Filed: Dec. 03, 1999
Latest Update: Mar. 02, 2020
Summary: IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT _ No. 98-40965 _ JARVIS CHRISTIAN COLLEGE, Plaintiff-Appellant, -vs- NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PENNSYLVANIA, Defendant-Appellee. _ Appeal from the United States District Court for the Eastern District of Texas _ December 3, 1999 Before POLITZ and STEWART, Circuit Judges, and LITTLE, District Judge.* LITTLE, District Judge: Plaintiff Jarvis Christian College (“Jarvis”) appeals the district court’s ruling declar
Summary: IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT _ No. 98-40965 _ JARVIS CHRISTIAN COLLEGE, Plaintiff-Appellant, -vs- NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PENNSYLVANIA, Defendant-Appellee. _ Appeal from the United States District Court for the Eastern District of Texas _ December 3, 1999 Before POLITZ and STEWART, Circuit Judges, and LITTLE, District Judge.* LITTLE, District Judge: Plaintiff Jarvis Christian College (“Jarvis”) appeals the district court’s ruling declari..
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IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
________________________
No. 98-40965
________________________
JARVIS CHRISTIAN COLLEGE,
Plaintiff-Appellant,
-vs-
NATIONAL UNION FIRE INSURANCE COMPANY
OF PITTSBURGH, PENNSYLVANIA,
Defendant-Appellee.
____________________________________________
Appeal from the United States District Court
for the Eastern District of Texas
____________________________________________
December 3, 1999
Before POLITZ and STEWART, Circuit Judges, and LITTLE,
District Judge.*
LITTLE, District Judge:
Plaintiff Jarvis Christian College (“Jarvis”) appeals the
district court’s ruling declaring that Jarvis is not entitled
to recover indemnity for the loss caused by the actions of
Jerrell J. Cosby, pursuant to the “School Leaders Errors and
Omissions” Policy, issued by defendant National Union Fire
Insurance Company of Pittsburgh, Pennsylvania (“National
*
District Judge of the W estern District of Louisiana, sitting by designation.
Union”). Jarvis argues that the district court made erroneous
findings of fact and conclusions of law regarding two of the
Policy’s exclusions: (1) the “personal profit or advantage”
exclusion, and (2) the “fraud or dishonesty” exclusion.
Moreover, Jarvis argues that the district court erred in not
awarding penalties and interest to Jarvis and in denying
Jarvis’ claim for attorney’s fees. We AFFIRM the district
court’s ruling.
I. BACKGROUND
A. Facts of the Case
Jarvis is a community college in Wood County, Texas,
operating as a Texas non-profit corporation. Jarvis is an
insured under a “School Leaders Errors and Omissions” Policy
(“Policy”) issued by National Union, which is authorized and
licensed to do business in the State of Texas. The Policy,
with a liability limit totaling $1 million, insured against
claims arising from “wrongful acts” committed by directors and
officers of the school.
Jerrell J. Cosby (“Cosby”) was a member of Jarvis’ board
of trustees, as well as Jarvis’ treasurer and chairman of the
finance committee. During his tenure, Cosby issued a proposal
to the finance committee and later the board of trustees about
an investment opportunity in a small factoring1 company called
1
Factoring is the business of accepting accounts receivable as security for short-term loans. See W EBSTER’S II NEW RIVERSIDE
UNIVERSITY DICTIONARY 460 (1988).
2
Action Funding, Inc. (“Action Funding”). Action Funding was
a relatively new and undercapitalized business with very
little experience in factoring. At the time, it even reported
a negative net worth on its tax return. Cosby had a 49%
ownership interest in, and was a director and salaried
employee of, Action Funding. Apparently, however, he did not
disclose that information to Jarvis’ finance committee and
board of trustees,2 and the committee and board were not aware
of such facts.
After a presentation to the finance committee by Cosby’s
Action Funding business partner, Rodney Williams, it was
Cosby’s recommendation that Jarvis invest $2 million of its
endowment funds in the venture. It is noted that $2 million
represent nearly the entire 15% of Jarvis’ endowment funds
that had been reserved for “nontraditional” investments.
