that the indemnification

issues between them are properly decided as a matter of law.

Quorum cross-appeals from the district court’s grant of

summary judgment, holding that THIE did not breach its duty to

defend Quorum and that Quorum did breach its duty to cooperate with

THIE. Quorum argues that there are genuine issues of fact material

to determining whether THIE satisfied its obligation to provide

counsel to Quorum or whether Quorum rejected the lawyer THIE

provided. Quorum argues that the evidence in the record either

negated THIE’s claim that Quorum breached the cooperation clause

or, at least, raised genuine factual disputes that precluded

summary judgment. Quorum also asserts that the record contains no

evidence that THIE suffered prejudice as a result of Quorum’s

actions or, at least, raised genuine factual disputes as to whether

THIE lost any right under its policy, precluding summary judgment.

Quorum argues that the district court’s ruling on these issues

should be reversed and remanded for trial.

Because of our resolution of the Hospital’s first ground

for appeal, we do not decide whether the Hospital’s indemnity

obligations to Quorum are limited by the Texas statutory cap on

tort damages against a State hospital district. The other bases

for appeal and cross-appeal are examined below.

II. The Standards of Review

10
 A grant of summary judgment is reviewed de novo. See

Dallas County Hosp. Dist. v. Associates’ Health and Welfare Plan,

293 F.3d 282, 285 (5th Cir. 2002). The interpretation of a

contract is a question of law, subject to de novo review. Fina,

Inc. v. ARCO, 200 F.3d 266, 268 (5th Cir. 2000); Am. States Ins.

Co. v. Bailey, 133 F.3d 363, 369 (5th Cir. 1998); Canutillo Indep.

Sch. Dist. v. Nat’l Union Fire Ins., 99 F.3d 695, 700 (5th Cir.

1996). Summary judgment is appropriate when there “is no genuine

issue as to any material fact and the moving party is entitled to

a judgment as a matter of law.” Conoco, Inc. v. Medic Systems,

Inc., 259 F.3d 369, 371 (5th Cir. 2001). The court must view facts

and inferences in the light most favorable to the party opposing

the motion. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248

(1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S.

574, 587-88 (1986). A factual dispute precludes a grant of summary

judgment if the evidence would permit a reasonable jury to return

a verdict for the nonmoving party. See Liberty Lobby, 477 U.S. at

248; Merritt-Campbell, Inc. v. RxP Prods., Inc., 164 F.3d 957, 961

(5th Cir. 1999). Credibility determinations are not part of the

summary judgment analysis. Liberty Lobby, 477 U.S. at 247-49.

Texas law applies in this diversity case, requiring this

court to consider the Texas express negligence rule for indemnity

contracts. “‘[I]n the absence of explicit guidance from the state

courts, [this court] must attempt to predict state law, not to

create or modify it.’” Assoc. Int’l Ins. Co. v. Blythe, 286 F.3d

11
780, 783 (5th Cir. 2002) (quoting United Parcel Serv., Inc. v.

Weben Indus., Inc., 794 F.2d 1005, 1008 (5th Cir. 1986)). Although

there is no Texas Supreme Court case involving the exact contract

language at issue here, Texas Supreme Court cases applying the

applicable rules of contract construction to similar indemnity

provisions provide ample guidance for this court to “substitute

[an] informed judgment for [an] informed guess[]” as to how a

Texas court would rule if presented with these facts. Nat’l Educ.

Assoc., Inc. v. Lee County Bd. of Public Instruction, 467 F.2d 447,

449 (5th Cir. 1972); Erie R.R. Co. v. Tompkins, 304 U.S. 64, 79-80

(1938); Harris v. Parker College of Chiropractic, 286 F.3d 790, 793

(5th Cir. 2002).

III. Analysis

A. The Texas Express Negligence Rule

The express negligence rule is a rule of contract

interpretation that applies specifically to agreements to indemnify

another party for the consequences of that party’s own negligence.

Under the express negligence rule, contracting parties seeking to

indemnify one party from the consequences of its own negligence

must express that intent in specific terms, within the four corners

of the document. Ethyl Corp. v. Daniel Const. Co., 725 S.W.2d 705,

707-08 (Tex. 1987). The Texas Supreme Court adopted this rule in

the Ethyl case, rejecting the less stringent “clear and

unequivocal” test, in recognition of the fact that “indemnification

12
of a party for its own negligence is an extraordinary shifting of

risk.”6 Id.; Dresser Industries, Inc. v. Page Petroleum, Inc., 853

S.W.2d 505, 508 (Tex. 1993). The express negligence rule is based

on a requirement of fair notice. Dresser, 853 S.W.2d at 506.

In Ethyl, a third party successfully sued Ethyl, the

premises owner, for injuries occurring during the performance of

Ethyl’s contract with Daniel, the contractor. 725 S.W.2d at 706-

07. Ethyl then sued Daniel, seeking contractual indemnity. The

jury found both Ethyl and Daniel negligent, apportioning liability

for the third party’s injuries ninety percent to Ethyl and ten

percent to Daniel. The contractual indemnity provision stated as

follows:

[Daniel] shall indemnify and hold [Ethyl]
harmless against any loss or damage to persons
or property as a result of operations growing
out of the performance of this contract and
caused by the negligence or carelessness of
[Daniel], [Daniel’s] employees,
Subcontractors, and agents and licensees.

Id. at 707. The Texas Supreme Court held that this contractual

language did not meet the express negligence test. Ethyl argued

that it was entitled to indemnification from Daniel. The Court

held that the language providing indemnification for “any loss . .

6
Under the “clear and unequivocal” test, a court examines
“whether the contract between the parties expresses in clear and
unequivocal language the intent of the indemnitor to indemnify the
indemnitee against the consequences of the indemnitee’s own
negligence whether such negligence was the sole proximate cause of
the injury or a proximate cause jointly and concurrently with the
indemnitor’s negligence.” 725 S.W.2d at 707.

