Filed: Oct. 30, 1997
Latest Update: Mar. 02, 2020
Summary: United States Court of Appeals, Fifth Circuit. No. 95-31078. The SOCIETY OF THE ROMAN CATHOLIC CHURCH OF THE DIOCESE OF LAFAYETTE, INC. and The Diocese of Lake Charles, Inc., Plaintiffs- Appellees, v. INTERSTATE FIRE & CASUALTY CO., et al., Defendants, Interstate Fire and Casualty Co., Defendant-Appellant, Arthur J. Gallagher & Co., Defendant-Appellant-Appellee, PACIFIC EMPLOYERS INSURANCE CO., Third Party Plaintiff-Appellee, v. LOUISIANA COMPANIES INC., Third Party Defendant-Appellant, St. Paul
Summary: United States Court of Appeals, Fifth Circuit. No. 95-31078. The SOCIETY OF THE ROMAN CATHOLIC CHURCH OF THE DIOCESE OF LAFAYETTE, INC. and The Diocese of Lake Charles, Inc., Plaintiffs- Appellees, v. INTERSTATE FIRE & CASUALTY CO., et al., Defendants, Interstate Fire and Casualty Co., Defendant-Appellant, Arthur J. Gallagher & Co., Defendant-Appellant-Appellee, PACIFIC EMPLOYERS INSURANCE CO., Third Party Plaintiff-Appellee, v. LOUISIANA COMPANIES INC., Third Party Defendant-Appellant, St. Paul ..
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United States Court of Appeals,
Fifth Circuit.
No. 95-31078.
The SOCIETY OF THE ROMAN CATHOLIC CHURCH OF THE DIOCESE OF
LAFAYETTE, INC. and The Diocese of Lake Charles, Inc., Plaintiffs-
Appellees,
v.
INTERSTATE FIRE & CASUALTY CO., et al., Defendants,
Interstate Fire and Casualty Co., Defendant-Appellant,
Arthur J. Gallagher & Co., Defendant-Appellant-Appellee,
PACIFIC EMPLOYERS INSURANCE CO., Third Party Plaintiff-Appellee,
v.
LOUISIANA COMPANIES INC., Third Party Defendant-Appellant,
St. Paul Fire and Marine Insurance Co., Appellant.
Oct. 30, 1997.
Appeals from the United States District Court for the Western
District of Louisiana.
Before HIGGINBOTHAM, EMILIO M. GARZA and DeMOSS, Circuit Judges.
EMILIO M. GARZA, Circuit Judge:
Fifteen years ago, defendant Arthur J. Gallagher & Co.
("Gallagher"), an insurance broker, presented a proposed insurance
coverage plan to The Society of the Roman Catholic Church of the
Diocese of Lafayette, Inc. and the Diocese of Lake Charles, Inc.
("the Diocese"), under which, it represented, the Diocese would not
be liable for any losses above $400,000 each policy year. The
Diocese agreed to the plan. Later, the Diocese faced numerous
claims from boys who were molested by pedophilic Diocese priests as
well as claims from the boys' parents. These claims resulted in
1
millions of dollars of losses for the first two years of the plan,
1981-82 and 1982-83. Unfortunately for the Diocese, though, there
was a gap in the plan's excess coverage that resulted in some
$4,500,000 in uninsured losses. The Diocese sued Gallagher to
recover this amount, alleging that Gallagher had expressly
warranted that the Diocese was fully insured above the $400,000
loss fund each policy year, and had breached a contract with the
Diocese to provide full insurance over the loss fund. The district
court granted summary judgment for the Diocese against Gallagher
for the $4,500,000 plus interest. Gallagher appeals. We determine
that the district court correctly granted summary judgment to the
Diocese against Gallagher for breach of contract with regard to the
first year of the plan, but erred in granting summary judgment for
breach of contract with regard to the second year.
Meanwhile, Preferred Risk Insurance Co. ("Preferred Risk") and
Pacific Employers Insurance Co. ("PEIC") had settled with two of
the molested boys for about $1,532,000. Under its three-year
primary policy, Preferred Risk paid $1,000,000 of this amount—its
policy had a limit of $500,000 per occurrence (which, in this case,
meant per molested boy) for the three years—and PEIC, as the excess
carrier, had to pay the rest. However, the Preferred Risk policy
was nonstandard. A standard three-year insurance policy would have
been annualized and provided a policy limit of $1,500,000 for each
boy (i.e., the $500,000 policy limit per occurrence would have been
"refreshed" each year)—which would have meant that PEIC would have
escaped paying any of the $1,532,000 settlement. Not surprisingly,
2
PEIC sued third-party defendant Louisiana Companies, Inc.
("LACOS"), an insurance agent to the Diocese, for $532,000,
alleging that LACOS had negligently misrepresented (1) the date of
expiration of the Preferred Risk policy, (2) the scope of the
coverage of this policy, and (3) that this policy was standard.
After a bench trial, the district court agreed with PEIC and
granted final judgment to PEIC against LACOS for $532,000 plus
interest. LACOS appeals. We find that the district court did not
err in granting final judgment for PEIC against LACOS.
Also in its final judgment, the district court equitably
subrogated to Gallagher the Diocese's rights against its excess
carriers. Defendant Interstate Fire & Casualty Co. ("Interstate"),
one of the excess carriers, challenges this ruling on the grounds
that Louisiana does not permit equitable subrogation. We agree
with Interstate.
In deciding this appeal, we will first examine the
Gallagher/Diocese dispute, then the Preferred Risk/PEIC conflict,
and lastly Interstate's argument about equitable subrogation.
I
We review a district court's grant of summary judgment de
novo. New York Life Ins. Co. v. The Travelers Ins. Co.,
92 F.3d
336, 338 (5th Cir.1996). In doing so, we employ the same criteria
as the district court, and construe all facts and inferences in the
light most favorable to the nonmoving party. LeJeune v. Shell Oil
Co.,
950 F.2d 267, 268 (5th Cir.1992). Summary judgment is
appropriate where the moving party establishes that "there is no
3
genuine issue of material fact and that [it] is entitled to a
judgment as a matter of law." FED. R. CIV. P. 56(c). The moving
party must show that if the evidentiary material of record were
reduced to admissible evidence in court, it would be insufficient
to permit the nonmoving party to carry its burden of proof.
Celotex v. Catrett,
477 U.S. 317, 327,
106 S. Ct. 2548, 2554,
91
L. Ed. 2d 265 (1986).
Once the moving party has carried its burden under Rule 56,
"its opponent must do more than simply show that there is some
metaphysical doubt as to the material facts." Matsushita Electric
Industrial Co., Ltd. v. Zenith Radio Corp.,
475 U.S. 574, 586,
106
S. Ct. 1348, 1356,
89 L. Ed. 2d 538 (1986) (citations omitted). The
opposing party must set forth specific facts showing a genuine
issue for trial and may not rest upon the mere allegations or
denials of its pleadings. FED. R. CIV. P. 56(e); Anderson v.
Liberty Lobby, Inc.,
477 U.S. 242, 249,
106 S. Ct. 2505, 2511,
91
L. Ed. 2d 202 (1986).
II
In late 1980, the Diocese decided to save money by opting for
a partial self-insurance plan, rather than a traditional
full-coverage plan. It formed a task force to look into this idea.
In 1981, Gallagher met with the task force and offered the Diocese
the so-called Bishop's Program ("the plan"). Under this plan, the
Diocese would establish a loss fund each policy year. If an
"occurrence" happened under the plan (i.e., if an event triggered
plan coverage), the Diocese would pay up to $100,000 from this fund
4
for the loss resulting from the occurrence. The Diocese would only
have to use money from the fund to pay for occurrence losses.
