Evanston Ins. Co. v. Jimco, Inc.

• Decision Date: 17 May 1988
• Docket Number: No. 87-3605,87-3605
• Citation: 844 F.2d 1185
• Parties: EVANSTON INSURANCE COMPANY, Plaintiff-Appellant Cross-Appellee, v. JIMCO, INC., et al., Defendants-Appellees, and Chromalloy Natural Resources Co., Defendant-Appellee, the Cajun Company, Duke Transportation, Inc. and Duke Equipment, Inc., Defendants-Appellees, Cross-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1185

844 F.2d 1185

EVANSTON INSURANCE COMPANY, Plaintiff-Appellant Cross-Appellee, v. JIMCO, INC., et al., Defendants-Appellees and Chromalloy Natural Resources Co., Defendant-Appellee the Cajun Company, Duke Transportation, Inc. and Duke Equipment, Inc., Defendants-Appellees, Cross-Appellants.

No. 87-3605.

United States Court of Appeals Fifth Circuit.

May 17, 1988.

Allen D. Darden, H. Alston Johnson, III, Baton Rouge, for Evanston ins. co.

S. Gene Fendler, James A. Brown, New Orleans, La., for Chromalloy Natural Resources Co., et al.

Richard M. Eustis, Charles A. Nunmaker, New Orleans, La., for Peterson Maritime Services, Inc.

Colleen McDaniel, Lafayette, La., for Duke Transp., Inc. and Duke Equipment.

Peter J. Butler, Richard M. Ireland, New Orleans, La., Madison C. Moseley, Metairie, La., for Fairgrounds Corp. John V. Baus, Jr., Metairie, La., for E.B. Ludwig.

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

Before RUBIN and POLITZ, Circuit Judges, and LEE ^*, District Judge.

ALVIN B. RUBIN, Circuit Judge:

Invoking diversity jurisdiction, an insurer who had been sued in more than 20 different state court actions filed a declaratory judgment action in federal court, seeking a judgment that its policy did not cover any of the claims asserted. The district court decided that it should abstain because the pendency of the same issues in the various state court actions was an exceptional circumstance warranting refusal to exercise federal jurisdiction. Because we read controlling Supreme Court precedent in Colorado River Water Conservation District v. United States ¹ and Moses H. Cone Memorial Hospital v. Mercury Construction Corp. ² differently, we hold that the court should entertain the declaratory judgment action.

I.

North-West Insurance Company, an Oregon insurer now in the process of liquidation, was not admitted to write insurance in Louisiana. Its wholly owned subsidiary, Mid-Continent Underwriters, which has filed proceedings under Chapter 7 of the Bankruptcy Code, was licensed as an insurance agent and surplus lines broker in Louisiana. Mid-Continent placed with North-West a number of policies of liability insurance covering Louisiana businesses. Evanston Insurance Company, an unrelated company, had issued an errors and omissions policy covering Mid-Continent and its officers, directors, and agents.

The obligations to its insureds that North-West could not fully discharge at the time it was placed in liquidation included claims asserted against many of the Louisiana businesses that would have been covered by North-West policies. Claimants against these Louisiana businesses have filed at least 20 suits based on such claims in various state courts. In their posture as defendants in these state court suits, the Louisiana businesses have filed third-party claims against Evanston in its capacity as the errors and omissions carrier for Mid-Continent. The businesses assert that the North-West policies would have afforded them protection, Mid-Continent violated its obligations to them as North-West's insureds or committed other derelictions, and consequently Evanston is liable to them under the errors and omissions policy it had issued to Mid-Continent.

Evanston contends that, whatever the nature of Mid-Continent's negligent or intentional fault in placing policies with North-West, the liability that the Louisiana businesses assert results from the insolvency of North-West. It therefore contends that an exclusion in the errors and omissions policy negates coverage. That provision excludes any coverage under the policy with respect to:

... claims based upon, arising out of, due to or involving directly or indirectly the insolvency, receivership, bankruptcy, liquidation or financial inability to pay, of any insurance company in which the Insured has placed or obtained coverage for a client or an account ...

Evanston's policy also excludes coverage for claims for intentional commission of a knowingly wrongful act or omission.

