Home Ins. Co. v. Matthews

• Citation: 998 F.2d 305
• Decision Date: 20 August 1993
• Docket Number: No. 92-3851,92-3851
• Parties: The HOME INSURANCE COMPANY, Plaintiff-Appellant, v. Michael J. MATTHEWS, et al., Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 305

998 F.2d 305

26 Fed.R.Serv.3d 939

The HOME INSURANCE COMPANY, Plaintiff-Appellant, v. Michael J. MATTHEWS, et al., Defendants-Appellees.

No. 92-3851.

United States Court of Appeals, Fifth Circuit.

Aug. 20, 1993.

John J. Hainkel, III, Walter F. Marcus, III, New Orleans, LA, for plaintiff-appellant.

Shelly D. Dick, Gary, Field, Landry & Dornier, Baton Rouge, LA, for Sharon Carder Tabler.

Anatole J. Plaisance, Baton Rouge, LA, for Sharlene Johnston.

Denise A. Vinet, Baton Rouge, LA, for Michael Dulane.

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

Before WISDOM, DAVIS, and SMITH, Circuit Judges.

WISDOM, Circuit Judge.

The question in this case is whether an insurance company waived its right to void a legal malpractice policy because the insured misrepresented his knowledge of malpractice claims against him. In this diversity case, Louisiana authorities compel this Court to hold that the insurer has waived its right. We AFFIRM the judgment of the district court.

I.

Michael J. Matthews, a Louisiana lawyer and a notary public, applied to The Home Insurance Company (Home Insurance) for malpractice insurance. A policy was issued to him on August 28, 1986 for one year. A second application to renew the policy was signed July 3, 1987, and this policy was also for one year. Both the original policy application and the second application contained the following question:

Does any lawyer in question 5(A) [Matthews] know of any circumstance, act, error, or omission that could result in a professional liability claim against him or his predecessor in business?

On both occasions, Matthews answered this question "No".

On September 28, 1988, Matthews sought to renew his policy for one year. He attached to his renewal application ¹ sixteen supplemental claims forms relating to settlement disputes with clients. Because of the many attached claims, Home Insurance declined to renew Matthews' policy. It did not, however, terminate the policy. Notice of non-renewal was mailed to Matthews on November 8, 1988.

Under Louisiana law, if a commercial insurance policy is not renewed, "coverage shall remain in effect under the same terms and conditions until sixty days after notice is mailed or delivered". ² Home Insurance continued the policy during this period, and Matthews paid a pro-rated premium on or about January 25, 1989.

The insurance contract in pertinent part provides:

If the company shall cancel or refuse to renew the policy for reasons other than the named insured's non-payment of premiums and/or deductibles or non-compliance with the terms and conditions of this policy, then the named insured upon payment of an additional premium as set forth herein shall have the option to extend the insurance afforded by this policy subject otherwise to its terms, limit of liability, exclusions and conditions, to apply to claims first made against the insured during (a) 12 months, (b) 24 months, or (c) 36 months, as elected by the named insured, following immediately upon the effective date of such termination, but only by reason of any act, error or omission in professional services rendered before such effective termination date and otherwise covered by this insurance.

Matthews purchased this optional reporting period for the 36 month term on or about January 25, 1989.

On July 11, 1989, Home Insurance sought a declaratory judgment that the policies and the extended reporting period coverage be declared void ab initio based upon Matthews' negative answer to the question of whether he knew of any reason to suspect that a malpractice claim could be brought against him. Matthews had acted dishonestly in the practice of law. We need not document his multiple transgressions; Matthews pleaded guilty on June 20, 1988 to five counts of forgery and five counts of felony theft of clients' funds. Two of the guilty pleas involved conduct that occurred before Matthews signed the 1986 application, and two more involved conduct that occurred before the 1987 renewal application. On October 27, 1988, the Louisiana Supreme Court disbarred Matthews.

Matthews asserted an affirmative defense to Home Insurance's claim of no coverage. At trial, the company made a motion in limine to strike Matthews' affirmative defense because, Home Insurance argued, Federal Rule of Civil Procedure 8(c) had not been complied with. The district court denied this motion. At the close of Home Insurance's case-in-chief, Matthews moved for judgment as a matter of law. The district court granted this motion and ruled that as a matter of law, Home Insurance had waived its right to assert a defense to liability based on Matthews' responses on his insurance applications. This appeal followed.

II.