Excess insurance carriers would be responsible for (1) any amounts
owed above the $100,000 the Diocese had to pay for each occurrence
loss and (2) any amounts owed after the fund was exhausted. In
short, the plan expressly warrants that the Diocese would be fully
insured for all losses above the loss fund.1
Gallagher and the Diocese agreed to the original plan as
proposed, except that they increased the Diocese's "deductible"
from $50,000 to $100,000 and the amount of the loss fund from
$375,000 to $400,000.
Unfortunately, the plan operated differently than Gallagher
had represented at the meeting. If the Diocese exhausted the
1
Specifically, the plan states that
[a]t no time will the Bishops be exposing the
Diocese to unlimited self-insurance.... If the
Loss Fund is exhausted, the Dioceses [sic] becomes
fully insured and losses are paid as they would be
under a conventional insurance program.... The
plan is designed so that no single loss can use up
the Loss Fund. The Dioceses would pay only the
first $50,000 [changed to $100,000] of each loss,
over which there will be full insurance coverage.
The plan also notes:
Loss Fund—$375,000 [changed to $400,000]
This fund represents the maximum loss payments the
diocese would be exposed to in the coming year.
Stop Loss —
No loss in excess of $50,000 [changed to $100,000]
(Combined Perils) will be charged to the Loss Fund;
therefore, one catastrophe claim could not wipe out
the entire fund.
5
$400,000 loss fund, a Lloyd's excess insurance package provided as
much as $100,000 of coverage per occurrence, up to an aggregate of
$450,000 (the parties refer to this layer of coverage as "the
excess aggregate"). After that, a $5,000,000 Interstate excess
policy covered additional losses from occurrences.2 The Interstate
policy, however, did not "drop down" to pick up losses exceeding
$100,000 per occurrence once the Lloyd's package had reached its
aggregate limit of $450,000. Assume, for example, that the Diocese
faced fifty occurrences resulting in losses of $100,000 each. If
so, the Diocese would not only pay out the $400,000 in the loss
fund, but also $50,000 for the ninth occurrence and $100,000 for
each of occurrences ten through fifty (a total of $4,550,000).
The record includes a number of documents indicating that, at
the meeting, Gallagher did not inform the Diocese about the excess
aggregate or that the Diocese would not be fully insured once the
excess aggregate was exhausted. These documents were written by
Ben Schull, Gallagher sales representative, to Tom O'Connell,
Gallagher sales manager. The documents include the following
statements regarding the plan:
M "You have reviewed the initial proposal and have seen that there
are multiple references to totally insured once you have
exceed the loss fund, and you have also seen that there is no
mention of any excess aggregate."
M "All parties stated that they voted for the bishop's program
because there was total insurance after the loss fund was
exceeded."
M "[The Dioceses'] understanding was that as soon as they exceeded
2
There were also other layers, but they are not relevant in
this case.
6
the loss fund, they were totally insured."
M "The only mention of the $450,000 excess aggregate is on the
premium page and is unintelligible to the unknowing client.
Our worst fears are realized:
1. The original program was oversold in the written proposal and in
verbal presentation."
M "How do we respond to the fully insured misrepresentation?"3
Besides these documents, there was also relevant deposition
testimony regarding the plan. The members of the Diocese task
force all testified that, at the time the Diocese entered into the
plan, they believed that the Diocese would be fully insured under
the plan after the exhaustion of the loss fund. Moreover, James
Helouin, who worked for a Gallagher affiliate and who accompanied
Gerald Lillis (Schull's predecessor as sales representative) to the
meeting at which Lillis explained the plan, testified that he left
the meeting with the same impression. The task members and Helouin
also testified that they did not remember any mention of a $450,000
excess aggregate at the meeting. Even Lillis conceded in his
deposition that he could not remember whether he referred to any
3
These statements are (1) offered against a party and (2) are
by the party's agents or servants concerning a matter within the
scope of the agency or employment and made during the existence of
the relationship. Thus, the statements are nonhearsay, and
admissible against Gallagher under Rule 801(d)(2) of the Federal
Rules of Evidence.
In determining the statements' admissibility, the fact
that Schull may have had no "personal knowledge" of the actual
negotiations over the contract or its final execution is
irrelevant. See State Farm Mut. Auto. Ins. Co. v. Porter,
186
F.2d 834, 842 (9th Cir.1951) ("The rule is that personal
knowledge of the person making an admission is immaterial.");
4 JOHN HENRY WIGMORE, WIGMORE ON EVIDENCE, § 1053, at 16 (noting
that personal knowledge is not required for admissions).
7
excess aggregate. Certainly, there is nothing in the written plan
itself regarding such an aggregate.
According to Gallagher's written proposal, the plan was to
have a three-year term, with adjustments for the second and third
annual periods to premiums, the service fee, and the loss fund.
After the parties had agreed to the plan and about two months
before it became effective on September 1, 1981, Lillis brought
James R. Oliver, one of the task force members, binders providing
details about the various insurance policies underlying the plan.
Shortly after he received the binders, Oliver forwarded copies of
them to another task force member, Harry Wagner. The binders make
an oblique reference to the excess aggregate. One sheet, for
instance, notes the following after the words "Amount or Limit":
$400,000 Each and Every Loss and/or Occurrence
$450,000 In the Aggregate annually in respect of the Assured's
Retention.
EXCESS OF:
$100,000 Each and Every Loss and/or Occurrence
$400,000 In the Aggregare [sic] annually in respect of the
Assured's Retention.
This sheet is dated June 22, 1981 and states that the insurance
policy runs from July 1, 1981 to October 1, 1982.
During the first six months of the plan, the Diocese suffered
from a rash of mysterious arson fires. Lillis and O'Connell
testified that they spoke to two task force members, Harry Benefiel
and H.A. Larroque, about how liability from the fires might exhaust
the loss fund and about how the Diocese might need a second layer
8
of excess aggregate insurance. Lillis and certain task force
members also stated that the Diocese was concerned that its
insurers might not renew the plan policies on July 1, 1982. In
addition, Wagner testified that around the time of the fires, he
realized that the Diocese might face insurance liability exceeding
the amount of the loss fund. Apparently, as a result of these
concerns, in March 1982 the Diocese agreed to create a separate
loss fund of $200,000 (in addition to the existing $400,000 loss
fund) and also made an additional premium payment. The additional
$200,000 loss fund remained in effect from April 1, 1982 to July 1,
1982. Confirming this change, Gallagher executed an endorsement,
dated August 19, 1982 and effective April 1, 1982, which reads that
"[i]t is hereby noted and agreed that the aggregate sum insured
hereon in respect of the first period of insurance, from July 1,
1981 to July 1, 1982, is amended...." The endorsement then refers
to an excess aggregate of $400,000 and notes the creation of the
$200,000 loss fund. The endorsement also states that "ALL OTHER
TERMS AND CONDITIONS REMAIN UNCHANGED."
Sometime before July 1, 1982 (the one-year anniversary date of
the effective date of the plan), Gallagher presented the Diocese
with a renewal proposal. This renewal proposal differed from the
original plan in two main ways. First, unlike the original
proposal, the renewal proposal was not accompanied with written
explanatory material assuring the Diocese that it was "fully
insured" over the loss fund. Second, the renewal proposal
mentioned the excess aggregate, though it did not illustrate how
9
the excess aggregate worked. The proposal simply noted:
"Lloyd's—Excess Package ... $450,000 Aggregate excess Loss Fund."
While the renewal proposal suggested a $400,000 loss fund, just
like the contract covering the first year of the plan, the parties
ended up agreeing to a $475,000 loss fund; however, the parties
also retained a $450,000 excess aggregate. Gallagher then executed
an endorsement, dated August 19, 1982 and effective July 1, 1982,
noting that the parties agreed to these amounts and that "ALL OTHER
TERMS AND CONDITIONS REMAIN UNCHANGED."