Ultimately, Cosby successfully caused the transfer of $2
million of Jarvis’ endowment funds to Action Funding. In
exchange, Action Funding gave Jarvis a piece of paper that
amounted to no more than an unsecured promissory note.
Perhaps unsurprisingly, the investment failed. With the
money from Jarvis, Action Funding had bought accounts
receivable from hospitals and health care providers at a
discounted rate, with plans to collect the debts at face value
2
Cosby testified that he had informed the board of his ownership interest and expected profits, but Jarvis fully disagreed with
that contention. According to the testimony of Jarvis representatives, Cosby never disclosed his involvement with Action Funding
and his conflicts of interest arising therefrom. As a matter of fact, the board minutes do not reflect that such a disclosure was made
until September 1992, when Jarvis’ executive committee became aware of Action Funding’s financial difficulties.
3
at a later time. The hospitals and health care providers went
into bankruptcy, however, and Action Funding was unable to
collect the debts. Action Funding failed to fulfill its
promissory note obligation to Jarvis and ceased doing business
altogether in 1991. In September 1992, Jarvis’ executive
committee first learned of Action Funding’s financial troubles
and the exact nature of Cosby’s involvement with Action
Funding. In light of Cosby’s status as co-owner, director,
and employee of Action Funding, Cosby was asked to resign from
Jarvis’ board, which he eventually did.
On 15 March 1993, Jarvis filed a lawsuit (“underlying
lawsuit”) against Cosby and Action Funding in the 294th
Judicial District Court for Wood County, Texas.3 In its
original petition, Jarvis alleged that Cosby had
misrepresented certain facts and had made false statements to
the board of trustees in connection with the $2 million
transfer. Jarvis timely presented its claim for payment to
National Union for the financial loss arising out of the acts
committed by Cosby as alleged in the petition.
The jury found that Cosby breached both the duty of care
and the duty of loyalty that he owed to Jarvis. Based upon
the jury’s verdict, a final judgment was signed by the state
court on 12 September 1995, awarding Jarvis judgment against
Cosby in the amount of $1,815,000 (of which $315,000 was
3
That lawsuit is styled Jarvis Christian College, Inc. v. Jerrell J. Cosby and Action Funding, Inc., No. 93-141.
4
prejudgment interest) and against Action Funding in the amount
of $2,015,000 (of which $15,000 was attorney’s fees). Jarvis
never received any payments on the judgment from either Cosby
or Action Funding.
Seeking to collect money from its School Leaders Errors
and Omissions Policy based upon the judgment in the underlying
lawsuit, on 28 March 1996, Jarvis made a written demand to
National Union to pay the policy limits. After evaluation of
the claim, National Union denied it in writing on 11 October
1996. The reasons given were that the loss was not covered
under the Policy by definition of “wrongful act” as set forth
in the contract, and that two of the policy exclusions--the
“fraud or dishonesty” exclusion and the “personal profit or
advantage” exclusion--were applicable in this case to preclude
coverage.
B. Procedural History
On 3 February 1997, Jarvis filed this lawsuit against
National Union in the 294th Judicial District Court of Wood
County, Texas, seeking a declaratory judgment as to coverage
under the Policy. National Union removed the action to the
United States District Court for the Eastern District of Texas
based upon diversity of citizenship and amount in controversy
in excess of $75,000. Both parties filed motions for summary
judgment on the coverage issues.
5
The parties stipulated that they would waive trial by
jury, and the case was tried before the district court on 15
January 1998. The record from the proceedings in the
underlying lawsuit was introduced into evidence by agreement
of the parties. Both parties’ motions for summary judgment
were denied.
