Texas District Lutheran Church-Missouri Synod The Lutheran Foundation of Texas Gerald Bryan Kieschnick Glenn Pittsford Glenn O'Shoney And the Lutheran Church-Missouri Synod v. Federal Insurance Company

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN ON MOTION FOR REHEARING NO. 03-99-00268-CV Texas District Lutheran Church-Missouri Synod; The Lutheran Foundation of Texas; Gerald Bryan Kieschnick; Glenn Pittsford; Glenn O'Shoney; and The Lutheran Church-Missouri Synod, Appellants v. Federal Insurance Company, Appellee FROM THE DISTRICT COURT OF TRAVIS COUNTY, 98TH JUDICIAL DISTRICT NO. 96-09791, HONORABLE JOHN K. DIETZ, JUDGE PRESIDING The opinion and judgment issued herein on March 23, 2000 are withdrawn and the following opinion is substituted for the earlier one. Texas District Lutheran Church-Missouri Synod, the Lutheran Foundation of Texas, Gerald Bryan Kieschnick, Glenn Pittsford, Glenn O'Shoney, and the Lutheran Church-Missouri Synod (collectively, "Lutherans") sued Federal Insurance Company ("Federal") seeking reimbursement of defense costs incurred and settlement payments made in two underlying lawsuits. The trial court granted summary judgment in favor of Federal, holding that neither the "Fiduciary Liability Coverage" nor "Executive Liability and Indemnification Coverage" section of the Federal policy purchased by Lutherans provided coverage. We will affirm the judgment as to the Fiduciary Liability section. Because we conclude that the exclusion on which Federal relies is not triggered by the wrongful acts of which Lutherans were accused, we will reverse in part the trial court's summary judgment and remand that portion of the cause for further proceedings. FACTUAL AND PROCEDURAL BACKGROUND The Lutheran Church-Missouri Synod obtained an Executive Protection insurance policy from Federal, effective April 1, 1994. The policy contains four discrete sections, two of which are relevant here. (1) The Fiduciary Liability Coverage section provides $10 million coverage to the Lutheran Church-Missouri Synod and its constituent operating units and includes a duty to defend against covered claims. The Executive Liability and Indemnification Coverage section provides up to $10 million coverage on behalf of the Lutheran Church-Missouri Synod, its districts, or the Lutheran Foundation of Texas for acts and omissions of certain officers and directors, but does not include a duty to defend against such claims. A coverage dispute arose under the policy about costs incurred and payments made by Lutherans in the defense and settlement of two underlying lawsuits. In the summer of 1994, Lutherans notified Federal that they had been sued in state court by the Estate of Louise Peter. (2) The suit alleged that Lutherans had insinuated themselves into the confidence of the elderly Peter and wrongfully pressured her into transferring control of her estimated $2 million estate to Lutherans. In doing so, Lutherans allegedly offered financial and estate-planning advice that they were not qualified to give. In 1988, Peter established a living trust and named the Lutheran Foundation as trustee. In 1990, she created a Charitable Remainder Unitrust and again named the Lutheran Foundation as trustee. Affiliated Lutheran entities were named remainder beneficiaries of both trusts upon Peter's death. At the urging of certain Lutheran executives, Peter executed other legal documents transferring property--including two homes and eleven other tracts of real property--to the trusts. Lutherans also allegedly induced Peter to purchase two $100,000 charitable annuities from the Lutheran Foundation, the remainders of both to pass to affiliated Lutheran entities on Peter's death. The lawsuit alleged that Lutherans mismanaged these trusts and annuities, which contained the bulk of her assets. Shortly after the state lawsuit was initiated, another lawsuit was filed on Peter's behalf in federal court. The federal suit contained both individual claims--which were almost identical to the claims brought in the state court lawsuit--and class action claims against approximately thirty charitable entities, including Lutherans. In the class action, Peter claimed to represent a class of persons like herself who had been coerced into donating money or other assets to charitable organizations. Peter's state court suit settled in July 1996, as did Peter's individual federal claims. The class action claims were not resolved. After being notified of Peter's lawsuits, Federal denied Lutherans coverage and accordingly refused to defend Lutherans in the litigation. Lutherans in turn filed this action, alleging, among other claims, that Federal's denial of coverage constituted a breach of contract. The parties first filed competing motions for summary judgment on the Fiduciary Liability Coverage section of the policy. The trial court granted Federal's motion for partial summary judgment, ruling that the allegations leveled against Lutherans in the underlying lawsuits did not constitute "Wrongful Acts" as defined in that section of the policy and thus were not covered under that section. The parties then filed motions for summary judgment on the Executive Liability Coverage section of the policy. The trial court again ruled in favor of Federal, ruling as a matter of law that an exclusion in that section precluded coverage; the court rendered a final summary judgment in Federal's favor, thus disposing