Around July 26, 1982, Lillis sent a letter to Benefiel
explaining how the $450,000 excess aggregate affected the two loss
funds that existed from April 1, 1982 to July 1, 1982. As Lillis
stated, "The Lloyd's of London policy provides a $450,000 aggregate
limit that will apply over these two loss funds. To clarify, this
aggregate limit applies up to $450,000 in total and does not apply
separately and distinctly to each of the loss funds. Any residual
over the first nine month period of the $450,000 aggregate limit
would apply to the second fund." However, Lillis did not attempt
to show how the Lloyd's excess aggregate interacted with the
Interstate excess policy.
Before July 1, 1983, Gallagher gave the Diocese a renewal
proposal similar to that of the previous year. This proposal
suggested a $400,000 loss fund and $450,000 excess aggregate. The
successor to Gallagher then executed an endorsement, dated July 19,
1983 and effective July 1, 1983, noting that the parties agreed to
a loss fund of $475,000 and an excess aggregate of $450,000. Also,
10
"all other terms and conditions remain unchanged."
Before July 1, 1984, Gallagher furnished the Diocese with a
renewal proposal that, for the first time, actually explained how
the excess aggregate worked and explicitly stated that the Diocese
was not fully insured above the loss fund. The renewal proposal,
under the subheading "operation of the plan," declares that "IF THE
[LOSS] FUND IS EXHAUSTED, THE DIOCESAN [SIC] BECOMES FULLY INSURED
UP TO THE LEVEL OF THE EXCESS AGGREGATE COVERAGE SELECTED." The
renewal proposal then notes that "[i]n the event the loss fund
amount of $550,000 is exhausted, the London Package policy provides
an additional limit of $450,000 to pay losses up to the $100,000
stop-loss limit. If this aggregate loss fund protection limit is
exhausted, then the diocese would be required to pay losses up to
$100,000 for each occurrence thereafter."
While the plan extended through 1984, only the first two years
of the plan, 1981-82 and 1982-83, are at issue in this appeal.
During these two years, there were dozens and dozens of occurrences
of molestation of boys. After various molested boys and their
parents began filing suits in 1984 against the Diocese, payments to
these individuals quickly exhausted the Diocese's $400,000 loss
fund, the $200,000 loss fund, and the Lloyd's package aggregate of
$450,000. A portion of the $5,000,000 Interstate coverage was also
used. However, at least forty-five occurrence losses fell in the
gap between the Lloyd's package aggregate and the Interstate policy
(i.e., arose in the first year after the $400,000 loss fund had
been exhausted and $450,000 excess aggregate had been reached or
11
arose in the second year after the $600,000 loss funds had been
exhausted and the $450,000 excess aggregate had been reached);
this amounted to about $4,500,000 of uninsured losses. Obviously,
the Diocese had not been fully insured for all losses above the
loss fund.
A
The Diocese argues that the law of the case bars Gallagher
from arguing that Gallagher did not expressly warrant that the
Diocese was fully insured. Specifically, the Diocese points to
this court's previous decision in this matter in The Society of the
Roman Catholic Church of the Diocese of Lafayette and Lake Charles,
Inc. v. Interstate Fire & Casualty Co.,
26 F.3d 1359 (5th Cir.1994)
("Society I "). In that opinion, we ruled that:
The Diocese argues that Gallagher warranted a specific result
when it told the Diocese: "If the [Loss] Fund is exhausted,
the Diocese[ ] becomes fully insured." Following [the] lead
[of Roger v. Dufrene,
613 So. 2d 947 (La.1993) ], the issue is
whether Gallagher specifically warranted the amount of the
Diocese's coverage, and we conclude that it did. Indeed, we
find it difficult to see how Gallagher could have been more
specific. The Diocese's claim is contractual because
Gallagher specifically stated that the loss fund capped the
Diocese's potential yearly exposure, which it certainly did
not.
Society
I, 26 F.3d at 1367.
The law of the case doctrine was developed to "maintain
consistency and avoid [needless] reconsideration of matters once
decided during the course of a single lawsuit." Royal Ins. Co. of
Am. v. Quinn-L Capital Corp.,
3 F.3d 877, 881 (5th Cir.1993)
(citation omitted), cert. denied,
511 U.S. 1032,
114 S. Ct. 1541,
128 L. Ed. 2d 193 (1994). Under this doctrine, we will follow one of
12
our prior decisions without reexamination in a subsequent appeal
unless the evidence in a subsequent trial was substantially
different, controlling authority has since made a contrary decision
of the law applicable to such issues, or the decision was clearly
erroneous and would work manifest injustice.
Id.
The language in the Society I opinion quoted above is somewhat
imprecise. First, the issue of whether the Diocese's claim against
Gallagher is contractual or delictual is a largely factual one—it
hinges on a question of fact: did the insured's agent or broker
expressly warrant a specific result?
Roger, 613 So. 2d at 949. The
Diocese was appealing the district court's grant of summary
judgment to Gallagher. Thus, what the panel really meant in the
text quoted above was that there was a genuine dispute of material
fact over whether the Diocese's claim is contractual; and, so, the
panel simply held that the Diocese's claim was not delictual as a
matter of law and thus the district court wrongly granted Gallagher
summary judgment (and this is the most the panel could have held).
To that extent the panel's statement was pure dicta. Gallagher
pointed out in a motion for rehearing to the panel that the
language quoted above could be erroneously interpreted as a factual
finding, but, alas, the panel did not alter its opinion. However,
the fact that the panel did not correct the quoted language does
not mean that dicta somehow becomes the law of the case.
Significantly, after the Society I panel remanded the case,
the district court granted the Diocese summary judgment on the
basis that the Diocese's claim against Gallagher was contractual.
13
This time around, the summary judgment burden was on the Diocese,
rather than Gallagher. Moreover, the district court considered
additional evidence in granting the Diocese summary judgment,
evidence that it did not have the opportunity to consider when it
erroneously granted Gallagher summary judgment on the same issue.
The Diocese even emphasizes this point in its brief: "On remand,
the trial court was presented with even stronger evidence than
before on the issue of Gallagher's liability."
This court will not apply the law of the case to factual
determinations if there is a different standard of review in the
two appeals. See
Royal, 3 F.3d at 881 (holding that "[b]ecause the
standard of review for factual determinations on direct appeal is
higher than the standard applied during an interlocutory appeal of
a preliminary injunction, the interlocutory appeal normally will
not establish law of the case on factual matters"). This court has
also held that the law of the case does not apply where the first
appellate ruling transpired before the parties had the opportunity
to present all their evidence to the district court. See Enlow v.
Tishomingo County, Mississippi,
45 F.3d 885, 888 n. 8 (5th
Cir.1995) (holding that, under law of the case, appellate decision
that material factual issues precluded summary judgment on
plaintiff's claims did not preclude district court from later
granting defendants' motion for a directed verdict because, by
then, the parties had presented all of their evidence).
Given this authority, the law of the case would not apply
here. There is a different standard of review in Society I and
14
this appeal. In Society I, the summary judgment burden was on
Gallagher; this court, for instance, construed the facts in favor
of the Diocese. Now, in this appeal, the summary judgment burden
is on the Diocese. Moreover, the parties presented additional
evidence in the district court after Society I. Thus, now, there is
a different record on appeal.
Therefore, the law of the case does not bar Gallagher from
contending that there is a triable issue over whether it expressly
warranted that the Diocese was fully insured. Accordingly, we will
next consider Gallagher's argument to that effect.
B
Gallagher maintains that there is a genuine dispute of
material fact over whether it expressly warranted that the Diocese
would be fully insured for all losses above the loss fund. If it
is correct, a jury question exists whether the Diocese's claim is
contractual or delictual. If the claim is contractual, then the
Diocese had a ten-year prescriptive period in which to file its
action. If the claim is delictual, it had a one-year prescriptive
period. The Diocese filed this action several years after it knew
or should have known of Gallagher's alleged negligent acts, that
is, several years after the one-year prescriptive period began to
run.