On 16 July 1998, the district court entered its findings
of fact and conclusions of law. The court found that the
language in the Policy’s definition of “wrongful act” is
ambiguous and must be construed in favor of Jarvis, the
insured, pursuant to Texas law. The court also found,
however, that two policy exclusions--the fraud or dishonesty
exclusion and the personal profit or advantage exclusion--are
applicable to Jarvis’ claim, either of which precludes
insurance coverage in this case. The court concluded that
Jarvis is not entitled to recover under the School Leaders
Errors and Omissions Policy issued by National Union for the
loss caused by Cosby’s actions. Having concluded that Jarvis’
claim was properly denied by National Union, the court awarded
no penalties, prejudgment interest, or attorney’s fees to
Jarvis.
Based upon its findings and conclusions, the district
court entered a final judgment in favor of National Union.
Jarvis filed a notice of appeal on 3 August 1998.
6
II. DISCUSSION
A. Standard of Review
A federal court of appeals reviews a judgment on the
merits of a nonjury civil case applying the usual standards of
review. See North Alamo Water Supply Corp. v. City of San
Juan, Tex., 90 F.3d 910, 914-15 (5th Cir. 1996). Thus, with
respect to the district court’s underlying fact-findings and
inferences deduced therefrom, the appellate court is bound by
the “clearly erroneous”4 standard of review. See Barrett v.
United States,
51 F.3d 475, 478 (5th Cir. 1995); see also Fed.
R. Civ. P. 52(a)(“[f]indings of fact, whether based on oral or
documentary evidence, shall not be set aside unless clearly
erroneous”). The legal conclusions reached by the district
court based upon factual data are reviewed de novo, as an
issue of law. See
Barrett, 51 F.3d at 478. If the district
court’s account of the evidence is plausible in light of the
record viewed as a whole, the appellate court may not reverse
even if it is convinced that, had it been sitting as the trier
4
In Anderson v. City of Bessemer City, N.C., 470 U.S. 564,
105 S. Ct. 1504 (1985), the Supreme Court discussed at length
the meaning of “clearly erroneous.” It stated that “‘[a] finding is “clearly erroneous” when although there is evidence to support it,
the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.’”
Id. at
573, 105 S.Ct. at 1511 (quoting United States v. United States Gypsum Co.,
333 U.S. 364, 395,
68 S. Ct. 525, 542 (1948)). The
Court elaborated:
This standard plainly does not entitle a reviewing court to reverse the finding of the trier of fact simply because
it is convinced that it would have decided the case differently. The reviewing court oversteps the bounds of
its duty under Rule 52(a) if it undertakes to duplicate the role of the lower court. . . . If the district court’s
account of the evidence is plausible in light of the record viewed in its entirety, the court of appeals may not
reverse it even though convinced that had it been sitting as the trier of fact, it would have weighed the
evidence differently. Where there are two permissible views of the evidence, the factfinder’s choice between
them cannot be clearly erroneous. . . . This is so even when the district court’s findings do not rest on
credibility determinations, but are based instead on physical or documentary evidence or inferences from
other facts.
Id. at 573-74, 105 S.Ct. at 1511-12 (citations omitted)(emphasis added).
7
of fact, it would have weighed the evidence differently. See
North Alamo, 90 F.3d at 915. “In practice, the ‘clearly
erroneous’ standard requires the appellate court to uphold any
district court determination that falls within a broad range
of permissible conclusions.” Cooter & Gell v. Hartmarx Corp.,
496 U.S. 384, 400,
110 S. Ct. 2447, 2458 (1990).
B. Rules of Interpretation
The district court’s interpretation of an insurance
contract and its exclusions is a question of law and, thus,
subject to de novo review. See Lubbock County Hosp. Dist. v.
National Union Fire Ins. Co., 143 F.3d 239, 241-42 (5th Cir.
1998).
In this diversity case, Texas rules of contract
interpretation govern. See Canutillo Indep. Sch. Dist. v.
National Union Fire Ins. Co., 99 F.3d 695, 700 (5th Cir.
1996); see also TEX. INS. CODE ANN. art. 21.42 (West 1999).
Under Texas law, the terms used in an insurance policy are to
be given their ordinary and generally accepted meaning, unless
there is an indication that the words were meant in a
technical or different sense.
