UNITED STATES COURT OF APPEALS
                          FOR THE FIFTH CIRCUIT



                               No. 01-60378




                 TWIN CITY FIRE INSURANCE COMPANY,

                                   Plaintiff-Counter Defendant-Appellee,


                                    VERSUS


                     CITY OF MADISON, MISSISSIPPI,


      Defendant-Counter Claimant-Third Party Plaintiff-Appellant,

   HARTFORD FIRE INSURANCE COMPANY; HARTFORD FINANCIAL SERVICES
GROUP, INC.; SPECIALTY RISK SERVICES, INC.; MICHAEL P. DANDINI;
                       KIMBERLY J. CHABERT,

                                       Third-Party Defendants-Appellees.



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

                              October 28, 2002


Before DUHÉ, DeMOSS and CLEMENT, Circuit Judges.

DUHÉ, Circuit Judge:

     Plaintiff Twin City Fire Insurance Company sued its insured,

the City of    Madison,    Mississippi,      for   a   declaratory    judgment

denying   coverage    under    a   policy    issued    to   Madison   and   for

reimbursement of defense costs concerning two lawsuits brought

against Madison.      After settlement of the underlying claims for
$250,000, Twin City dropped its claim for defense costs and added

a claim herein for reimbursement of the settlement amount.         Madison

counter-claimed asserting coverage under the policy and liability

based on estoppel.      Madison also asserted third-party tort claims

against affiliates of Twin City involved in adjusting Madison’s

claims.

       The district court granted summary judgment to Twin City,

holding that a policy exclusion applied so that Twin City was

entitled to reimbursement from its insured of the amount paid in

settlement of the underlying claims.         On the City’s counterclaim

the court ruled that estoppel cannot create or expand coverage.

Granting summary judgment to third-party defendants, the court

ruled that Madison failed to show a genuine issue of material fact

regarding its third party claims.        Madison timely appeals.   Finding

fact questions material to the issue of estoppel and the third-

party claims, except concerning Hartford Financial Services Group,

we affirm in part, reverse in part, and remand.

                                    I.

       The Public Official Errors and Omissions Liability Insurance

Policy issued to Madison covers damages that the City becomes

legally obligated to pay because of errors or omissions of public

officials.       The underlying damage claim was based on the City’s

1986    impact    fee   ordinance   (“IFO”),    which   required   housing

developers, in order to obtain a building permit, to pay per-lot

fees upon filing a preliminary subdivision plat and upon plat

                                     2
approval.       Twin City provided Madison a defense under its errors

and omissions policy against the claims, with a reservation of

rights.

       Several developers sued the City in federal district court,

asserting various claims pertaining to the IFO.                    Upon a finding

that   IFO    was   a   tax,    the   matter     was   dismissed    for   lack    of

jurisdiction under the Tax Injunction Act.              This Court affirmed the

dismissal on the jurisdictional ground that the IFO was a tax, not

a fee.       Home Builders Assoc. of Mississippi, Inc. v. City of

Madison, 

(5th Cir. 1998).                The developers then sued

Madison in state court contending that the IFO violated state law

and comprised an unconstitutional taking.

       The developers settled their claims with Madison for $250,000.

In a separate agreement with Madison, Twin City agreed to pay the

settlement amount to the developers, reserving its right to seek

recoupment from Madison in this declaratory judgment action.

       Twin City contends that the claims are excluded, relying on

exclusion 3(h) for “Liability arising out of any insured obtaining

remuneration or financial gain to which such insured was not

legally      entitled.”        The    district    court     held   that   the    IFO

constituted     a   tax,   following      the    analysis    of    Home   Builders.

Further, it found no legislative authority for the tax, and held

that the IFO funds were illegal tax revenues.               It therefore applied

exclusion 3(h) regarding financial gain to which the City was not

legally entitled.

                                          3
                                II.

      This court reviews the grant of summary judgment motion de

novo, using the same criteria as the district court, reviewing the

evidence and inferences to be drawn therefrom in the light most

favorable to the nonmoving party.     Hanks v. Transcontinental Gas

Pipe Line Corp., 

, 997 (5th Cir. 1992).

