Administaff, Inc. v. American International Speciality Lines Insurance

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT September 9, 2003

_____________________ Charles R. Fulbruge III
Clerk
No. 02-21253
_____________________

Administaff, Inc. and Administaff of Texas, Inc.,

Plaintiffs- Counter Defendants-Appellants,

versus

American International Speciality Lines Insurance Company,

Defendant-Counter Claimant-Appellee.

_________________________________________________________________

Appeal from the United States District Court
for the Southern District of Texas
District Court No. H-02-CV-1964
_________________________________________________________________

Before WIENER, CLEMENT and PRADO, Circuit Judges.1

PRADO, Circuit Judge.

This appeal arises from a dispute between an insured and its

insurer. The appellant, Administaff, Inc. and its subsidiary,

Administaff of Texas, Inc., filed a lawsuit in district court

seeking declaratory judgment that Administaff’s insurer was bound

to defend it in a lawsuit.2 Both parties, the appellant-insured

1
Pursuant to 5th Cir. R. 47.5, this Court has determined
that this opinion should not be published and is not precedent
except under the limited circumstances set forth in 5th Cir. R.
47.5.4.
2
To simplify the language of this opinion, the Court will
refer to Administaff, Inc. and its subsidiary, Administaff of
Texas, Inc., as a single plaintiff-appellant.

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and the appellee-insurer, moved for summary judgment. The

district court granted summary judgment in favor of the insurer

and stated in its judgment that the insurer did not have a duty

to defend the insured nor a duty to indemnify. In response, the

insured filed a notice of appeal.

Background Facts

The appellant is a professional employer organization that

provides personnel management and human resources services to

small and medium sized companies. The appellant purchased

insurance coverage from the appellee, American International

Speciality Lines Insurance. The policy included an obligation to

defend the insured in lawsuits. During the coverage period,

Aetna Life Insurance Company (Aetna) named the appellant as a

defendant in a counterclaim. The counterclaim arose from a

dispute between the appellant and Aetna in the provision of

health insurance to Administaff employees. The appellant

notified its insurer about the counterclaim, and the insurer

refused to defend the appellant because it maintained the policy

did not cover the claim. The appellant sought relief in district

court, but lost on summary judgment. On appeal, the appellant

maintains the district court erred by granting summary judgment

in favor of the appellee.

Standard of Review

In reviewing a district court's grant of summary judgment,

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this Court uses the same standard of review used by the district

court. See Lowery v. Ill. Cent. Gulf R. Co., 891 F.2d 1187, 1190

(5th Cir. 1990). “The pleadings, depositions, answers to

interrogatories, and admissions on file, together with any

affidavits, must demonstrate that there is no genuine issue of

material fact and that the moving party is entitled to judgment

as a matter of law. Under this standard, questions of fact are

considered with deference to the nonmovant, while questions of

law are subject to de novo review.” Lowery, 891 F.2d at 1190

(citations omitted). Although this Court ordinarily defers to the

district court in a diversity case like this one requiring

interpretation of state law, the Court is not bound by the

district court's interpretation and can reverse the court if the

district court incorrectly applied state law. See id.

Whether the District Court Erred

In its first issue, the appellant argues that the district

court erred in determining the appellee had no duty to defend the

appellant in its defense of Aetna’s counterclaim. The appellant

maintains that the district court not only rejected the clear,

unequivocal language of the policy, but also rejected Texas law

in interpreting the policy limits. The appellant is correct.

Under Texas law, the question of insurance coverage is

determined under the “eight corners” rule. See Guaranty Nat’l

Ins. Co. v. Vic Mfg. Co., 143 F.3d 192, 193 (5th Cir. 1998).

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Under this rule, the “court compares the four corners of the

insurance policy with the four corners of the plaintiff's

pleading to determine whether any claim alleged by the pleading

is potentially within the policy coverage.” Guaranty Nat’l Ins.

Co., 143 F.3d at 193. The district court makes this comparison

without reference to the truth or falsity of the plaintiff’s

allegations. See Guaranty Nat’l Ins. Co., 143 F.3d at 193.

“[I]f the allegations in the complaint will allow the plaintiff

to recover on a theory within the scope of the insurance policy,

there is potential liability against which the insurer is

obligated to defend.” Sentry Ins. v. R.J. Weber Co., Inc., 2

F.3d 554, 556 (5th Cir. 1993).

The Insurance Policy. In the instant case, the four corners

of the insurance policy provide:

ERRORS AND OMISSIONS.