13
. as a result of operations” did not expressly state that the

indemnity obligation included losses resulting from Ethyl’s own

negligence. The Texas Supreme Court held that under the express

negligence rule, “[i]ndemnitees seeking indemnity for the

consequences of their own negligence which proximately causes

injury jointly or concurrently with the indemnitor’s negligence

must also meet the express negligence test.” Id. at 708. The

contract contained “no provision for contractual comparative

indemnity,” id., and the Texas Supreme Court refused to imply such

an obligation from the contract language.

The Texas Supreme Court explained the need for the strict

requirements of the express negligence doctrine:

As we have moved closer to the express
negligence doctrine, the scriveners of
indemnity agreements have devised novel ways
of writing provisions which fail to expressly
state the true intent of those provisions.
The intent of the scriveners is to indemnify
the indemnitee for its negligence, yet be just
ambiguous enough to conceal that intent from
the indemnitor. The result has been a
plethora of law suits to construe those
ambiguous contracts. We hold the better
policy is to cut through the ambiguity of
those provisions and adopt the express
negligence doctrine.

Id. at 708-09. Whether a contractual indemnity provision complies

with the express negligence doctrine is a question of law for the

court. See Dresser, 853 S.W.2d at 509; Fisk Elec. Co. v.

Constructors & Assocs., Inc., 888 S.W.2d 813, 814 (Tex. 1994).

1. Does the Express Negligence Rule Apply?

14
 The express negligence rule applies if Quorum seeks

indemnification for its own acts of negligence or for the joint or

concurrent negligence of Quorum and the Hospital. “Indemnitees

seeking indemnity for the consequences of their own negligence

which proximately causes injury jointly or concurrently with the

indemnitor’s negligence must also meet the express negligence

test.” Ethyl, 725 S.W.2d at 708. If Quorum is seeking

indemnification for the consequences of the Hospital’s negligence,

the express negligence doctrine does not apply. See id.; Gulf Ins.

Co. v. Burns Motors, Inc., 22 S.W.3d 417, 423-24 (Tex. 2000);

Boston Old Colony Ins. Co. v. Tiner Assocs. Inc., 288 F.3d 222, 230

(5th Cir. 2002).

Quorum argues that the judgment in the Rodriguez suit is

not based on Quorum’s own negligence, but rather solely on the

negligence of the Hospital Board and the Hospital personnel who

attended Cristina Rodriguez’s delivery. The Rodriguez plaintiffs

nonsuited the Hospital and its employees before trial. The

Rodriguez jury answered questions only as to the negligence of

Quorum and the obstetrician, who was not a Hospital employee. The

jury found that Quorum negligently fulfilled duties it owed to the

patients of the Hospital. The jury answered the comparative

causation issue by finding Quorum 65 percent at fault and the

obstetrician 35 percent at fault. The jury answered questions

finding that Quorum was liable for the negligence of the Quorum

15
Administrator and Controller, Quorum employees provided to the

Hospital under the Management Agreement.

The record does not support Quorum’s argument that the

damages awarded resulted from the sole negligence of the Hospital

and its employees and staff members, not Quorum’s employees. The

express negligence rule applies.

2. Does the Contract Language Satisfy the Express Negligence
Rule?

Quorum argues that the language of the indemnity

provision satisfies the Texas express negligence rule, so as to

require the Hospital to indemnify Quorum from the consequences of

Quorum’s own negligence. Quorum relies on one general provision

and two more specific provisions of the Management Agreement

paragraph entitled “Indemnification by Hospital.”

The first provision Quorum invokes is the statement that

the Hospital will indemnify Quorum from “losses, claims, damages,

liabilities, costs, and expenses . . . arising in connection with

the activity of the Hospital (‘Quorum Claim’).” The second

provision is the definition of “Quorum Claim” as “including but not

limited to . . . any pending or threatened medical malpractice or

other tort claims asserted against Quorum.” The third provision

is the statement that the Hospital will not indemnify Quorum for

claims caused by Quorum’s “gross negligence or willful or wanton

misconduct.” As to the second and third provisions, Quorum argues

that because a medical malpractice claim is a negligence claim, and

16
because the express exclusion for gross negligence is “tantamount

to the express inclusion of ordinary negligence,” the contract,

construed as a whole, sufficiently expressed the parties’ intent to

require the Hospital to indemnify Quorum for its own ordinary

negligence.7 The Hospital argues that the contract language fails

to meet the stringent requirements of the Texas express negligence

rule.

This court compares the language of the Management

Agreement indemnity provision to similar provisions that courts

have examined under the Texas express negligence standard. The

comparison reveals that the Management Agreement provision does not

meet the Texas express negligence rule and cannot be the basis for

requiring the Hospital to indemnify Quorum for the judgment

resulting from its own negligence or the concurrent negligence of

the indemnitor and indemnitee.

The Texas Supreme Court has consistently refused to

enforce indemnity agreements that do not expressly and specifically

provide for indemnification for the indemnitee’s own negligence.

General, broad statements of indemnity are not effective to shift

the consequences of the indemnitee’s own negligence to the

indemnitor. The indemnity provision that the Court found

7
Although the district court found that general principles
of contract construction supported Quorum’s argument, the court
accurately noted that “[i]t is absurd that a county hospital
district, which has a $100,000.00 statutory cap on its liability,
would intentionally agree to indemnify another party for an
unspecified amount.”

17
ineffective in Ethyl, the case in which Texas adopted the express

negligence rule, provided that the contractor would indemnify the

owner against "any loss . . . [incurred] as a result of operations

growing out of the performance of this contract and caused by the

negligence or carelessness of Contractor [indemnitor] . . . ." 725

S.W.2d at 708. The Texas Supreme Court rejected the argument that

this broad language sufficiently expressed the intent that the

contractor/indemnitor would absorb the consequences of the

owner/indemnitee’s negligence, including joint negligence. Id.

