Louisiana Ins. Guar. Ass'n v. Interstate Fire & Cas. Co.

• Decision Date: 14 January 1994
• Parties: 93-0911 La
• Court: Louisiana Supreme Court

Page 759

630 So.2d 759

93-0911 La. 1/14/94

LOUISIANA INSURANCE GUARANTY ASSOCIATION v. INTERSTATE FIRE & CASUALTY COMPANY.

Douglas D. GREEN, as Commissioner of Insurance for the State

of Louisiana v. CHAMPION INSURANCE COMPANY.

No. 93-C-0911.

Supreme Court of Louisiana.

Jan. 14, 1994.

Charles W. Schmidt, Daniel A. Rees, Christovich & Kearney, New Orleans, for applicant.

Thomas E. Balhoff, Carey J. Guglielmo, Judith R. Atkinson, Matthews, Atkinson, Guglielmo, Marks & Day, Sheldon D. Beychok, Beychok & Freeman, Baton Rouge, for respondent.

[93-0911 La. 1] HALL, Justice. ^*

In this declaratory judgment action, we revisit the question of whether an excess insurer must "drop down" into the position of an insolvent primary insurer. See Kelly v. Weil, 563 So.2d 221 (La.1990); Robichaux v. Randolph, 563 So.2d 226 (La.1990). ¹ The relevant parties here are the excess insurer, Interstate Fire & Casualty Company ("Interstate"); the insolvent primary insurer, Champion Insurance Company ("Champion"); and the Louisiana Insurance Guaranty Association ("LIGA"). The precise issue presented is whether Interstate's excess policy provides "drop down" coverage for policyholders insured both by Interstate as excess carrier and by Champion as primary carrier. The district court determined that Interstate's policy provided drop down coverage. Although agreeing with the district court, the appellate court conditioned Interstate's obligation to provide drop down coverage on either the [93-0911 La. 2] primary insurer (Champion) or the insured being held liable to pay the full policy limits. We reverse.

I.

Interstate issued excess automobile liability policies to a number of insureds for whom Champion issued primary policies. Typically, the policies provided personal injury limits, expressed in terms of split per person/per occurrence limits, as follows: Champion's primary policies provided for underlying limits of $10,000/$20,000, and Interstate's excess policies provided for excess limits of either $25,000/$50,000 or $100,000/$300,000. ²

On June 5, 1989, Champion was declared insolvent and placed in liquidation, triggering LIGA's statutory responsibility under LSA-R.S. 22:1382 A(1)(a) for claims made by or against Champion's insureds. LIGA and Champion's liquidator each commenced separate declaratory judgment actions against Interstate; each sought a judgment declaring that Interstate's excess policies provided drop down coverage from dollar one and thereby precluded LIGA's statutory responsibility. After these actions were consolidated, LIGA and Interstate filed cross motions for summary judgment. The district court denied Interstate's motion and granted LIGA's motion. In so doing, the district court declared that Interstate was obligated to "pay claims made by or against [Champion's insureds] under its policies ahead of and before LIGA has any obligation to pay."

On Interstate's appeal, the appellate court agreed with the district court's declaration insofar as it found that Interstate's policies provided drop down coverage from dollar one, but disagreed with the district court's declaration insofar as it found that such drop down obligation was unconditional. Louisiana Ins. Guar. Ass'n v. Interstate Fire & Casualty Co., 613 So.2d 210 (La.App. 1st Cir.1992). Construing the loss payable clause contained in the limits of liability provision of Interstate's policy, the appellate court found that this clause conditioned drop down coverage on either the primary insurer or the insured being held liable to pay the full [93-0911 La. 3] underlying limits. ³ The appellate court thus amended the district court's judgment to reflect that condition and to provide "that the Interstate policy affords drop down coverage from dollar one up to the Champion policy limits in addition to the policy limits of the Interstate policy, but only after Champion or its insured has been held liable to pay the full amount of the Champion policy." Id at 214. One judge dissented, finding that there was no ambiguity in the policy, read as a whole, and that the majority's interpretation of the policy was unreasonable.

We granted Interstate's writ application to determine the correctness of that decision. 617 So.2d 921 (La.1993).

II.

The drop down issue presented here is whether the excess insurer, Interstate, is liable only for the amount of the insured's loss above the specified underlying primary limits, or whether it is liable to provide drop down coverage and essentially step into the shoes of the insolvent underlying primary insurer, Champion. Kelly v. Weil, 563 So.2d 221 (La.1990). Kelly reaffirms that the controlling consideration in resolving this drop down issue is the language of the excess policy. See Nasello v. Transit Casualty Co., 530 So.2d 1114, 1115 (La.1988).

