Blakely v. AMERICAN EMPLOYERS'INSURANCE COMPANY, 27537.

• Citation: 424 F.2d 728
• Decision Date: 06 July 1970
• Docket Number: No. 27537.,27537.
• Parties: L. E. BLAKELY and Richard R. Campbell, Jr., Plaintiffs-Appellees, v. The AMERICAN EMPLOYERS' INSURANCE COMPANY et al., Defendants-Appellants, v. Neil L. VAUGHN, d/b/a Vaughn Agency, Third-Party Defendant, v. ECHLIN-IRVIN-CROWELL & COMPANY, Fourth-Party Defendant.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

424 F.2d 728 (1970)

L. E. BLAKELY and Richard R. Campbell, Jr., Plaintiffs-Appellees, v. The AMERICAN EMPLOYERS' INSURANCE COMPANY et al., Defendants-Appellants, v. Neil L. VAUGHN, d/b/a Vaughn Agency, Third-Party Defendant, v. ECHLIN-IRVIN-CROWELL & COMPANY, Fourth-Party Defendant.

No. 27537.

United States Court of Appeals, Fifth Circuit.

April 9, 1970.

Rehearing Denied and Rehearing Denied July 6, 1970.

James A. Williams, Bailey, Williams, Weber & Allums, Dallas, Tex., for defendants-appellants.

Otto B. Mullinax, Mullinax, Wells, Mauzy & Collins, Dallas, Tex., for L. E. Blakely.

Thomas H. Hight, Dallas, Tex., Maloney, Black & Hearne, Thomas Black, Austin, Tex., for Richard R. Campbell III.

Before THORNBERRY, GODBOLD and MORGAN, Circuit Judges.

Rehearing Denied and Rehearing En Banc Denied July 6, 1970.

LEWIS R. MORGAN, Circuit Judge.

This appeal arises from actions (later consolidated) brought by Richard R. Campbell, Jr., and L. E. Blakely against the American Employers' Insurance Company.

In October, 1965, American issued a standard automobile liability policy to Richard R. Campbell, Jr., in the name of Richard R. Campbell, III, covering one Chevrolet automobile. On April 13, 1966, Campbell, III, who resided in Lubbock, Texas, was driving his Chevrolet in Collins County, Texas, and collided with Blakely, causing serious injuries to Blakely.

American's policy in question was sold to the Campbells by its recording agent, Neil Vaughn, who officed in Lubbock, and was signed by him and delivered by him to the Campbells, and the premium in the amount of $135.00 was collected by Vaughn and remitted by him to American. The premium was retained by American until October 31, 1966, when the sum of $90.00, representing the return of Richard R. Campbell's premium was deposited into the Registry of the Court by American. American's general agent, one Echlin, was located in El Paso, Texas.

Blakely gave notice to the Campbells of his claim for damages and later sued Campbell, III, in the District Court of Collin County for damages. All notices, demand letters and citations were forwarded by the Campbells to American promptly, but American refused to defend or accept liability under the policy. In April, 1967, by letter, Blakely offered to settle the action for $10,000.00; this offer was communicated to American, which again refused to investigate, negotiate or settle the claim.

Thereafter, in August, Blakely recovered in the Collin County action a judgment in the amount of $88,606.46, plus interest and costs, against Campbell, III.

On or about the time the damage action was filed by Blakely against Campbell, III, in Collin County, Campbell, Jr., brought an action for declaratory judgment in Lubbock County District Court against American to have the rights and duties under the policy determined. American removed this action to the Federal Court for the Northern District of Texas, Lubbock Division, where it remained until consolidated with this action by Blakely against American in the Dallas Division of the Northern District of Texas. By amended complaint, Campbell abandoned his action for declaratory judgment and sought recovery for breach of the policy contract, to include: (1) recovery of policy limits; (2) attorneys' fees and expenses, including medical expenses; (3) the excess above policy limits resulting from the negligence in refusing to defend and settle the Blakely suit, as well as (4) recovery of $50.00 paid on the excess judgment.

American joined issue denying that it was liable asserting that at the time of the collision in question it did not have any coverage on Richard R. Campbell, III, claiming that it had cancelled the policy of insurance in accordance with the provisions of the policy originally issued to Campbell, III.