The Texas courts have rigorously applied the express

negligence rule since Ethyl was decided. In Gulf Coast Masonry,

Inc. v. Owens-Illinois, Inc., 739 S.W.2d 239 (Tex. 1987), a

contractor agreed to indemnify the plant owner for losses "arising

out of or in any way connected with or attributable to the

performance or non-performance of work hereunder by

contractor. . . ." Id. at 240. The Texas Supreme Court held that

the clause failed the express negligence test because the language

did not specifically and expressly state that the losses included

those resulting from the owner’s own negligence. Id. In Fisk

Elec. Co. v. Constructors & Assoc. Inc., the indemnity clause

provided that "[t]o the fullest extent permitted by law, [Fisk]

shall indemnify, hold harmless, and defend [Constructors] ... from

and against all claims, damages, losses, and expenses, including

but not limited to attorney's fees..." arising out of or resulting

from the performance of Fisk's work. 888 S.W.2d at 814. The Texas

18
Supreme Court held that language insufficiently specific to provide

“fair notice” that Fisk was obligated to indemnify Constructors for

its own negligence. Id. at 815-16; see also DDD Energy, Inc. v.

Veritas DGC Land, Inc., 60 S.W.3d 880, 883 (Tex. App.–Houston [14th

Dist.] 2001, n.p.h.) (holding that the following clause did not

expressly state that Veritas would indemnify DDD for DDD’s own

negligence: “Veritas shall indemnify, defend, . . . [DDD] for all

claims, damages, causes of actions, and liabilities resulting from

Veritas' failure to conduct seismic operations in an orderly and

workmanlike manner . . . ”).

The Texas Supreme Court has applied the express

negligence rule so strictly that contracts defining what is

included in an indemnity obligation by stating what is excluded

fail the rule’s requirements. In Singleton v. Crown Cent.

Petroleum Corp., 729 S.W.2d 690 (Tex. 1987), the plaintiff sued

the premises owner and the contractor, for injuries caused by the

contractor’s employee. The jury found that the owner and

contractor were concurrently negligent. The trial court required

the contractor to indemnify the owner based on an indemnity

agreement that provided as follows:

Contractor agrees to . . . indemnify . . .
owner . . . from and against any and all
claims . . . of every kind and character
whatsoever, . . . for or in connection with
loss of life or personal injury . . . directly
or indirectly arising out of . . . the
activities of contractor . . . excepting only

19
 claims arising out of accidents resulting from
the sole negligence of owner.

713 S.W.2d 115, 118 (Tex. App. – Houston [1st Dist.] 1986)

(emphasis added). The Texas Supreme Court held that the indemnity

agreement did not satisfy the express negligence rule. Singleton,

729 S.W.2d at 691. The Court explained this result more fully in

a later opinion:

The indemnity contract in Singleton did not
specifically state that [Contractor] was
obligated to indemnify [Owner] for [Owner’s]
own negligence. Rather, it specifically
stated what was not to be indemnified, “claims
resulting from the sole negligence of the
owner.” The agreement was an implicit
indemnity agreement requiring [Owner] to
deduce his full obligation from the sole
negligence exception.

Atlantic Richfield Co. v. Petroleum Personnel, Inc., 768 S.W.2d

724, 725 (Tex. 1989).

Under these Texas Supreme Court cases, a contract subject

to the express negligence rule cannot define what is included in an

indemnity provision by stating what obligations are outside that

indemnity agreement. Such implicit agreements to require an

indemnitor to indemnify against the indemnitee’s own negligence are

not express and, therefore, not enforceable. Id.

By contrast, Texas courts have enforced indemnity

agreements that state, in clear, express, and specific terms, the

extent of the obligation to indemnify. In Atlantic Richfield, the

Court considered an indemnity clause providing that the indemnitor

would indemnify the indemnitee for “any negligent act or omission

20
of [the indemnitee], its officers, agents or employees. . . .” 768

S.W.2d at 726. The Texas Supreme Court held that this language met

the requirements of the express negligence rule. Id. In Enserch

Corp. v. Parker, 794 S.W.2d 2, 6-7 (Tex. 1990), the Court

considered a clause providing that the indemnitor would indemnify

for any claims “regardless of whether such claims are founded in

whole or in part upon alleged negligence of [the indemnitee]” and

that the indemnitor “further agrees to indemnify and hold harmless

[the indemnitee] . . . in respect to such matters.” The Court held

that the contract defined the parties’ intent to indemnify for the

consequences of the indemnitee’s own negligence. Id. at 8. In

Maxus Exploration, Co. v. Moran Brothers, Inc., 817 S.W.2d 50, 56

(Tex. 1991), the court found that the following provision met the

express negligence test: "Diamond Shamrock agree[s] to indemnify

Moran against all bodily injury, death and property claims by its

employees or the employees of its contractors 'without limit and

without regard to the cause or causes thereof or the negligence of

any party or parties, . . . .’” Id.; see also Permian Corp. v.

Union Texas Petroleum Corp., 770 S.W.2d 928, 929-930 (Tex. App.-El

Paso 1989, no writ)(clause providing "Contractor hereby

indemnifies and agrees to protect, hold and save Union Texas . . .

harmless from and against all claims, . . . including but not

limited to injuries to employees of Contractor, . . . on account

of, arising from or resulting, directly or indirectly, from the

work and/or services performed by Contractor . . . and whether the

21
same is caused or contributed to by the negligence of Union Texas,

its agent or employees, . . . " met the express negligence test).

At one end of the spectrum, general statements providing

for indemnification for a type of activity from which losses or

claims arise do not satisfy the express negligence doctrine. See,

e.g., Fisk Elec., 888 S.W.2d at 814; Gulf Coast Masonry, 739 S.W.2d

at 240; Ethyl, 725 S.W.2d at 708. Statements that require

inference or extension to impose an indemnification obligation for

the indemnitee’s own negligence do not satisfy the express

negligence doctrine. See, e.g., Singleton, 729 S.W.2d at 690;

Houston Lighting & Power v. Atchison, Topeka, & Santa Fe Rwy. Co.,

890 S.W.2d 455, 458 (Tex. 1994) (provision expressly providing

indemnification for indemnitee’s own negligence could not be

inferentially extended to include indemnification for strict

liability claims against indemnitee); see also Glendale Constr.

