Revised July 16, 2002
UNITED STATES COURT OF APPEALS For the Fifth Circuit
No. 01-20723
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA,
Plaintiff-Counter Defendant-Appellee,
VERSUS
MARK A. WILLIS,
Defendant-Counter Claimant-Appellant.
Appeal from the United States District Court For the Southern District of Texas
June 25, 2002 Before DUHÉ, DeMOSS, and CLEMENT, Circuit Judges.
DeMOSS, Circuit Judge:
Appellant, Mark A. Willis (Willis), brought this appeal asking
this Court to reverse the district court's granting of summary
judgment in favor of appellee, National Union Fire Insurance
Company of Pittsburgh, PA (National Union). The district court
found that Willis was not entitled to coverage under a directors,
officers, and corporate liability insurance policy issued by
National Union to EqualNet Communications Corporation (EqualNet) of which Willis was an officer. We affirm.
BACKGROUND
National Union brought an action against Willis, who was an
officer and director of EqualNet, seeking a declaratory judgment
that Willis was not entitled to coverage under any of three
directors, officers, and corporate liability insurance policies
issued by National Union to EqualNet. The first policy covered the
time period of March 8, 1998, to March 9, 1999 (1998 policy). The
second policy covered the time period of March 8, 1999, to March 8,
2000 (1999 policy). The third policy covered the time period of
March 8, 2000, to March 8, 2001 (2000 policy). EqualNet
intervened.
A United States magistrate judge granted summary judgment in
favor of National Union. Furthermore, the district court granted
National Union's motion to dismiss Willis' counterclaims for extra-
contractual liability. Thereafter, EqualNet dismissed its
intervention and is not a party to the present appeal.
This appeal stems from a cause of action brought by
CyberServe, Inc., WSHS Enterprises, Inc., and William Stuart
(collectively “CyberServe”) on September 21, 1998, against
EqualNet, Netco Acquisition L.L.C., Willis, and Willis Group L.L.C.
in the 215th District Court of Harris County, Texas. The action
2 asserted claims against Willis for fraud, fraud in the inducement,
statutory fraud in a stock transaction, tortious interference with
a contract, and conspiracy. In addition, claims for breach of
contract and quantum meruit were alleged against EqualNet and the
Willis Group. The plaintiffs filed their fourth amended petition
in March 2000, adding a claim for negligent misrepresentation
against Willis, the Willis Group, and EqualNet. The added
negligent misrepresentation claim was based on the same alleged
misrepresentations underlying the fraud, fraudulent inducement, and
statutory fraud claims. Furthermore, the factual basis of the
fourth amended petition was the same as that used in the original
petition.
Notably, National Union was first notified of the lawsuit by
EqualNet on February 29, 2000. The first time Willis notified
National Union of the lawsuit was by letter dated May 11, 2000.
National Union denied coverage and declined to advance defense
costs to Willis because, in accordance with paragraph 7 of the
policies, the claims were not timely reported. Willis and EqualNet
did not dispute that they failed to notify National Union of the
CyberServe lawsuit during the 1998 policy period. Willis, however,
argued that he was not required to give notice of a lawsuit unless
a claim asserted against him was covered by the terms of the
policy.
Therefore, Willis asserted that he was not required to notify
National Union until after the fourth amended petition was filed in
3 March 2000. The three previously amended petitions, according to
Willis, asserted intentional torts that fell within the policy
exclusion for claims “arising out of, based upon, or attributable
to the committing in fact of any criminal or deliberate fraudulent
act.” As a result, Willis claimed that his May 11, 2000,
notification to National Union was timely to provide coverage under
the 2000 policy.
The district court determined that Willis was not entitled to
coverage under any of the three policies and granted summary
judgment in favor of National Union. The court concluded that
Willis should have given notice to National Union in 1998 when he
was first made aware of circumstances that could reasonably be
expected to give rise to a claim against him. National Fire Ins.