Because the plaintiffs in the state court actions were not diverse in citizenship from the principal defendants, whom North-West had insured, Evanston could not remove the state court actions to federal court. The Louisiana businesses named as defendants were, however, diverse in citizenship from Evanston. Accordingly, Evanston filed suit in federal district court naming as defendants each of the businesses that had been insured by North-West under policies placed by Mid-Continent, seeking a declaratory judgment that the errors and omissions policy does not cover the third-party claims. Evanston contended that the provision quoted above excludes each of the third-party claims from the policy's coverage because each claim arose directly or indirectly from the financial plight of North-West. The businesses responded by filing counterclaims asserting coverage and alleging various factual and legal bases for their contentions that Mid-Continent either had been negligent in placing policies with North-West or had placed the policies with North-West intentionally despite its knowledge that North-West was insolvent.

Some of the insured Louisiana businesses that are defendants in the federal court action contended that the district court lacked jurisdiction because the diversity jurisdiction statute, 28 U.S.C. Sec. 1332(c), denies federal jurisdiction over a direct action against an insurer. These defendants also contended that the action should be dismissed because the federal forum was inappropriate under principles of abstention. The district court held that it had jurisdiction, but dismissed the action because the state forums were more appropriate. 664 F.Supp. 1004. Evanston appeals and only two defendants respond, seeking to uphold the judgment of dismissal.

II.

The Louisiana Direct Action Statute ³ permits an injured party to sue the insurer of the person against whom he asserts a claim. Because this permitted Louisiana residents to file tort claims against non-resident insurers without joining the Louisiana resident who allegedly committed the tort, Louisiana federal courts were inundated with suits based on diversity jurisdiction filed by Louisiana residents who met the requirement of complete diversity by naming only a non-resident insurer as the defendant. Accordingly, in 1964, Congress amended the diversity jurisdiction statute, 28 U.S.C. Sec. 1332, to provide "in any direct action against the insurer of a policy or contract of liability insurance ... such insurer shall be deemed a citizen of the State of which the insured is a citizen," in addition to its other states of citizenship.

As the district court correctly held, the statute by its terms applies only to a direct action "against" the insurer. The phrase "direct action" is a term of art, and neither the statute nor the cases interpreting it support the view that it includes every action in which an insurance company is a party.

The history of the Louisiana Direct Action Statute demonstrates that the statute is a procedural convenience, a telescoping of the actions available to the victim of the alleged conduct of an insured. ⁴ Before adoption of the statute, any litigation was between the victim and the actor, whether insurance existed or not. If the victim won on the merits, the actor would be required to pay the judgment and could then seek indemnity from the insurer, thus necessitating two lawsuits or at least one lawsuit and a claim procedure. If the actor should be insolvent and unable to pay the judgment (and therefore not in need of indemnity), the victim would not be paid and would have no right to seek recovery from the insurer directly.

In order to avoid these problems, the Direct Action Statute gives the victim the right to sue the insurer either jointly with, or without joining, the insured. Such an action is not one by an insured against his own carrier to resolve coverage issues, and it is not one brought by the carrier itself to resolve coverage or other issues, regardless of the defendant. In other words, the fact that an insurer is a "direct" party does not make the litigation a "direct action," and the language of Sec. 1332(c) clearly confirms that view.

Three years after Congress adopted the amendment to Sec. 1332, a federal district court held in Government Employees Insurance Co. v. LeBleu ⁵ that the statute as amended did not preclude a Louisiana non-resident insurer from invoking diversity jurisdiction in an action against Louisiana-resident claimants to seek a declaratory judgment that its insurance policy did not cover a claim. The defendants argued, as the defendants do here, that this was a direct action in reverse, barred by the purpose of the 1964 amendment. The district court held, however, that the action was permitted by the express terms of Sec. 1332, as amended. ⁶

In Campbell v. Insurance Co. of North America, ⁷ we held that Sec. 1332(c) barred the exercise of diversity jurisdiction over a particular type of action by an insurance company against an insured, despite the argument that the action was not a direct action against the insurer. Campbell was not a declaratory judgment action, but involved an unusual state appellate procedure: Texas law provided for appeals from workmen's compensation awards by trial de novo, in which even when the insurer rather than the insured brought the appeal, "the overall proceeding seen as a whole [was] that of a process initiated by the injured work[er] against the insurer" ⁸ with the burden of proof remaining on the injured worker. ⁹ In Dairyland Insurance Co. v. Makover, ¹⁰ we distinguished Campbell and held that Sec. 1332(c) did not bar a declaratory judgment action brought by an insurer seeking a declaration as to coverage. Dairyland controls our resolution of this issue. The district court had jurisdiction.

III.

Having jurisdiction, did the district court err in failing to exercise...