Boudreaux v. Fireman's Fund Ins. Co., 81-3005

• Citation: 654 F.2d 447
• Decision Date: 28 August 1981
• Docket Number: No. 81-3005,81-3005
• Parties: Wilfred H. BOUDREAUX, Plaintiff-Appellee, v. FIREMAN'S FUND INSURANCE COMPANY, Defendant-Appellant. Summary Calendar. . Unit A
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 447

654 F.2d 447

Wilfred H. BOUDREAUX, Plaintiff-Appellee, v. FIREMAN'S FUND INSURANCE COMPANY, Defendant-Appellant.

No. 81-3005

Summary Calendar.

United States Court of Appeals,

Fifth Circuit.

Unit A

Aug. 28, 1981.

Gerard M. Dillon, New Orleans, La., for defendant-appellant.

Rene Pastorek, Thomas L. Gaudry, Jr., Daniel A. Ranson, Gretna, La., for plaintiff-appellee.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before BROWN, POLITZ and TATE, Circuit Judges.

JOHN R. BROWN, Circuit Judge:

Wilfred H. Boudreaux brought this action originally to recover major medical expenses under an insurance policy for members of the Louisiana State Bar Association issued by defendant/appellant, Fireman's Fund. The events leading to the case are undisputed and were submitted to the District Court upon stipulations and briefs of counsel. Judgment was rendered in favor of Boudreaux for $26,166.53 with an additional $1,710 in attorney's fees plus 12% interest on the amount of loss. The interest award was based on the Court's finding that the Company's declination of coverage and liability under the policy's terms was arbitrary and capricious. Fireman's Fund appeals this judgment and seeks a determination of two issues: (i) whether or not the insurance contract provided coverage for expenses occurring after the dependent son ceased to be covered by the policy, but whose sickness had its origin while the son was still insured, and (ii) whether the Company's denial of liability was so arbitrary and capricious as to entitle the insured to a recovery of attorney fees plus 12% interest on the amount of loss.

AMBIGUITY?

John C. Boudreaux, age twenty-four, graduated from Tulane School of Law in May 1978. In late July and early August of that summer, he began to develop eye problems which eventually led to a diagnosis of reticulum cell sarcoma of the brain. From August until his death in March 1979, a total of $26,166.53 in medical expenses was incurred in combating the disease. The Court found it undisputed that John C. Boudreaux was an "insured dependent" under the terms of the policy, ¹ but at the time the medical expenses were actually incurred, he had ceased to be an "insured dependent" because he was no longer a full time student.

However, based on the reports in the record by attending physicians, the Court went on to find that because the onset of decedent's sickness commenced approximately six months prior to any overt symptomatology, he was an "insured dependent" under the terms of the policy at the time his illness commenced. Thus, the insurer was obligated to pay those reasonable medical expenses incurred as a result of that sickness, notwithstanding that the expenses themselves were not incurred until after coverage terminated. The resolution to the present appeal, therefore, centers on the correct interpretation of clause 1 of the policy which details when expenses are incurred.

When, as a result of injury or sickness and commencing while this insurance is in force as to an insured person, such insured person incurs expenses listed in section three, the company will pay ... reasonable expenses actually incurred ... as a result of any one period of sickness ... (emphasis supplied)

Fireman's Fund argues that the provision is clear and unambiguous, and does not provide coverage with respect to expenses incurred as a result of a sickness that commences while a "dependent insured" is still an insured under the policy where his sickness is not discovered or diagnosed and no expenses are incurred until he no longer is covered. Simply stated, the actual loss must have occurred while the policy was in force.

According to Fireman's Fund's interpretation of the provision, there are two conditions which must be met in order for coverage to follow: (i) as a result of injury or sickness, such insured person incurs expense and (ii) commencing while this insurance is in force as to an insured person, such insured person incurs expense. It is their position that the rules of construction in interpreting contracts requires the Court to construe the word "and" as a conjunctive which is its plain, common and usual significance. Bergholm v. Peoria Life Insurance Co., 284 U.S. 489, 492, 52 S.Ct. 230, 231, 76 L.Ed. 416, 419 (1932); Calcasieu-Marine National Bank of Lake Charles v. American Employers Insurance Co., 533 F.2d 290, 295-96 (5th Cir. 1976); Muse v. Metropolitan Life Insurance Co., 193 La. 605, 192 So. 72, 75 (1939); Floyd v. Pilot Life Insurance Co., 135 So.2d 546, 548 (La.App.1961). Variance from this rule is only if a word is used as a "term of art", in which case its meaning in the area for which it is a term of art is applied. See LSA-C.C. Art. 1947; Reliance Insurance Co. v. Orleans Parish School Board, 322 F.2d 803, 806, cert. denied, 377 U.S. 916, 84 S.Ct. 1180, 12 L.Ed.2d 186 (1963). Such is not the case here argues Fireman's Fund.