Servs., Inc. v. Accurate Air Sys., Inc., 902 S.W.2d 536, 538-39

(Tex. App.–Houston [1st Dist.] 1995, writ denied) (indemnification

clause applying to loss “regardless of whether it was caused in

part by a party indemnified hereunder” does not expressly include

loss from negligence); Lee Lewis Constr., Inc. v. Harrison, 64

S.W.3d 1, 20-22 (Tex. App.–Amarillo 1999), aff’d on other grounds,

70 S.W.3d 778 (Tex. 2001) (same). At the other end of the

spectrum, indemnity provisions explicitly and affirmatively stating

that the parties intend to provide indemnification for the

indemnitee’s own negligence provide fair notice under the express

22
negligence doctrine. See, e.g., Maxus Exploration, 817 S.W.2d at

56; Atlantic Richfield, 768 S.W.2d at 726; Enserch, 794 S.W.2d at

8.

Quorum essentially argues that the indemnity provisions

in the Management Agreement place it at the enforceable end of the

spectrum, allowing the district court to use general contract

construction principles to view the contract as a whole and

conclude that the indemnity clauses were sufficiently specific to

give the Hospital fair notice of its obligation to indemnify Quorum

for losses resulting from Quorum’s own negligence. Quorum’s

argument fails under the Texas cases on which it relies.

Quorum first relies on the general statement in the

“Indemnification by Hospital” provision, stating that the Hospital

“agrees to indemnify and hold harmless Quorum . . . for any and all

losses, claims, damages, liabilities, costs, and expenses . . .

joint or several . . . arising in connection with the activity of

the Hospital . . . .” Under clear Texas Supreme Court precedent,

this language is insufficient to establish, in the required express

terms, that the parties intended that the Hospital would indemnify

Quorum for its own negligence. See, e.g., Ethyl, 725 S.W.2d at 708

(“any loss” arising as “a result of operations” does not convey

intent to cover the indemnitee’s own negligence).

Quorum argues that indemnity provision’s definition of

the losses, claims, and damages for which the Hospital must

indemnify Quorum provides the necessary specificity. The

23
Management Agreement defines the losses, claims, and damages

covered by the Hospital’s indemnification obligation as “including,

but not limited to . . . medical malpractice and other tort claims

asserted against Quorum.” Quorum argues that “medical malpractice

or other tort claims asserted against Quorum” includes claims based

on Quorum’s own negligence. However, not all “losses, claims,

damages, [or] liabilities” arising in connection with a medical

malpractice or other tort claim asserted against Quorum are

necessarily based on Quorum’s own negligence. A statement that

indemnification applies to certain types of claims does not extend

the obligation to the indemnitee’s own negligence, even if the

types of claims specified could include claims based on the

indemnitee’s negligence. In Ethyl, for example, the contract

provided indemnity for losses “as a result of the operations

growing out of the performance of this contract.” 725 S.W.2d at

707. Ethyl, the indemnitee, argued that this language was so broad

that it covered all losses resulting from contract performance,

including losses caused by Ethyl’s own negligence. The Texas

Supreme Court held that such a broad statement of indemnity did not

meet the express negligence test. Id.; accord Gulf Coast Masonry,

739 S.W.2d at 239-40 (claims “arising out of or in any way

connected with or attributable to” a list of specified items did

not state with sufficient specificity the parties’ intent to

indemnify for the party’s own negligent performance of the

described items); DDD Energy, 60 S.W.3d at 883 (“all claims”

24
asserted “on account of . . . damage to property” insufficient to

establish intent to indemnify for the indemnitee’s own negligence

that caused damage to property).

The language in the Management Agreement provision

setting out the Hospital’s obligation to indemnify Quorum does not

expressly and specifically state that the Hospital must indemnify

Quorum for losses, damages, liabilities, and costs of defense,

arising in connection with medical malpractice or other tort claims

asserted against Quorum and resulting from Quorum’s negligence.

The language in the provision does not satisfy the requirements of

the express negligence rule.

Quorum also argues, and the district court concluded,

that the language excluding losses or claims caused by Quorum’s

gross negligence from the Hospital’s obligation to indemnify Quorum

meant that the parties intended to include losses, damages, and

claims caused by Quorum’s simple negligence within the Hospital’s

indemnity obligation. Quorum cites “established principles” of

contract construction and interpretation to support this result.

However, the express negligence doctrine is a rule of contract

construction that imposes requirements beyond the “established

principles” of construction on which Quorum relies. See Dresser,

853 S.W.2d at 508. The express negligence rule requires an

explicit statement of the parties’ intention to require the

Hospital to indemnify Quorum for the consequences of its own simple

negligence. Ethyl, 725 S.W.2d at 707-08.

25
 The Texas Supreme Court has held that an indemnity

agreement that implies an obligation to indemnify for the

indemnitee’s own negligence as to one category or type of liability

by excluding it for a different category or type of liability is

not enforceable under the express negligence doctrine. The Texas

Supreme Court held in Singleton, 729 S.W.2d at 691, and Atlantic

Richfield, 768 S.W.2d at 725, that an agreement that implies an

obligation to indemnify for the indemnitee’s own negligence as to

one degree or type of liability - concurrent negligence - by

excluding it for a different degree or type of liability - sole

negligence - is not enforceable under the express negligence

doctrine. Under that holding, the language in the Management

Agreement requiring deduction to determine what is included in the

indemnity obligation – indemnity for Quorum’s simple negligence –

from the description of what is excluded – indemnity for Quorum’s

gross negligence – does not meet the “explicit” requirement of the

Texas express negligence rule.

Texas cases decided since Singleton and Atlantic

Richfield have reached similar results. In Texas Utils. Elec. Co.

v. Babcock & Wilcox Co., Inc., 893 S.W.2d 739, 740 (Tex. App. –

Texarkana 1995, no writ), Texas Utilities sought indemnification

from Babcock & Wilcox for a claim that Texas Utilities had settled

with a third party arising from the use of equipment sold by

Babcock & Wilcox to Texas Utilities. Texas Utilities, the

purchaser, asserted that it and Babcock & Wilcox, the seller, were

26
concurrently negligent in causing the injury that formed the basis

of the claim. Id. The indemnity provision in the contract between

the parties provided that

[Seller] shall . . . indemnify . . .
[Purchaser] . . . from and against any and
all claims . . . of every kind and character
whatsoever arising in favor of any person or
entity . . . with the only exception being
that . . . [Purchaser] shall not be entitled
to indemnification for claims, demands,
expenses, judgments, and causes of action
resulting from [Purchaser’s] sole negligence.