Co. v. Willis, 139 F. Supp. 2d 827, 835 (S.D. Tex. 2001). In
addition, the court concluded that the claims made in the fourth
amended petition were “expressly excluded from the coverage of the
policy because they allege, arise out of, are based upon, or are
attributable to a pending or prior litigation or allege or derive
from the same or essentially the same facts as alleged in such
pending litigation.” Id. Willis now appeals the district court's
decision.
STANDARD OF REVIEW
Review of the district court's granting of summary judgment is
4 de novo. Harris v. Rhodes, 94 F.3d 196, 197 (5th Cir. 1996).
Summary judgment may be granted “if the pleadings, depositions,
answers to interrogatories, and admissions on file, together with
the affidavits, if any, show that there is no genuine issue as to
any material fact and that the moving party is entitled to a
judgment as a matter of law.” FED. R. CIV. P. 56(c). All disputed
facts and reasonable inferences are viewed “in the light most
favorable to the nonmoving party.” Duffy v. Leading Edge Prods.,
44 F.3d 308, 312 (5th Cir. 1995).
DISCUSSION
The issue before this Court is whether the district court
erred in granting summary judgment in favor of National Union
having found that Willis failed to provide timely notice of the
claims or potential claims asserted against him as required by his
insurance policy. This Court has clearly identified that Texas law
requires an insurance policy to be construed against the insurer
and in favor of the insured. See Lubbock County Hosp. Dist. v.
National Union Fire Ins. Co, 143 F.3d 239, 242 (5th Cir. 1998);
National Union Fire Ins. Co. v. Hudson Energy Co., 811 S.W.2d 552,
555 (Tex. 1991); Blaylock v. American Guarantee Bank Liab. Ins.
Co., 632 S.W.2d 719, 721 (Tex. 1982). As a result, an insurance
policy's exceptions and limitations are construed in favor of the
insured in order to avoid exclusion of coverage. Puckett v. U.S.
5 Fire Ins. Co., 678 S.W.2d 936, 938 (Tex. 1984). Furthermore, when
interpreting an insurance policy, courts must consider that the
primary goal is to give effect to the written expression of the
parties' intent. Balandran v. Safeco Ins. Co. of Am., 972 S.W.2d
738, 741 (Tex. 1998). In so doing, courts are to ensure the policy
is interpreted in such a way as to give effect to each term in the
contract so that none will be rendered meaningless. Lynch Props.
Inc. v. Potomac Ins. Co., 140 F.3d 622, 626 (5th Cir. 1998);
Kelley-Coppedge, Inc. v. Highlands Ins. Co., 980 S.W.2d 462, 464
(Tex. 1998). In addition, all provisions of the policy should be
considered with reference to the whole contract so that no
provision is controlling. State Farm Life Ins. Co. v. Beaston, 907
S.W.2d 430, 433 (Tex. 1995).
The insurance policies at issue here are “claims-made”
policies. To invoke coverage under a claims-made policy, a claim
must be made against the insured during the coverage period of the
policy and the insured must notify the insurer of the claim during
the same period. Matador Petroleum Corp. v. St. Paul Surplus Lines
Ins. Co., 174 F.3d 653, 658-59 & n.2 (5th Cir. 1999). The
insured's giving notice to the insurer triggers coverage. Id. at
659. Further, under a claims-made policy, insurers may deny
coverage if notice is not given timely. Id.
A. Willis' Contentions
Willis argues that he is entitled to coverage under the 2000
6 policy for the negligent misrepresentation claim made against him
in April 2000 when CyberServe and the other plaintiffs in the
underlying lawsuit filed their fourth amended petition. Willis
first complains that the district court's ruling was erroneous
because it misconstrued the applicable notice provisions under
section 7(c) of the policy. See Willis, 139 F. Supp. 2d at 832.
Section 7(c) provides:
(c) If during the Policy Period or during the Discovery Period (if applicable) the Company or the Insureds shall become aware of any circumstances which may reasonably be expected to give rise to a Claim being made against the Insureds and shall give written notice to the Insurer of the circumstances and the reasons for anticipating such a Claim, with full particulars as to dates, persons, and entities invoked, then any Claim which is subsequently made against the Insureds and reported to the Insurer alleging, arising out of, based upon or attributable to such circumstances or alleging any Wrongful Act which is the same as or related to any Wrongful Act alleged or contained in such circumstances, shall be considered made at the time such notice of such circumstances was given.
