Home Life Ins. Co., New York v. Equitable Equipment Co., Inc.
| Decision Date | 19 July 1982 |
| Docket Number | No. 80-3874,80-3874 |
| Parties | HOME LIFE INSURANCE COMPANY, NEW YORK, Plaintiff-Appellee Cross-Appellant, v. EQUITABLE EQUIPMENT COMPANY, INC., Defendant-Appellant Cross-Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Brian, Simon, Peragine, Smith & Redfearn, A. Morgan Brian, Jr., New Orleans, La., for defendant-appellant cross-appellee.
Herman & Herman, Russ M. Herman, Shelley C. Herman, New Orleans, La., Thomas F. Coughlin, New York City, for plaintiff-appellee cross-appellant.
Appeals from the United States District Court for the Eastern District of Louisiana.
Before GEE, RUBIN and GARZA, Circuit Judges.
This case turns on a single question of law: is an employer liable for the fraudulent misrepresentations of his employee made to further the employee's peculations while apparently acting for the employer in the course of the employer's business? Our jurisdiction being founded on diversity, as surrogate Louisiana judges we conclude that Louisiana courts would visit responsibility on the employer, and we, therefore, affirm the judgment of the district court finding the employer liable. Finding that the district court did not allow the injured third party the full measure of damages due, however, we reverse and remand for the entry of judgment in the larger amount we find owing.
Home Life Insurance Company ("Home Life") provided group medical benefits insurance coverage for the employees of Equitable Equipment Company ("Equitable," now Equitable Shipyards, Inc.). As is customary in administering such group policies, Equitable provided the insurance administrator to prepare and handle claims. These duties were performed by an Equitable employee, Bernard Sciambra. Equitable employees who made claims under the group medical coverage filled out and signed the employee portion of the claim form supplied to them, asked their physician to sign another part of that form, and attached required supporting documents, such as medical expense bills. They submitted the documents to Sciambra for processing. It was Sciambra's duty to verify that the employee-claimant was covered, sign the employer portion of the form, and forward the form to Home Life's regional claims office in Atlanta. There, Home Life's claims personnel further processed the claim, prepared payment drafts, and returned them by mail to Sciambra. Upon receiving the draft from Home Life's Atlanta office, Sciambra delivered it to the claimant.
Sciambra submitted a mixture of valid and fraudulent claims to Home Life. The bogus claims were contrived in a variety of ways that involved altering only portions of valid supporting documents, such as exaggerating medical facts and conclusions, increasing the length of time and unit rates of cost involved, fabricating documents, and forging signatures of claimants and physicians. Sciambra was the sole perpetrator of the fraud on some false claims. In these cases, when Sciambra altered valid claims, the claimants were completely unaware of his fraud, and Sciambra pocketed the proceeds. In most instances, however, Sciambra conspired with the claimant. When Home Life's payment draft on a fraudulent claim arrived, Sciambra obtained the signature of his co-conspirator, cashed the draft, and split the money with the named claimant.
When Home Life raised Equitable's premiums as a result of a high loss experience, Equitable investigated and learned of Sciambra's misdeeds. Equitable fired Sciambra. He and his co-conspirators were prosecuted for federal crimes. Sciambra was convicted and sentenced to imprisonment. He has now served his time and has been released from prison.
Some restitution to Home Life has been made by Sciambra and certain of his co-conspirators. But Home Life sustained a net loss in connection with the money it paid out on the fraudulent claims over the years. Home Life, therefore, sued Equitable and Sciambra jointly in the instant action, for recoupment of that loss. Equitable denied any liability to Home Life, but alternatively sought indemnity against Sciambra.
After a bench trial, the district court judge rendered judgment for Home Life in the amount of $34,706.63 against Sciambra and Equitable, and for Equitable against Sciambra in like amount. Equitable was expressly exonerated of negligence in hiring and supervising of Sciambra and in failing to learn of his fraudulent activity, but was cast solely on the basis of vicarious liability.
Article 2320 of the Louisiana Civil Code sets forth the Louisiana equivalent of the common law rule of respondeat superior. That article provides in relevant part:
Masters and employers are answerable for the damage occasioned by their servants and overseers, in the exercise of the functions in which they are employed.