      We agree with the district court that the underlying claim

falls under policy exclusion 3(h),1 as the IFO was an unauthorized

tax and illegal “financial gain.”     While Mississippi’s Home Rule

statute provides municipalities discretion in managing municipal

affairs, it also addresses the limited power of a city to tax:

      (1) The governing authorities of every municipality of
      this state shall have the care, management and control of
      the municipal affairs and its property and finances. In
      addition to those powers granted by specific provisions
      of   general   law,   the   governing    authorities   of
      municipalities shall have the power to adopt any . . .
      ordinances with respect to such municipal affairs,
      property and finances which are not inconsistent with the
      Mississippi Constitution . . . Code . . . or any other
      statute . . . . Except as otherwise provided in
      subsection (2) of this section, the powers granted to
      governing authorities of municipalities in this section


  1
    Madison contends that if estoppel applies, we do not need to
address the coverage issue, because the insurer’s liability will be
a foregone conclusion. While this may be true in principle, it is
not true on summary judgment, because we are not asked to determine
whether estoppel applies, but only whether a genuine issue of fact
exists pertaining to the question of estoppel. As discussed later
in Part III, we disagree with the district court and find that fact
issues do exist which are material to the question of estoppel. If
upon remand a fact finder determines that the insurer is not
estopped, however, the district court will be faced with the same
question on the exclusion it has already decided. For this reason,
we will review its decision on the exclusion issue as well.

                                 4
      are complete without the existence of or reference to any
      specific authority granted in any other statute or law of
      the State of Mississippi. . . .

      (2) Unless such actions are specifically authorized by
      another statute or law of the State of Mississippi, this
      section shall not authorize the governing authorities of
      a municipality to (a) levy taxes of any kind or increase
      the levy of any authorized tax . . . .

Miss. Code Ann. § 21-17-5 (West 2001) (emphasis added).

      Even though under subsection (1) the City’s powers of self-

governance concerning municipal finances do not depend on any other

statutory    grant    of   authority,   subsection   (2)   provides     the

exception:     a municipality’s power to levy a tax requires a

“specific[] authoriz[ation] by another statute or law.” Miss. Code

Ann. § 21-17-5.      None existed for this IFO.   Under a plain reading

of this statute, we reject the City’s contention that it had

authority to enact an IFO as part of the Home Rule Act.

      We reject the City’s further contention that the power to

enact the IFO is impliedly granted by the legislation as a means to

an end, or is incident to specific grants of authority to provide

services, hospitals, and the like.2      The power to levy taxes is not

embraced in a general grant of power such as police power.            Pitts

v. Mayor of Vicksburg, 

, 

, 419 (1894).            Nor

will we characterize the impact fees as a regulatory fee rather

than a tax, as Madison urges us to do, to avoid application of the


  2
     This Court denied the City’s motion to certify the question
whether a Mississippi municipality can lawfully enact and enforce
a developmental impact fee ordinance.

                                    5
plain terms of the Home Rule Act.          Madison has not challenged the

factual basis for the district court’s characterization of this IFO

as a classic tax.

      Since   the    ordinance   created   a   tax,   and    the   City   lacked

specific authority to impose such a tax, the collection of monies

thereunder fits squarely within exclusion 3(h).

                                    III.

      Madison contends in its counterclaim that Twin City should be

estopped from denying liability under the policy because of various

claims handling violations and breach of the duty to defend.3               When

sued by Home Builders for the underlying claims, Madison made a

demand upon Twin City for defense and indemnity, assuming the suits

were covered under the errors and omissions liability policy.               Upon

notification of the claims, Twin City appointed Daniel, Coker law

firm as counsel for Madison, with a reservation of rights.                 Terry

Levy of Daniel, Coker defended the claims by Home Builders against

the City in both the federal and state actions.             When an insurer is

defending under a reservation of rights, “a special obligation is

placed upon the insurance carrier” because of the built-in conflict

of interests.       Moeller v. American Guar. & Liab. Ins. Co., 

1062, 1069 (Miss. 1996).

  3
     As part of a settlement, Madison waived all extra-contractual
damages against Twin City (but not third-party defendants,
discussed later). The only issue on the counterclaim is whether
the offending actions estop Twin City from denying liability under
the policy.


                                      6
      In support its estoppel claim, Madison points out the conflict

of interests between itself and the insurer, in that Levy wanted

coverage for his client the City, and Twin City seeks to avoid

coverage.    Levy reported to both Madison and Twin City’s claims

adjusters about defense of the matter.          Madison contends that Twin

City improperly utilized privileged information from Levy’s claim

file to develop Twin City’s position of non-coverage.

      The   district   court   concluded   that,      as    a   matter     of   law,

estoppel    cannot   expand    coverage   in   the    face      of   an   otherwise

applicable policy exclusion.          We disagree.           When the alleged

misconduct of the insurer concerns the duty to defend, the insurer

may be liable despite an exclusion otherwise applicable.                        Upon

withdrawal from the defense of an action, for example, an insurer

may be estopped from denying liability under a policy, if its

conduct results in prejudice to the insured.               Southern Farm Bureau

Cas. Ins. Co. v. Logan, 

, 

, 272 (1960).