To pay on behalf of the Insured all sums which the
Insured shall become legally obligated to pay as
Damages resulting from any claim or claims first made
against the Insured and reported to the Company during
the Policy Period for any Wrongful Act of the Insured
or of any other person for whose actions the Insured is
legally responsible, but only if such Wrongful Act
first occurs during the Policy Period and solely in the
conduct of the Insured’s Profession as stated in Item 6
of the Declarations.

Policy at ¶ 1 (emphasis added). The italicized language is

important in interpreting the contract.

The policy also provides that the insurer will “[d]efend any

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action or suit brought against the Insured alleging a Wrongful

Act, even if such action is groundless, false or fraudulent . . .

.” Id. at ¶ 2(a). The policy defines Wrongful Act as “any

actual or alleged breach of duty, neglect, error, misstatement,

misleading statement or omission solely in the conduct of the

Insured’s Profession as stated in Item 6 of the Declarations.”

Policy at Definition #3 (emphasis added). Item 6 defines

“Insured’s Profession” as:

Soley [sic] in the performance of recruiting and
selection, outplacement services, employer liability
management and assistance, related government and
compliance, owner support, performance management,
training and development, benefit management, HR
consulting, permanent placement services, insurance
agent and broker services, risk management services,
employer liability management services and accounting
and book keeping services including related data
processing services for others for a fee.

Policy at Item 6 (emphasis added). Under this language, the

insurer has a duty to defend the insured if Aetna’s counterclaim

alleged a Wrongful Act that occurred in the conduct of the

Insured’s Profession.

Aetna’s counterclaim. Aetna’s counterclaim alleged ERISA

violations, breach of contract and misrepresentation, and asked

for declaratory judgment. The misrepresentation cause of action

lies at the center of the parties’ dispute about whether a duty

of defend exists. The four corners of that allegation claim:

Administaff, through its authorized agents and vice
principals, made material misrepresentations or failed

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 to disclose material information when there was a duty
to speak. . . . Administaff failed to exercise due care
and/or acted recklessly or with knowledge that its
statements were false.

Counterclaim at ¶ 37 & 38. Although the parties do not seriously

dispute whether this language alleges a Wrongful Act, the

appellee-insurer maintains these allegations did not occur in the

conduct of the Insured’s Profession. Instead, the appellee-

insurer characterizes the alleged acts and omissions as

management tasks of a nonprofessional nature and not professional

services on behalf of clients.

Whether the Wrongful Act Occurred in the Conduct of the

Insured’s Profession. Although the district court did not

prepare a written legal analysis in support of its judgment, the

transcript of the hearing conducted on the motion for summary

judgment indicates the district court analogized the insurance

policy to a professional liability policy for doctors and

lawyers. The district court reasoned that because a doctor’s or

lawyer’s malpractice policy was designed to protect the doctor or

lawyer from lawsuits by patients or clients, the appellant’s

policy was designed to protect the appellant from lawsuits by its

employee-clients.

The district court focused on the title of the policy,

“Miscellaneous Professional Liability Policy.” The district

court reasoned that “the nature of even a miscellaneous

professional liability policy, is protecting the consumer,” and

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concluded accordingly that the policy is “an Administaff-to-

consumer policy because that’s what [a] professional liability

policy covers.” The district court explained that

if you say you’re going to go out and get a
professional liability policy, you’re talking about
people who are hurt by your practicing your profession,
not your creditors, not those whom you trespass upon on
the way to work; and this is on the way to providing
the service. . . . But regardless of the label we stick
on it, what Administaff does in acquiring things and to
third parties is not covered[,] just as a lawyer who
hires a secretary away from the law office next door
would not be covered under his professional liability
policy because they are not essential to the provision
of services.

Notably, the district court did not address the language of

the policy quoted above. Had the district court considered that

language, it should have first concluded that Aetna had alleged a

Wrongful Act. The language of the Aetna allegations almost

mirrors the policy’s definition of Wrongful Act. The policy

defines Wrongful Act, in part, as “any actual or alleged . . .

misstatement, misleading statement or omission,” and Aetna

alleged “material misrepresentations” and “failure to disclose

material information when there was a duty to speak.” Thus, a

comparison of the four corners of the contract with the four

corners of the factual allegations of the counterclaim indicates

a Wrongful Act under the policy. Because Aetna alleged a

Wrongful Act, the next question is whether the Wrongful Act

occurred in the conduct of the Insured’s Profession.