of all of Lutherans' claims. Lutherans perfected this appeal, asserting that the policy terms are ambiguous and should therefore be construed in favor of coverage. They ask us to reverse the trial court's grant of summary judgment in favor of Federal, grant their own motion for summary judgment, and hold that coverage is provided under either the Executive Liability or the Fiduciary Liability section of the policy. DISCUSSION Where, as here, both sides move for summary judgment and the trial court grants one motion and denies the other, we review the summary judgment evidence presented by both sides and determine all questions presented. See Commissioners Court v. Agan, 940 S.W.2d 77, 81 (Tex. 1997). If we find error, we then render the judgment that the trial court should have rendered. See id. Fiduciary Liability Coverage Section We turn first to Lutherans' claim that the Fiduciary Liability section of the policy covers the liability and expenses incurred in defending and settling Peter's claims against Lutherans. The insuring clause of the Fiduciary Liability section provides: The Company shall pay on behalf of each of the Insureds all Loss for which the Insured becomes legally obligated to pay on account of any Claim first made against the Insured during the Policy Period or, if exercised, the Extended Reporting Period, for a Wrongful Act committed, attempted, or allegedly committed or attempted, before or during the Policy Period by an Insured or by any person for whose Wrongful Acts the Insured is legally responsible. The bold-type, capitalized words are all defined in the "Definitions" section of the policy. "Wrongful Act" is defined therein as follows: Wrongful Act means: (a) with respect to a Sponsored Plan, (i) any breach of the responsibilities, obligations or duties imposed upon fiduciaries of the Sponsored Plan by the Employee Retirement Income Security Act of 1974, as amended, or by the common or statutory law of the United States, or any state or other jurisdiction anywhere in the world; (ii) any other matter claimed against the Sponsor Organization or an Insured Person solely because of the Sponsor Organization's or the Insured Person's service as a fiduciary of any Sponsored Plan; or (iii) any negligent act, error or omission in the Administration of any Sponsored Plan; and (b) with respect to an Insured Plan, (i) any negligent act, error or omission in the Administration of any Insured Plan. (c) any negligent act, error or omission in the Administration of any Benefit Program. (3) There is no dispute that the claims in the underlying lawsuit did not involve the administration of any kind of employee benefit program. Thus, the dispositive issue is whether the foregoing definition restricts coverage under the Fiduciary Liability section to fiduciary misconduct arising in the administration of such plans. Lutherans claim that the language in the insuring clause is broad and that the activities their fiduciaries are accused of engaging in are covered by the language that purports to insure against "all Loss for which the Insured becomes legally obligated to pay . . . for a Wrongful Act committed . . . by an Insured or by any person for whose Wrongful Acts the Insured is legally responsible." Federal counters that the broad language of the insuring clause is limited by reference to the defined terms and that the term "Wrongful Act" is defined so that it applies only to two types of employee benefit plans: "Sponsored Plans" and "Insured Plans." Lutherans respond that the scope of the defined term is ambiguous. In general, the interpretation of insurance contracts is governed by the same rules of construction as other contracts. See Balandran v. Safeco Ins. Co., 972 S.W.2d 738, 740-41 (Tex. 1998); Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 133 (Tex. 1994). Our primary goal is to read all parts of the contract together and give effect to the written expression of the parties' intent. See Balandran, 972 S.W.2d at 741; Forbau, 876 S.W.2d at 133. If, after applying these rules, a contract is subject to two or more reasonable interpretations, it is ambiguous. See Balandran, 972 S.W.2d at 741; Columbia Gas Transmission Corp. v. New Ulm Gas, Ltd., 940 S.W.2d 587, 589 (Tex. 1996). In one respect, however, insurance contracts are different from other contracts. In other contracts ambiguous language generally creates a fact question, but with insurance policies a presumption exists in favor of coverage; we therefore construe ambiguities against the carrier and in favor of the insured. See State Farm Fire & Cas. Co. v. Reed, 873 S.W.2d 698, 701 (Tex. 1993). That is, if both the insurer and the insured offer reasonable interpretations of a policy, we must resolve the ambiguity in favor of the construction that provides coverage to the insured. See Barnett v. Aetna Life Ins. Co., 723 S.W.2d 663, 666 (Tex. 1987); American Nat'l Ins. Co. v. Paul, 927 S.W.2d 239, 243 (Tex. App.