Even if the insurer would not have been liable had it not assumed

the defense in the first instance, it may become liable for

withdrawing, because the assumption of the defense may give rise to

a duty to continue with the defense.                 

at 272.

Additionally, a breach of the duty to defend renders the insurer

liable to the insured for all damages, including in a proper case

the amount of the judgment rendered against the insured.4

  4
     Appleman discusses a number of concepts of waiver and estoppel
in the context of insurance policies, see generally 8 Eric Mills

                                      7
      Madison’s claim about conflict of interests may give rise to

estoppel or liability for breach because it concerns the duty to

defend.     “A law firm which cannot be one hundred percent faithful

to   the   interests   of    its   clients   offers   no     defense    at   all.”

.

      The City of Madison complains that the reservation-of-rights

letters were insufficient.           Twin City’s first two letters to

Madison did not identify Twin City at all but reserved rights to

“Hartford    Insurance      Co.”    While    the   letters    recited    certain

allegations of the complaint and a number of policy exclusions, the

only remark about exclusion 3(h) among the list of exclusions in

the letters was:    “to the extent which the complaint asserts unjust

enrichment by the defendants at the expense of the plaintiffs,


Holmes, Holmes’ Appleman on Insurance 2d § 50.9 (1998), and it is
true that some if applied will not expand coverage in the face of
a clear exclusion. 

(“The doctrine of equitable estoppel
is not available to bring within the coverage of an insurance
policy risks that are not covered by its terms or that are
expressly excluded therefrom.”); see also Gilley v. Protective Life
Ins. Co., 

(5th Cir. 1994) (insurer’s letter to an
insured that coverage would begin for her son does not waive or
enlarge the policy which under its terms does not contemplate such
coverage).
   The Mississippi Supreme Court provided a useful comparison of two
different analyses of waiver in Hartford Accident & Indemnity Co.
v. Lockard, 

, 

(1960). For waiver based
on an agent’s alleged knowledge that the insured used his truck
with a trailer, the insurer was not estopped to deny coverage and
did not “waive” the clear exclusion of the trailer in the 

.     However, for waiver under the very same
policy based on different alleged conduct — refusal to defend — a
different analysis applies. Despite the express policy exclusion,
the insurer may become liable if the insured was “misled to his
hurt or prejudice” by the conduct or representations of the insurer
on which he 

.

                                       8
Section 3h would serve to exclude coverage for such allegations.”

The reservation of rights was “as to the issues of coverage

identified as well as any other issues which we may become aware of

or which may come into existence at a later date.”

       Although these first two reservation-of-rights letters were

delivered shortly after the Home Builders filed the two lawsuits

against Madison (November 1995 and October 1998), it was January

2000, with the Home Builders’ trial less than a month away, when

Twin       City     sent       a    third    reservation-of-rights            letter       which

identified Twin City as the party reserving rights and informed the

insured of its position.                This letter stated, “The policy does not

provide coverage . . . if Madison enacted the [IFO] without proper

authority, or if Madison obtained remuneration or financial gain to

which      it     was    not       legally   entitled.         Consequently,      Twin     City

reserves its right to deny coverage under Paragraph 3(h) of the

policy.”          Further, this letter stated that “based on our present

understanding of the claims, we believe that in the event of an

adverse judgment against Madison, any award of damages likely would

not be covered by the policy.”

       A    fact        finder       might   conclude        that   Twin   City      did    not

effectively         advise         Madison    of       its   opinion   that    any     damages

recovered by the Home Builders would not be covered until it sent

this letter.            If an insurer is defending under a reservation of

rights, “the insured should be immediately notified of a possible

conflict of interest between his interests and the interests of his

                                                   9
insurance   company     so   as    to    enable    him    to     give    informed

consideration to the retention of other counsel.”                    7C John Alan

Appleman, Appleman Insurance Law & Practice § 4694 at 365 (1979).

When an insurer is defending under a reservation of rights, the

carrier “should afford the insured ample opportunity to select his

own independent counsel to look after his interest.”                 Moeller, 

at 1070.   Here, the reservation-of-rights letters offered no

opportunity to the insured to select its own independent counsel.

Rather, they referred the “defense of this entire matter” to Levy’s

firm.   With this evidence Madison demonstrates an issue for trial,

i.e.,   whether   the   notice    to    the   insured    of    the   conflict   of

interests was adequate, clear, and timely.