Gallagher first asserts that there can only be an express
warranty if there is a contract. In this regard, it contends that
there is material evidence that the plan was not a contract and
that the Diocese knew of the excess aggregate limit before the
15
second year of the plan. Second, Gallagher avers that a vice of
consent prevented the plan from becoming a contract.
Clearly, there can only be an express warranty for purpose of
determining whether the Diocese's claim is contractual if that
express warranty was part of some sort of contract. See Harrison
v. Gore,
660 So. 2d 563, 568 (La.App.) (suggesting that, under
Roger, the ten-year prescriptive period applies only if the
plaintiff's claim is grounded in "a special obligation
contractually assumed by the obligor"), writ denied,
664 So. 2d 426
(La.1995). In other words, at a minimum, there must be no genuine
dispute of material fact that there was a contract that contained
the express warranty. At the time of the events in dispute, a
contract was an agreement, in which one person obligates himself to
another, to give, to do or permit, or not to do something, express
or implied by the agreement.4 Julius Cohen Jeweler, Inc. v.
Succession Jumonville,
506 So. 2d 535, 538 (La.App.) (applying pre-
1984 law), writ denied,
511 So. 2d 1155 (La.1987). The Civil Code
required four elements for a valid contract: (1) the parties must
have the capacity to contract; (2) the parties' mutual consent
must be freely given; (3) there must be a certain object for the
contract; and (4) the contract must have a lawful purpose.
Id.
Gallagher contends that triable issues exist on the second and
third elements here—the existence of consent and a certain object.
4
The Civil Code articles dealing with obligations were
extensively revised in 1984. The articles in effect before the
1984 revisions apply here. We will apply them throughout this
opinion.
16
In response, the Diocese generally cites Roger and claims that
there was a unilateral or gratuitous contract.
The Diocese's reply is totally inadequate. For one thing,
there was no unilateral contract. Obviously, if the Diocese
consented to the plan, it would be obligated to pay
premiums/commissions in return for brokerage services. In other
words, assuming there was a contract, it imposed obligations on
both the Diocese and Gallagher. Therefore, any contract would be
synallagmatic. Bullock v. Louisiana Indus.,
370 So. 2d 148, 149
(La.App.1979); Kaplan v. Whitworth,
116 La. 337,
40 So. 723, 724
(1905). The Diocese is also wrong to say that the alleged contract
was gratuitous. Gallagher was demanding a price for its services
(i.e., premiums/commissions). So, the contract cannot be
gratuitous. Armour v. Shongaloo Lodge No. 352, Free and Accepted
Masons,
330 So. 2d 341, 345 (La.App.1976), judgment rev'd for other
reasons,
342 So. 2d 600 (La.1977).
The gist of Gallagher's argument here is that the document
containing the "fully insured" language was just a proposal, that
some terms were changed during negotiations, and that the parties
never actually entered into a contract (or, if they did enter a
contract, it is unclear what that contract really included).
However, there is much evidence that, except for slight alterations
in the dollar amounts, the proposal was Gallagher's offer and the
Diocese agreed to it; there is really no material proof to the
contrary. To win a reversal on this point, Gallagher must
demonstrate a jury question on the following: that sometime after
17
Gallagher presented the plan to the Diocese and before the Diocese
agreed to it (with a few changes in dollar amounts), Gallagher
withdrew its representation that the Diocese was fully insured.
But Gallagher cannot. The record plainly indicates that both
Gallagher and the Diocese consented to the plan (with the dollar
changes) and that there was a certain object to the plan (i.e., the
provision of full insurance coverage above the loss fund).
Therefore, the Diocese and Gallagher had a valid contract, and
Gallagher expressly warranted a specific result. Accordingly, the
Diocese's claims against Gallagher, at least with regard to the
first year of the plan, are contractual and thus timely filed.
Next, Gallagher contends in the alternative that, even if it
expressly warranted that the Diocese would be fully insured for the
first year of the plan, it specifically explained the $450,000
aggregate limit to the Diocese before the beginning of the second
year of the plan, and the Diocese chose not to purchase additional
coverage. The contract between the Diocese and Gallagher was for
a three-year term and provided for adjustments to premiums, the
service fee, and the loss fund for the second and third annual
periods. The "renewal proposals" Gallagher provided to the Diocese
for the second year presented such adjustments. In agreeing to a
change in terms, parties may intend to make a new and separate
contract rather than modify an existing contract. See Ketteringham
v. Eureka Homestead Soc.,
140 La. 176,
72 So. 916, 917 (1916).
However, we do not see the changes made pursuant to the renewal
proposals as creating new contracts. The summary judgment record
18
does not present evidence that there were three separate one-year
contracts, and Gallagher does not argue that in its brief.
Therefore, Gallagher must demonstrate that it and the Diocese
modified their contract to discharge Gallagher from the warranty.5
Under Louisiana law, contracts may be modified only by mutual
consent of the parties to the contract. See Williams Eng'g, Inc.
v. Goodyear,
480 So. 2d 772, 778 (La.Ct.App.1985), aff'd,
496 So. 2d
1012 (La.1986). In order to constitute a valid modification, an
agreement must be clearly defined, and the party sought to be held
to the modification must have in fact actually agreed to and
authorized the modification. See Cardos v. Cristadoro,
228 La.
975,
84 So. 2d 606, 610 (1955) (holding that there was no evidence
that parties actually agreed to modify stock purchase agreement and
thus contract was effective as originally written); see also Wise
v. Lapworth,
614 So. 2d 728, 731 (La.Ct.App.1993) (holding that
subsequent modifications to a written proposal, which constituted
a contract upon oral acceptance, were not part of the contract
because they were done without the knowledge or consent of other
5
Nine months into the first year of the plan, the Diocese and
Gallagher modified the contract by agreeing that the Diocese would
establish an additional loss fund of $200,000 and pay an extra
premium. However, we do not see the parties' modification here as
a new contract. As Gallagher stated in its endorsement, the
parties here merely agreed to "amend[ ]" the "aggregate sum agreed
hereon in respect of the first period of insurance, from July 1,
1981 to July 1, 1982." Because this amendment did not create a new
contract, it did not discharge Gallagher's original express
warranty. See Ketteringham v. Eureka Homestead Soc'y (In re Salzer
),
140 La. 176,
72 So. 916 (1916) (holding that parties, who agreed
to substitute a hot-water heating system for the hot-air system
stipulated in contract, did not make a new contract but only
amended the existing contract).
19
party). Modifications may, however, be effected by implication,
silence, or inaction. See, e.g., W.R. Aldrich & Co. v. Spalitta,
285 So. 2d 835, 836-37 (La.Ct.App.1973) (holding that although
person who hired an excavating company did not expressly consent to
a modification in the cost of the contract, he did consent by
implication when he asked for location of excavation to be changed,
was advised that the cost would be greater, and made no objection).
A modification will, however, not be effected when there is no
meeting of the minds regarding the modification, such as when the
parties did not discuss or agree to the change. See Williams
Eng'g, 480 So. 2d at 776 (holding that because there was no
discussion or agreement regarding change in engineer's method of
providing cost estimates to company that hired him, there was no
meeting of the minds and thus no modification as to how the
engineer should provide cost estimates).
The issue, then, becomes whether the Diocese consented, either
expressly or impliedly, to the discharge of Gallagher's warranty
that the Diocese was fully insured. On the one hand, members of
the Diocese task force generally testified that they believed until
1984 that the Diocese was fully insured over the loss fund. Also,
the record indicates that Gallagher did not fully illustrate how
the excess aggregate operated in any of its proposals until 1984.