According to Willis, requiring the insured to give notice of
circumstances likely to give rise to a claim ignores the plain
language of the insurance policy's notice requirement. Willis
contends that the applicable provision “permitted but did not
require Mr. Willis to give notice of any circumstances which might
reasonably be expected to give rise to a claim being made against
him that had not yet resulted in a claim that is covered by the
policies.”
Second, Willis argues that the district court misconstrued the
scope of the policy's exclusions concerning pending litigation.
7 The district court held that the negligent misrepresentation claims
asserted in the fourth amended petition were excluded from coverage
under exclusion clause 4(e) because “they allege, arise out of, are
based upon, or are attributable to a pending or prior litigation or
allege or derive from the same or essentially the same facts as
alleged in such pending or prior litigation.” Id. at 835.
Exclusion clause 4(e) provides the insurer does not have to make a
payment in connection with a claim against an insured:
(e) alleging, arising out of, based upon or attributable to any pending or prior litigation as of the Continuity Date, or alleging or derived from the same or essentially the same facts as alleged in such pending or prior litigation.
According to Willis, the court's interpretation of exclusion clause
4(e) ignores the controlling language “as of the Continuity Date.”
Under the policy, the Continuity Dates were in 1995 and 1996, which
were well before the institution of the underlying CyberServe
litigation initiated in 1998. Similarly, Willis notes that the
court erred in concluding that exclusion 4(d) deprived him of
coverage. Exclusion clause 4(d) provides the insurer need not make
a payment for a claim:
(d) alleging, arising out of, based upon or attributable to the facts alleged, or to the same or related Wrongful Acts alleged or contained, in any claim which has been reported, or in any circumstances of which notice has been given, under any policy of which this policy is a renewal or replacement or which it may succeed in time.
According to Willis, because his claim was made under the 2000
policy, which was a renewal or replacement policy, exclusion 4(d)
8 does not apply.
Third, Willis contends that the district court failed to
appropriately distinguish between intentional claims and negligent
misrepresentation claims. Specifically, Willis argues that the
court concluded that the deliberate fraud exclusion did not reach
the claims asserted in the original petition. Therefore, according
to Willis, National Union did not have be contacted until after the
petition was amended for the fourth time.
Fourth, Willis argues that the court erroneously applied
contractual interpretation principles to the insurance policies.
According to Willis, the district court's decision was based on
legal doctrines that were designed to protect insureds but were
misapplied to deprive him of his insurance.
B. National Union's Contentions
National Union contends that the addition of the negligent
misrepresentation claim in the fourth amended petition did not
constitute a new claim, as Willis argues. Rather, National Union
argues that holding otherwise would require courts “to consider
each area of recovery as a separate claim.” Therefore, according
to National Union, the “claim” is the demand for damages initially
made in the first petition filed by the plaintiffs in the
underlying lawsuit. As a result, National Union argues that the
1998 policy applies to this case.
Further, National Union contends that the policies in question
9 do not limit the notice provisions to only covered claims.
According to National Union, “if an insured is free to make its own
coverage determination and decided to notify its insurer of a claim
only when the insured wishes to do so, then the notice provisions
in claim-made policies become meaningless.” In addition, National
Union disputes Willis' contention that coverage was never triggered
in the original petition because only acts of intentional,
deliberate conduct were alleged. Rather, National Union argues
that under the express language of the policy, only a finding that
the insured actually committed the alleged criminal or deliberate
fraudulent act will make the exclusion applicable. Moreover,
National Union argues that statutory fraud, which was alleged in
the original petition, does not require proof of scienter to
recover actual damages. Therefore, National Union contends that
actual damages could be awarded “without ever having to find that
Willis had committed in fact any deliberate fraudulent act.”