Plaintiffs filed a motion for partial summary judgment, alleging that prior to the accident in question and prior to the cancellation in question, the agent, Neil Vaughn, had advised the mother of Richard R. Campbell, III, that in the event a cancellation was attempted by the company, to disregard it as he had taken care of things, or words to that effect. The Court granted that motion for partial summary judgment, ordering the defendant to pay the basic limits of the policy to discharge in part the judgment obtained by Blakely against Campbell, as well as medical payments and expenses of defense to Campbell. Thereafter, the matter was reviewed by the trial court and the original action confirmed in a subsequent order. Plaintiffs filed a motion for summary judgment seeking to hold the insurance carrier liable for the total amount of the judgment obtained by Blakely against Campbell on the basis that its refusal to defend and settle the litigation prior to its trial amounted to negligence as a matter of law, subjecting the insurance carrier to an excess judgment even though the policy limits were $10,000.00. In addition, the plaintiffs filed a motion to suppress, seeking to suppress all evidence of reasons for the refusal to defend on the part of the insurance carrier. The motion to suppress was sustained and the trial court also sustained the motion for summary judgment granting judgment providing affirmation of the partial summary judgment previously entered, also holding that the insurance carrier was liable for the total amount of the judgment obtained by Blakely against Campbell.

The two main thrusts of American's appeal assert error by the District Court in holding: (1) that American's attempt to cancel the policy was ineffective because of the actions of its recording agent Vaughn, and (2) the sustaining of plaintiffs' motion for summary judgment holding American liable for the total amount of the judgment obtained by Blakely against Campbell on the basis that its refusal to defend and to settle the litigation prior to its trial amounted to negligence as a matter of law, subjecting American to the excess judgment above the policy limits of $10,000.00. We affirm the District Court's granting of the motions for summary judgment.

Before considering the question of cancellation of the policy, it becomes necessary to narrate the circumstances surrounding the issuance of the American policy in question. It is undisputed that at all relevant times Neil Vaughn was a duly licensed local recording agent of American in Lubbock, Texas, and on October 8, 1965, American issued its liability policy covering Campbell, III, said policy being signed by Vaughn as authorized representative, and the policy premium in the amount of $135.00 was paid on October 8, 1965.

On November 23, 1965, American, through its general agents in El Paso, Texas, wrote Mr. Vaughn and stated, "Unfortunately, due to the insured's driving record, we will not be in a position to provide coverage." Mr. Vaughn answered with a plea "to go along because of the supporting business and the improved conditions of the boy."

On December 21, 1965, the general agents again wrote Vaughn and again asked for a replacement. Vaughn replied, "I need some help on this risk * * * please."

Vaughn heard nothing further from his company after he replied to the letter of December 21st until after the accident. On April 27, 1966, he received a credit memo reciting that the policy was "canceled for nonpayment of budget contract," although the premium had been paid in full at the time the policy was issued.

Sometime in late December or early January Vaughn related the following conversation with Mrs. Campbell, who handled all transactions for the Campbell family:

"Q. Will you please go ahead and tell us everything that was said to you.

"A. I mentioned to Mrs. Campbell that I had had some previous correspondence on the policy, but that I had heard, of course, nothing from the last letter, and that I assumed everything had been taken care of with the company, but in case she received anything in the mail or heard anything on it, to disregard it, that I\'d taken care of it.

"Q. This would be in the nature of a cancellation notice or something of that order? Was that what you were referring to?

"A. Well, I did not anticipate a cancellation notice as I assumed this case would be handled like all the other automobile policies.

"Q. But you assured her if she got anything in the mail to just ignore it?

"A. That\'s right.

"Q. Her policy on R. R. Campbell with this insurance company was perfectly all right?

"A. That\'s right."

Mrs. Campbell remembered the conversation in similar terms.

She testified that she and her son received the notice of cancellation and disregarded it as they had been told to do. She also testified that sometime later, but before the accident, she advised Vaughn "that notice came, and we ignored it as you instructed".

Asked by appellant's counsel why she did nothing about her son's policy after the notice of cancellation was received, she stated that she did nothing because Vaughn had told her "that the notice of cancellation was to be ignored, that it was being sent by mistake".

The District Court correctly held that the attempt to cancel the Campbell, III, policy was ineffective. Under Erie¹ the federal courts, in this type case, are bound by the substantive laws of Texas, and the scope of the recording agent's authority must be governed by Texas law. It is undisputed that during all times pertinent to this transaction Neil Vaughn was the appointed local recording agent for American. Texas Insurance Code, Vernon's Annot.Civil Stats., Art. 21.14, Sec. 2, reads in part (material to this issue):

"Sec. 2. Definitions; Certain Orders, Societies or Associations Not Affected. — By the term `Local Recording Agent\' is meant a person * * * engaged in soliciting and writing insurance, being authorized by an insurance company * * * to solicit business and to write, sign, execute, and deliver policies of insurance, and to bind companies on insurance risks, and who maintain an office and a record of such business and

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