                    UNITED STATES COURT OF APPEALS
                         FOR THE FIFTH CIRCUIT

                          _____________________

                               No. 91-7057
                          _____________________

                          JUEDELL T. LAWRENCE,

                                                      Plaintiff-Appellant,

                                    VERSUS

                    VIRGINIA INSURANCE RECIPROCAL,

                                                       Defendant-Appellee.

      ____________________________________________________

           Appeal from the United States District Court
             for the Southern District of Mississippi

      _____________________________________________________

                        (December 9, 1992)
Before POLITZ, Chief Judge, SMITH, and BARKSDALE, Circuit Judges.

BARKSDALE, Circuit Judge:

     For the most part, this appeal turns on whether an insurer,

which did not defend an underlying action against its insured, is

therefore estopped from asserting sovereign immunity in defending

against a garnishment by the plaintiff from the prior action.

Juedell   T.   Lawrence   appeals    from    a   summary   judgment   granted

Virginia Insurance Reciprocal (VIR) on her garnishment action to

collect punitive and mental anguish damages awarded her in a state

court action against VIR's insured, Southwest Mississippi Regional

Medical Center (Southwest). Because VIR is not estopped, we AFFIRM

in part and REVERSE and REMAND in part.
                                          I.

     Lawrence suffered a work-related injury while an employee of

Southwest.1     In April 1987, she sued Southwest in state court,

alleging breach of her employment contract and bad faith refusal to

pay benefits due under it.           In that contract, Southwest had agreed

to pay Lawrence benefits equivalent to workers' compensation, even

though    it   was    not    legally    obligated       to    participate    in   the

Mississippi workers' compensation program.

     Southwest had an insurance contract with VIR, in which VIR

agreed,   inter      alia,   to   pay    on    behalf   of     Southwest    all   sums

Southwest became legally obligated to pay for damages sustained by

employees      resulting      from      the     negligent       administration     of

Southwest's "employee benefit programs".                     But, upon Southwest's

inquiry early in the case, VIR denied coverage and, therefore, did

not defend Southwest at trial.

     By a jury verdict in October 1990, Lawrence was awarded, inter

alia, $216,000 against Southwest: $66,000 for compensatory damages

(benefits); $50,000 for mental anguish damages; and $100,000 for

punitive damages.       But, the judgment provided that, "pursuant to

[Miss. Code Ann. §] 41-13-11(2)", in seeking to recover the mental

anguish and punitive damages, Lawrence would "have recourse only to

the proceeds or right to proceeds of any liability policy covering

[Southwest] for such damages, if any".

1
     Lawrence developed thoracic outlet syndrome, a disorder
associated with repetitious upper extremity activity, presumably as
a result of her repeated overhead filing of x-ray jackets while
employed as a clerk-typist in the medical records division of the
hospital.

                                        - 2 -
     Promptly after entry of judgment, Lawrence sought to garnish

VIR to collect the mental anguish and punitive damages. The action

was removed to district court, which granted VIR summary judgment.

In accordance with the law at the time, the district court treated

the mental anguish damages as "exemplary damages", as it did the

punitive damages.      VIR was not estopped from relitigating coverage

for exemplary damages in district court, as a result of the court's

holding that VIR had no duty to defend Southwest because the

exemplary    damages   "were   barred    as   a   matter   of   law"   by   the

hospital's sovereign immunity "and thus not covered under the

insurance policy...."

                                   II.

     Lawrence contends that (1) the issue of sovereign immunity was

fully litigated in state court by Southwest and thus VIR should

have been collaterally estopped from relitigating it in federal

court, (2) Mississippi law allows recovery of punitive and mental

anguish damages against a community hospital to the extent that it

has insurance coverage, and (3) the VIR policy provides coverage

for the punitive and mental anguish damages awarded her.2

     Needless to say, we apply Mississippi law in resolving these

issues.     Erie R. Co. v. Tompkins, 304 U.S. 64 (1938); Allison v.

ITE Imperial Corp., 928 F.2d 137, 138 (5th Cir. 1991).                 And, we

review de novo the district court's interpretation of that law.

Salve Regina College v. Russell, ___ U.S. ___, 111 S. Ct. 1217,

2
     In the alternative, Lawrence requests this court to certify
the issues to the Mississippi Supreme Court. We decline to do so.


                                  - 3 -
1221 (1991).         In deciding an unsettled point of state law, Erie

requires that we determine how the Mississippi Supreme Court would

interpret its own law if presented with the question.                 American

Waste & Pollution Control Co. v. Browning-Ferris, Inc., 949 F.2d

1384, 1386 (5th Cir. 1991).           When we are required to make an Erie

guess, it is not our role to create or modify state law, rather

only to predict it.        Id.

                                        A.

