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Board of Education v. CNA Insurance Co.

decided: January 29, 1988.

BOARD OF EDUCATION, YONKERS CITY SCHOOL DISTRICT, PLAINTIFF-APPELLEE,
v.
CNA INSURANCE COMPANY AND CONTINENTAL CASUALTY CO., DEFENDANTS-APPELLANTS



Appeal from summary judgment entered by Chief Judge Brieant of the United States District Court for the Southern District of New York. Appellants contend that the district court erroneously construed an insurance contract to cover costs incurred defending a desegregation action and that summary judgment was improvidently granted because a material question of fact remained whether appellees met their contractually imposed duty of cooperation.

Kaufman, Cardamone and Pratt, Circuit Judges.

Author: Kaufman

KAUFMAN, Circuit Judge:

Appellant Continental Casualty Company, (the company), a member of the CNA Insurance Group, is the primary liability insurer for the appellee, the Board of Education of the City of Yonkers (the Board). Under the terms of a 1978 liability policy, the company agreed to indemnify the Board, up to $3 million, for a broad spectrum of possible liabilities. The policy, however, is not all-inclusive. It contains a substantial number of coverage exclusions. The appellants now ask us to determine that the policy excludes defense costs attributable to racial discrimination claims.

This litigation arises in the aftermath of a civil rights action, brought in 1980, where the United States Department of Justice and the Yonkers branch of the National Association for the Advancement of Colored People charged the Board with intentional school segregation. In 1985, after a protracted bench trial, Judge Leonard Sand of the United States District Court for the Southern District of New York found that the Board had violated the 1964 Civil Rights Act, 42 U.S.C. § 2000c et seq., § 2000d et seq. (1982), U.S. v. Yonkers Board of Education, 624 F. Supp. 1276, 1289 (S.D.N.Y. 1985), and subsequently imposed a wide range of remedial sanctions, U.S. v. Yonkers Board of Education, 635 F. Supp. 1538 (S.D.N.Y. 1986). This court recently affirmed those rulings in all respects, U.S. v. Yonkers Board of Education, 837 F.2d 1181, slip op. 6153, 6159 (2d Cir. 1987). The instant dispute derives from the Board's attempt to gain reimbursement under the policy for defense costs incurred in those proceedings.

We note at the outset that this appeal does not require any discussion of the Board's discriminatory conduct. Indeed, this court has already passed on the merits of the underlying claim. Nor are we called upon to weigh the wisdom of permitting public entities to insure themselves against costs associated with such practices. That is the legislature's responsibility. We are asked simply to interpret a legally valid insurance contract and determine the respective rights and liabilities of the parties.

On December 4, 1980, the Board notified its insurance broker that the Justice Department had filed the complaint in the underlying action. The broker, in turn, forwarded the complaint to Continental, requesting its position pertaining "to the defense of this matter." Following a spate of internal memoranda, the company responded on April 10, 1981, conceding that the policy would "respond for defense and investigative costs in connection with this litigation," but disclaiming liability for the costs of implementing a desegregation plan.

For more than four years, the parties remained in close communication as the underlying litigation progressed. Both unsolicited and upon request, Continental received reports prepared by defense counsel, outlining the substantive and procedural status of the case. The Board regularly apprised Continental of attorneys' fees incurred. In addition, representatives of the Board and the company met at least twice to discuss the litigation. Although Continental occasionally complained that it required more information, it never contradicted its initial willingness to cover defense costs.

The company's change of heart did not occur until shortly after July 29, 1985, when the Board formally demanded reimbursement of attorneys' fees to date. Rather than comply, Continental hired an outside auditor to analyze the Board's defense costs. The Board cooperated fully in the audit. Throughout September, the parties exchanged correspondence further detailing fees and expenses, but still no payments were received from the insurer. Finally, for a second time, on October 8, 1985, the Board demanded reimbursement.

By letter dated October 15, 1985, the company advised the Board it no longer intended to reimburse defense costs. Rather, it contended, the policy "would preclude any coverage and/or payment" of costs resulting from discrimination claims. The Board commenced this action three weeks later, charging that Continental's refusal to pay breached the agreement between them.

Before the case reached trial, however, both parties moved for summary judgment, alleging the plain language of the policy supported their respective proposed constructions. Continental argued that the policy's "Clarification Endorsement" excluded all costs associated with segregation. The Board responded that the provision's ambit was narrower, applying only to the substantive costs incurred by virtue of its discrimination, and that the policy's "New York State Provision" specifically brought defense costs within the contemplated coverage. By order dated November 19, 1986, Chief Judge Brieant granted the Board's motion for summary judgment, holding that the policy covered the costs in question and that Continental had therefore breached its contractual obligation. Board of Education, Yonkers City School District v. CNA Insurance Co., 647 F. Supp. 1495 (S.D.N.Y. 1986). Damages were stipulated at $2.75 million. This appeal by Continental ensued, with the parties repeating substantially the same contentions.

Unfortunately, the policy is less than a model of clarity. Substantial ambiguity permeates the agreement, compelling us to parse the document to ascertain its meaning. Nonetheless, based upon the language of the policy, the conduct of the parties and the rules of contractual construction, we find that the policy includes the costs in question, and thus we affirm Chief Judge Brieant's judgment.

Our analysis necessarily begins with the "Insuring Clause," the driving force governing the agreement. In general terms, it delineates the policy's coverage. Specifically, it requires the company to reimburse "all loss which the [Board] . . . shall become legally obligated to pay." (emphasis added). The question, then, becomes whether defense costs incurred during a desegregation action constitute "loss" under the terms of the policy. For the answer, we turn to the policy's definition section.

"Loss" as defined in the policy includes: judgments, settlements and costs, cost of investigation and defense of legal actions (excluding from such costs of investigation and defenses, salaries of officers or employees of the School District or any other governmental body) claims or ...


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