La.Civ.Code Ann. art. 2320 (West 1979). We need consider, therefore, only whether the harm Sciambra visited on Home was "occasioned ... in the exercise of the functions in which (he was) employed."
In LeBrane v. Lewis, 292 So.2d 216 (La.1974), Justice Tate (now Judge Tate of this court) held that a supervisor's intentional stabbing of a recently discharged employee was within the scope of the supervisor's employment, thus rendering the employer liable for the injuries inflicted by the supervisor. In reaching this conclusion, Justice Tate stated, "the tortious conduct of the supervisor was so closely connected in time, place, and causation to his employment-duties as to be regarded a risk of harm fairly attributable to the employer's business, as compared with conduct motivated by purely personal considerations entirely extraneous to the employer's interests." Id. at 218. 1
Sciambra's fraudulent conduct was certainly connected in time and place to his employment. The district court judge found that 90% of the fraudulent claims were concocted at the job-site, on Equitable's time. Sciambra's conduct was also causally related to his employment duties for Equitable. As the district judge found, 90% of the fraudulent claims were accomplished through collaboration with Equitable employee-claimants. Most of the fraudulent claims were exaggerations of essentially valid claims. Nor can it be said that Sciambra's conduct was "motivated by purely personal considerations entirely extraneous to the employer's interests." LeBrane, 292 So.2d at 218. This is not a case where an employee turned aside from his ordinary duties and responsibilities to perpetrate a crime. Sciambra's actions were carefully contrived to fit into his normal duties and the usual course of events. 2 Therefore, we hold that Sciambra was acting in the course and scope of his employment as defined by article 2320, LeBrane, and Miller, and Equitable is liable for his conduct. 3
This holding accords with the result in Riley v. Wiseman, 395 So.2d 384 (La.Ct.App.1981). There the court held that the employer-insurance agency was liable for the damage resulting from the issuance of bogus performance bonds by its employee: the employee's actions "although personally motivated, were so closely interwoven with his employer's business that it can be said to be 'a risk of harm fairly attributable to the employer's business.' " Id. at 387 (quoting Mays v. Pico Fin. Co., 339 So.2d 382 (La.Ct.App.1976), writ denied, 341 So.2d 1123 (La.1977)). 4
The same result would obtain under the common law concept of respondeat superior which is virtually identical to the civil law concept of vicarious liability set forth in article 2320. 5 The Restatement (Second) of Agency leads to an easy solution. 6 The Restatement provides that the misrepresentations of a servant are governed by the same rules applicable to the misrepresentations of an agent. 7 Then the Restatement provides: "A principal who puts a servant or other agent in a position which enables the agent, while apparently acting within his authority, to commit a fraud upon third persons is subject to liability to such third persons for the fraud." Restatement (Second) of Agency § 261 (1957). 8 The comments and illustrations to § 261 make clear its application in a case such as the present one. For instance:
A, local manager of P, a telegraph company, gives padded statements of account to T, a patron of the company, who pays in accordance with such statements. A deposits the money to P's credit, withdraws the surplus, and absconds. P is subject to liability to T for the excessive payments.
Id. comment a, illustration 2. Such a result is explained by the comment:
Liability is based upon the fact that the agent's position facilitates the consummation of the fraud, in that from the point of view of the third person the transaction seems regular on its face and the agent appears to be acting in the ordinary course of the business confided to him.
Id. comment a.
Equitable placed Sciambra in a position to defraud Home Life while he was apparently acting within his authority to process and submit claims to Home Life. His position facilitated the consummation of the fraud and Equitable should, therefore, be liable for the unfortunate consequences of the fraudulent activity.
On cross appeal Home Life asserts that the district court's award of damages in the amount of $34,706.63 is erroneous. The district court credited the testimony and theory of damages set forth by Equitable's expert, Roch E. E. deMontluzin, an independent insurance broker, and calculated the amount of Home Life's loss, based on this testimony, as follows:
Total loss sustained by
Home Life on all claims $146,671.00
Less: Restitution 15,466.37
Claims Run-Outs 12,750.00
Pooling Credit 39,813.00
Excess Negative absorbed 43,935.00
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Net Loss to Home Life $34,706.63
This theory is based on the premise that Equitable in fact paid the cost of the fraudulent claims during the first three policy years. 9 It is true that the amount Home...
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