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Federal Insurance Co. v. Singing River Health System

United States Court of Appeals, Fifth Circuit

March 1, 2017

FEDERAL INSURANCE COMPANY, Plaintiff - Appellant
v.
SINGING RIVER HEALTH SYSTEM, Defendant-Appellee FEDERAL INSURANCE COMPANY, Plaintiff-Counter Defendant-Appellee
v.
SINGING RIVER HEALTH SYSTEM, Defendant-Appellant & SINGING RIVER HEALTH SYSTEM FOUNDATION, Counter Claimant - Appellant

         Appeals from the United States District Court for the Southern District of Mississippi

          Before HIGGINBOTHAM, JONES, and HAYNES, Circuit Judges.

          HAYNES, Circuit Judge

         In this insurance coverage dispute, the district court granted partial summary judgment in favor of Singing River Health System and Singing River Health System Foundation and partial summary judgment in favor of Federal Insurance Company. The parties appeal, and we affirm in part, and reverse and render in part.

         I.

         Federal Insurance Company ("Federal") provided insurance to Singing River Heath System ("SRHS") (collectively with Singing River Health System Foundation, "Medical Insureds"). This coverage dispute between Federal and Medical Insureds relates to various underlying lawsuits arising from SRHS's alleged underfunding of its Retirement Plan and Trust ("SRHS Lawsuits"). The SRHS Lawsuits involve various claims, such as breach of fiduciary duty, breach of contract, violations of the United States Constitution and the Mississippi constitution, and violations of 42 U.S.C. § 1983.

         As relevant to this appeal, Federal issued to SRHS a Health Care Portfolio, Policy No. 8211-9592, which had a policy period of March 1, 2014 to March 1, 2015 (the "2014-2015 Policy"). The 2014-2015 Policy contains two parts, both of which are written on a claims-made basis[1]: (1) a Fiduciary Coverage Section ("Fiduciary Coverage"), and (2) an Executive Liability, Entity Liability, and Employment Practices Liability Section ("ELI/EPL Coverage"). The policy limit for Fiduciary Coverage is $1 million for each claim, and the policy limit for ELI/EPL Coverage is $5 million for each claim. Under the Fiduciary Coverage, "[Federal] shall pay, on behalf of the Insureds, Loss for which the Insureds become legally obligated to pay on account of any Fiduciary Claim [under certain conditions]." The ELI/EPL Coverage contains a similar obligation to pay for loss.

         The 2014-2015 Policy contains the following language relevant to this appeal:

The applicable limit(s) of liability to pay "loss" will be reduced, and may be exhausted, by "defense costs" unless otherwise specified herein. . . . .
The limit of liability to pay "loss" will be reduced and may be exhausted by "defense costs", unless otherwise specified herein, and "defense costs" will be applied against the retention. In no event will the company be liable for "defense costs" or other "loss" in excess of the applicable limit(s) of liability. . . . .
If the Optional Separate Defense Costs Coverage is not purchased, Defense Costs shall be part of, and not in addition to, the Limits of Liability set forth . . . for this coverage section, and the payment by the Company of Defense Costs shall reduce and may exhaust such applicable Limits of Liability.

(emphasis omitted). SRHS did not purchase the Optional Separate Defense Costs Coverage. The application for the 2014-2015 Policy states:

The limit of liability to pay damages or settlements will be reduced and may be exhausted by "defense costs, " and "defense costs" will be applied against the retention amount. In no event will the company be liable for "defense costs" or other "loss" in excess of the applicable limit of liability.

(emphasis omitted). In this application, SRHS did not check the box for Optional Separate Defense Costs Coverage.

         The 2014-2015 Policy defines Defense Costs as "that part of Loss consisting of reasonable costs, charges, fees (including but not limited to attorneys' fees and experts' fees) and expenses . . . incurred in defending any Claim." "Loss, " in turn, is defined as "the amount that any Insured . . . becomes legally obligated to pay on account of any covered [Claim], including but not limited to . . . Defense Costs." Finally, the ELI/EPL Coverage contains Exclusion 7(e), which provides that:

The Company shall not be liable for Loss on account of any Claim . . . for any actual or alleged violation of the responsibilities, obligations or duties imposed by any federal, state, or local statutory law or common law anywhere in the world (including but not limited to the Employee Retirement Income Security Act of 1974 (except section 510 thereof) and the Consolidated Omnibus Budget Reconciliation Act of 1985), . . . that governs any employee benefit arrangement program, policy, plan or scheme of any type . . . ("Employee Benefits Program Laws"), including but not limited to any . . . retirement income or pension benefit program . . . [or] similar arrangement, program, plan or scheme.

         SRHS and various individual insureds tendered defense of the SRHS Lawsuits to Federal, and Federal defended SRHS and the individual insureds under a reservation of rights.[2] In its reservation of rights letter, Federal stated that, pursuant to the policy, Defense Costs deplete the policy limits. Federal also denied ELI/EPL Coverage on the grounds that Exclusion 7(e) covered the subject matter of the SRHS Lawsuits.

          In its subsequent declaratory action, Federal sought a declaration that, inter alia, "the Limit of Liability under the Fiduciary Coverage Section is $1 million, subject to a $1 million aggregate limit, and a $10, 000.00 Retention, with Defense Costs eroding or depleting those limits." It also sought a declaration that no coverage exists under the ELI/EPL Coverage section. SRHS filed a counterclaim, which named as a party Singing River Health System Foundation, formerly known as Coastal Medical Healthcare Foundation Inc. (the "Foundation"). The counterclaim alleged "causes of action" for waiver, estoppel, civil conspiracy, breach of contract, tortious breach of contract, breach of fiduciary duty, breach of the duty of good faith and fair dealing, bad faith, interference with contract and business relations, and conversion, and sought declaratory relief.

         Medical Insureds moved for partial summary judgment and injunctive relief, or in the alternative for a preliminary injunction. By this motion, Medical Insureds requested the court order Federal to continue to pay all Defense Costs in the SRHS Lawsuits without regard to the policy limits. The district court granted the motion, entering judgment that "defense costs paid in the underlying pension plan litigation . . . should not be deducted from the policy limits."

         While Medical Insureds' motion was pending, Federal moved for summary judgment, requesting the district court issue a declaratory judgment that Federal's defense and indemnity obligations for the SRHS Lawsuits are limited to the policy's $1 million Limits of Liability for Fiduciary Liability Coverage and that Defense Costs erode this limit. Medical Insureds then moved to join necessary parties and for the court to continue its ruling on Federal's motion so Medical Insureds could conduct discovery pursuant to Federal Rules of Civil Procedure 56(d). The district court denied Medical Insureds' motion and granted Federal's motion in part. After determining that there was no just reason for delay, the court entered a partial final judgment.

         II.

         The district court exercised diversity jurisdiction under 28 U.S.C. § 1332. Both parties appealed from the district court's Rule 54(b) partial final judgment. Because the district court properly entered a partial final judgment under Rule 54(b), see Eldredge v. Martin Marietta Corp., 207 F.3d 737, 740 (5th Cir. 2000), we have jurisdiction.[3]

         We review a grant of summary judgment de novo, applying the same standard as the district court. United States v. Lawrence, 276 F.3d 193, 195 (5th Cir. 2001). Summary judgment is proper where there is no genuine dispute of material fact, ...


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