Canutillo, 99 F.3d at 700
(citing Security Mut. Cas. Co. v. Johnson,
584 S.W.2d 703, 704
(Tex. 1979). The policy is to be considered as a whole, with
each part given effect and meaning. See
id. (citing Forbau v.
Aetna Life Ins. Co.,
876 S.W.2d 132, 133 (Tex. 1994).
8
It is well established under Texas law that ambiguities
in insurance contracts are to be strictly construed against
the insurer. See Sharp v. State Farm Fire and Cas. Ins. Co.,
115 F.3d 1258, 1260-61 (5th Cir. 1997)(citing Puckett v. U.S.
Fire Ins. Co.,
678 S.W.2d 936, 938 (Tex. 1984)). This is
“‘especially so when dealing with exceptions and words of
limitation.’” Lubbock
County, 143 F.3d at 242 (quoting Ramsay
v. Maryland Am. Gen. Ins. Co.,
533 S.W.2d 344, 349 (Tex.
1976)). If a policy clause is ambiguous, the court must adopt
the insured’s construction of the clause, “‘as long as that
construction is not unreasonable, even if the construction
urged by the insurer appears more reasonable or a more
accurate reflection of the parties’ intent.’”
Id. (quoting
National Union Fire Ins. Co. v. Hudson Energy Co.,
811 S.W.2d
552, 555 (Tex. 1991)).
These rules favoring the insured apply only if the
contract is determined to be ambiguous. See Sharp, 115 F.3d
at 1261. Whether the contract is ambiguous is a question of
law for the court to decide. See
id. The fact that the
parties disagree as to coverage does not create an ambiguity.
See
id. The court looks first to the language of the policy
itself. See
id. If the policy clause is susceptible of only
one reasonable interpretation, the court must enforce the
clause as written, see Lubbock
County, 143 F.3d at 242, even
if disfavorable to the insured.
9
C. “Personal Profit or Advantage”
The School Leaders Errors and Omissions Policy issued by
National Union to Jarvis contains a policy exclusion as to
“any claim arising out of5 the gaining in fact of any personal
profit or advantage to which the Insured is not legally
entitled.”6 The district court found that “[i]n completing
the transfer of the $2,000,000 of the plaintiff’s funds to
Action Funding, Inc., Cosby gained, in fact, a personal profit
or advantage.” (R. 582, Finding of Fact No. 10). To support
its finding, the court below articulated:
Despite the plaintiff’s contention that Cosby
obtained no profit as a result of the $2 million
transfer, it seems self-evident that Cosby’s
actions provided him, ultimately, with a distinct
business advantage. It cannot be disputed that the
investment of $2 million dollars into the coffers
of Action Funding accrued to Cosby’s personal
advantage by infusing his business with substantial
investment capital with which to operate his
business. As a factoring business, such capital
would enable Action Funding to acquire from other
businesses the accounts receivable necessary for it
to operate and ultimately profit. The record in
the underlying case makes clear, and Cosby himself
admitted, that he maintained a forty-nine percent
interest in Action Funding, Inc. As an owner of
Action Funding, Cosby stood to gain, personally,
from any investment of capital into his business.
It [is] clear then, that Cosby gained, in fact, an
advantage from the transfer of the $2 million to
Action Funding, Inc.
(R. 597)(emphasis in original)(citation omitted).
5
The words “arising out of,” when used within an insurance policy, are “‘broad, general, and comprehensive terms effecting
broad coverage.’ The words are understood to mean ‘originating from,’ ‘having its origin in,’ ‘growing out of’ or ‘flowing from.’”
American States Ins. Co. v. Bailey, 133 F.3d 363, 370 (5th Cir. 1998)(quoting Red Ball Motor Freight, Inc. v. Employers Mut. Liab.
Ins. Co.,
189 F.2d 374, 378 (5th Cir. 1951)).
6
This language appears in the “Exclusions” section of the policy as Exclusion (f).