Although Boudreaux agrees with Fireman's Fund designation of the word as a conjunctive, he disagrees with the phrase which it conjoins. Instead, Boudreaux submits that a more reasonable interpretation would be that the word "and" conjoins the phrase which precedes it with the phrase which follows it "as a result of injury and sickness and commencing while the insurance is in force as to an injured person." Boudreaux reenforces this interpretation by calling attention to the comma which separates the phrase referring to injury and sickness which commences during the policy period, and the phrase regarding expenses the company will pay. Because a comma's primary function is to separate ideas within a sentence, it is logical, asserts Boudreaux, to assume that the phrase "commencing while the insurance is in force ..." modifies the phrase "injury and sickness" rather than "expenses." This is also the most logical interpretation from the insurer's view point because it indicates that the insurer will not pay for pre-existing injury or sickness.

In assessing these two arguments, the District Court concluded that clause 1, coupled with the policy definition of sickness ² rendered the policy ambiguous and susceptible to two different interpretations producing opposite results. Clause 1 could be interpreted as requiring only that the expense be incurred as a result of sickness and that the sickness commence while the insurance is in force or that the expense be the result of sickness and that the expense be incurred while the insurance is in force as to the insured. Consequently, if the policy language is not found to be clear, the rules of construction and interpretation require a construction favorable to the insured to provide coverage. ³ Under these circumstances the Court found coverage. Agreeing with the Court's analysis and supportive legal reasoning, we affirm the ultimate finding of liability against Fireman's Fund.

STATUTORY PENALTIES ^*

Fireman's Fund also challenges the District Court's award of statutory penalties and attorney's fees pursuant to LSA-R.S. 22:658, which provides that where the insurer's failure to make payment is found to be arbitrary, capricious, or without probable cause, the insured is entitled to an award of twelve percent (12%) of the total amount due with reasonable attorney's fees for the prosecution of the claim. ⁴ We must determine whether Fireman's Fund's failure to make timely payments to the insured was arbitrary, capricious or without probable cause within the intendment of this statute.

The district court and Boudreaux rely on language from the Supreme Court of Louisiana in Carney v. American Fire and Indem. Co., 371 So.2d 815, 819 (La.1979), to support a penalties and attorney's fees award:

An insurer's liability to pay penalties and attorney's fees is based on whether their action in denying coverage is arbitrary, capricious and without probable cause. LSA-R.S. 22:658. An insurer must take the risk of misinterpreting its policy provisions. If it errs in interpreting its own insurance contract, such error will not be considered as a reasonable grounds for delaying the payment of benefits, and it will not relieve the insurer of the payment of penalties and attorney's fees. Albert v. Cuna Mutual Insurance Society, 255 So.2d 170 (La.App. 3rd Cir. 1971) and cases therein decided.

Accord, Sanders v. General American Life Ins. Co., 364 So.2d 1373, 1378 (La.App.3d Cir. 1978); Rushing v. American Income Ins. Co., 274 So.2d 458, 460 (La.App.3d Cir. 1973).

Noting that in Carney the award of penalties and attorney's fees were reversed and in view of the subsequent decision by the Louisiana Supreme Court in Rudloff v. Louisiana Health Services and Indem. Corp., 385 So.2d 767 (La.1980), (on rehearing), and the concerns we voiced in Offshore Logistics Services, Inc. v. Arkwright-Boston Manufacturers Mut. Ins. Co., 639 F.2d 1142 (5th Cir. 1981), a critical examination of LSA-R.S. 22:657-58 and interpretative jurisprudence is in order.

As a general proposition, if an insurance policy is ambiguous, the court will adopt any reasonable interpretation which favors the insured. Calcasieu-Marine Nat'l Bank v. American Employers Ins., 533 F.2d 292 (5th Cir. 1977); Graham v. Equity Nat'l Life Ins. Co., 373 So.2d 988 (La.App.3d Cir. 1979). An insurer is not precluded from seeking a judicial determination of its contractual liability, Cotlar v. Gulf Ins. Co., 318 So.2d 923 (La.App. 4th Cir. 1975), but it must bear the expenses of that determination and shoulder the risk of penalties and attorney's fees should its interpretation of the policy prove erroneous. Carney, supra. See Smith v. Reserve Nat'l Ins. Co., 370 So.2d 186 (La.App.3d Cir. 1976).

The statutory scheme is apparent; insurers are discouraged from lightly denying coverage. An unreasonable denial will result in a sanction in the form of an award of attorney's fees and assessment of a penalty. Under R.S. 22:657 an insurer may dispute coverage of a health and accident...