--Austin 1996, writ denied). In the present case, this presumption of coverage arises only if we deem Lutherans' interpretation of this section of the policy reasonable, for not every difference in the interpretation of an insurance policy amounts to an ambiguity. See Forbau, 876 S.W.2d at 134. Lutherans contend that while "Wrongful Act" is specifically defined in this section of the policy "with respect to" breaches of fiduciary duty arising in the context of employee benefit plans, nothing in the policy indicates that the definition is intended to be exclusive. If Federal intended the definition of "Wrongful Act" to be exclusive, the insurer merely had to include a clause to that effect. Absent such language, Lutherans argue, it is reasonable to assume that the defined terms are inclusive. As a consequence, Lutherans assert that the policy can be read to include other, undefined "Wrongful Acts." When the plain language of the policy is scrutinized, we cannot agree that the Fiduciary Liability section covers liability for "Wrongful Acts" beyond those specifically defined in the policy. In arguing that the definition of "Wrongful Act" should be construed as inclusive and not exclusive, Lutherans rely heavily on the phrase "with respect to" as it is used in sections (a) and (b) of the definition to reference Sponsored and Insured Plans. While the definition begins "Wrongful Act means," which seems to signify the exclusivity of the definition, it goes on to offer two partial definitions that are limited by use of the phrase "with respect to." Lutherans contend Federal's use of the phrase in drafting the policy shows that Federal contemplated that "Wrongful Act" was intended to have an undefined meaning outside the context of Sponsored and Insured plans. During oral argument and in their post-submission brief, Lutherans offered an analogy to exemplify how a term might be given a definition that would apply in certain contexts without restricting the overall applicability of the term to those contexts: Imagine that a national organization for some reason obtains an insurance policy to protect it against misdeeds by any "mayor." The policy goes on to say that, "with respect to" New York City, the word "mayor" means Rudy Giuliani and, "with respect to" Austin, Texas, the word "mayor" means Kirk Watson. This would scarcely compel the conclusion that no other city or town has a "mayor," or that coverage applied only to claims concerning New York City or Austin. We believe, however, that subsection (c) of the "Wrongful Act" definition undermines this argument because it does not contain the phrase "with respect to." This section partially defines "Wrongful Act" as "any negligent act, error or omission in the Administration of any Benefit Program." "Benefit Program" is defined in the policy as "(a) any Sponsored Plan, or (b) any Insured Plan." Thus, subsection (c), taken in conjunction with the definition of "Benefit Program," effectively says: "Wrongful Act means . . . any negligent act, error or omission in the Administration of any Sponsored Plan or any Insured Plan." (Emphasis added.) Subsection (c) parrots the identical language used in subsections (a)(iii) and (b)(i), except that it does not use the "with respect to" language and thus negates the possibility asserted by Lutherans that "Wrongful Act" could have other definitions. (4) Rules of construction require us to examine all parts of the contract and the circumstances surrounding the formulation of the policy. See Columbia Gas Transmission Corp., 940 S.W.2d at 591; Forbau, 876 S.W.2d at 133. Comparing the application for and terms used in the Fiduciary Liability section with those in the Executive Liability section, it is clear that the Fiduciary Liability section was intended to cover a much narrower range of potential losses. The application for the Fiduciary Liability section asks almost exclusively about the employee benefit plans administered by Lutherans, and Federal assessed the risks and set its premiums based on the answers given. In contrast to the narrow focus of the application for the Fiduciary Liability section, the application for the Executive Liability section asks broad questions about recent changes, property holdings, and legal history of the parent organization, indicating that a much broader range of risks was anticipated when the parties were negotiating the terms of this section of the policy. Further, the rest of the Fiduciary Liability section is devoid of reference to any breach of fiduciary duty other than with respect to employee benefit plans, and most of the defined terms relate to employee benefit plans. The terms and definitions in the Executive Liability section are much broader. Like the Fiduciary Liability section, the Executive Liability section of the policy contains a broad insuring clause. (5) The Executive Liability section, however, contains a definition of Wrongful Act that is much broader than that used in the Fiduciary Liability Section. The Executive Liability definition reads: Wrongful Act means any error, misstatement, misleading statement, act, omission, neglect, or breach of duty committed, attempted, or allegedly committed or attempted, by an Insured Person, individually or otherwise, in his Insured Capacity, or any matter claimed against him solely by reason of his serving in such Insured Capacity. Lutherans essentially ask us to accept as reasonable an interpretation of the definition in the Fiduciary Liability section (which refers only to sponsored plans, insured plans, and benefit programs) that makes that definition just as broad as that found in the Executive Liability section. We find this stretches the language too far. We believe the plain language of the two sections, especially when compared side-by-side, shows that the Fiduciary Liability section covers a much narrower range of potential wrongful