Hartford Underwriters v. Foundation Health Servs.

• Decision Date: 09 April 2008
• Docket Number: No. 07-60023.,07-60023.
• Parties: HARTFORD UNDERWRITERS INSURANCE COMPANY, Plaintiff-Appellant, v. FOUNDATION HEALTH SERVICES, INC., formerly known as Lunch, Inc., Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

524 F.3d 588

HARTFORD UNDERWRITERS INSURANCE COMPANY, Plaintiff-Appellant, v. FOUNDATION HEALTH SERVICES, INC., formerly known as Lunch, Inc., Defendant-Appellee.

No. 07-60023.

United States Court of Appeals, Fifth Circuit.

April 9, 2008.

James Lawson Hester (argued), Jan F. Gadow, Jacqueline H. Ray, Page, Kruger & Holland, Jackson, MS, for Plaintiff-Appellant.

Patricia Joan Kennedy, Michael A. Heilman (argued), Heilman, Kennedy Graham, PA, Jackson, MS, for Defendant-Appellee.

Appeal from the United States District Court for the Northern District of Mississippi.

Before KING, DeMOSS and SOUTHWICK, Circuit Judges.

DeMOSS, Circuit Judge:

Hartford Underwriters Insurance Company ("Hartford") appeals the district court's order denying Hartford's motions for declaratory judgment and partial summary judgment. In denying Hartford's motions and dismissing Hartford's suit, the district court held that the substantive law of Mississippi, not Louisiana, applies to a dispute between Hartford and Magnolia Healthcare, Inc. ("Magnolia") involving reimbursement for attorney's fees. After conducting our own choice of law analysis, we agree with the district court that Mississippi law applies.

BACKGROUND AND FACTS

Foundation Health Services, Inc. ("Foundation") is a Louisiana non-profit corporation that, through its subsidiaries, owns and operates healthcare facilities and nursing homes in seven states. One of its wholly-owned subsidiaries is Magnolia, which itself owns and operates four nursing homes in Mississippi. Magnolia is a Mississippi corporation but maintains its corporate offices in Louisiana.

In 1997 and 1998, Hartford issued several insurance policies to Foundation's predecessor, Lunch, Inc. ("Lunch").¹ The policies provided liability coverage for the operation of each Lunch subsidiary, including Magnolia. The insurance policies named Lunch as the insured, and despite Hartford's arguments to the contrary, the record confirms that the policies named Magnolia as an additional insured. The insurance policies also separately identified the location of Magnolia's four nursing homes by their Mississippi address. It is undisputed that Lunch, and not Magnolia, applied for and procured the policies and that the policies were delivered to Lunch in Louisiana, where Lunch paid the policy premiums.

While the insurance policies were in effect, Magnolia was sued in fourteen civil actions in Mississippi state court, with each suit arising out of Magnolia's operation of its nursing home business in Mississippi. Pursuant to its duties under the insurance policies, Hartford defended Magnolia in each case, but did so under a reservation of rights.² Magnolia also independently retained counsel in the fourteen lawsuits. Thereafter, Magnolia sought reimbursement from Hartford for legal fees incurred by its independently-retained counsel. Hartford declined to pay the fees.

Magnolia and Foundation then filed suit against Hartford in Mississippi state court on October 22, 2004, asserting breach of contract and various tort claims in an effort to recover the legal fees incurred by its independently-retained counsel. On December 3, 2004, Hartford removed to federal court in the Northern District of Mississippi on the basis of diversity. However, prior to learning of the Magnolia/Foundation suit, Hartford filed its own action against Foundation in Louisiana federal court on October 29, 2004. Hartford's suit sought a declaration that it had no duty to pay the legal fees incurred by Magnolia's independently-retained counsel. Pursuant to Foundation's motion, the Louisiana federal court transferred Hartford's suit to the Northern District of Mississippi where the suit brought by Magnolia and Foundation was pending.

Following the transfer, the district court considered the two cases together, although they have never been consolidated. The district court limited discovery in both cases to the issue of which state's law should apply to the attorney's fee dispute. Eventually Hartford filed a motion for declaratory judgment and partial summary judgment in both cases, and Foundation and Magnolia moved for partial summary judgment in the case they originally filed. On November 17, 2006, the district court filed a written order concluding that Mississippi law applied to the dispute. Consequently, the court granted partial summary judgment to Foundation and Magnolia, and denied Hartford's motions in each case. In the case originally brought by Hartford, the denial of Hartford's motion for declaratory judgment resulted in a final judgment dismissing that case. Hartford has timely appealed the dismissal and we presently consider that appeal here. The appeal in the case originally brought by Magnolia and Foundation, case number 07-60010, is disposed of in a separate opinion.