Under the policy, a covered act must have occurred “solely

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in the conduct of the Insured’s Profession.” Understandably, the

district court may not have fully understood what functions

constituted the Insured’s Profession. That question created an

ambiguity in the contract. At one point, the district judge

recognized the ambiguity and ordered the appellant to “file a

one-page factual declaration of its business” in an order

directing the appellant to move for summary judgment. The one-

page declaration of Administaff’s business includes “providing

and managing all benefits, including health and dental

insurance.” The declaration went on to detail the functions

required to provide these services.3 Notably, Item 6 of the

policy defines the Insured’s Profession, in part, as “benefit

management.”

Under Texas law, ambiguity such as the ambiguity created by

the “solely in the conduct of the Insured’s Profession” language

must be resolved in favor of the insured. See Nat’l Union Fire

Ins. Co. of Pittsburgh, Pa. v. Hudson Energy Co., 811 S.W.2d 552,

555 (Tex. 1991); Puckett v. U.S. Fire Ins. Co., 678 S.W.2d 936,

938 (Tex. 1984) (stating that contracts are to be interpreted to

avoid exclusion of coverage). As a result, the question of

3
The declaration provided: “The management functions related
to the Health Plan include but are not limited to: implementing,
monitoring and maintaining an appropriate funding arrangement
with the health carrier; negotiating, reviewing and implementing
insurance rates on an on-going basis; and monitoring the
financial status of the funding arrangement with the carrier.”

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whether the Wrongful Act occurred in the conduct of the Insured’s

Profession should have been answered “yes.” The next step would

have been to consider the appellee’s arguments that an exclusion

applied. The district court, however, did not reach the

exclusions because it read language into the policy that does not

exist.

The district court read the policy as if the duty to defend

applied only to claims made by consumers. Nothing in the policy

indicates the policy covers only Wrongful Acts alleged by

Administaff’s client-consumers. “An intent to exclude coverage

must be expressed in clear and unambiguous language.” Nat’l

Union Fire Ins. Co. of Pittsburgh, Pa., 811 S.W.2d at 555. Had

the appellee-insurer wanted to limit its duty to defend to claims

brought by consumers, it was incumbent upon the insurer to

expressly and clearly state the exclusion in the language of the

policy. See id. Because the appellee-insurer did not draft the

contract to expressly and clearly cover only claims brought by

consumers, it cannot complain now.

In its second issue, the appellant contends the district

court erred by finding the contract ambiguous and construing the

policy in contravention of Texas state law. Although the

appellee maintains the district court did not find the contract

was ambiguous, the transcript of the hearing shows that the

district court read the contract as having more than one reading.

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At one point during the hearing on the motion for summary

judgment, the district court considered the appellant’s position

that the duty to defend was not limited to claims brought by

consumers and stated “I’m hesitant to say that your position is

unreasonable.” The district court also recognized that “there

are alternative interpretations” of the policy. Ultimately,

however, the district court concluded that “on its face, th[e]

policy has one compelling reading, and that is, to cover the

consumers of the services, not the vendors of the parts of the

services.” Without a written order clarifying the court’s

analysis, it is difficult to ascertain whether the district court

ultimately determined the contract was ambiguous. Albeit

unclear, the district court treated the contract as if it were

unambiguous–that is, the district court determined the face of

the contract indicated that it did not apply to claims brought by

non-clients and non-consumers. This Court, however, need not

determine this issue because the district court erred by failing

to interpret the contract language.

Whether Remand Is Appropriate

When the district court errs in its reason for granting

summary judgment, this Court can affirm the summary judgment

where other adequate grounds for granting summary judgment exist.

See Thompson v. Ga. Pacific Corp., 993 F.2d 1166, 1167-68 (5th

Cir. 1993). In this appeal, however, remand is appropriate

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because the district court did not consider whether a policy

exclusion applied. The district court did not consider the

exclusions because it determined the policy did not apply to

claims brought by non-clients and non-consumers. As a result,

remand is appropriate for consideration of the exclusions. On

remand, the district court is bound under Texas law to strictly

construe exclusions against the insurer and in favor of the

insured. See Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 811

S.W.2d at 555.

Remand is also appropriate for reconsideration of the

appellee-insured’s argument that it had no duty to indemnify.

Unlike the duty to defend, the “duty to indemnify is triggered by

the actual facts establishing liability in the underlying suit.”

See Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d 819, 821

(Tex. 1997). The district court, however, did not reach those

facts. Instead, the district court based its determination on

its finding that the appellee-insurer had no duty to defend.

Conclusion

Having sustained the appellant’s first argument that the

district court erred in granting summary judgment in favor of the

appellee, the Court REVERSES the district court’s summary

judgment and REMANDS the case to the district court for further

proceedings consistent with this opinion.

REVERSED and REMANDED.

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