In Kelly, we canvassed the federal and state jurisprudence on the drop down issue, and, based on the particular policy language, found that most excess policies can be sorted into three categories. Relevant here are the first and second Kelly categories. ⁴ The first category is comprised of policies which hinge coverage on the "collectibility" or "recoverability" of the primary limits, and thus clearly facilitate drop down coverage. The second category is comprised of policies that describe the coverage as excess of the scheduled underlying limits of [93-0911 La. 4] primary policies for losses "covered" by such policies. As this second category refers to a fixed, predetermined amount of underlying limits, such policies clearly preclude drop down coverage. See W. McKenzie and H. Johnson, Insurance, 52 La.L.Rev. 525, 530-31 (1992); Lumar Marine, Inc. v. Insurance Co. of North America, 910 F.2d 1267 (5th Cir.1990).

In sorting an excess policy into the appropriate Kelly category, the pertinent policy provision ordinarily is the limits of liability provision since it defines the scope of coverage. See Interco Inc. v. National Surety Corp., 900 F.2d 1264, 1267 n. 4 (8th Cir.1990) (collecting cases); Highlands Ins. Co. v. Gerber Products Co., 702 F.Supp. 109, 112-13 (D.Md.1988). The Interstate policy's limits of liability provision provides:

LIMITS OF LIABILITY: OUR policy is an excess policy over the PRIMARY INSURANCE. OUR obligation does not extend beyond the limits shown in the DECLARATIONS. WE are not obligated to pay under this policy until the PRIMARY INSURER has paid or has been held liable to pay the full amount of the PRIMARY INSURANCE. WE shall then be liable to pay only such additional amounts necessary to provide YOU with a total coverage under the PRIMARY INSURERS and this policy combined.

Pigeonholing its policy into the second Kelly category, Interstate contends that Kelly is dispositive and drop down is precluded. Stated otherwise, Interstate contends that its policy clearly defines the retained limit in terms of the scheduled underlying insurance as set forth in the declarations page. LIGA counters that Interstate's policy cannot be squeezed into any of the three Kelly categories. LIGA further suggests that those three categories are not all-inclusive and that this policy represents a fourth type.

If Interstate's limits of liability provision stopped after the second sentence, it would fit precisely, as Interstate suggests, into the second Kelly category. Indeed, the dissenting judge recognized this, noting that "[t]he interpretation given by the majority, that Interstate must pay both the primary and excess limits if there is a judgment in excess of the primary limits, is unreasonable in light of the first two sentences." Interstate Fire, 613 So.2d at 214. However, the limits of liability provision contains third and fourth sentences not found in any of the policies we categorized in Kelly. Because of these additional sentences, we agree with LIGA's contention that Interstate's excess policy cannot be squeezed neatly into any of the Kelly [93-0911 La. 5] categories. ⁵ Nor have the parties cited, or our research uncovered, any case construing policy language identical to that in the Interstate excess policy under scrutiny here. ⁶

The instant case thus hinges on an interpretation of Interstate's excess policy. In our task, we are guided by several elementary principles regarding construction of insurance policies.

An insurance policy is a contract between the parties and should be construed by using the general rules of interpretation of contracts set forth in the Civil Code. Smith v. Matthews, 611 So.2d 1377, 1379 (La.1993); Central Louisiana Electric Co. v. Westinghouse Elec. Corp., 579 So.2d 981, 985 (La.1991). The judicial responsibility in interpreting insurance contracts is to determine the parties' common intent. LSA-C.C. Art. 2045 (defining contractual interpretation as "the determination of the common intent of the parties"); Garcia v. St. Bernard Parish School Bd., 576 So.2d 975, 976 (La.1991) (citing W. McKenzie & H. Johnson, 15 Civil Law Treatise, Insurance Law and Practice § 4 (1986) ("Civil Law Treatise ")).

The parties' intent as reflected by the words in the policy determine the extent of coverage. Trinity Industries, Inc. v. Ins. Co. of North America, 916 F.2d 267, 269 (5th Cir.1990) (citing Pareti v. Sentry Indemnity Co., 536 So.2d 417 (La.1988)). Such intent is to be determined in accordance with the general, ordinary, plain and popular meaning of the words used in the policy, unless the words have acquired a technical meaning. LSA-C.C. Art. 2047; ⁷ Breland v. Schilling, 550 So.2d 609, 610 (La.1989); Capital Bank & Trust Co. v. Equitable Life Assur. Society of United States, 542 So.2d 494, 497 (La.1989).

An insurance policy should not be interpreted in an unreasonable or a strained manner so as to enlarge or to restrict its provisions beyond what is reasonably contemplated by its terms or so as to achieve an absurd conclusion. Lindsey v. Poole, 579 So.2d 1145, 1147 (La.App. [93-0911 La. 6] 2d Cir.), writ denied, 588 So.2d 100 (La.1991) (citi...