Highlands Ins. Co. v. EMPLOYERS'SURPLUS LINES, Civ. A. No. 78-846.

Decision Date14 July 1980
Docket NumberCiv. A. No. 78-846.
Citation497 F. Supp. 169
PartiesHIGHLANDS INSURANCE CO. v. EMPLOYERS' SURPLUS LINES INSURANCE CO.
CourtU.S. District Court — Eastern District of Louisiana

Dermot S. McGlinchey, McGlinchey, Stafford, Mintz & Hoffman, New Orleans, La., for plaintiff.

Edward A. Rodrigue, Jr., Montgomery, Barnett, Brown & Read, New Orleans, La., for defendant-movant.

CHARLES SCHWARTZ, Jr., District Judge.

Highlands Insurance Company (hereinafter "Highlands"), the plaintiff in this case, seeks reimbursement from the defendant, Employers' Surplus Lines Insurance Company (hereinafter "Employers") on a policy of reinsurance issued to it by Employers. Defendant Employers moved for summary judgment. Counsel filed briefs on the motion, and the Court heard argument on June 11, 1980.

On October 22, 1970, Curtis Smith, a Louisiana resident, filed suit against J. D. Ward, doing business as Ward Drilling Company, Ward Drilling Company, Inc. (Louisiana entities), and as Waseca Chemical Company (hereinafter collectively referred to as "Ward") and against Highlands, Ward's insurance carrier, to recover for injuries sustained in an accident which occurred on February 28, 1970. Civil Action No. 73-3115, United States District Court for the Eastern District of Louisiana. His suit resulted in an award of $180,000 plus interest. Judgment was entered on October 31, 1972; the Court of Appeals for the Fifth Circuit affirmed on December 12, 1974.

Highlands defended Smith's suit against Ward and paid the entire resultant judgment without notifying Employers, the issuer of the reinsurance policy. Highlands sent the first notice of the accident and lawsuit to Employers on September 17, 1976, more than a year after satisfaction of the judgment and six and one-half years after the accident. Employers thereupon denied liability under the reinsurance policy, and the present action ensued.

Highlands is a Texas corporation with its principal place of business in Houston. Employers is a Delaware corporation with its principal place of business in Boston. Both do business in Louisiana. The reinsurance contract was executed in Massachusetts to cover liability for claims against Highlands. Eventual performance of this contract was to occur in Texas.

The policy at issue here reinsured a portion of the risk assumed by Highlands in issuing the original liability insurance policy to Ward. Under the terms of the reinsurance contract, Highlands was to retain the first $50,000 of risk, with Employers assuming responsibility for an additional $200,000, for a total liability coverage of $250,000 for claims made against Ward. The insurance and reinsurance policies each took effect on January 1, 1970.

The narrow issue presented today is whether notice of a claim six and a half years after an accident, and over a year after final resolution of the resulting litigation, relieves a reinsurer of its obligations under a contract which includes a provision for prompt notice.

As a defense to its liability, Employers relies upon a clause of the reinsurance contract requiring prompt notice of any accident which might result in liability:

Prompt notice shall be given to the Reinsurer by the Company of any occurrence or accident which appears likely to involve this reinsurance and while the Reinsurer does not undertake to investigate or defend claims or suits it shall nevertheless have the right and be given the opportunity to associate with the Company and its representative at its own expense in the defense and control of any claim, suit or proceeding involving this reinsurance with full cooperation of the Company.

Obviously, since Highlands sent Employers the first notice of any kind more than a year after satisfaction of judgment, Employers was denied its contractual right to join in the defense of the personal injury claim at both trial and appellate levels.

Although the question of whether the requisite notice has been given promptly is generally one of fact, courts of both Texas and Massachusetts have held it to be a matter of law if the delay has been unreasonable under the undisputed facts of the particular case.1 Accordingly, Employers seeks a ruling that the delay in this case was so grossly unreasonable as to constitute a breach of the contract of reinsurance, thereby releasing it from liability.

The resolution of this motion for summary judgment turns upon the determination of the state law — whether that of Louisiana, Texas, or Massachusetts — to be applied. This Court, sitting in Louisiana and hearing this case under the diversity jurisdiction, is bound to follow the Louisiana approach to conflicts of law. Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). The Supreme Court of Louisiana adopted the interest analysis method of resolving choice of law problems in Jagers v. Royal Indemnity Co., 276 So.2d 309 (La.1973). Subsequently Louisiana courts and federal courts sitting here have applied the interest analysis to contract cases, thereby retreating from the lex loci approach to conflicts problems. Wickham v. Prudential Insurance Co. of America, 366 So.2d 951 (La.App. 1st Cir. 1978); Sutton v. Langley, 330 So.2d 321 (La.App. 2nd Cir.), writs denied, 332 So.2d 805, 332 So.2d 820, 333 So.2d 242 (La.1976); Brinkley and West, Inc. v. Foremost Insurance Co., 499 F.2d 928 (5th Cir. 1974); Ardoyno v. Kyzar, 426 F.Supp. 78 (E.D.La. 1976); Southern Insurance Co. v. Consumer Insurance Agency, 442 F.Supp. 30 (E.D.La. 1977).

Interest analysis is a two-step process whereby the Court must first determine whether a true or false conflict exists. If a true conflict exists, the Court applies the significant contacts approach of the Restatement Second of Conflicts of Law to determine which of the competing states' interests is dominant and hence prevailing. See Ardoyno, supra, at 81. If the alleged conflict is a false one, however, there is no need for such analysis; law of a state having no interest in a given matter is of course not to be applied to that matter.

Highlands argues that Louisiana has a continuing interest in this litigation stemming from its interest in enforcing obligations under reinsurance contracts which ultimately affect the rights and liabilities of its citizens under insurance policies. Highlands urges that Louisiana's interest encompasses the entire scope and all the ramifications of the original liability claim, including the indemnification claim of the primary insurer to the reinsurer.

Under the Louisiana law Highlands urges as appropriate, delayed notice of a claim of insurance does not of itself terminate coverage; the insurer must prove that its defense of the claim was actually prejudiced. The interest of the state in formulating this rule was stated in Miller v. Marcantel, 221 So.2d 557, 559 (La.App. 3d Cir. 1967):

The function of the notice requirements is simply to prevent the insurer from being prejudiced, not to provide a technical escape hatch by which to deny coverage in the absence of prejudice nor to evade the fundamental protective purpose of the insurance contract to assure the insured and the general public that liability claims will be paid up to the policy limits for which premiums were collected. Therefore, unless the insurer is actually prejudiced by the insured's failure to give notice immediately, the insurer cannot defeat its liability under the policy because of the non-prejudicial failure of its insured to give immediate notice of an accident or claim as stipulated by a policy provision.

Employers, on the other hand, analyzes the interests of the states involved and argues...

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