Lastly, National Union argues that Willis' contention that
exclusion 4(d) does not apply to the present case because he never
reported the claim until the 2000 policy period is erroneous.
National Union notes that “EqualNet, of which Willis was an
officer, reported the claim to National Union during the 1999
policy period.” Thus, according to National Union, the initial
claim had been reported under a prior policy period, which
triggered exclusion 4(d).
10 C. Analysis
The original petition in the underlying CyberSpace lawsuit was
filed on September 21, 1998. The fourth amended petition, which
included the negligent misrepresentation claim, was filed on April
11, 2000. As noted above, Willis argues that the negligent
misrepresentation falls under the 2000 policy that covers the time
period of March 8, 2000, to March 8, 2001. National Union,
however, contends that the negligent misrepresentation claim is
part of the initial lawsuit and, therefore, falls under the 1998
policy that covers the time period of March 8, 1998, to March 9,
1999. The district court concluded that Willis was foreclosed from
relying on the 2000 policy for coverage arising from the negligent
misrepresentation claim. The district court reached this
conclusion because the claims made in the fourth amended petition
“arise out of, are based upon, or are attributable to a pending or
prior litigation, or allege or derive from the same or essentially
the same facts as alleged in such pending or prior litigation, and
thus are expressly excluded from the coverage of the [2000]
policy.” Willis, 139 F. Supp. 2d at 835.
We agree with the district court. All three policies define
“Claim” as “a civil . . . proceeding . . . which is commenced by
service of a complaint or similar pleading.” Under this
definition, the initial complaint brought by CyberServe “commenced”
this civil proceeding as a whole. Under this plain reading of the
11 contract's language, amended complaints cannot commence a civil
proceeding that has already been commenced by the filing and
service of the initial complaint. Any other reading would result
in one lawsuit qualifying as two different civil proceedings. See,
e.g., FED. R. CIV. PRO. 3 (“A civil action is commenced by filing a
complaint with the court.”); TEX. R. CIV. P. 22 (“A civil suit in
the district or county court shall be commenced by a petition filed
in the office of the clerk.”); Ameriwood Indus. Int'l Co. v.
American Cas. Co., 840 F. Supp. 1143, 1152 (W.D. Mich. 1993) (“A
suit begins in federal court with the filing of a complaint. After
the original filing, the suit is considered to be pending. Thus
the amendment of the . . . complaint . . . does not constitute a
new filing of the case.”) (citations omitted); see also 4 CHARLES
ALAN WRIGHT & ARTHUR R. MILLER, FEDERAL PRACTICE AND PROCEDURE § 1052 (3d ed.
2002) (describing the commencement of a civil action with the
filing of a complaint). This is particularly true when, as in this
case, the amended complaint is based on identical facts as those
used in the original petition. We conclude, therefore, nothing in
the record supports Willis' contention that the negligent
misrepresentation claim set forth in the fourth amended complaint
gives rise to a new theory of recovery that is a separate claim
governed by the 2000 policy. As a result, Willis was required to
notify National Union during the 1998 policy period.
12 As already noted, however, Willis argues that he was not
obligated to notify National Union of claims made against him
unless they were actually covered by the policy. Specifically,
Willis contends that the “deliberate fraudulent act” exclusion
under section 4(c) removes the claims made against him from the
scope of the 1998 policy. Under Texas law, an insurer's duty to
defend arises when the pleadings allege a claim that is
“potentially” covered by the applicable policy. Gulf States Ins.
Co. v. Alamo Carriage Serv., 22 F.3d 88, 90 (5th Cir. 1994);
Fidelity & Guar. Ins. Underwriters, Inc. v. McManus, 633 S.W.2d
787, 788 (Tex. 1982). To determine whether the pleadings contain
a “potentially” covered claim, this Court “'must focus on the
factual allegations that show the origin of the damages rather than
on the legal theories alleged.'” American States Ins. Co. v.
