Great Southwest Fire Ins. Co. v. CNA Ins. Companies

• Decision Date: 12 March 1990
• Docket Number: 89-CC-1939,Nos. 89-CC-1938,s. 89-CC-1938
• Citation: 557 So.2d 966
• Parties: GREAT SOUTHWEST FIRE INSURANCE COMPANY v. CNA INSURANCE COMPANIES, et al. 557 So.2d 966
• Court: Louisiana Supreme Court

Page 966

557 So.2d 966

GREAT SOUTHWEST FIRE INSURANCE COMPANY v. CNA INSURANCE COMPANIES, et al.

Nos. 89-CC-1938, 89-CC-1939.

557 So.2d 966

Supreme Court of Louisiana.

March 12, 1990.

Alfred Landry, Landry, Watkins & Bonin, New Iberia, for applicant/respondent.

David Hurlburt, Fontenot, Andrus & Preis, Lafayette, for respondent/applicant.

DENNIS, Justice.

This is a suit by Great Southwest Fire Insurance Company, an excess liability insurance carrier, against Transportation Insurance Company, a primary liability insurance carrier. It seeks to recover sums that Great Southwest had to pay due to the alleged bad faith failure of Transportation to defend properly and settle a lawsuit against their common insured, Contract Cleaners, Inc. Whether the excess insurer can recover from the primary insurer, either directly or as subrogee of the insured, is the only question in this case.

The facts are these: John C. Youngblood was injured when he slipped and fell on a slate floor upon which Contract Cleaners had performed sealing work. Youngblood sued Contract Cleaners and obtained a judgment in the principal sum of $396,137.43. Youngblood did not sue Contract Cleaners' primary insurer, Transportation, or its excess insurer, Great Southwest. Nevertheless, Transportation defended Contract Cleaners and the two insurers paid the judgment. Transportation paid its primary policy limits of $300,000 plus interest, a total of $323,560. On September 9, 1986, Great Southwest paid $110,043.81, the amount recovered in excess of the primary policy limits plus interest.

Great Southwest filed this suit against Transportation for judgment in the amount of $110,043.81 plus interest, fees and costs, alleging that the excess of Youngblood's judgment over Transportation's policy limits was caused by the primary insurer's bad faith failure to settle within the policy limits and to properly defend the interests of the insured, Contract Cleaners. Plaintiff alleges that it was damaged directly by the bad faith conduct of Transportation which caused it to be liable for the excess judgment and, further, that upon paying its share of the judgment against the insured it became conventionally and legally subrogated to the insured's right of action against Transportation. In the trial court an exception of no right or cause of action was overruled. The Court of Appeal refused to review this ruling, but we subsequently ordered it to do so. Great Southwest Fire Ins. Co. v. CNA Ins. Co., 533 So.2d 3 (La.1988). After the Court of Appeal's review, it affirmed the trial court's judgment overruling the exception, reasoning that, while Great Southwest had no independent or direct right of action against Transportation, plaintiff could assert the insured's right acquired through legal and conventional subrogation against Transportation for damage caused by Transportation's bad faith conduct. Great Southwest Fire Ins. Co. v. CNA Ins. Co., 547 So.2d 1339 (La.App. 3d Cir.1989). We granted writs to both plaintiff and defendant to consider whether the plaintiff has its own right that it may assert against the defendant directly and whether it may assert the right of the insured through subrogation. Great Southwest Fire Ins. Co. v. CNA Ins. Co., 551 So.2d 1309, 1310 (La.1989).

The principle that good faith shall govern the conduct of the obligor and the obligee in whatever pertains to the obligation applies generally to all kinds of obligations, regardless of their origin. La.C.C. art. 1759. See also Expose Des Motifs, La.Stat.Ann.C.C. Obligations 1987 Sp.Pamph. p. 2; 2 S. Litivinoff, Obligations Secs. 4, 5 in 7 Louisiana Civil Law Treatise (1975); A. Levasseur, Louisiana Law of Obligations in General 28-29 (1988). Consequently, there is no doubt that under the alleged facts the insured, Contract Cleaners, would have had a right to recover from Transportation any excess judgment caused by Transportation's failure to perform its obligations to conduct settlement negotiations and defend in good faith. See, e.g. Holtzclaw v. Falco, 355 So.2d 1279 (La.1978) (on rehearing); Hodge v. American Fidelity Fire Ins. Co., 486 So.2d 233 (La.App. 3d Cir.) writ denied, 489 So.2d 917 (La.1986); Bowen v. Government Employees Ins. Co., 451 So.2d 1196 (La.App. 5th Cir.1984); Domangue v. Henry, 394 So.2d 638 (La.App. 1st Cir.1980); Champion v. Farm Bur. Ins. Co., 352 So.2d 737 (La.App. 3d Cir.1977); Cousins v. State Farm Mut. Ins. Co., 294 So.2d 272 (La.App. 1st Cir.) writ refused, 296 So.2d 837 (La.1974); Younger v. Lumbermen's Mut. Ins. Co., 174 So.2d 672 (La.App. 3d Cir.) writ refused, 247 La. 1086, 176 So.2d 145 (1965); Comment, Duty of Insurer to Settle, 30 La.L.Rev. 622 (1970).