DISCUSSION

A. Standard of review and choice of law principles

"This Court reviews questions of law, including conflicts of law questions, de novo and district court factual determinations for clear error." Abraham v. State Farm Mut. Auto. Ins. Co., 465 F.3d 609, 611 (5th Cir.2006). We also review de novo the dismissal of a declaratory judgment action when the dismissal is based on a question of law. Sobranes Recovery Pool I, LLC v. Todd & Hughes Constr. Corp., 509 F.3d 216, 220 n. 8 (5th Cir.2007).

Magnolia is seeking reimbursement for attorney's fees incurred by its independently-retained counsel in suits where Hartford defended Magnolia under a reservation of rights. Mississippi law requires an insurer defending an insured under a reservation of rights to provide the insured with independent counsel because of the "built-in" conflict that is created. Twin City Fire Ins. Co. v. City of Madison, 309 F.3d 901, 905 (5th Cir.2002) (applying Moeller v. Am. Guar. & Liab. Ins. Co., 707 So.2d 1062, 1069 (Miss.1996)). Conversely, Louisiana law does not require an insurer to furnish independent counsel merely because it defends an insured under a reservation of rights. See Trinity Universal Ins. Co. v. Stevens Forestry Serv., Inc., 335 F.3d 353, 356 (5th Cir.2003) (applying Louisiana law); see also Nat'l Union Fire Ins. Co. of Pittsburgh, Pa., v. Circle, Inc., 915 F.2d 986, 991 (5th Cir. 1990) ("[A]n insurer does not automatically breach its duty to defend merely because it reserves the right to deny coverage under the policy.") (applying Louisiana law).³ Because Foundation would have a viable cause of action to recover the attorney's fees under Mississippi law, but not under Louisiana law, we must conduct a choice of law analysis to determine which law applies. See Zurich Am. Ins. Co. v. Goodwin, 920 So.2d 427, 432 (Miss.2006) ("Choice of law analysis arises only when there is a true conflict between the laws of two states, each having an interest in the litigation."); see also Chapman v. Thrasher Trucking Co., 729 F.Supp. 510, 510 (S.D.Miss.1990) (considering a choice of law analysis necessary only for conflicts "hav[ing] a significant effect on the outcome of the case").

Sitting in diversity, we apply the choice of law rules of the forum state to determine which state's substantive law applies. In re Katrina Canal Breaches Litig., 495 F.3d 191, 206 (5th Cir.2007). The forum state, Mississippi, resolves choice of law issues by applying the following steps: (1) determine whether the laws at issue are substantive or procedural; (2) if substantive, classify the laws as either tort, property, or contract; and (3) look to the relevant section of the RESTATEMENT (SECOND) OF CONFLICT OF LAWS. See Zurich, 920 So.2d at 433-34.

Regarding the first step, we conclude that this issue is substantive in nature. "[T]he law of the forum determines whether an issue in the action is substantive or procedural in nature." 1A C.J.S. Actions § 41. In Mississippi, "few laws are classified as procedural" and for choice of law purposes the Mississippi Supreme Court has labeled as procedural only rules of evidence and procedure, statutes of limitations, and awards of attorney's fees and interest. See Zurich, 920 So.2d at 433. While this dispute generally involves reimbursement for attorney's fees, the more precise issue is whether an insurer must provide an insured with independent counsel when defending them under a reservation of rights. Because resolution of this issue determines whether Foundation "has a viable cause of action," and not merely whether a party is entitled to attorney's fees for prevailing in a particular case, the issue is substantive. See Hancock v. Watson, 962 So.2d 627, 629 (Miss.Ct.App.2007); see also Zurich, 920 So.2d at 433.

Second, the parties assert, and we agree, that this issue is contractual in nature. Finally, regarding the third step, Mississippi courts seek to determine the "center of gravity" of a dispute and apply "the law of the place which has the most significant relationship to the event and parties or which, because of the relationship or contact with the event and parties, has the greatest concern with the specific issues . . . ." Zurich, 920 So.2d at 433 (internal quotation marks omitted). In applying this approach, Mississippi "has embraced the Restatement (Second) of Conflict of Laws." Ingalls Shipbuilding v. Fed. Ins. Co., 410 F.3d 214, 230 (5th Cir. 2005). Three Restatement sections are potentially relevant here: sections 6, 188, and 193.

B. Application of the relevant Restatement sections

Magnolia urges us to analyze this case under section 193, which applies to all kinds of insurance contracts, except those providing life insurance. See Boardman v. United Servs. Auto. Ass'n, 470 So.2d 1024, 1033 (Miss.1985). Section 193 states that the rights created by such a contract

are determined by the local law of the state which the parties understood was to be the principal location of the insured risk during the term of the policy, unless with respect to the particular issue, some other state has a more significant relationship under the principles stated...