Id. at 741-42. The court held that, as in Singleton, the

contract’s exclusion of the purchaser/indemnitee’s sole negligence

from the indemnity obligation failed the express negligence test

because it did not affirmatively state that the parties intended to

include indemnity for concurrent negligence. Id. Similarly, in

Houston Lighting & Power, 890 S.W.2d at 458, the Texas Supreme

Court held that a contract provision expressly providing

indemnification for the indemnitee’s own negligence could not be

extended by inference to require indemnification for the

indemnitee’s losses resulting from strict liability.

These results are consistent with Ethyl itself, the

opinion in which the Texas Supreme Court adopted the express

negligence test as the Texas rule. In Ethyl, the court first

considered whether the contractor was required to indemnify the

owner for the damages based on a broad provision providing

indemnity for “losses as a result of the operations growing out of

the performance of this contract.” 725 S.W.2d at 707. The court

27
held that the indemnity obligation did not extend to the owner’s

own negligence. The indemnity provision also explicitly stated

that the contractor would indemnify the owner for damages “caused

by the negligence or carelessness of Contractor.” Ethyl argued it

was entitled to indemnification because the jury found the damages

were proximately caused by both the owner and contractor. 725

S.W.2d at 707. The court held, however, that this provision,

requiring indemnification for losses caused by the indemnitor’s

negligence, did not include indemnification for the concurrent

negligence of both the indemnitee and indemnitor. The contract did

not explicitly include concurrent negligence within the indemnity

obligation and the court declined to find it by deduction or

inference. Id.

These Texas cases make it clear that an indemnity

provision excluding one degree or type of liability does not permit

a Texas court to find that the parties implicitly intended to

include indemnification for a different degree or type of

liability. This result applies even if excluding the specified

type or degree of liability appears, by deduction, to leave only

the type or degree of liability for which indemnity is sought.

Excluding sole negligence from an indemnity obligation would appear

to leave concurrent negligence within the indemnity obligation, but

the Texas Supreme Court in Singleton and Atlantic Richfield held

that a contract cannot implicitly include an obligation to

indemnify for the indemnitee’s concurrent negligence by explicitly

28
excluding the obligation to indemnify for the indemnitee’s sole

negligence. Singleton, 729 S.W.2d at 691; Atlantic Richfield, 768

S.W.2d at 725.

A provision excluding the indemnitee’s gross negligence

from the losses, damages, or claims covered by the indemnity

obligation appears, by deduction, to leave the indemnitee’s simple

negligence within the indemnity obligation. However, just as a

provision explicitly excluding indemnification for the indemnitee’s

sole negligence is insufficient to establish inclusion of

indemnification for the indemnitee’s concurrent negligence, so the

provision in the Management Agreement explicitly excluding Quorum’s

gross negligence from the Hospital’s indemnification obligation is

insufficient to require the Hospital to indemnify Quorum for

Quorum’s simple negligence. The indemnity provision’s exclusion of

losses, damages, and claims caused by Quorum’s gross negligence

from the Hospital’s indemnity obligation does not explicitly state

that the Hospital is obligated to indemnify Quorum for losses,

damages, or claims caused by Quorum’s simple negligence. Rather,

the exclusion of gross negligence creates an implicit agreement to

indemnify for simple negligence, requiring the Hospital to deduce

its full obligation from the gross negligence exception. An

implicit indemnity agreement does not pass the Texas express

negligence test. Singleton, 729 S.W.2d at 691; Atlantic Richfield,

768 S.W.2d at 725; Houston Lighting & Power, 890 S.W.2d at 458.

29
 Quorum cites Fina, Inc. v. ARCO, 200 F.3d 266 (5th Cir.

2000), to support its argument that the indemnity provision is

sufficient to meet the express negligence test. In Fina, the court

held that an indemnity provision excluding claims caused by the

indemnitee’s “gross negligence” did not expressly state the

parties’ intent to indemnity against strict liability claims. In

reaching this conclusion, the court in Fina stated: “Even if the

exclusion of gross negligence from the indemnity’s coverage is

interpreted as indicating that [the indemnitor] intended to

indemnify [the indemnitee] for ordinary negligence,[] claims based

on strict liability are of quite a different nature.” 200 F.3d at

273 (citing Rizzo v. John E. Healy and Sons, Inc., 1990 WL 18378,

at *2 (Del. Super. Feb.16, 1990); Laws v. Ayre Leasing, 1995 WL

465334, at *2 (Del. Super. July 31, 1995)). Quorum argues that

this sentence permits a court to find that a contract excluding

gross negligence from indemnification shows the parties’ intent to

include simple negligence.

Fina involved contracts governed by both Texas and

Delaware law. Although the court made the statement Quorum cites

in analyzing whether the indemnity provision was enforceable under

Texas law, the only authorities the court cited in support are

unpublished Delaware cases. Delaware follows the more permissive

“clear and unequivocal” test. As the court in Fina noted, when the

Texas Supreme Court adopted the express negligence standard, it

rejected the “clear and unequivocal” test. In Fina, the court

30
concluded that under Texas law, an indemnity provision expressly

excluding gross negligence claims could not be enforced as applied

to a strict liability claim. The dicta in Fina does not make the

indemnification provision at issue here enforceable.

Quorum also relies on Banzhaf v. ADT Sec. Sys. Southwest,

Inc., 28 S.W.3d 180, 189 (Tex. App. – Eastland 2000, pet. denied),

involving an indemnity provision in a security alarm installation

contract. The contract provided that the store would indemnify the

alarm company, ADT, for claims against ADT “for failure of its

equipment or service in any respect.” Id. The court stated that

the provision met the express negligence rule and required

indemnification of ADT for claims based on “failure of [ADT’s]

equipment or service in any respect.” Id. Banzhaf does not lead

to the conclusion that the Hospital must indemnify Quorum for its

sole negligence under the Management Agreement. In Banzhaf,

another section of the indemnity provision made it clear that the

parties intended to indemnify ADT “if loss, damage or injury”

resulted from “performance or nonperformance of obligations imposed

by this contract or from negligence, active or otherwise, of ADT,

its agents or employees,” a statement which clearly did satisfy the

express negligence rule. Id. at 189-90.

