                                                                                United States Court of Appeals
                                                                                         Fifth Circuit
                                                                                       F I L E D
                     IN THE UNITED STATES COURT OF APPEALS
                                                                                         July 9, 2003
                                  FOR THE FIFTH CIRCUIT
                                                                                   Charles R. Fulbruge III
                                                                                           Clerk


                                    Nos. 02-50119; 02-50438



AMERICAN STATES INSURANCE COMPANY, ET AL.

                                                                                          Plaintiffs,

AMERICAN ECONOMY INSURANCE COMPANY

                                                                                Plaintiff-Appellant,

                                              versus

SYNOD OF THE RUSSIAN ORTHODOX CHURCH OUTSIDE OF
RUSSIA, ET AL.,

                                                                                       Defendants,

SYNOD OF THE RUSSIAN ORTHODOX CHURCH OUTSIDE OF
RUSSIA,

                                                                              Defendant-Appellee.


                          Appeals from the United States District Court
                               for the Western District of Texas



Before BENAVIDES, STEWART, and CLEMENT, Circuit Judges.

CARL E. STEWART, Circuit Judge:

       American Economy Insurance Company (“American Economy”) appeals the district court’s

grant of summary judgment to the Synod of the Russian Orthodox Church Outside of Russia

(“Church”) regarding its duty to indemnify the Church for claims arising out of litigation involving
the molestation of a minor. For the following reasons we vacate and remand.

                       FACTUAL AND PROCEDURAL BACKGROUND

       In August 2000, the Church was sued by a minor who alleged that he had been molested on

six occasions by two priest-monks, Sam Greene and Jonathan Hitt at a monastery in Blanco County,

Texas. In June 2000, the Church notified American Economy of the underlying lawsuit. American

Economy agreed to defend the Church, subject to a reservation of rights. In its reservation of rights

letter, American Economy indicated that the loss alleged might be subject to the policy’s expected

or intended injury exclusion and thus, might not be the result of a covered occurrence. The Church

then sought a declaratory judgment in state court that American Economy and American States

Insurance Company (“American States”) (collectively with American Economy, “insurance

companies”) had a duty to defend and indemnify up to the policy limits for damages incurred from

the underlying lawsuit.

       The insurance companies removed the action to federal court and the Church moved for

partial summary judgment, seeking a declaration that the insurance companies had a duty to defend

and indemnify it in the underlying litigation. The insurance companies also moved for summary

judgment seeking a declaration that they were not required to defend and indemnify the Church. Prior

to the district court’s ruling, American States was dismissed as a party from the action. The district

court granted the Church’s motion for partial summary judgment and denied American Economy’s.

The district court held that American Economy had a duty to defend and indemnify the Church in the

underlying litigation for all non-punitive damages up to the monetary limits provided in the policy.

American Economy filed a motion for reconsideration arguing in part, that the district court’s ruling

with respect to its duty of indemnity was premature.


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         The Church and American Economy then entered into a settlement agreement which rendered

all issues related to American Economy’s duty to defend moot. Both parties, however, reserved their

rights concerning which party would bear the cost of the settlement, thus American Economy’s duty

to indemnify the Church remained a live issue. Following the settlement, American Economy

conceded that the district court’s ruling was not premature, but argued that the district court erred

in concluding that it had the duty to indemnify the Church because the Church failed to fulfill its

burden of proof. On January 16, 2002, the district court denied American Economy’s motion for

reconsideration.

         On January 23, 2002, American Economy filed a notice of appeal of the district court’s

summary judgment order. American Economy then moved for the entry of a final judgment which

the district court entered o n April 1, 2002. On April 25, 2002, American Economy filed a second

notice of appeal of the final judgment entry.1

                                          STANDARD OF REVIEW

         We review the grant of summary judgment de novo. Mowbray v. Cameron County, Tex., 274

F.3d 269, 278 (5th Cir. 2001). Summary judgment is appropriate only when the record indicates “no

genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of

law.” FED. R. CIV. P. 56. “Questions of fact are reviewed in the light most favorable to the

nonmovant and questions of law are reviewed de novo.” Mowbray, 274 F.3d at 278-79.

                                                  DISCUSSION

         American Economy avers that the district court applied an incorrect standard when it



   1
    The Church raised the issue of our jurisdiction to hear this appeal, however, it is clear that we have jurisdiction
based on the second notice of appeal.

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determined that it had a duty to indemnify the Church.2 American Economy contends that this error

stemmed from the district court’s incorrect assumption that the duty to indemnify is inexorably linked

to the duty to defend. American Economy asserts that the district court assumed that it had the duty

to indemnify the Church because of its duty to defend the Church.