On the other hand, some evidence exists that Gallagher alluded to
and even explained the excess aggregate to members of the task
force before the parties entered into the 1982-83 plan year. For
instance, the plan binders and first renewal proposal mentioned the
20
excess aggregate. Also, Wagner testified that he knew during the
first year of the plan that the Diocese might face insurance
liability over the amount of the loss fund. Finally, Lillis and
O'Connell testified that they spoke to two task force members
around the time of the arson fires about how the Diocese might need
another layer of excess aggregate insurance. Thus, a genuine
dispute of material fact exists as to whether the Diocese impliedly
consented to discharge Gallagher's warranty by continuing the
program in the second year knowing the risk of inadequate coverage.
Consequently, a genuine dispute of material fact exists as to
whether the Diocese's claims arising out of the second year of the
plan are delictual, and thus time barred.
Gallagher also argues that a "vice of consent" exists that
precludes the formation of a contract under Louisiana law, and that
the contract must be annulled because of unilateral error.
Gallagher claims that the Diocese knew that it would be liable for
pedophilic acts by its priests and failed to inform Gallagher of
this before entering into the plan. Gallagher also suggests that
the Diocese breached its duty under agency law by failing to
disclose that it knew some of its priests had molested boys.
To show vice of consent on the basis of unilateral error,
Gallagher must show that (1) the Diocese made misrepresentations,
(2) Gallagher justifiably relied on these misrepresentations, (3)
the error bears upon the principal cause of the contract, and (4)
the Diocese knew or should have known that its misrepresentations
would be relied upon. McCarty Corp. v. Pullman-Kellogg, Div. of
21
Pullman, Inc.,
751 F.2d 750, 755 (5th Cir.1985).
Gallagher has gathered evidence that, before the Diocese
entered into the plan, Larroque and Bishop Gerald L. Frey knew
about incidents of priestly pedophilia. There is at least a
triable issue that the Diocese made material omissions.
The biggest obstacle here for Gallagher, though, is the
principal cause element. With regard to errors of fact, article
1823 provides that "a principal cause for making the contract ...
may be either as to the motive for making the contract, to the
person with whom it is made, or to the subject matter of the
contract itself." There is no alleged unilateral error here with
regard to the subject matter of the plan; both the Diocese and
Gallagher knew what the plan principally covered. True, the
Diocese did not specifically know about the excess aggregate before
entering into the 1981-82 plan year. However, even if the excess
aggregate was a principal cause of the making of the contract,
there is no indication that the Diocese knew or should have known
about it; the record indicates that Gallagher did not provide any
information to the Diocese about the excess aggregate until after
the parties entered into the 1981-82 plan year and that Gallagher
had in fact expressly warranted that the Diocese was fully insured
over the loss fund. Hence, the contract cannot be annulled. See
Carpenter v. Christian,
496 So. 2d 1364, 1368 (La.App.1986) (ruling
that "a contract may be invalidated for unilateral error as to a
fact which was the principal cause for making the contract only
when the other party knew or should have known it was the principal
22
cause").
The only issue left regarding the principal cause element,
then, is motive, that is, whether the Diocese entered into the plan
for the purpose of having Gallagher cover some of its expected
losses from claims arising from pedophilic Diocese priests. See
Savoie v. Bills,
317 So. 2d 249, 255 (La.App.) (finding that
"defendants knew that these errors were the principal cause for the
signing of the contract by the two landowners. The
misrepresentations ... were for the very purpose of securing the
signatures."), writ dismissed,
320 So. 2d 554 (1975). There is
absolutely no evidence of such a motive; in fact, Gallagher's
argument here is implausible. If the Diocese really intended to
avoid large losses that it expected from pedophilia claims it would
hardly have tried to pass these losses along to Gallagher—its
insurance agent. Instead, it would have tried to slough the losses
off on some insurer. Moreover, the Diocese would not have entered
an insurance coverage plan that contained a large coverage gap,
such as the one at issue here. Rather, it would have entered into
a conventional insurance scheme, one that ensured that the
insurance companies would pay the maximum amount of the anticipated
liability tab. There is certainly no genuine dispute of material
fact on whether the Diocese entered into the plan with the primary
purpose of making Gallagher pay for uninsured losses.
Lastly, Gallagher makes an agency argument. It contends that
it was the agent of the Diocese, and the Diocese had the duty to
inform it of the risk of pecuniary loss that existed in the
23
performance of its duties in brokering the plan. Gallagher avers
that the Diocese breached its fiduciary duty by failing to inform
it that Gallagher might be liable to cover certain losses incurred
from the activities of pedophilic priests. This breach, Gallagher
claims, precludes the Diocese from relying on the express warranty
to argue that Gallagher is liable for the Diocese's uninsured
losses.
Gallagher is correct that it was the agent of the Diocese.
See Motors Ins. Co. v. Bud's Boat Rental, Inc.,
917 F.2d 199, 204
(5th Cir.1990) (noting that under Louisiana law, an insurance
broker is generally deemed to be the agent of the insured rather
than the insurer); Tassin v. Golden Rule Ins. Co.,
649 So. 2d 1050,
1054 (La.App.1994) (holding that insurance broker is generally
agent of insured). Its agency argument fails, though—at least with
regard to the first year of the plan. The Diocese had no duty to
provide Gallagher with any information about possible future losses
either when the parties entered the plan or during the plan's
initial year. First, at the time the Diocese agreed to the plan,
it reasonably believed (given Gallagher's express warranty) that
the plan would cover all losses over the loss fund. Hence, even
assuming that a task force member knew before 1981 that the Diocese
might face losses resulting from priestly molestations, this person
would have thought that the insurance companies underwriting the
plan—not Gallagher—would cover the losses. Second, during the
first year of the plan, Gallagher was contractually bound to ensure
that the Diocese remained fully insured over the loss fund. This
24
contractual obligation would have stayed unchanged even if the
Diocese had learned about the excess aggregate during this period
and told Gallagher that it might be liable for the Diocese's
uninsured losses. Hence, the Diocese had no duty during the first
year of the plan to share any information it had with Gallagher
about pedophilic priests.
In addition, even if the Diocese did have a duty to inform
Gallagher about possible future losses and breached that duty
during the first year of the plan, this would not be grounds for
preventing the Diocese from relying on the express warranty.
Absent an explicit agreement to the contrary, a principal has no
duty to indemnify an agent for losses incurred due to the agent's
fault. Shair-A-Plane v. Harrison,
291 Minn. 500,
189 N.W.2d 25,
27-28 (1971) (citing RESTATEMENT (SECOND) OF AGENCY §§ 438 & 440(a) and
accompanying cmts.). Here, Gallagher's liability to the Diocese
stems from the fact that Gallagher made an express warranty that
was flatly incorrect. Refusing to recognize that liability would
force the Diocese to indemnify Gallagher for losses that resulted
from Gallagher's own error. Therefore, the Diocese is not barred
from using the express warranty to hold Gallagher responsible for
the Diocese's uninsured losses during the first year of the plan.
Accordingly, we determine that, with regard to the first year
of plan coverage, there is no genuine dispute of material fact over
whether Gallagher expressly warranted that the Diocese would be
fully insured for all losses above the loss fund. However, with
regard to the second year of plan coverage, we conclude that a
25
genuine dispute of material fact exists over whether Gallagher made
such an express warranty.
C
Gallagher maintains that a triable issue exists on whether it
breached a contract with the Diocese. As demonstrated above,
Gallagher and the Diocese had a contract, and as part of that
contract, Gallagher expressly warranted that the Diocese was fully
insured above its loss fund. It is undisputed that the Diocese was
not fully insured above its loss fund. Hence, no jury question
exists over whether Gallagher breached this contract with the
Diocese for the first year.
D
Gallagher contends that the parties did not reasonably
contemplate as a matter of law that Gallagher (as opposed to the
insurance companies providing the Diocese with coverage) would be
liable for damages arising from child molestation by pedophilic
Diocese priests.