The Banzhaf court cited Arthur’s Garage, Inc. v. Racal-

Chubb Sec. Sys., 997 S.W.2d 803, 814 (Tex. App. – Dallas 1999, no

pet.), in support of its statement that a contract does not have to

31
include the word “negligence” to satisfy the express negligence

doctrine. Arthur’s Garage does not support this statement because

the indemnity clause in that case did include the word

“negligence.” In Arthur’s Garage, the indemnity clause in the

alarm installation contract provided that the purchaser would

indemnify the seller for claims brought by third parties

regardless of cause, including [seller’s]
performance or failure to perform, and
including defects in products, design,
installation, maintenance, operation or non-
operation of the system, whether based upon
negligence, active or passive, warranty, or
strict product liability on the part of
[seller], its employees or agents . . . .

Id. at 815. The court concluded that because “this provision

clearly and specifically provides that it covers any negligence .

. . on the part of the [security alarm seller and installer],” it

met the express negligence test. Id.8

In contrast to Banzhaf, other Texas courts of appeals

have held that an indemnity provision must specifically refer to

the indemnitee’s own negligence to meet the express negligence

test. In Monsanto Co. v. Owens-Corning Fiberglass, 764 S.W.2d 293,

295 (Tex. App. - Houston [1st Dist.] 1988, no writ), the Houston

8
The Texas Supreme Court denied the petition for review of
the Banzhaf decision with the notation “petition denied,”
indicating that “[t]he supreme court is not satisfied that the
opinion of the court of appeals has correctly declared the law in
all respects, but determines that the petition presents no error
that requires reversal or that is of such importance to the
jurisprudence of the state as to require correction.” TEXAS RULES OF
FORM 88 (9th ed. 1998).

32
Court of Appeals held that the contract did not meet the express

negligence test, in part because the agreement did not use the word

“negligence." In Lee Lewis Constr., 64 S.W.3d at 21 n.13, the

court interpreted Ethyl and its progeny as explicitly requiring the

parties to use the word “negligence” in stating the indemnitor’s

obligation to indemnify the indemnitee for the indemnitee’s own

negligence.

In the cases in which the Texas Supreme Court has allowed

indemnification of a party for its own negligence, the contracts

contained language that expressly referred to the type of the

indemnified party’s negligence covered by the indemnity obligation.

Atlantic Richfield, 768 S.W.2d 724; Enserch, 794 S.W.2d 2; Maxus

Exploration, 817 S.W.2d at 56; Payne & Keller, Inc. v. P.P.G.

Indus., Inc., 793 S.W.2d 956, 957-59 (Tex. 1990) (indemnitor owed

indemnification for indemnitee’s concurrent negligence where

indemnity provision covered claims “arising out of . . . the acts

or omissions . . . of [indemnitor] . . . in the performance of the

work . . . irrespective of whether [indemnitee] was concurrently

negligent . . . but excepting [claims] caused by the sole

negligence of [indemnitee]”). In contrast, Texas courts do not

allow indemnification of a party for its own negligence when the

contract did not expressly identify the precise category of

liability for which indemnification was sought. Ethyl, 725 S.W.2d

at 708 (no indemnification for concurrent negligence when sole

negligence of indemnitor included); Singleton, 729 S.W.2d at 691

33
(no indemnification for concurrent negligence when sole negligence

of indemnitee excluded); Texas Utils., 893 S.W.2d at 741 (same);

see also Houston Lighting & Power, 890 S.W.2d at 458 (no

indemnification for strict liability when negligence of indemnitee

included); Fina, 200 F.3d at 273 (no indemnification for strict

liability when gross negligence of indemnitee excluded). The

exclusion of coverage for Quorum’s gross negligence falls into the

second category because it fails expressly to state the parties’

intent to require the Hospital to indemnify Quorum for losses,

claims or damages resulting from Quorum’s simple negligence.

The Management Agreement provision requiring the Hospital

to indemnify Quorum fails to satisfy the fair notice requirements

of the express negligence rule. As a matter of law, the provision

is not enforceable against the Hospital for claims based on

Quorum’s own negligence. Quorum is not entitled to indemnification

from the Hospital for the Rodriguez judgment.

B. The Insurer’s Duty to Defend and Indemnify

Texas law is clear that insurance policies are subject to

the same rules of construction generally applicable to contracts.

Kelley-Coppedge, Inc. v. Highlands Ins. Co., 980 S.W.2d 462, 464

(Tex. 1998)(citations omitted). If one party to an agreement

commits a material breach, the other party is discharged or excused

from any otherwise binding obligation to perform. See Hernandez v.

Gulf Group Lloyds, 875 S.W.2d 691, 693 (Tex. 1994); Mead v. Johnson

34
Group, Inc., 615 S.W.2d 685, 689 (Tex. 1981). An insurer’s duty to

defend and its duty to indemnify are distinct and separate.

Farmers Tex. County Mut. Ins. v. Griffin, 955 S.W.2d 81, 82 (Tex.

1997); E&L Chipping Co. v. Hanover Ins. Co., 962 S.W.2d 272, 274

(Tex. App. – Beaumont 1998, no pet.); Argonaut Southwest Ins. Co.

v. Maupin, 500 S.W.2d 633, 636 (Tex. 1973). The duty to defend is

based upon the factual allegations in the pleadings and the policy

language itself. See American Nat. Gen. Ins. Co. v. Ryan, 274

F.3d 319 (5th Cir. 2001); American Physicians Ins. Exch. v. Garcia,

876 S.W.2d 842, 847-48 (Tex. 1994). The duty to indemnify arises

from the actual facts that are developed to establish liability in

the underlying suit. See Trinity Univ. Ins. Co. v. Cowan, 945

S.W.2d 819, 821 (Tex. 1997) (citing Heyden Newport Chem. Corp. v.

Southern Gen. Ins. Co., 387 S.W.2d 22, 25 (Tex. 1965)). An insurer

may have a duty to defend but, eventually, not to indemnify.