We see no error in the Court of Appeal's conclusion that Great Southwest became conventionally and legally subrogated to Contract Cleaners' right against Transportation when Great Southwest performed the obligation that the primary insurer owed its insured because of its failure to perform in good faith. The thrusts of Transportation's argument against this conclusion are that, in general, no subrogation occurred because the insured, which ultimately sustained no loss, had no right or action to subrogate; that conventional subrogation did not take place because Great Southwest had an independent obligation to pay the excess judgment; and that legal subrogation did not take place because Transportation and Great Southwest were not bound with each other to pay the excess judgment. But each of these contentions is without merit.

Performance, which is the normal mode of extinction of an obligation by an obligor, may also be rendered by a third person, unless the obligor or the obligee has a specific interest in the obligation being fulfilled by the obligor personally. La.C.C. arts. 1854, 1855. See also Levasseur, supra at 200-201; S. Litvinoff, The Law of Obligations in the Louisiana Jurisprudence 614 (1979); 4 C. Aubry & C. Rau, Droit Civil Francois Sec. 316 (6th ed. Bartin) in A. Yiannopoulos, 1 Civil Law Translations 156, 157 (1965); 2 M. Planiol, Civil Law Treatise, pt. 1 No. 400 (11th ed. La.St.L.Inst. trans. 1959). Performance by a third person causes subrogation to take effect when authorized by law or by agreement. La.C.C. art. 1855. Accordingly, when the creditor receives his payment from a third person who, by operation of law or by virtue of contract, is substituted in his rights, this payment effects a change in the person of the creditor rather than an extinction of the obligation. La.C.C. art. 1855. See also Aubry & Rau, supra Sec. 315 at 156. Transportation argues that it never became obliged to Contract Cleaners to repair the damage done by the primary insurer's bad faith conduct because Great Southwest had issued a policy to Contract Cleaners insuring against liability in excess of the primary insurance limits. But this is a non sequitur. The fact that an obligation created by the contract or the wrongful act of an obligor may be performed by a third person does not prevent the obligation from arising. Otherwise, even a tortfeasor would not be obliged to repair the damage to another caused by his fault whenever insurance was potentially available to compensate for the injury.

There is no requirement that the third person who performs the obligation must be disinterested in the obligation or its performance in order to be conventionally subrogated. The Civil Code provides simply that an obligee who receives performance from a third person may subrogate that person to the rights of the obligee, even without the obligor's consent, subject to the rules governing assignment of rights. La.C.C. art. 1827. There is no prohibition in the rules pertaining to assignment of rights against the transfer of credits, rights or claims to a third person with an interest in the performance of the obligation. La.C.C. art. 2642 et seq. Thus, subrogation by the consent of the creditor is always possible. Planiol, supra No. 479. The creditor, on receiving payment from a person other than the debtor, can always accord him subrogation to assure his recourse, just as he is always free to refuse it conventionally. Planiol, supra No. 479. In our experience, the vast majority of subrogees, such as insurer subrogees, have a preexisting interest in the performance of the obligation before becoming substituted to their creditors' rights against their codebtors.

Legal subrogation takes place when an obligor pays a debt he owes with others or for others and who has recourse against those others as a result of the payment. La.C.C. art. 1829(3). Transportation argues that Great Southwest did not become subrogated under this provision to the insured's claim against it for damages due to its failure to perform in good faith because Great Southwest did not owe the debt with or for Transportation. It is well established, however, that an obligor owes a debt with or for another if he is solidarily obliged with that person to perform the obligation. Planiol, supra No. 501; Levasseur, supra at 168; Aubry & Rau, supra Sec. 321 at 202. It also seems clear that Transportation and Great Southwest were solidarily obliged to the insured to pay on its behalf the portion of the judgment in excess of the primary policy limits.

The essential elements of a solidary obligation are that the obligors are obliged to the same thing, that each is liable for the whole performance, and that the payment by one relieves the others of liability toward the obligee. La.C.C. art. 1794. See also Fertitta v. Allstate Ins. Co., 462 So.2d 159 (La.1985); Narcise v. Illinois Central Gulf R. Co., 427 So.2d 1192 (La.1983); Hoefly v. Government Employees Ins. Co., 418 So.2d 575 (La.1982); Sampay v. Morton Salt Co., 395 So.2d 326 (La.1981); Foster v. Hampton, 381 So.2d 789 (La.1980); Pearson v. Hartford Acc. & Indem. Co., 281 So.2d 724 (La.1973). Transportation and Great Southwest were each obliged to pay off the portion of the judgment against the...