Western Heritage Ins. Co. v. Magic Years Learning Centers and Child Care, Inc.

Citations: 45 F.3d 85; 1995 U.S. App. LEXIS 2896; 66 Empl. Prac. Dec. (CCH) 43,448; 67 Fair Empl. Prac. Cas. (BNA) 1319; 1995 WL 37617Docket: 94-60136

Court: Court of Appeals for the Fifth Circuit; February 16, 1995; Federal Appellate Court

Original Court Document: View Document

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In the Fifth Circuit case No. 94-60136, Western Heritage Insurance Company (Western Heritage) appealed a district court ruling that required it to defend and indemnify Magic Years Learning Centers and Child Care, Inc. and its operators, Charles R. Wilson and Doris J. Wilson, in a state court lawsuit filed by former employee Theresa L. Alexander and her husband. The Alexanders' suit alleged that Mr. Wilson sexually harassed Mrs. Alexander, leading to her constructive discharge, and claimed multiple violations of her civil rights, including assault, invasion of privacy, and intentional infliction of emotional distress. The Alexanders also asserted claims against Mrs. Wilson and Magic Years based on respondeat superior and gross negligence for failing to prevent the harassment.

The district court found that Western Heritage was obligated to cover the claims under its comprehensive general liability insurance policy, which listed the Wilsons and Magic Years as insured parties. Western Heritage argued on appeal that the policy did not cover sexual harassment under its definition of "occurrence" and that the allegations were excluded by the assault and battery endorsement and the employer liability exclusion. The appellate court affirmed the ruling for Mr. and Mrs. Wilson but reversed it concerning Magic Years, indicating that some allegations pertained to conduct outside Mrs. Alexander's employment, which remained covered under the policy.

Texas substantive law governs this diversity jurisdiction case, requiring insurers to defend any claim within the policy's coverage. Courts must enforce the insurance policy as written if it has only one reasonable interpretation. If the policy is ambiguous, the interpretation favoring the insured prevails, especially regarding exclusions and limitations, which are interpreted strictly against the insurer. The duty to defend arises when the pleadings in the underlying case allege facts that constitute bodily injury from an occurrence not excluded by the policy. An occurrence is defined as an accident resulting in injury or damage that is neither expected nor intended by the insured.

Western Heritage argues that the definition excludes intentionally inflicted injuries, such as those arising from sexual harassment, asserting that Mr. Wilson intended to injure Mrs. Alexander. However, the policy includes a special endorsement, the Physical and/or Mental Abuse Limitation Endorsement, which specifically covers acts classified as abuse or harassment. This endorsement suggests that, despite the general definition of occurrence, claims of sexual harassment are covered. To rule otherwise would negate the endorsement's purpose. The principle of severability applies, meaning the insurance coverage applies separately to each insured, reinforcing the endorsement's validity and ensuring all contract terms are given effect.

Allegations against Mr. Wilson in the underlying state court suit fall under the insurance endorsement due to their potentially sexual nature, which includes classifications such as Abuse, Harassment, Molestation, and Invasion of Privacy. Both Magic Years and Mrs. Wilson argue that these allegations meet the general definition of occurrence since there is no claim of intent to injure the Alexanders, referencing the case Walker v. Lumbermens Mut. Casualty Co., which held that exclusions for intentional acts do not apply when a parent is held liable for a child's actions.

Western Heritage asserts that claims involving assault and battery are excluded under a specific endorsement stating that the policy does not cover bodily injury related to assault and battery. However, the underlying suit, focused on alleged sexual harassment, is expressly covered by the policy's endorsement for physical and mental abuse. The legal theories of assault and battery and related claims are seen as alternatives to the harassment allegations, and applying the assault and battery exclusion would negate the purpose of the abuse endorsement.

Additionally, Western Heritage argues that employer liability exclusion applies to the allegations, which states that the insurance does not cover injuries to employees arising from their employment. However, the policy's language suggests that while it excludes claims by employees of the insured, it does not exclude claims against individual insureds, as coverage is provided separately for each insured. This nuance indicates that claims against one insured could be covered even if similar claims against another insured are excluded.

The court references *Commercial Standard Ins. Co. v. Am. Gen. Ins. Co.*, affirming that an employee exclusion clause applies separately to each insured when a severability of interests clause is present. It emphasizes that an exclusionary clause should be interpreted in favor of the insured unless unreasonable. The employer liability exclusion applies only to the insured who is the employer of the injured party or their spouse. In this case, Mr. and Mrs. Wilson were not Mrs. Alexander's employers, thus they are not excluded from coverage, while Magic Years, her employer, is excluded. The excerpt notes two cases where the employer liability exclusion applied to both corporate and individual employers, but highlights that those policies lacked a severability clause, differentiating them from the current case. All claims against Magic Years are excluded due to the employer-employee relationship with Mrs. Alexander, including her spouse's derivative claims. It concludes that while claims from non-employees, like those against Mr. and Mrs. Wilson, are covered, claims from employees are excluded. The judgment in favor of Mr. and Mrs. Wilson is affirmed, while the judgment for Magic Years is reversed, mandating that Western Heritage is not required to defend or indemnify Magic Years in the related state court suit.