      The evidence leaves room for conflicting inferences regarding

not only notice to Madison of the conflict of interests and the

right to select its own counsel, but also its alleged consent to

continue with Terry Levy as its defense counsel.              Twin City asks us

to hold, based on Levy’s 27 April 1999 letter5 and evidence that

  5
     A letter of 27 April 1999 from Levy to the Mayor of Madison
stated:   “As we discussed, under the Moeller descision
          [sic], since your insurer, is providing the
          City a defense but reserving its rights to pay
          any indemnity for the claim, the City has the
          option to designate its own counsel to defend
          the suit at the carrier’s expense. However,
          it is our understanding that the City believes
          it is in its best interest for Daniel, Coker .
          . . to continue the defense of this action.
          In light of such, we do not believe there is
          any   conflict  of   interest   in  our   firm
          representing the City in this action. If you
          ever believe that a conflict does exist in our

                                        10
Levy conferred with Madison’s city attorney about Moeller, that

Madison made an informed decision to continue with Levy despite the

conflict.    Levy’s 27 April 1999 letter leaves fact questions about

the adequacy of the Moeller notice, because Levy gave his client an

opinion that no conflict existed when a bona fide conflict did

exist.   Further, a fact finder might conclude from Levy’s testimony

that he was not aware of the conflict himself.               Accordingly, the

inference could still be drawn that Madison did not give informed

consent under those circumstances.6

      The foregoing might also support an inference that Twin City

effectively withdrew the defense or breached the duty to defend.

Such conduct could give rise to application of equitable estoppel,

preventing the insurer from denying liability under the policy, if

Madison can show that the conduct resulted in prejudice to the

insured.    Southern Farm 

.

      The   evidence   presents   a   genuine   issue   of    fact   regarding



          firms representation of you or you believe we
          are not representing the City’s interest
          regarding   this   lawsuit  to   the   City’s
          satisfaction, please advise us of such
          immediately so we can make sure that the
          City’s interest is being properly protected.”
Sealed ex. N.
  6
     We also reject the notion that Madison’s city attorney bore
responsibility for discerning whether a conflict existed. It was
the insurer’s choice to defend under a reservation of rights, and
by choosing to furnish legal representation for the claims with the
single law firm, it created a conflict of interest.   See Moeller,

at 1071. The duty is on the insurer, not the insured,
to determine whether a conflict exists and to notify the insured.

                                      11
prejudice, because the very ruling obtained by Levy in favor of the

City in Home Builders (that the IFO was a tax) was used against the

City in this coverage dispute.          Had it known earlier, the City

could have hired its own attorney who might have foregone the

jurisdictional   tax   argument.    A    reasonable   fact   finder   might

believe that Madison relied on Twin City’s conduct in assuming the

defense and did not know until three weeks before trial that it had

no truly independent counsel.      One might find that Madison learned

only within that month before trial that its insurer had hired

counsel to defeat coverage, was using Levy’s work product against

Madison, and was suing Madison for the costs of defense7 over the

past five years.   Moeller recognized that allowing an insured the

opportunity to select its own counsel to defend the claim at the

insurer’s expense can prevent such prejudice as the insurer gaining

“‘access to confidential or privileged information in the process

of the defense which it might later use to its advantage in

litigation concerning coverage.’”         Moeller, 

at 1069

(quoting CHI of Alaska, Inc. v. Employers Reinsurance Corp., 

, 1116 (Alaska 1993)).

      The facts could permit the inference that Madison relied on

Twin City’s appointment of Levy as counsel, was prejudiced, and has




  7
     Twin City dropped its claim for the cost of defense early in
these proceedings.

                                   12
compensable   damages.8      Viewing     the    summary    judgment   evidence

favorably to Madison, we see the need for a trial, because there

are “genuine factual issues that properly can be resolved only by

a finder of fact because they may reasonably be resolved in favor

of either party.”      Anderson v. Liberty Lobby, Inc., 

,

250, 

, 2511 (U.S. 1986).           Because these fact issues

are germane to the question whether Twin City discharged its duty

to defend or mishandled the claim, they may provide grounds to

estop Twin City from denying liability.                 Accordingly, we find

summary judgment inappropriate on the counterclaim by Madison.

                                    IV.