         Lawrence maintains that, in state court, Southwest "hotly

contested"     its     sovereign    immunity   with   respect   to   exemplary

damages, but lost when the court ruled that the issue could be

submitted to the jury.           She asserts that VIR is estopped from

relitigating the issue in federal court, under the principle that

an insurer that breaches its duty to defend an action against its

insured is bound in subsequent litigation by all issues litigated

in the first suit. See Travelers Ins. Co. v. General Refrigeration

& Appliance Co., 218 So. 2d 724, 727 (Miss. 1969) ("The insurer

acts at its peril when it refuses to defend a suit against its

insured"); Southern Farm Bureau Casualty Ins. Co. v. Logan, 119 So.

2d 268, 270-72 (Miss. 1960).3         It makes no difference that Lawrence

is   a    judgment    creditor     seeking   garnishment,   rather   than   the

insured. E.g., Ridgway v. Gulf Life Ins. Co., 578 F.2d 1026 (1978)

(applying analogous rule under Texas law).             And, for purposes of

this opinion, we assume that VIR had a duty to defend Southwest.

3
     Initially, we note that collateral estoppel can apply to legal
issues as well as to factual issues previously litigated.       See
State Ex Rel. Moore v. Molpus, 578 So. 2d 624, 640 (Miss. 1991).

                                       - 4 -
(As discussed, infra, this will be an issue on remand.) Therefore,

estoppel vel non comes into play.         The Mississippi Supreme Court

has stated, however, that collateral estoppel can apply only if

there is "an identity of parties from one suit to the next, and of

their capacities as well".     State Ex. Rel. Moore v. Molpus, 578 So.

2d 624, 640 (Miss. 1991).         This identity requirement can be

expressed as a "succession in interest" between the two parties.

Id.     Therefore, we look to the respective interests of Southwest

and VIR in litigating the sovereign immunity issue.

       Southwest would not have been obligated to pay any exemplary

damages awarded against it, because Miss. Code Ann. § 41-13-11

allows recovery only against the hospital's insurer to the extent

the hospital obtains coverage in accordance with the statute.4        If

coverage does not exist, Southwest is protected by immunity. Miss.

Code Ann. § 41-13-11(1).        Although Southwest did litigate its

sovereign immunity at trial, it had little interest, because of

this rule, in the outcome on the issue.      This is illustrated by the

fact    that   Southwest   appealed   only   the   compensatory   damages

(benefits) award, choosing not to appeal the punitive and mental

anguish damages, specifically because it was not obligated to pay

them.    Cf. Guaranty Nat'l Ins. Co. v. Pittman, 501 So. 2d 377, 385

(Miss. 1987) (citing fact that insolvent insured failed to appeal


4
     The statute authorizes the purchase of certain insurance
coverage and provides: "immunity from suit is only waived to the
extent of such liability insurance available to satisfy any
judgment rendered, and a judgment creditor shall have recourse only
to the proceeds or right to proceeds of such liability insurance".
Miss. Code Ann. § 41-13-11(2).

                                  - 5 -
judgment against him as illustration of his lack of vigor in trying

to   avoid   judgment   and   his   inadequate   representation   of   his

insurer's interest).

      Needless to say, the insured ordinarily remains obligated on

a judgment in the absence of insurance coverage.         Here, however,

the insured and insurer were not aligned in interest, because

Southwest was not obligated to pay the punitive and mental anguish

damages, even in the absence of coverage under the VIR policy.         Cf.

American Casualty Co. v. United Southern Bank, 950 F.2d 250, 253-54

(5th Cir. 1992) (rejecting application of collateral estoppel where

specifics of coverage placed insurer's and insured's interests on

liability issue in opposition).       We hold, therefore, that VIR was

not estopped from raising sovereign immunity as a defense to

Lawrence's garnishment action.

                                     B.

      Lawrence next contends that the Mississippi statutory scheme

permits recovery of punitive and mental anguish damages against

Southwest to the extent of its insurance.

      Community hospitals such as Southwest enjoy immunity from suit

"at law or in equity on account of any wrongful or tortious act or

omission by any such [community hospital] or its employees relating

to or in connection with any activity or operation of any such

community hospital ...".      Miss. Code Ann. § 41-13-11(1).5     The same

5
     Recent developments in Mississippi's sovereign immunity law do
not apply to this case. In Presley v. Mississippi State Highway
Comm., No. 90-CC-0644, 1992 WL 211961 (Miss. Sept. 4, 1992) (en
banc), the Mississippi Supreme Court declared unconstitutional the
Mississippi Sovereign Immunity Act, Miss. Code Ann. § 11-46-1, et

                                    - 6 -
statute that creates this immunity provides that it may be waived

to a limited extent: "[i]f liability insurance is in effect, ...

suit may be maintained ....              However, immunity from suit is only

waived to the extent of such liability insurance available to

satisfy any judgment rendered ...". Miss. Code Ann. § 41-13-11(2).

     The statute also authorizes community hospitals to purchase

liability insurance "to cover damages or injury to persons or

property     or    both   caused    by    the    negligence   of   any   [hospital

employee]".       See Miss. Code Ann. § 41-13-11(2) (emphasis added).