acts. Because the actions that caused Lutherans' losses in the underlying lawsuit did not involve the administration of any benefit program, any coverage to which Lutherans are entitled must come from another section of the policy. Executive Liability Coverage Section Federal also denied coverage under the Executive Liability section, asserting that an exclusion precluded coverage. Lutherans initially argue that Federal is not entitled to summary judgment based on the exclusion because it failed to plead this exclusion before the trial court. An insurer is not allowed to allege that a loss comes within a particular exception to general liability unless that affirmative defense is contained in its pleadings. See Tex. R. Civ. P. 94. However, if the movant's pleadings do not support its motion for summary judgment, the non-movant must object or waive the error. See Roark v. Stallworth Oil & Gas, Inc., 813 S.W.2d 492, 495 (Tex. 1991). An unpleaded defense that is expressly included in a motion for summary judgment is tried by consent if the non-movant does not object in its response to the motion. See id. Here, Federal's motion for partial summary judgment on the Executive Liability section was based entirely upon the applicability of the exclusion. Lutherans failed to object in the trial court, and in fact argued the inapplicability of the same exclusion in their own motion for summary judgment. Accordingly, they have waived any right to complain on appeal of Federal's failure to plead the exclusion. Finding no procedural bar to Federal's summary judgment under the Executive Liability section, we next turn to the interpretation of the exclusion at issue. The policy of construing language in an insurance policy strictly against the insurer and in favor of the insured is "especially strong when the court is dealing with exceptions and words of limitation." Blaylock v. American Guarantee Bank, 632 S.W.2d 719, 721 (Tex. 1982); see also National Union Fire Ins. Co. v. Hudson Energy Co., 811 S.W.2d 552, 555 (Tex. 1991). "The court must adopt the construction of an exclusionary clause urged by the insured as long as that construction is not unreasonable, even if the construction urged by the insurer appears to be more reasonable or a more accurate reflection of the parties' intent." National Union Fire, 811 S.W.2d at 555 (citing Glover v. National Ins. Underwriters, 545 S.W.2d 755, 761 (Tex. 1977); Continental Cas. Co. v. Warren, 254 S.W.2d 762, 763 (Tex. 1953)). The exclusion cited by Federal states that Federal is not liable under the insuring clause on account of any claim made against Lutherans based upon, arising from or in consequence of any actual or alleged Wrongful Act arising from the Insured's conduct of business as an investment company, investment advisor, trust company, commercial bank, insurance company, insurance agent, securities broker, securities dealer, mutual fund manager, financial planner or estate planner. Federal essentially concedes that the claims brought against Lutherans in the underlying lawsuits are covered by the insuring clause in the Executive Liability policy unless this exclusion applies. (6) Thus, coverage turns on whether the loss sustained by Lutherans in settling the Peter lawsuits arose from wrongful acts committed in the "conduct of business as" one of the enumerated entities. Federal urges that the only reasonable interpretation of this exclusion defines the term "as" to mean "like," so that coverage is not available if Lutherans conducted business like an investment company, trust company, financial planner, etc. See Webster's Third New International Dictionary 125 (Philip B. Gove ed., 1986). In the underlying lawsuits, Peter complained that Lutherans wrongfully pressured her into establishing trusts and annuities for the benefit of the church, offered financial and estate-planning advice that Lutherans were not qualified to give, and then mismanaged the assets she transferred to Lutherans' control. Federal argues that all of these allegations easily fit within the ambit of the exclusion. Federal's interpretation of the exclusionary language may be reasonable, but that is not enough to defeat Lutherans' claim for coverage, for Lutherans have offered a reasonable interpretation as well. Lutherans ask us to define "as" to mean "in the capacity" of, pointing out that at no time relevant to any of the underlying claims did they conduct business "in the capacity of" an investment company, trust company, insurance company, or similar enterprise. In fact, the gravamen of Peter's allegations in her lawsuits is that Lutherans should have been licensed to conduct business in those capacities when the church offered its advice and services in managing her assets. We find Lutherans' interpretation of this exclusion reasonable, especially considering the language that Federal used in drafting the exclusion. Federal asks us to interpret the exclusion to preclude coverage for any wrongful acts arising while Lutherans were engaging in activities similar to banking, investment advising, estate planning, etc. Yet in drafting the exclusion, Federal did not use the verb forms of these words, which might have indicated an emphasis on the type of activity. Instead, Federal specifically referred to particular kinds of entities--investment company, investment advisor, trust company, commercial bank, insurance company, etc.