Absent fraud or bad faith, a party in breach of contract is
"liable only for such damages as were contemplated, or may
reasonably be supposed to have entered into the contemplation of
the parties at the time of the contract." L.S.A.-C.C. art.1934(1).
At the time they entered into the plan, the parties reasonably
contemplated that Gallagher would be liable for damages that arose
if, contrary to Gallagher's express warranty, the Diocese was not
fully insured above its loss fund. Therefore, Gallagher's
contention here has no merit.
26
E
Gallagher asserts that a genuine dispute of material fact
exists on whether its express warranty caused the Diocese damages.
First, it avers that the district court did not determine how the
insurance policies interrelated. However, the interrelation of the
insurance policies is clear from the record. As discussed earlier,
from the Diocese's perspective, the primary problem with the plan
was that the Interstate policy did not "drop down" to pick up
losses exceeding $100,000 per occurrence once the Lloyd's excess
package had reached its aggregate limit of $450,000. This resulted
in some $4,500,000 in uncovered losses. Obviously, if the Diocese
was fully insured beyond the loss fund, which Gallagher had
expressly warranted, it would not have incurred these losses.
Hence, the Diocese is entitled to compensatory damages of about
$4,500,000. As the breaching party, Gallagher must put the Diocese
in as good a position as it would have been had Gallagher fulfilled
its express warranty.
Second, Gallagher claims that there is a jury issue on
whether the Diocese committed criminal acts, which would be
excluded from coverage. Apparently, Gallagher maintains that
various Diocese officials violated § 14:403 of the Louisiana
Statutes and thus committed the misdemeanor of failing to report
child abuse. However, it is only a crime in Louisiana for certain
persons to fail to report child abuse; the Diocese officials here
are not such persons. La. Stat. § 14:403; L.S.A.-Ch. C. art. 609.
Gallagher also suggests that Diocese officials aided and abetted
27
child molestation. There is no evidence of this.
In conclusion, Gallagher has failed to show a genuine dispute
of material fact on the express warranty issue with regard to the
first year of the plan. No rational jury could find for Gallagher
on the express warranty issue. BMG Music v. Martinez,
74 F.3d 87,
91 (5th Cir.1996). However, Gallagher has succeeded in
demonstrating a triable issue over whether it made an express
warranty with regard to the second year of the plan.6
III
The issue raised on appeal by LACOS arises out of lawsuits by
two children molested by a pedophilic priest in the Diocese. One
child's suit was settled for about $900,000 and the other child's
suit for about $632,000.
Preferred Risk provided the primary insurance for the Diocese
from July 1978 to July 1981 through a three-year policy with a
limit of $500,000. This policy did not contain an annualization
clause, that is, it provided a policy limit of $500,000 for the
three years together rather than a policy limit of $500,000 for
each of the three years. In other words, the policy suggested that
Preferred Risk only offered $500,000 of coverage, not $1,500,000.
Houston General Insurance Co. ("Houston") and PEIC provided
excess coverage for the Diocese. Houston furnished a one-year
6
Gallagher also claims that there is a triable issue on
whether the Diocese's losses would have been covered by a
"conventional" insurance plan (i.e., whether, but for entering the
flawed Bishop's Program, the Diocese would have sustained damages).
This cause-in-fact argument, though, is inappropriate for a breach
of contract action. Hence, we do not discuss it.
28
excess policy from July 1978 to July 1979, and PEIC provided a
one-year excess policy from July 1979 to July 1980 and a one-year
excess policy from July 1980 to July 1981.
To obtain excess coverage from PEIC during the 1979-80 and
1980-81 periods, LACOS mailed applications to an agent of PEIC.
These applications allegedly contain materially false information.
First, the 1979-80 application states that the Preferred Risk
policy period runs from July 1, 1979 to July 1, 1980 and that the
policy provides $500,000 of coverage per occurrence. In turn, the
1980-81 application states that the Preferred Risk policy period
runs from July 1, 1980 to July 1, 1981 and that the policy provides
$500,000 of coverage per occurrence. However, as this court ruled
in Society I, the Preferred Risk policy only furnished a total of
$500,000 of coverage for the period from July 1, 1978 to July 1,
1981. Second, the statement in the 1979-80 application that the
Preferred Risk policy expired on July 1, 1980 was false—the policy
in fact did not expire until July 1, 1981. Third, each application
states that the Preferred Risk policy does not "afford coverage
less than standard in any respect." However, the district court
found that the insurance industry at the time the applications were
sent regarded three-year policies that were not annualized as
"nonstandard."
In Society I, this court adopted an "exposure rule" to
allocate losses stemming from the molestations. This rule defined
what an "occurrence" would be under the insurance policies. We
held that there was an occurrence when a child was first molested
29
during a policy period, and that all subsequent molestations of a
particular child during the policy period, as well as any resulting
injury to the child's parents, arose out of the same occurrence.
We also ruled that a loss due to an occurrence would be allocated
among the insurers according to the percentage of the time or
period that each occurrence happened during an insurer's policy
period.
Under this rule, Preferred Risk had to contribute $500,000 for
each of the two settlements. PEIC then had to pay the remaining
$532,000. Obviously, if the policy limit for each occurrence under
the Preferred Risk was $1,500,000, rather than $500,000, then PEIC
would have had to pay nothing.
PEIC then sued LACOS to recover the $532,000. It alleged that
LACOS was liable for negligent misrepresentation. Specifically, it
asserted (1) that LACOS had failed to disclose that its primary
policy was for three years, rather than one; (2) that LACOS
misrepresented that the primary policy had policy limits of
$500,000 for each year; and (3) that LACOS failed to disclose that
the primary policy was "substandard" in that it did not have an
annualization clause.
PEIC and LACOS submitted this issue to the district court for
a bench trial. The district court relied entirely on trial briefs,
depositions, and documentary evidence. The district court
determined that a legal duty exists between LACOS and PEIC because
"[c]ommon sense dictates that the excess carrier or its agent must
know the material details of the underlying policy." The district
30
court then found that LACOS breached this duty by "misstating the
expiration of the policy and by misrepresenting the scope of the
underlying coverage." The court also appears to have implicitly
found that LACOS misrepresented the coverage as standard when it
was in fact substandard. Finally, the district court ruled that
PEIC had suffered damages because, if the Preferred Risk policy
provided annualized coverage, as LACOS had suggested, then PEIC
would not have had to pay $532,000.
LACOS alleges that the district court erred in finding that
it had negligently misrepresented the terms of the policy. A
person commits the tort of negligent misrepresentation when (1) he
has a legal duty to supply correct information; (2) he breaches
that duty; and (3) his breach causes damages to the plaintiff.
Barrie v. V.P. Exterminators, Inc.,
625 So. 2d 1007 (La.1993);
L.S.A.-C.C. arts. 2315 & 2216. This tort applies in both
nondisclosure and misinformation cases. Nesbitt v. Dunn,
672 So. 2d
226, 231 (La.App.1996).
LACOS avers that all three of these elements are lacking.
First, LACOS asserts that it had no "duty to read the Preferred
Risk Policy and identify the lack of "annualization' language
therein." Second, LACOS concedes that it misstated the expiration
of the policy, but asserts that this was not a material
misrepresentation. Similarly, it avers that, at the time of the
policies in question, the insurance industry treated three-year
policies as one-year policies. Therefore, LACOS asserts that it
did not breach any duty to PEIC. Third, it claims that PEIC would
31
have written the excess coverage even in the absence of LACOS'
alleged misrepresentations and omissions, and thus it was not the
cause in fact of PEIC's damages.
We disagree with LACOS' first contention. LACOS clearly had
a legal duty to provide correct information to the Diocese. It was
the Diocese's insurance agent.