Griffin, 955 S.W.2d at 82.

An insured has a duty to cooperate with its insurer in

the defense of claims for which the insurer has a duty to defend.

See State Farm & Cas. Co. v. S.S., 858 S.W.2d 374, 385 (Tex. 1993).

These “[c]ooperation clauses are intended to guarantee to insurers

the right to prepare adequately their defense on questions of

substantive liability.” Martin v. Travelers Indem. Co., 450 F.2d

542, 553 (5th Cir. 1971). To breach its duty to cooperate, an

insured’s conduct must materially prejudice the insurer’s ability

to defense the lawsuit on the insured’s behalf. Id. at 553;

35
Hernandez, 875 S.W.2d at 692-93; State Farm, 858 S.W.2d at 385; Oil

Ass’n v. Royal Indem. Co., 519 S.W.2d 148, 150 (Tex. App.– Houston

[14th Dist.] 1975, writ ref’d n.r.e.). However, an insurer who

first “wrongfully refuses to defend” an insured is precluded from

insisting on the insured’s compliance with other policy conditions.

See Employers Cas. Co. v. Block, 744 S.W.2d 940, 943 (Tex. 1988);

St. Paul Ins. Co. v. Rahn, 641 S.W.2d 276, 278 (Tex. App. - Corpus

Christi 1982, no writ); Enserch v. Shand Morahan & Co., Inc., 952

F.2d 1485, 1496 n.17 (5th Cir. 1992) (applying Texas law). Even if

an insurer wrongfully refuses to defend, it still has the right to

assert the policy defense of noncoverage and will only be liable to

indemnify the insured up to the policy limits. Western Alliance

Ins. Co. v. Northern Ins. Co. of New York, 176 F.3d 825, 830 (5th

Cir. 1999); Rhodes v. Chicago Ins. Co., 719 F.2d 116, 120 (5th Cir.

1983); Willcox v. American Home Assur. Co., 900 F. Supp. 850, 855-

57 (N.D. Tex. 1995) (citing Ideal Mutual Ins. Co. v. Myers, 789

F.2d 1196, 1200 (5th Cir. 1986)); Texas United Ins. Co. v. Burt

Ford Enterp., 703 S.W.2d 828, 834 (Tex. App.– Tyler 1986, no writ).

THIE concedes that, under the insurance policy, it had a

duty to defend Quorum in the Rodriguez litigation. The parties do

not dispute that, once Quorum was joined as a defendant in the

Rodriguez litigation, THIE fulfilled its duty to defend Quorum by

assigning a lawyer to handle its defense. The issue is whether

THIE met its duty to defend after Quorum sought separate counsel on

the basis of a conflict of interest, or whether Quorum breached its

36
duty to cooperate by rejecting the lawyer THIE offered and

insisting upon separate counsel.

The summary judgment evidence consisted of various

letters exchanged among the parties and their representatives, as

well as affidavits from the parties and their representatives. The

parties disputed the meaning and significance of the letters

exchanged between the parties and the events described in the

affidavits. This court must view facts and inferences in the light

most favorable to Quorum, the party opposing summary judgment. See

Liberty Lobby, 477 U.S. at 248; Matsushita, 475 U.S. at 587-88.

When Quorum was added as a party defendant to the

Rodriguez litigation, THIE assigned a lawyer to defend Quorum and

advised Quorum in writing of the policy limits of $100,000 per

occurrence and the policy exclusion for punitive damages. THIE

advised Quorum of its “right to consult with additional counsel, at

its own expense, to protect any uninsured interests.” In February

1998, Quorum told the attorney assigned by THIE that Quorum’s

excess insurer, American Continental Insurance Company (“ACIC”),

wished to play a “more active role in the case.” ACIC appointed a

lawyer “to work with [the THIE lawyer] on the case, especially to

assist in monitoring Quorum’s and ACIC’s interests.” A February

25, 1998 letter from ACIC to Quorum clarifies the role Quorum

expected the ACIC lawyer to take: “[He] shall be considered ‘co-

counsel’ to oversee and work with [the THIE lawyer] to protect

Quorum and ACIC’s interests. By copy of this letter to [the

37
lawyers], we look forward to their assistance in coordinating this

team.” Quorum did not ask THIE to pay for this “co-counsel.” In

late March or early April 1998, the ACIC lawyer arranged to visit

the offices of the THIE lawyer to review the claim file.

On April 13, 1998, Quorum told THIE, in writing, that a

conflict of interest had arisen in the “co-counsel” arrangement and

that Quorum had retained the lawyer previously provided by ACIC to

represent its interests. Quorum demanded that THIE pay for this

lawyer as part of Quorum’s cost of defense. “[I]t is expected that

Texas Hospital Insurance Exchange will pay for the defense of this

matter for those additional insurance [sic], Quorum Health

Resources, Inc. and Quorum Health Group, Inc., through their new

counsel, [the ACIC lawyers].” On April 16, 1998, THIE responded to

Quorum’s letter, stating that while THIE was “willing to provide

Quorum Health Care with separate legal representation,” the law

firm retained by Quorum was not on THIE’s list of approved counsel.

THIE would “not be responsible for payment of any services provided

by the firm.”

On April 17, 1998, THIE assigned a lawyer from its

approved list to represent Quorum in the Rodriguez litigation and

notified Quorum of this assignment. Shortly after that date, Sally

Stewart of THIE had a telephone conference with Ann Peck of ACIC

and Elizabeth Berryman of Quorum. Stewart stated in her affidavit

that in this conversation, Peck or Berryman told her that “[the

ACIC lawyer] would be representing Quorum in this litigation

38
regardless of who paid for the defense costs, and I was also

informed that the issue of defense costs would simply have to be

resolved later.”

On April 21, 1998, the ACIC lawyer asked the THIE lawyer

to provide copies of the Rodriguez case files. In the letter, the

ACIC lawyer stated,

We need to make sure that these files are
copied as soon as possible as the clients have
requested that we enter an appearance on
behalf of Quorum and begin defending their
interest. Regardless of whether THIE steps
into this case and pays for the defense costs,
Quorum and American Continental Insurance have
asked that we provide services to them
regarding the defense of this particular
matter as it relates to Quorum.