      Madison also asserted bad faith claims handling and tort

claims   against     third-party   defendants         involved   in   adjusting

Madison’s claims, namely, Hartford Fire Insurance Company (Twin

City’s parent corporation), Hartford Financial Services Group,

Inc.,    Specialty    Risk   Services,         Inc.    (“SRS”)   (a   Hartford

subsidiary), Michael P. Dandini (a Hartford claims consultant), and

Kimberly J. Chabert (an SRS claims consultant).            Madison sued these

affiliates of Twin City for grossly negligent claims handling,

tortious interference with contract, misrepresentation, fraud, and


  8
     As for the contention that Madison cannot show a genuine issue
of fact material to damages, Madison’s potential liability herein
for reimbursement of the $250,000 paid in settlement to the Home
Builders constitutes damage enough to defeat summary judgment. On
the verge of trial Madison asked its insurer to settle within the
policy limits; had it had the confidence in having an independent
attorney, it might have proceeded to trial and obtained a victory.

                                    13
breach of fiduciary duty.

      These claims depend in part on the same evidence Madison

presents against Twin City on the counterclaim discussed above.

Because   issues     of    fact    remain,        we   find        summary     judgment

inappropriate for these defendants as well, excepting Hartford

Financial Services Group.9

      In addition to the issues of fact concerning breach of the

duty to defend discussed above, Madison has demonstrated a number

of other issues of fact:           whether Chabert was involved in both

claims analysis and coverage analysis, prejudicing the insured with

a conflict of interests; whether Hartford Fire adequately separated

claim-handling     responsibility         from    coverage     analysis;        whether

Chabert   remained    silent      about    a     conflict     of    interests     while

developing a strategy of noncoverage; whether Chabert ever told

Levy that she and Dandini were involved in coverage, though she

instructed   him     to   send    them    both     status     reports        containing

confidential information received from the client, detrimental to

coverage; whether Dandini relied on confidential information from

Levy’s status reports to develop a coverage defense or in deciding

to hire independent coverage counsel; whether coverage counsel

conducted any investigation besides the one performed by Levy;

whether the entire claims file was forwarded to Phelps Dunbar to


  9
     As appellees point out, Madison waived any claim against this
defendant by not arguing in its opening brief that it has
demonstrated an issue for trial concerning this defendant.

                                          14
formulate its non-coverage position; whether third-party defendants

relied on Levy’s legal defense against the underlying claims10 to

formulate a strategy to defeat coverage in this action; and whether

the    timing    and    content    of   the   commencement     of    this   action

demonstrated bad faith (claiming defense costs when Moeller plainly

precludes such recovery).

       These    facts   in   dispute    leave   a   question   regarding     third

parties’ gross negligence in claim handling.              A fact finder might

consider   that       coverage    analysts    having   unfettered      access    to

privileged      information      from   appointed    defense    counsel     in   the

presence   of    an     undisclosed     conflict    support    the   tort   claims

asserted herein.          Finding no fact issue suggested as to the

liability of Hartford Financial Services Group, however, we affirm

the summary judgment in favor of that third-party defendant.

                                         V.


  10
      Twin City specifically challenges Madison’s ability to show
a genuine issue of fact that anyone relied on Levy’s status report
or defense strategy. Levy argued in Home Builders that the IFO was
a tax rather than a fee for federal jurisdictional purposes under
the Tax Injunction Act and won a dismissal on jurisdictional
grounds. On appeal from that dismissal, this Court noted Madison’s
contention that the ordinance fit squarely within the meaning of
“tax” as contemplated by the Tax Injunction Act. Home 

.    Although this Court noted that we were not
deciding for purposes of other statutes or litigation whether the
IFO constituted a tax or 

n.12, it is
abundantly clear that the district court found the tax/fee
distinction in Home Builders instructive for state law purposes,
and concluded, like Home Builders, that the IFO was a tax not a
fee. To that extent a fact finder might conclude that Madison’s
very argument in those proceedings became the basis for a ruling
against it in this coverage dispute.

                                         15
       The City’s motion to recuse having been filed in the district

court after this appeal was noticed, the question of recusal is not

before this Court.

                                          VI.

       Fact issues surround the questions whether Twin City and

affiliates     notified       Madison     of    the    conflict    of     interests,

sufficiently offered Madison the right to Moeller counsel, or used

confidential information or Levy’s arguments (made earlier on

behalf   of    Madison)   against       Madison   in    this    action.      Summary

judgment is not appropriate on the liability issue, because Twin

City   may    be   estopped    by   its    conduct     from    denying    liability.

Factual issues preclude summary judgment on the claims against

third-party defendants as well, with the exception of Hartford

Financial     Services    Group.        Accordingly,      the    judgment    of   the

district court is affirmed in part as to the exclusion and summary

judgment in favor of Hartford Financial Services Group, reversed in

part, and the matter is remanded.

       AFFIRMED IN PART, REVERSED IN PART, and REMANDED.




                                          16