--which indicates an emphasis on the form of organization used by Lutherans in conducting the activities. It is undisputed that Lutherans never operated as any of the enumerated business forms in the exclusion, nor did they purport to be licensed to do so. Construing the exclusionary language narrowly, as we are required to do, we find reasonable Lutherans' interpretation that, whatever activities they are accused of engaging in, they never conducted business as any of the kinds of businesses listed in the exclusion. See Blaylock, 632 S.W.2d at 721; National Union Fire Ins. Co., 811 S.W.2d at 555. Because they have offered a reasonable interpretation of the exclusionary language, the presumption in favor of coverage applies and Lutherans are entitled to coverage under the Executive Liability section of the policy. See Barnett, 723 S.W.2d at 666; American Nat'l Ins. Co., 927 S.W.2d at 243. CONCLUSION We hold that the scope of coverage in the Fiduciary Liability section of the Federal policy is not ambiguous and that Lutherans have not offered a reasonable interpretation of that portion of the policy. We affirm that portion of the trial court's judgment. Regarding the Executive Liability section of the policy, however, we hold that the exclusion Federal relies on to deny coverage does not unambiguously apply to the misconduct alleged in the underlying lawsuit; accordingly, we reverse the grant of summary judgment in favor of Federal as to the Executive Liability section of the policy. That portion of the cause is remanded to the trial court for such other proceedings as may be appropriate. J. Woodfin Jones, Justice Before Justices Jones, Kidd and Patterson Affirmed in Part; Reversed and Remanded in Part Filed: May 18, 2000 Do Not Publish 1. In addition to the Fiduciary Liability and Executive Liability sections at issue in this case, the policy also contained a Crime Coverage section and a Kidnap/Ransom and Extortion Coverage section. 2. The suit was brought by Boyd L. Richie in his capacity as Louise Peter's guardian. 3. Subsection (c) of the definition of "Wrongful Act" was added in an endorsement to the policy, effective April 1, 1994. The endorsement purported to delete a non-existent paragraph (c) and replace it with the above-quoted paragraph (c). Because the claims at issue in this case were first asserted the following summer, the endorsement was in effect. 4. Using Lutherans' own example to demonstrate this point, imagine that an insurance policy is obtained to protect against misdeeds by any "mayor." The term is then defined for reference in the policy as follows: "Mayor means (a) with respect to New York City, Rudy Giuliani, (b) with respect to Austin, Texas, Kirk Watson, (c) Rudy Giuliani or Kirk Watson." To the extent that subsections (a) and (b) might be read to indicate that mayors of other cities could fall within the definition of "mayor," subsection (c) precludes that interpretation. 5. By contrast, the insuring clauses contained in the other two sections of the policy are much narrower. The Crime Coverage section provides that Federal is liable only for losses caused by theft or forgery by any employee of the insured. The Kidnap/Ransom and Extortion Coverage section provides coverage only for payments made on behalf of the insured as a result of kidnapping or extortion threats. 6. In its brief, Federal states that indemnification coverage is "potentially available" under this section, but it then argues exclusively that the underlying claims come within the exclusion, never arguing that the underlying claims are not acts covered under the insuring clause. dicated an emphasis on the type of activity. Instead, Federal specifically referred to particular kinds of entities--investment company, investment advisor, trust company, commercial bank, insurance company, etc.--which indicates an emphasis on the form of organization used by Lutherans in conducting the activities. It is undisputed that Lutherans never operated as any of the enumerated business forms in the exclusion, nor did they purport to be licensed to do so. Construing the exclusionary language narrowly, as we are required to do, we find reasonable Lutherans' interpretation that, whatever activities they are accused of engaging in, they never conducted business as any of the kinds of businesses listed in the exclusion. See Blaylock, 632 S.W.2d at 721; National Union Fire Ins. Co., 811 S.W.2d at 555. Because they have offered a reasonable interpretation of the exclusionary language, the presumption in favor of coverage applies and Lutherans are entitled to coverage under the Executive Liability section of the policy. See Barnett, 723 S.W.2d at 666; American Nat'l Ins. Co., 927 S.W.2d at 243. CONCLUSION We hold that the scope of coverage in the Fiduciary Liability section of the Federal policy is not ambiguous and that Lutherans have not offered a reasonable interpretation of that portion of the policy. We affirm that portion of the trial court's judgment. Regarding the Executive Liability section of the policy, however, we hold that the exclusion Federal relies on to deny coverage does not unambiguously apply to the misconduct alleged in the underlying lawsuit; accordingly, we reverse the grant of summary judgment in favor of Federal as to the Executive Liability section of the policy. That portion of the cause is remanded to the trial court for such other proceedings as may be appropriate.