Federal Insurance Co. v. Singing River Health System
850 F.3d 187
| 5th Cir. | 2017Background
- Federal Insurance issued a claims-made health-care policy to Singing River Health System (SRHS) for 3/1/2014–3/1/2015 with two sections: $1M Fiduciary Coverage and $5M ELI/EPL Coverage. SRHS did not buy Optional Separate Defense Costs Coverage.
- The policy repeatedly stated that "Defense Costs" are part of "Loss," that Defense Costs erode and may exhaust the limits, and that the insurer will not pay defense costs in excess of the limits.
- Plaintiffs in multiple underlying suits sued SRHS and others for claims arising from alleged underfunding of SRHS’s pension plan (breach of fiduciary duty, contract, constitutional and statutory claims including §1983).
- Federal defended under a reservation of rights, took the position that Defense Costs erode limits, and invoked Exclusion 7(e) in the ELI/EPL section (Employee Benefits Program Laws exclusion) to deny coverage for many pension-related claims.
- District court granted Medical Insureds partial summary judgment ordering that defense costs should not be deducted from policy limits, and granted Federal partial summary judgment finding many underlying claims excluded under Exclusion 7(e). Both parties appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Moeller and policy language require insurer to pay Defense Costs separate from limits | Moeller requires insurer to fund independent counsel and the policy’s phrasing ("becomes legally obligated to pay") means Defense Costs cannot erode limits | Policy unambiguously states Defense Costs are part of Loss and erode limits; SRHS declined separate non‑eroding coverage | Reversed district court: Defense Costs erode policy limits; Moeller does not override clear policy language or parties’ bargain |
| Whether public policy/statutes bar defense-within-limits clauses for a community hospital | Such clauses violate public policy and Mississippi statutes re: public hospital insurance and board approvals | Policy enforcement is governed by contract terms; statutes cited do not invalidate eroding defense provisions | Public policy and cited statutes do not bar eroding defense provisions; insurer may rely on negotiated terms |
| Whether Exclusion 7(e) (Employee Benefits Program Laws exclusion) bars ELI/EPL coverage for many underlying claims | Exclusion should be read narrowly; constitutional claims fall outside because clause references statutory or common law | Exclusion is broad and covers any claim alleging violation of duties imposed by federal/state/local statutory or common law that govern employee benefit plans, including claims relying on constitutional principles via statutes like §1983 | Affirmed: identified pension-plan-related counts and many complaints fall within Exclusion 7(e); no ELI/EPL coverage for those claims |
| Whether district court abused discretion in denying joinder and discovery (Rule 19/20 and Rule 56(d)) | Additional insureds and plaintiffs are necessary parties with interests in coverage; discovery could show waiver/estoppel | Joinder not required because existing parties adequately protect absent parties’ interests; plaintiffs can intervene and did not seek to; 56(d) not shown to produce facts that would change outcome | Affirmed: denial of joinder and 56(d) discovery was not an abuse of discretion; existing parties adequately protect interests |
Key Cases Cited
- Moeller v. Am. Guar. & Liab. Ins. Co., 707 So. 2d 1062 (Miss. 1996) (insurer must fund independent counsel when conflict of interest exists but not an absolute rule overriding policy terms)
- Southern Healthcare Servs., Inc. v. Lloyd’s of London, 110 So. 3d 735 (Miss. 2013) (Moeller’s duty to provide independent counsel is subject to specific policy terms such as deductibles or eroding provisions)
- Noxubee Cty. Sch. Dist. v. United Nat’l Ins. Co., 883 So. 2d 1159 (Miss. 2004) (insurance policies are enforced according to their provisions; parties receive the benefit of their bargain)
- Corban v. United Servs. Auto. Ass’n, 20 So. 3d 601 (Miss. 2009) (contract interpretation: read the policy as a whole and give effect to all provisions)
- Eldredge v. Martin Marietta Corp., 207 F.3d 737 (5th Cir. 2000) (procedural authority upholding entry of a Rule 54(b) partial final judgment)