(Article from Insurance Law Alert, April 2019)
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The Fifth Circuit ruled that an insurer was obligated to defend a church against claims alleging Texas Election Code violations. Word of Life Church of El Paso v. State Farm Lloyds, 2019 WL 1324845 (5th Cir. Mar. 22, 2019).
El Paso Mayor John Cook sued the Word of Life Church, alleging violations of the Texas Election Code. The suit alleged that Tom Brown, pastor, president and chairman of the church, violated state law by circulating and submitting petitions seeking a recall election to remove Cook and two other elected representatives from office. A Texas appellate court concluded that the church violated the Election Code and issued injunctive relief requiring decertification of the recall petition. Thereafter, the parties entered into a judgment agreement for $475,000.
The church sought indemnification for the judgment and $450,000 in attorneys’ fees from State Farm under a D&O policy that provided coverage for “wrongful acts” defined as “any negligent acts . . . directly related to the operations of your church.” When State Farm denied coverage, the church brought suit, alleging breach of contract and bad faith. A Texas district court granted State Farm’s summary judgment motion, concluding that it had no duty to defend or indemnify. The district court reasoned that Brown’s actions relating to the recall election were not “directly related to the operations” of the church. The Fifth Circuit reversed.
Applying an “eight corners analysis,” the Fifth Circuit held that the underlying allegations of Election Code violations gave rise to a duty to defend. The Fifth Circuit explained that the complaint sufficiently alleged a direct relationship between Brown’s activities and church operations because the complaint claimed that Brown, in his capacity as church director and pastor, caused the church to violate state law. In so ruling, the court noted that the district court erred in focusing on whether political actions were within the realm of “typical” church operations, rather than on the particular conduct alleged in the complaint. The Fifth Circuit also ruled that a criminal acts exclusion did not negate the duty to defend because the Texas Election Code does not specify that a violation of its provisions constitutes a criminal act. As to the duty to indemnify, the court ruled that issues of fact existed as to whether Brown’s conduct was directly related to church operations.