         Both parties agree that New York law governs the outcome of this case. Servidone

Construction Corp. v. Security Insurance Co. of Hartford is the leading New York case regarding

the duty to indemnity. 64 N.Y.2d 419 (1985). In Servidone, the insured settled a claim after the trial

court found that the insurer breached its duty to defend. Id. at 422. The trial court in turn awarded

the insured the amount of the settlement. Id. at 423. The insurer appealed to the New York Court

of Appeals, which reversed the trial court’s imposition of liability and held that the duty to indemnify

could not be based on the mere possibility of coverage, but rather must be based on an independent

factual finding that the insured's liability is within the coverage provided by the policy. Id. The New

York Court of Appeals reasoned that “an insurer’s breach of duty to defend does not create coverage

and . . . even in cases of negotiated settlements, there can be no duty to indemnify unless there is first

a covered loss.” Id. The Court of Appeals based its holding on the difference between the duty to

defend and the duty to indemnify: “The duty to defend is measured against the allegations of [the]

pleadings but the duty to pay is determined by the actual basis for the insured's liability to a third

person.” Id. at 424.

         American Economy argues that Servidone requires the Church t o prove actual liability.


    2
     The Church contends that American Economy waived this issue by failing to raise it before the district court.
American Economy argues that the issue was raised in its response to the Church’s motion for summary judgment,
its motion for reconsideration, and in its reply to the Church’s response to the motion for reconsideration. Although
not clearly stated, American Economy did raise this issue in its reply to the Church’s motion for summary judgment.
As such, we will consider the issue.

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American Economy asserts that Judge Brown’s dissent in W.R. Grace & Co. v. Continental Casualty

Co., 896 F.2d 865 (5th Cir. 1990) supports this reading of Servidone. American Economy highlights

Judge Brown’s emphasis on the following language from Servidone: “the duty to defend is measured

against the allegations of pleadings but the duty to pay is determined by the actual basis for the

insured's liability to a third person.” W.R. Grace & Co., 896 F.2d at 878). The Church counters that

Servidone merely requires that it prove that the settled claim is a covered loss under the insurance

policy. We agree with the Church. See Uniroyal v. Home Insurance Co. 707 F. Supp. 1368, 1379

(E.D.N.Y. 1998) (noting that Servidone “never held that an otherwise covered claim, once settled,

must be proven anew by the insured[;]” rather Servidone “only required that the claim settled by the

insured be a covered loss under the policy.”). The majority opinion in W.R. Grace & Co. also

supports this reading of Servidone. See W.R. Grace & Co., 896 F.2d at 874 (quoting Servidone for

the principle that there “can be no duty to indemnify unless there is first a covered loss”).

         In this case, the district court erred when it incorrectly assumed that American Economy had

a duty to indemnify the Church based solely on its duty to defend. The district court should have

determined whether the Church had sho wn that the settled claim was a covered loss under the

insurance policy.3 After reviewing the record, we are unable to determine whether the settled claim

   3
    In determining which state’s law governs where to place the burden of proof, we apply Texas conflict-of-law rules.
See Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 496 (1941). The Texas Supreme Court has indicated that
Texas conflict-of-law rules track, at least in part, the Restatement (Second) of Conflict of Laws. See, e.g., Ford Motor
Co. v. Leggat, 904 S.W.2d 643, 647 (Tex. 1995) (“We begin with the conflict-of-law principles established by the
RESTATEMENT (SECOND) OF CONFLICT OF LAWS (1988) . . . .”). The Restatement provides: “The forum will apply its
own local law in determining which party has the burden of persuading the trier of fact on a particular issue unless the
primary purpose of the relevant rule of the state of the otherwise applicable law is to affect decision of the issue rather
than to regulate the conduct of the trial.” § 133.

          We conclude that allocation of the burden of proof at issue in this case “regulate[s] the conduct of the trial”
and does not have as its primary purpose to “affect decision of an issue.” As a result, Texas law applies. Under Texas
law, the insured has the burden to prove insurance coverage. See Employers Casualty Co. v. Block, 744 S.W.2d 940,
943-44 (Tex. 1988).

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was a covered loss under the policy.4 Thus, we vacate the district court’s judgment with respect to

the duty to indemnity and remand the case to the district court for further proceedings consistent with

this opinion.

VACATE AND REMAND.




   4
     We are unable to determine whether the Church’s claim is a covered loss under the insurance policy because of
the lack of evidence in the record regarding the date(s) of the molestation of the minor. During oral argument,
American Economy argued that the record contained no such evidence. The Church, however, argued that there was
no doubt that the minor was molested during the policy period based on the fact that the priest monks both pleaded
guilty to molesting the minor during the summer of 1997, which is within the policy period. In its brief, the Church
further argued that the state court plaintiffs’ Seventh Amended Petition, which was attached to its partial summary
judgment motion, proves that the minor was molested during the policy period. The Seventh Amended Petition
submitted by the plaintiffs’ in the state court is not proper summary judgment evidence. See Diamond Offshore Co.
v. A&B Builders, Inc., 302 F.3d 531, 545 n. 13 (5th Cir. 2002) (holding that the plaintiff’s attempt to rely on a state
court petition submitted in the underlying case was not proper summary judgment evidence). Based on the lack of
reliable evidence in the summary judgment record before us, the district court will have to make that determination
on remand.

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