LACOS makes two arguments why it did not breach any duty it
had to the Diocese. First, LACOS alleges that it was industry
practice in the late 1970s and early 1980s to annualize three-year
insurance policies and that this was what Preferred Risk did to its
policy. Thus, LACOS avers that it did not make any
misrepresentations. There was much testimony in the district court
on industry practice at the time the policies were written. There
was no dispute that three-year insurance policies were generally
annualized. The only dispute was over whether three-year insurance
policies that lacked an annualization clause would typically be
annualized. The district court sided with the Diocese's expert on
this point. It believed that the most credible explanation of
industry practice was that three-year policies with annualization
clauses would be annualized, and three-year policies without such
clauses would not; otherwise, it reasoned, there was no reason to
have annualization clauses at all. We agree with the district
court's logic. Certainly, it is not clearly erroneous. Since the
Preferred Risk policy lacked an annualization clause, then, LACOS
negligently misrepresented that the Preferred Risk policy was
standard.
32
Second, LACOS claims that this court's adoption of the
"exposure rule" in Society I was a "watershed" decision that
created new law. Under the exposure rule, a three-year policy that
is not annualized provides less coverage in a situation where
children are repeatedly molested over several years than three
one-year policies (or a three-year policy that is annualized).
LACOS suggests that the claims it made to the Diocese about the
Preferred Risk policy predate Society I, and thus were not
misrepresentations at the time they were made. This contention is
a red herring. If industry practice was to include annualization
clauses in three-year policies, then LACOS breached its duty by
representing that the Preferred Risk policies were standard. The
"exposure rule" is irrelevant here.
In addition, we determine that LACOS was the cause in fact of
PEIC's damages. There was evidence that LACOS misled PEIC into
thinking that the Preferred Risk policy was not annualized. There
was also proof that PEIC would not have provided excess coverage if
it had known that the Preferred Risk policy was not annualized.
Therefore, PEIC would not have suffered injury if LACOS had not
negligently misrepresented the terms of the policy.
In conclusion, PEIC has demonstrated that LACOS negligently
misrepresented the Preferred Risk policy. Thus, the district court
did not err in granting final judgment to PEIC for $532,000.
IV
In its final judgment, the district court ruled that "[t]he
Diocese hereby expressly subrogates to ... Gallagher its rights
33
against the Diocese's excess carriers or other debtors."
Interstate alleges that the district court erred in including
the language quoted directly above. Interstate did not raise this
issue below. Thus, we review for plain error. Douglass v. United
Services Automobile Ass'n,
79 F.3d 1415, 1422 (5th Cir.1996).
Gallagher did not make a claim for subrogation in the
district court. Apparently, the district court added the
subrogation language at the Diocese's invitation. In any event,
though, the common-law theory of equitable subrogation does not
exist in Louisiana. Institute of London Underwriters v. First
Horizon Ins. Co.,
972 F.2d 125, 127 (5th Cir.1992). Louisiana law
recognizes only conventional subrogation (i.e., subrogation by
contract) and legal subrogation (i.e., subrogation specifically
recognized by the Civil Code).
Id. Under the Civil Code, legal
subrogation takes place in five instances:
(1) In favor of an obligee who pays another obligee whose
right is preferred to his because of a privilege, pledge, or
mortgage;
(2) In favor of a purchaser of movable or immovable property
who uses the purchase money to pay creditors holding any
privilege, pledge, or mortgage on the property;
(3) In favor of an obligor who pays a debt he owes with others
or for others and who has recourse against those others as a
result of the payment;
(4) In favor of an heir with benefit of inventory who pays
debts of the estate with his own funds;
(5) In the other cases provided by law.
L.S.A.-C.C. art. 1829. Comment (e) to article 1829 explains what
the "other cases provided by law" are. These other cases—all of
which are in the Louisiana statutes—include subrogation of a
34
state-supported charity hospital to the rights of a patient,
subrogation of an employer or insurer who pays an employee
workmen's compensation to the rights of that employee against a
third person under the Workmen's Compensation Act, and subrogation
of a taxpayer to the right of the collecting authorities.
In this case, neither conventional nor legal subrogation
exists. Therefore, the district court erred in providing for
equitable subrogation, which is not permitted under Louisiana law.
We, nevertheless, affirm the district court's transfer of rights
from the Diocese to Gallagher. In passing, Gallagher mentions that
only the Diocese has standing to challenge the court's transfer of
its right to Gallagher. And the Diocese did not object to the
court's subrogation. Obviously, Interstate has some reason to
think that the rights are more dangerous in the hands of Gallagher
than in the hands of the Diocese. But as far as the law is
concerned, the subrogation paragraph did not adversely affect
Interstate's rights. See Dairyland Ins. Co. v. Makover,
654 F.2d
1120, 1123 (5th Cir. Unit B Sept.1981) (applying the rule that
"ordinarily only a litigant who was a party below and who is
aggrieved by the judgment or order may appeal"). Accordingly, the
district court's ruling on subrogation must be affirmed.7
7
In response to Interstate's appeal, Gallagher argues that
this court lacks jurisdiction because Interstate's notice of appeal
is technically deficient. This argument is without merit.
Interstate stated that it was appealing "from the Final Judgment
entered on August 30, 1995, and from the March 10, 1995 Partial
Summary Judgment, if the August 30, 1995 Final Judgment is
interpreted to have modified or amended the judgment in favor of
Interstate Fire & Casualty Company in the March 10, 1995 Partial
Summary Judgment." Gallagher would have us read the conditional
35
V
For the foregoing reasons, we AFFIRM the district court's
judgment against Gallagher for occurrences during the first year of
plan coverage and REVERSE and REMAND as to this judgment for
occurrences during the second year of plan coverage; AFFIRM the
district court's judgment against LACOS; and AFFIRM paragraph four
of the district court's final judgment (which pertains to
subrogation).
DeMOSS, Circuit Judge, concurring in part and dissenting in
part:
I concur in the analysis and holdings of parts II(A), II(E),
III, and IV of the majority opinion. I concur also as to certain
limited holdings in part II(B). I respectfully dissent, however,
as to the remainder of II(B) and as to parts II(C) and (D). I
write now to set forth my reasons for these positions.
I.
I concur in part II(A) of the majority opinion, which holds
that certain language from our Court's prior opinion in Society of
the Roman Catholic Church v. Interstate Fire & Casualty Co.,
26
F.3d 1359 (5th Cir.1994) [hereinafter Society I ], does not bar
Gallagher from contending that there is a triable issue over
whether it expressly warranted that the Diocese was fully insured.
clause as applying to the entire sentence. But it applies only to
the phrase "from the March 10, 1995 Partial Summary Judgment."
Interstate's notice of appeal adequately indicated that it was
appealing the Final Judgment unconditionally. And according to
Interstate, Gallagher did not raise the issue of subrogation below,
so Interstate never had an opportunity to contest it. Thus,
Interstate has not waived its right to appeal the issue.
36
See ante, at 397 (quoting Society
I, 26 F.3d at 1367). In essence,
the majority categorizes this quote as dicta, pointing out that
"what the [Society I ] panel really meant ... was that there was a
genuine dispute of material fact over whether the Diocese's claim
is contractual; and, so, the [Society I ] panel simply held that
the Diocese's claim was not delictual as a matter of law and thus
the district court wrongfully granted Gallagher summary judgment
(and this is the most the panel could have held)." Ante, at 397-
98.
While the majority does not discuss it, I am concerned by the
fact that the district court, in rendering summary judgment in
favor of the Diocese after remand, quoted the same Society I
language. I think it is therefore highly probable that the
district judge treated the statement in Society I not as dicta, but
rather as a ruling which dictated a grant of summary judgment in
favor of the Diocese after remand. I cannot fathom any other
reason why the district judge would have referred to it in his
summary judgment determination, and from my review of this record
I have serious doubts that the district judge would have granted
summary judgment in favor of the Diocese if the opinion in Society
I had not included the quoted language, but had instead said what
the majority opinion now says the panel in Society I "really meant"
to say.