The THIE lawyer responded that THIE had that day “authorized the

copying of the file for you [the ACIC lawyer’s] and Quorum’s new

[THIE] attorney . . . .” Neither Quorum nor its counsel objected

to copying the case file for the “new THIE attorney.” On that same

day, however, Stewart acknowledged that the new lawyer THIE had

assigned to the defense of Quorum in the Rodriguez case had

“declined the assignment.”

On April 28, 1998, THIE asked ACIC to send a firm resume

and fee billing schedule for the ACIC lawyers representing

Quorum’s interests. The record does not reveal that THIE received

a response or took further action. THIE did not offer further

representation to Quorum. On May 13, 1998, the Rodriguez court

allowed the ACIC lawyer to substitute in as counsel for Quorum.

39
Quorum proceeded to trial represented by this lawyer, as well as

two additional law firms. The trial transcripts reveal that the

two additional law firms played the major role at trial. The

parties have presented conflicting affidavits as to the

representation Quorum’s lawyers provided during the trial. The

lawyers who tried the case explained the circumstances that made it

challenging; the preparation and expertise they brought to the

trial; and the absence of any prejudice to THIE as a result of

their actions and decisions in defending Quorum. The lawyer who

was initially hired by THIE to represent Quorum, but whose

involvement ended after April 1998, criticized the trial strategy

that Quorum followed.

Quorum and THIE dispute the conclusions and inferences

that can be drawn from the summary judgment evidence. Quorum

asserts that because the lawyer THIE provided after Quorum asserted

a conflict of interest almost immediately declined the

representation, and THIE did not offer a replacement, the record

does not permit the conclusion that THIE met its duty to defend, as

a matter of law. THIE argues that the evidence shows that Quorum

unreasonably rejected the second lawyer THIE offered and took over

the defense, leading to the conclusions that THIE met its duty to

defend and that Quorum breached its duty to cooperate. As a

result, THIE contends that it is relieved of any duty to indemnify

Quorum for any part of the Rodriguez judgment. Quorum responds

that the evidence is insufficient to establish that Quorum rejected

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THIE’s offer of a lawyer or breached its duty to cooperate under

the policy. Quorum asserts that the evidence can reasonably be

interpreted as showing that Quorum wanted to retain the ACIC lawyer

in addition to the counsel THIE would provide, regardless of

whether THIE paid for all such costs of defense. Quorum points to

the absence of any evidence that it directly rejected THIE’s offer

of a lawyer and a defense.

The party moving for summary judgment must demonstrate

the absence of a genuine issue of material fact. See Little v.

Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) (en banc). If

the moving party fails to meet its initial burden, the motion for

summary judgment must be denied, regardless of the nonmovant’s

response. See id. The evidence in the present record shows that

until April 13, 1998, Quorum was represented by a lawyer THIE

assigned and for which it paid, and by a lawyer ACIC assigned and

for which it paid. When Quorum notified THIE of the conflict of

interest, Quorum told THIE that it expected THIE to continue to pay

for Quorum’s defense. THIE responded that it was willing to

provide Quorum with separate legal representation, but could not

approve the law firm Quorum had retained and would not pay for its

services. THIE asserts that Quorum made it clear that it would

reject any lawyer THIE provided; Quorum denies that it conveyed

such a position, pointing out that although THIE provided another

lawyer, that lawyer almost immediately declined the representation

and THIE did not provide other counsel.

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 The evidence does not support the conclusion that, as a

matter of law, THIE met its duty to defend Quorum after the

conflict of interest arose. Nor does the evidence support the

conclusion that, as a matter of law, Quorum breached its duty of

cooperation after THIE’s second lawyer declined the representation.

Quorum points to summary judgment evidence showing that it did not

decline to accept the lawyer offered. Quorum also points to

summary judgment evidence showing that after THIE’s involvement in

the defense ceased, Quorum’s lawyers mounted a vigorous defense,

raising a fact issue as to whether THIE suffered prejudice, a

necessary component of a breach of the duty to cooperate.

Hernandez, 875 S.W.2d at 692-94.; State Farm, 858 S.W.2d at 385;

Oil Ass’n, 519 S.W.2d at 150.

In deciding a summary judgment motion, “[t]he evidence of

the nonmovant is to be believed, and all justifiable inferences are

to be drawn in his favor.” Liberty Lobby, 477 U.S. at 255. The

fact issues disclosed in the present record are genuine in that the

evidence would permit a reasonable factfinder to return a verdict

for the nonmoving party, and are material, in that resolution of

the issues might affect the outcome of the suit under governing

law. Merritt-Campbell, 164 F.3d at 961. The summary judgment

record is insufficient to demonstrate the absence of a genuine

issue of material fact as to whether THIE met its obligation to

defend Quorum after the second THIE lawyer declined the

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representation. The record is also insufficient to permit the

conclusion that, as a matter of law, Quorum breached its duty of

cooperation by rejecting THIE’s proffered representation, depriving

THIE of its ability to control Quorum’s defense. The evidence is

conflicting as to whether Quorum told THIE that it would reject any

lawyer THIE offered, but would insist on representation solely by

counsel ACIC provided. The evidence is conflicting as to whether

THIE met its obligation to provide a lawyer after the counsel it

did offer declined to proceed. The evidence is conflicting and

insufficient to support the conclusion that, as a matter of law,

Quorum breached its duty of cooperation once THIE’s involvement in

the defense ceased. The district court’s grant of summary judgment

is reversed and the case remanded for further proceedings on these

issues.

IV. Conclusion

This court holds that, as a matter of law, the Hospital

does not have a duty to indemnify Quorum for the Rodriguez verdict

because the contractual indemnity provision did not expressly state

the parties’ intention to indemnify Quorum for its own negligence.

The district court’s summary judgment ruling that the Hospital is

obligated to indemnify Quorum is REVERSED. This court concludes

that the evidence does not support summary disposition of THIE’s

satisfaction of its duty to defend and Quorum’s satisfaction of its

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duty to cooperate. As to these issues, this court REVERSES and

REMANDS to the district court.

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