10
The district court’s finding that Cosby actually gained
a personal profit or advantage from the $2 million transfer is
not clearly erroneous. First, any time money was loaned to
Action Funding, it worked to Cosby’s personal advantage, from
a business perspective, as he was a 49% owner of Action
Funding. Capital investmests would allow the small factoring
company to grow and prosper, and also to gain credibility with
other companies--companies with which Action Funding could
transact business. Consequently, Cosby would become the owner
of a successful business. Business success clearly qualifies
as a personal advantage.
Importantly, Cosby was not personally responsible for the
loan repayment. As a 49% owner, Cosby stood to reap the
financial benefits from profitable investments, without
personal responsibility for borrowed funds.
In this case, Cosby breached his fiduciary duties to
Jarvis, as the jury in the underlying lawsuit found, and
wrongfully gave himself the personal advantage in transferring
$2 million of Jarvis’ money to a small, highly risky business.
One must ask why any corporate officer/trustee would violate
his fiduciary duties by transferring a substantial sum of
corporate funds to another company--one that he owns--if the
transfer was not going to give him a personal advantage.
Second, Action Funding was operating at a loss prior to
the $2 million transfer. As previously mentioned, it reported
11
a negative net worth on its tax return. By infusing funds
into his undercapitalized business, Cosby created a viable
opportunity for his business, and therefore himself as well,
to make a profit.
It also may be noted that by not disclosing to the others
at Jarvis his ownership interest in and employee status with
Action Funding, Cosby placed himself at a personal advantage.
Had he disclosed such information, Cosby very well may not
have been able to accomplish what he hoped to do, namely to
transfer Jarvis’ $2 million to Action Funding. Had Cosby
disclosed, the investment opportunity that was to his distinct
advantage would have been lost. Therefore, by not revealing
his connection with Action Funding to the Jarvis board and
finance committee, Cosby placed himself, and Action Funding,
at an advantage.
One of Jarvis’ central arguments in its appellate brief
is that Cosby did not gain “in fact” a personal profit or
advantage, as set forth in the language of the policy
exclusion at issue. It is Jarvis’ contention that Cosby’s
only “benefit” received in connection with Action Funding was
a monthly salary of $6,000 for a period of sixteen months as
a director of Action Funding. Jarvis defends that such a
salary does not constitute “profit.” While Jarvis’ argument
takes account of Cosby’s employee status with Action Funding,
it fails to acknowledge the fact that Cosby was also an owner
12
of Action Funding. Employees may not share in profits, if
any, but owners certainly do. And it is clear from the
records that from the $2 million investment, Cosby expected to
make over $360,000 personally as an Action Funding owner and
director. Unrealistic or not, his expections fueled his
objective to transfer $2 million of Jarvis’ endowment funds to
Action Funding.
Even if it were conceded that Cosby did not gain “in
fact” a personal profit, the policy exclusion at issue
contains a second exclusionary term: “advantage.” Although
Cosby may not have gained a balance-sheet profit, Cosby did
gain in fact a personal advantage, as the district court
correctly concluded and as discussed in the above paragraphs.
Jarvis accuses the district court of impermissibly
compounding inferences in arriving at the conclusion that
Cosby gained a personal advantage from the $2 million
transfer. The alleged inferences are: “(1) Jarvis’ investment
in Action Funding ‘would enable Action Funding to
acquire . . . accounts receivable necessary for it to operate
and ultimately profit’; and (2) ‘Cosby stood to gain,
personally[,] from any investment of capital into his
business.’” (Pl.’s Br. at 37). Then Jarvis quickly points
out that Action Funding operated at a loss rather than a
profit and that regardless of what Cosby stood to gain, he
13
received only a salary and in fact lost all the money he
personally had invested in Action Funding.
Jarvis would have this Court believe that in order to
gain an advantage in fact, one necessarily has to make some
sort of tangible profit. Such a construction is unreasonable,
for it would render the advantage prong of “personal profit or
advantage” meaningless and superfluous. As National Union
suggests, the term “advantage” is broader than the term
“profit.”7 The former does not mean a balance-sheet profit;
rather, it encompasses any gain or benefit, such as an
opportunity to make a profit but without responsibility to
repay the loan.