Federal Rule of Civil Procedure 8(c) requires that

In pleading to a preceding pleading, a party shall set forth affirmatively accord and satisfaction, arbitration and award, assumption of risk, contributory negligence, discharge in bankruptcy, duress, estoppel, failure of consideration, fraud, illegality, injury by fellow servant, laches, license, payment, release, res judicata, statute of frauds, statute of limitations, waiver, and any other matter constituting an avoidance or affirmative defense. When a party has mistakenly designated a defense as a counterclaim or a counterclaim as a defense, the court on terms, if justice so requires, shall treat the pleading as if there had been a proper designation.

Matthews raised an affirmative defense in the pre-trial stipulations of April 13, 1992:

1. The Home is equitably estopped by its acts and/or the acts of its agent, Gilsbar, Inc., from declaring the policy it issued to Matthews null and void ab initio, since The Home extended Matthews' reporting period and his policy period for minimal premiums after The Home and Gilsbar had been notified of sixteen claims pending against Matthews for his alleged failure to disburse settlement proceeds to this[sic] clients and/or for his alleged unauthorized settlement of his clients' cases.

Matthews' defense, however, is not one of estoppel but waiver. Indeed, he perhaps realized this when preparing the special jury instructions. There, under the general heading "Estoppel", part a. is titled "Waiver". In the most frequently cited commentary on waiver and estoppel in Louisiana insurance law, Matthews' defense that Home Insurance accepted premiums is discussed as waiver. ³ This commentary, however, acknowledges that, "Much confusion surrounds the principles of waiver and estoppel in insurance law. Many courts have used the two terms interchangeably, while others have considered waiver and estoppel as being complementary, that is, that waiver must be supported by estoppel, or estoppel is the result of waiver." ⁴ On this very point of acceptance of premiums, although many Louisiana courts analyze the problem in terms of waiver, ⁵ Justice Tate (as he then was) wrote for the Louisiana Supreme Court that, "under the circumstances here shown, the insurer is estopped from denying liability ... when it has accepted premiums with knowledge...." ⁶ Moreover, in a case involving a misrepresentation by the insured which was later discovered by the insurer who nevertheless chose to continue to receive premium payments, the Louisiana Supreme Court discussed the issue in terms of both waiver and estoppel. ⁷ Even Home Insurance which argues that it was prejudiced by the failure of Matthews to designate the defence as waiver rather than estoppel, on one occasion in its brief blurs the distinction between the two: "the doctrine of estoppel or waiver is recognized as being founded upon equity...." (Brief at 13).

If we were concerned only with notice pleading under rule 8(b), this Court would excuse the mislabelling on the principle that the rules "contemplate the greatest liberality in pleading". ⁸ The words "set forth affirmatively" in rule 8(c), however, would seem to demand more than mere notice. This Court, in the early years under the regime of the new federal rules, held that the liberal spirit also applied to rule 8(c): "Under our very liberal rules of pleading, although a plea of contributory negligence must be affirmatively set forth, it need not be predicated upon extensive factual allegations. A plea that simply states that complainant was guilty of contributory negligence, as in the case at bar, is sufficient." ⁹ In that case, the defendant had at least set forth the name of the affirmative defense he was pleading. In this case Matthews pleaded estoppel when waiver was the proper term. The Court of Appeals for the Second Circuit once noted in the context of an affirmative defense that the pleading seemed "to state the defense of estoppel rather than waiver". ¹⁰ In that case, however, the defendant merely pleaded bad faith; it was the district court which sua sponte raised the affirmative defense, and the Court held that the lack of notice prejudiced the plaintiff.

In reading rule 8(c), this Court attempts "to do substantial justice" and will forgive "technical failure to comply precisely with Rule 8(c)" if the matter is raised in such a manner so as not to "result in unfair surprise". ¹¹ In Bull's Corner Restaurant, this Court held that when the defendant sufficiently articulated the defense so that the plaintiff was not a victim of unfair surprise, the requirements of rule 8(c) were satisfied. ¹²

Home Insurance argues that it is prejudiced by substituting waiver for estoppel. Home Insurance is entirely correct that the proper defense was waiver, and that the elements of waiver and estoppel are different. Justice Dennis, for the Louisiana Supreme Court, defined waiver as "the intentional relinquishment of a known power or privilege". ¹³ Equitable estoppel is founded on detrimental reliance on the representations of the other party. ¹⁴ Two factors here, however, mitigate any prejudice. Matthews, while labelling the defense as estoppel, set forth...