Thus,   to   the    extent   that    coverage      is   provided   by    insurance

purchased under this authority, a community hospital's sovereign

immunity is waived.        We focus, therefore, on whether this statute

authorized Southwest to purchase insurance to cover the punitive

and mental anguish damages awarded Lawrence.6




seq. Subsequently, the legislature amended the Act. Because this
case falls under § 41-13-11, which specifically governs the
immunity of community hospitals, changes to § 11-46-1 have no
effect.
6
     The VIR policy is a comprehensive liability policy containing
an endorsement specifically governing liability arising in
connection with the hospital's employee benefits program. In that
endorsement, VIR agreed to pay on behalf of Southwest "all sums
which [Southwest] shall become legally obligated to pay as a result
of damages sustained by an employee ... in the administration of
the Insured's Employee Benefit Programs ... caused by any negligent
act, error or omission of the Insured ...." As noted, Southwest
elected to provide its employees with medical and disability
benefits, equivalent to those provided by employers subject to the
workers' compensation laws, which VIR acknowledges were part of
Southwest's employee benefit program. Moreover, Southwest acted as
a self-insurer of these benefits; the VIR policy did not cover
Southwest's contractual liability for them, and Lawrence does not
contend that VIR is obligated to pay her compensatory damages
(benefits).

                                         - 7 -
                                           1.

     As the state jury was instructed, punitive damages can be

awarded only upon finding that the defendant acted with malice,

gross negligence, or reckless disregard for the rights of others.

E.g., Universal Life Ins. Co. v. Veasley, No. 07-CA-59316, 1992 WL

30112, at 3 (Miss. Feb. 19, 1992).                  And, as that jury was also

instructed, the purpose of punitive damages, of course, is to

punish   a    tort-feasor     as    an    example       to    deter    others,      not    to

compensate     a   party    for    an    injury.        E.g.,    State       Farm   Mutual

Automobile Ins. Co. v. Daughdrill, 474 So. 2d 1048, 1052 (Miss.

1985).       Punitive   damages,        therefore,       do    not    fall    within      the

category of "damages or injury to persons or property or both

caused by ... negligence", which are insurable under the statute.

Because they do not fall within this category, Southwest lacked the

statutory authority to purchase insurance to cover them.7                        In other

words, the legislature did not expressly waive the hospital's

sovereign immunity in this respect.                      See Joseph v. Tennessee

Partners, Inc., 501 So. 2d 371, 375 (Miss. 1987) ("a governmental

entity has not waived immunity from suit simply because it has

obtained liability insurance without express statutory authority").

Because Southwest's sovereign immunity was retained as to punitive

damages,     VIR   cannot    be    obligated       to    pay    them    on    behalf       of

Southwest, even if the policy provides such coverage.




7
     We assume, without deciding, that such damages are otherwise
covered under the policy.

                                         - 8 -
                                2.

     Mental anguish damages, however, can be awarded upon a finding

of simple negligence in the breach of contract.      Strickland v.

Rossini, 589 So. 2d 1268, 1275 (Miss. 1991).     Although, in the

past, the rule in Mississippi has been to the contrary, two recent

Mississippi Supreme Court cases, handed down after the award of

summary judgment in this case, make clear that mental anguish

damages are no longer a form of exemplary damages, but rather, are

compensatory in nature and can be the proximate result of simple

negligence.   See Veasley, No. 07-CA-59316, 1992 WL 30112, at 6-7

(Miss. Feb. 19, 1992); Strickland, 589 So. 2d at 1275.     Because

they result from negligence and are compensatory in nature, mental

anguish damages fall within the statutory category of "damages or

injury to persons or property or both caused by ... negligence".

Southwest, therefore, was authorized to purchase insurance to cover

them; and its sovereign immunity was waived to the extent of such

coverage.8

     At issue, therefore, is whether the VIR policy provided

coverage for Lawrence's mental anguish damages.       Because the

district court has not had an opportunity to rule on this issue, or


8
     The jury in this case was given conflicting instructions
regarding the standard of conduct necessary to sustain an award of
mental anguish damages. One instruction stated that they could be
awarded if they were proximately caused by the hospital's breach of
contract, if any; another lumped them with punitive damages,
requiring a finding of malicious conduct, gross negligence, or
reckless disregard for the rights of others. Because the jury's
award of punitive damages indicates that the higher of the two
standards was met, the ambiguity does not present a problem; we can
assume that there was at least simple negligence.

                              - 9 -
the duty to defend issue as to such damages, by summary judgment or

otherwise, we remand it to that court for such further proceedings

as it deems appropriate.

                                 III.

     For the foregoing reasons, we AFFIRM the summary judgment with

respect to the punitive damages; but, with respect to the mental

anguish damages, we REVERSE and REMAND for further proceedings

consistent with this opinion.

          AFFIRMED IN PART; REVERSED AND REMANDED IN PART.




                                - 10 -