Furthermore, the district court found that “Cosby was not
legally entitled to a personal profit or advantage from the
$2,000,000 transfer because, in transferring these funds,
Cosby breached his duty of loyalty to the plaintiff.” (R.
583, Finding of Fact No. 19). The lower court’s reasoning was
that “the jury found, and the record affirms, that the
transfer of funds from Jarvis’ endowment to Action Funding
came about through Cosby’s breach of duty of loyalty.” (R.
597). The court then cited GNG Gas Systems, Inc. v. Dean, 921
S.W.2d 421 (Tex.App.--Amarillo 1996), for the proposition that
7
"Advantage” is defined as: 1.A factor conducive to success. 2.Profit or benefit: GAIN. 3. A relatively favorable position. .
. . W EBSTER’S II NEW RIVERSIDE UNIVERSITY DICTIONARY 81 (1988)(emphasis in original). By contrast, “profit” is defined as: 1. An
advantageous gain or return: BENEFIT. 2. The return received on a business undertaking after meeting all operating expenses.
3. often profits. a. The return received on an investment after paying all charges. b. The rate of increase in the net worth of a
business enterprise during a given accounting period. c.Income received from investments or property. d. The amount received
for a commodity or service above the original cost. Id. at 939 (emphasis in original). Thus, even if to Jarvis’ advantage we were
to choose the narrowest definition of each term, the term “advantage” is still more expansive in meaning than “profit.”
14
when a corporate officer or director diverts assets of the
corporation to his own use, he breaches a fiduciary duty of
loyalty to the corporation, and the transaction is
presumptively fraudulent and void as being against public
policy. See id. at 427. On that basis, the court concluded
that Cosby clearly was not legally entitled to the funds which
his business received as a result of a fraudulent transaction.
(R. 597).
The district court’s finding that Cosby was not legally
entitled to a personal profit or advantage from the $2 million
transfer is not clearly erroneous. In fact, it is wholly
consistent with Texas law. In Kinzbach Tool Co. v. Corbett-
Wallace Corp., 138 Tex. 565,
160 S.W.2d 509 (Tex. 1942), the
Supreme Court of Texas announced that “if [a] fiduciary ‘takes
any gift, gratuity, or benefit in violation of his duty, or
acquires any interest adverse to his principal, without a full
disclosure, it is a betrayal of his trust and a breach of
confidence, and he must account to his principal for all he
has received.’”
Id. at 574, 160 S.W.2d at 514 (quoting United
States v. Carter,
217 U.S. 286, 306,
30 S. Ct. 515, 520
(1910)). This indicates that a fiduciary is not legally
entitled to any profit or advantage he gains as a result of a
breach of duty or trust.
Jarvis contends that the district court’s finding “is
premised on the erroneous view that a breach of the duty of
15
loyalty is an illegal act. . . .” (Pl.’s Br. at 39). Jarvis
then proceeds by arguing that Cosby’s actions were not per se
illegal under Texas law. While the district court found that
Cosby is not legally entitled to a personal profit or
advantage, it never decided that Cosby’s breach of the duty of
loyalty is an illegal act.
“Not legally entitled” simply is not synonymous with
“illegal.” The two have quite different meanings, with
“illegal” involving a greater degree of misconduct.8 Jarvis
misconstrues the language of the district court’s finding and
asserts that Cosby’s breach of his fiduciary duties was not
tantamount to illegality. The policy exclusion clearly states
that it precludes coverage for “any personal profit or
advantage to which the Insured is not legally entitled”
(emphasis added).
Jarvis criticizes the definition of the duty of loyalty
provided to the jury in the underlying state court action.
The duty of loyalty was defined in the jury charge to mean
that “the director must act in good faith and must not allow
his personal interests to prevail over the interests of the
corporation.” Jarvis disputes the conjunctive word “and,”
arguing that “[the] elements are conjunctive. . . . The
8
National Union provides a good illustration of the distinction in its brief:
For example, a bank customer who receives an erroneous credit on his monthly statement is not “legally
entitled” to keep the mistaken deposit, since the bank or another customer has a superior right to that money;
however, that customer is not guilty of illegal or illicit activity.