Bailey, 133 F.3d 363, 369 (5th Cir. 1998) (quoting National Union
Fire Ins. Co. v. Merchants Fast Motor Lines, Inc., 939 S.W.2d 139,
141 (Tex. 1997)). Furthermore, this Court should not consider the
truth or falsity of the allegations in the pleadings. Guaranty
Nat’l Ins. Co. v. Vic Mfg. Co., 143 F.3d 192, 193 (5th Cir. 1998).
Rather, all of the facts alleged in the complaint are assumed to be
true. See Houston Petroleum Co. v. Highlands Ins. Co., 830 S.W.2d
153, 155 (Tex. App.–Houston [1st Dist.] 1990, writ denied).
The original petition alleges, inter alia, that Willis made
misrepresentations and omissions that induced BlueGate and Stuart
13 to perform thereunder. In addition, the petition alleges that
Willis' “representations and promises were false and were made
either intentionally or recklessly without regard to their truth or
falsity.” Furthermore, the petition asserts that Willis “agreed to
participate in unlawful acts for the purposes of defrauding
BlueGate and Stuart and tortiously interfering with BlueGate's
right to exercise the Lien pursuant to the terms of the Web Page
Agreement.” In determining whether the original petition in the
CyberServe lawsuit was “potentially” covered, the district court
undertook an analysis of whether a “reckless” act is equivalent to
a “deliberate” act and, therefore, excluded under section 4(c) of
the 1998 policy. See Willis, 139 F. Supp. 2d at 834-35.
We do not believe that such an analysis is warranted in this
case. The gist of the original petition's factual allegations are
that Willis made misrepresentations, omissions, and false promises
that induced BlueGate and Stuart to perform thereunder. These
factual allegations are enough to implicate the 1998 policy under
which National Union is obligated to “pay the Loss of each and
every Director or Officer of the Company arising from a Claim . . .
for any actual or alleged Wrongful Act.” Whether a director or
officer ultimately is found to have committed a wrongful act based
on the legal theory of tortious conduct, be it intentional or
negligent, is irrelevant for requiring notification under the
claims-made policy in this case.
14 The purpose of claims-made policies, unlike occurrence
policies, is to provide exact notice periods that limit liability
to a fixed period of time “after which an insurer knows it is no
longer liable under the policy, and for this reason such reporting
requirements are strictly construed.” Resolution Trust Corp. v.
Ayo, 31 F.3d 285, 289 (5th Cir. 1994). Allowing coverage beyond
that period would be to grant the insured more coverage than that
which was bargained for, and to require insurers to provide
coverage for risks not assumed. See United States v. A.C. Strip,
868 F.2d 181, 187 (6th Cir. 1989). Ultimately, a claims-made
policy's notice requirement “actually serves to aid the insured by
extending claims-made coverage beyond the policy period.” FDIC v.
Booth, 82 F.3d 670, 678 (5th Cir. 1996) (citing FDIC v. Barham, 995
F.2d 600, 604 & n.9 (5th Cir. 1993)). Furthermore, as correctly
noted by the Eighth Circuit:
“[C]laims-made” policies permit the reporting of acts not yet in litigation. This provides additional protection for the insured, because coverage could extend to a suit not brought until long after the policy has expired, as long as the insured provides notice to the insured [sic] of potential claims. Yet this highlights the reciprocal responsibility of the insured to report all acts and occurrences that could become future clams. Thus, the notice provision requirement sets the parameters of the coverage under the policy.
FDIC v. St. Paul Fire & Marine Ins. Co., 993 F.2d 155, 158 (8th
Cir. 1993). Clearly, the “as soon as practical” language in
section 7(a) of the 1998 policy was intended to prevent an insured
15 from waiting to notify the insurer of the existence of a claim.
Had Willis reported the claim to National Union “as soon as
practicable” during the 1998 policy period in which the claim was
first made, he would have preserved his rights to coverage.
Because Willis did not properly report the claim, he violated the
timely notice provision and, therefore, his claim was not within
the 1998 policy's coverage.
CONCLUSION
For the foregoing reasons, we AFFIRM the district court's
judgment.