II.
A.
I concur with the language of part II(B) of the majority
37
opinion which disposes of the Diocese's contentions regarding
"unilateral" or "gratuitous" contracts. Likewise, I concur with
the majority's determination in part II(B) that the contractual
relationship between Gallagher and the Diocese was for a term of
one year only with the parties being able to renew and extend that
contractual relationship for subsequent years by making renewal
agreements each year. Finally, I also concur with the majority's
determination in part II(B) that, with regard to the "second year
of plan coverage," there was a genuine dispute of material fact as
to whether Gallagher made an express warranty.
B.
I cannot concur with and therefore dissent from the majority's
determination in part II(B) that, "with regard to the first year of
plan coverage, there is no genuine dispute of a material fact over
whether Gallagher expressly warranted that the Diocese would be
fully insured for all losses above the loss fund." Ante, at 403.
From my reading of the summary judgment record in this case, I
think there is sufficient evidence upon which a jury could
reasonably conclude that the "fully insured" language in the first
plan proposal did not create an express warranty by Gallagher that
the Diocese would be fully insured for all losses above the loss
fund.
The best example of the evidence upon which I think a jury
could so conclude is the parties' actions following the "rash of
mysterious arson fires" which occurred during the first year of the
plan. See ante, at 395-96. The losses sustained by the Diocese
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from these arson fires were of such number and magnitude as to make
readily apparent that the loss fund of $400,000 for the first year
would not be adequate to absorb the losses involved and also pay
the other losses which the parties had estimated would need to be
covered by the loss fund. If the Diocese truly believed that the
"fully insured" language in the first-year proposal created an
express warranty by Gallagher that the Diocese would never have to
pay more than $400,000 on losses in the first year, then surely the
Diocese would have immediately asserted its rights under that
express warranty and called upon Gallagher to pay the losses
chargeable for the first year against the loss fund in excess of
the $400,000 upper limit. I could find absolutely nothing in the
summary judgment record which indicated that the Diocese ever
asserted such a right at that time; accordingly, I think a
reasonable jury could infer that at the time of the "rash of
mysterious arson fires" the parties did not construe the language
of the first-year proposal as creating such an obligation on the
part of Gallagher.
Likewise, when the parties addressed the task of entering into
the renewal agreement for the second year of the plan, the renewal
proposal did not include any "written explanatory material assuring
the Diocese that it was "fully insured' over the loss fund." Ante,
at 396. If the Diocese truly considered the "fully insured"
language in the first proposal as creating an express warranty on
the part of Gallagher, one would expect the Diocese to raise some
objection about the exclusion of this language in the second
39
proposal. From my examination of the summary judgment record, I
saw no indication that that was the position taken by the Diocese.
Consequently, I think a jury could reasonably infer that the
Diocese did not consider the "fully insured language" as an express
warranty on the part of Gallagher because (i) they did not insist
on compliance therewith during the first year of the plan, and (ii)
they did not raise any objection to the elimination of this
language in the proposal for the second year.
In reviewing a grant of summary judgment, we are required to
"construe all facts and inferences in the light most favorable to
the nonmoving party," see ante, at 393, which in this circumstance
is Gallagher. Consequently, I would not distinguish the first year
from the second year of the plan. I would simply send the whole
issue of what the parties intended by use of the "fully insured
language" for trial on the merits by the jury.
C.
I cannot concur with the majority's holding that "[t]he
Diocese had no duty to provide Gallagher with information about
possible future losses either when the parties entered the plan or
during the plan's initial year." Ante, at 402-03. The majority
cites no case law or statute to support that proposition regarding
the duty owed by a proposed insured to the agent who is going to
arrange insurance coverage for the insured. While I cannot cite
any Louisiana case which deals specifically with the situation of
proposed insured and its insurance agent, I read the opinion of the
Louisiana Supreme Court in Bunge Corp. v. GATX Corp.,
557 So. 2d
40
1376 (La.1990), as a broad overview of the circumstances in which
disclosure is required. In that opinion, the Louisiana Supreme
Court stated: "Modern law ... imposes on parties to a transaction
a duty to speak whenever justice, equity and fair dealing demand
it."
Bunge, 557 So. 2d at 1383 (quoting W. Page Keeton,
Fraud—Concealment and Non-Disclosure, 15 TEXAS L. REV. 1, 15 (1936)).
Furthermore, the Louisiana Supreme Court stated in that same
opinion:
It has long been held that the duty to disclose exists
where the parties stand in some confidential or fiduciary
relation to one another, such as that of principal and agent
or executor and beneficiary of an estate.
Id. 557 So.2d at 1383-84 (footnote omitted and emphasis supplied).
We are bound to apply Louisiana law in this diversity case, and I
think that under the language and philosophy of Bunge we should
hold that there is a duty upon a proposed insured to disclose to
the insurance agent all of the knowledge and awareness which the
insured might have as to possible claims and risks for which the
proposed insured wants to be protected by insurance. I think that
duty would be particularly applicable in the circumstances of the
present case where the Diocese now claims that Gallagher gave it an
express warranty that it would be fully insured and yet did not
tell Gallagher about the incidents of molestation which had already
occurred. There is sufficient summary judgment evidence of such
prior knowledge on the part of the Diocese as to raise a triable
issue that the Diocese had knowledge which was not disclosed.
The possible liability which the Diocese would face as a
result of sexual molestation of young boys by its priests is, in my
41
view, not the sort of standard or typical risk which a reasonably
prudent insurance agent would be expected to anticipate in
arranging for insurance coverage. If the Diocese wanted to be
"fully insured" as to that particular risk, it should have fully
disclosed the nature and extent of the prior incidences of sexual
molestation by its priests. The summary judgment record in this
case indicates that Gallagher made inquiries about the loss
experience of the Diocese in prior years and tailored its plan
based upon that prior loss experience. The task of an insurance
agent in designing the types and levels of insurance coverage so
that an insured may be "fully insured" cannot be done unless the
agent knows all of the types of risks and claims to which the
insured is exposed. In my view there is a triable jury issue as to
whether the phrase "fully insured" constituted an express warranty
by Gallagher, but even assuming it did, I think fairness and
justice and the language of Bunge would say that there is a
legitimate jury issue as to (i) whether the Diocese knew and failed
to disclose to Gallagher the risk of sexual molestation claims as
a result of the conduct of pedophilic priests and (ii) whether
Gallagher should be held for liability under its special warranty
as to a risk which was not a standard and ordinary risk and which
was a risk of which it had no prior knowledge.
D.
In my view, there are innumerable fact issues which a jury
should decide. Undoubtedly, Gallagher's sales representatives used
a lot of puffery in selling their program to the Diocese. The
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Diocese demonstrated by its actions, however, that it recognized
that it was just puffery and not a special contractual warranty.
Everything was working fine until the landslide of the sexual
molestation cases hit. Because there were so many of these claims
and the dollar amount of each claim was so high, the layer of
Lloyd's excess coverage was burned up by the first few settlements
of the child molestation claims. As a consequence, the Diocese had
to pay the first $550,000 of each later claim rather than just the
first $100,000. A jury might find that at that point, the Diocese
decided that it would go back and change the puffery into a special
contractual warranty and shift the loss to Gallagher. Gallagher
responds that it was the Diocese's employee, the priest, who was
committing all of the acts of sexual molestation, and the Diocese
knew about it and did not tell Gallagher. How, Gallagher asks,
could it be expected to design an insurance plan that would
adequately cover a risk it did not know about? The place to sort
out all of these cross-currents of claims and factual disputes is
before the trial jury, and under the facts available in this case,
the jury could find either for the Diocese or for Gallagher and the
evidence would support either finding. Summary judgment in favor
of the Diocese was, therefore, error.
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