(Def.’s Br. at 27).
16
district court has therefore in effect held that Cosby’s
failure to act in good faith is sufficient proof of illegality
to preclude coverage.” (Pl.’s Br. at 43).
As discussed earlier, the district court made no mention,
let alone a finding, of illegality in this case. Jarvis’
criticism of the jury charge is without merit. As this Court
stated in Gearhart Industries, Inc. v. Smith Intern., Inc.,
741 F.2d 707 (5th Cir. 1984), “[t]he duty of loyalty dictates
that a director must act in good faith and must not allow his
personal interests to prevail over the interests of the
corporation.”
Id. at 719. The definition in the jury charge,
which is essentially verbatim, was not erroneous.
Finally, pointing out that the policy insures against
wrongful acts, which are defined as “any actual or alleged
breach of duty . . . ,” Jarvis then makes a twisted argument.
Jarvis argues: (1) insurance contracts should be construed to
provide meaning to all terms, including the word “any” in the
above clause; (2) that term “any” conflicts with the policy
exclusion at issue; (3) under Texas law, if a policy contains
conflicting provisions, the insuring clause takes precedence
over a conflicting exclusionary clause.
The frailty of that argument is obvious. Jarvis’
construction of the policy and the word “any” in the insuring
clause would render the policy exclusion at issue completely
meaningless. In fact, any exclusionary provision would be
17
devoid of meaning or value. There would be no reason for
having an “Exclusions” section in any insurance contract.
Interestingly, that would violate the very same rule that
Jarvis invokes: insurance contracts should be construed to
provide meaning to all terms.
For all of the foregoing reasons, the district court’s
findings with respect to the “personal profit or advantage”
exclusion are not clearly erroneous, and Jarvis’ arguments to
the contrary are unpersuasive.
D. “Fraud or Dishonesty”
The policy issued by National Union to Jarvis contains
another applicable policy exclusion. The exclusion defeats
“any claim involving allegations of fraud, dishonesty or
criminal acts or omissions; however, the Insured shall be
reimbursed for all amounts which would have been collectible
under this policy if such allegations are not subsequently
proven.”9 The district court found that this “fraud or
dishonesty” exclusion applies to this case and precludes
coverage of Jarvis’ claim.
We need not engage in a discussion of the fraud or
dishonesty exclusion here, as the personal profit or advantage
exclusion applies and fully precludes coverage in this case.
E. “Wrongful Act”
9
This language appears in the “Exclusions” section of the policy as Exclusion (a).
18
The School Leaders Errors and Omissions Policy issued by
National Union to Jarvis insures against claims for any
“wrongful act” committed by directors and officers of Jarvis.
“Wrongful act” is specifically defined in the policy as
follows: “any actual or alleged breach of duty, neglect,
error, misstatement, misleading statement or omission
committed solely in the performance of duties for the School
District . . . .”
A dispute at trial before the district court centered on
the phrase “solely in the performance of duties for the School
District.” National Union interpreted the phrase to mean
“when an insured has no interest in a transaction other than
that of the School District.” Such interpretation would
exclude coverage from the outset for the wrongful acts of
directors and officers “wearing two hats” or having “divided
loyalties,” such as Cosby had as a director of both Jarvis and
Action Funding. Jarvis offered a different interpretation of
the same phrase: “while performing duties for the School
District.” Jarvis’ claim arising from Cosby’s actions
initially would fall within coverage under this second
interpretation.
The district court found that the phrase “solely in the
performance of duties for the School District” in the insuring
clause is ambiguous and susceptible to more than one
reasonable interpretation. Recognizing that Texas law compels
19
the court to construe ambiguities in favor of the insured
regardless of which interpretation is more reasonable, the
district court adopted the interpretation offered by Jarvis.
National Union contends that the district court erred in
finding the phrase ambiguous. According to National Union,
there is no ambiguity; “[b]ased upon the express terms of this
provision, a covered act must be one that was done ‘solely’ on
behalf of Jarvis.” (Def.’s Br. at 43). Because Cosby clearly
had divided loyalties between Jarvis and Action Funding,
National Union’s argument is that when Cosby made the $2
million transfer, he was not acting “solely in the performance
of duties” for Jarvis.
The district court’s finding that the phrase at issue is
ambiguous is not clearly erroneous. Jarvis presented to the
district court an interpretation that is reasonable and
different from the one provided by National Union, which also
is reasonable. Under Texas law, a contract is ambiguous if it
is reasonably susceptible of two different meanings. See
Canutillo Indep. Sch. Dist. v. National Union Fire Ins. Co.,
99 F.3d 695, 700 (5th Cir. 1996)(citing Coker v. Coker,
650
S.W.2d 391, 393 (Tex. 1983)). If a policy provision is
ambiguous, the court must adopt the insured’s construction of
the provision, as long as that construction is not
unreasonable, even if the construction urged by the insurer
appears more reasonable or a more accurate reflection of the
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parties’ intent. See Lubbock County Hosp. Dist. v. National
Union Fire Ins. Co., 143 F.3d 239, 242 (5th Cir. 1998)(citing
National Union Fire Ins. Co. of Pittsburgh, Pennsylvania v.
Hudson Energy Co.,
811 S.W.2d 552, 555 (Tex. 1991)). Thus,
the district court was correct in construing the ambiguity in
favor of Jarvis, the insured.
Contrary to National Union’s position that, due to
divided loyalties, Cosby could not have acted “solely in the
performance of duties for the School District” when he caused
the $2 million transfer, a fair argument can be made that it
is because Cosby was acting solely in the performance of his
duties as Jarvis’ treasurer that he was able to accomplish
what he did. Cosby may very well have been the only person at
Jarvis authorized to invest that kind of money in another
business. Regardless of motive or intention, Cosby’s job as
treasurer was to manage and make investments with Jarvis’
money, and that is what he did in this case.
Because the definition of “wrongful act” contains a
phrase for which there is no one clear reading, the district
court did not clearly err in finding an ambiguity and
construing it in favor of the insured, under Texas law.
F. Penalties, Interest, and Attorney’s Fees
Based on our discussion, Jarvis is not entitled to a
favorable ruling on any of the issues presented. Because the
“personal profit or advantage” exclusion precludes coverage of
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Jarvis’ claim in this case, the district court was correct in
not awarding penalties and interest to Jarvis.
Jarvis also is not entitled to attorney’s fees incurred
in prosecuting its claim against National Union. Because it
was proper for National Union to deny Jarvis’ claim, the
district court did not err in declining to grant Jarvis
attorney’s fees in this case. There is no issue remaining as
to attorney’s fees to remand to the district court.
III. CONCLUSION
The district court’s finding that Cosby gained in fact
a personal profit or advantage when he caused the transfer
of $2 million of Jarvis’ endowment funds to a company in
which he was a 49% owner--all without disclosing his
conflicts of interest to Jarvis--is not clearly erroneous.
Cosby gained measurable personal advantages from a financial
and business perspective, including continuation of a steady
monthly salary and the opportunity to make a handsome
profit. The district court properly concluded that Jarvis’
claims against Cosby were excluded from the coverage of the
National Union policy by virtue of the “personal profit or
advantage” exclusion. Because such exclusion applies,
applicability of the “fraud or dishonesty” exclusion is
unnecessary and need not be considered in this case.
The district court’s finding that there is not one
clear reading of the policy language “solely in the
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performance of duties for the School District” is not
clearly erroneous, since the phrase is susceptible to more
than one reasonable interpretation. The court’s finding in
favor of the insured, that Cosby’s conduct constituted a
“wrongful act” within the scope of the policy’s coverage, is
also not clearly erroneous.
Finally, since Jarvis is not entitled to a favorable
ruling on any of the issues, the district court did not err
in denying Jarvis penalties and interest, as well as
attorney’s fees. We AFFIRM the judgment of the district
court in all respects.
AFFIRMED
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