Merchants Nat. Bank, Vicksburg, Miss. v. Southeastern Fire Ins. Co., Inc.
| Decision Date | 28 January 1985 |
| Docket Number | No. 83-4381,83-4381 |
| Citation | 751 F.2d 771 |
| Parties | MERCHANTS NATIONAL BANK, VICKSBURG, MS, Plaintiff-Appellee-Appellant-Cross Appellee, v. SOUTHEASTERN FIRE INSURANCE CO., INC. and American Security Insurance Co., Inc., Defendants-Third Party Defendants-Appellees-Cross Appellants, v. The BOSSIER CITY BANK & TRUST CO., Defendant-Third Party Plaintiff-Appellant. John BARLOW, Plaintiff-Appellee-Appellant, v. AMERICAN SECURITY INSURANCE CO., Defendant-Third Party Defendant-Appellee, v. The BOSSIER CITY BANK & TRUST CO., Defendant-Third Party Plaintiff-Appellant, v. Edna Earl BARLOW, Defendant-Third Party Plaintiff Appellee-Appellant. VICKSBURG SMALL BUSINESS INVESTMENT CO., Plaintiff-Appellee, v. AMERICAN SECURITY INSURANCE CO., et al., Defendants-Third Party-Defendants, v. The BOSSIER CITY BANK & TRUST CO., Defendant-Third Party Plaintiff-Appellant. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Keyes, Moss & Piazza, Donald C. Woods, Ben J. Piazza, Jr., Jackson, Miss., for Bossier Bank.
Ward, Martin, Terry, King & Sorey, Edley H. Jones, III, Vicksburg, Miss., for Merchants Nat. Bank.
Bodron & Yoste, Harry M. Yoste, Jr., Vicksburg, Miss., for John and Edna Barlow.
Varner, Parker & Sessums, R.E. Parker, Jr., Davis M. Sessums, Vicksburg, Miss., Watkins & Eager, James L. Carroll, Jackson, Miss., for S.E. Fire & American Sec.
Appeals from the United States District Court for the Southern District of Mississippi.
Before WISDOM, RANDALL and JOLLY, Circuit Judges.
This diversity action was brought when the defendant insurers refused to pay claims on a casualty policy to the owner and mortgagees of a house destroyed by fire. The plaintiff John Barlow (Barlow) had purchased a casualty insurance policy on his home from American Security Insurance Company (American). He listed as mortgagees on the policy Merchants National Bank (Merchants), Bossier Bank and Trust Company (Bossier), and Vicksburg Small Business Investment Company (VSBIC), but excluded another mortgagee, Edna Earl Barlow, his mother. After the home was later destroyed by fire, Barlow and all mortgagees sought payment under the policy. American and Southeastern Fire Insurance Company (Southeastern), to which the policy had been "bordereauxed," refused payment. Barlow brought suit in state court against American and all mortgagees of the property, demanding payment under the policy. Edna Barlow and Bossier cross-claimed against American to recover their share of the insurance proceeds. Merchants and VSBIC, also seeking payment, each brought separate suits against Southeastern and American. The cases were later removed to federal district court where all actions were consolidated for trial. The district court directed a verdict against John Barlow, Bossier and Edna Barlow. The jury returned a verdict in favor of Merchants and VSBIC; nevertheless, Merchants is unhappy because the district court refused to submit a punitive damage instruction to the jury. John Barlow, Merchants, Bossier and Edna Barlow all appeal. We reverse and remand.
John N. Barlow and his former wife Sandra Barlow owned a house as joint tenants in Bovina, a small town in Warren County, Mississippi. On July 6, 1978 they both executed a deed of trust on the house to Merchants National Bank to secure a promissory note for $37,500. On January 5, 1978 they executed another deed of trust, this time to the Vicksburg Small Business Investment Corporation. Later Barlow sought still another loan, this time from the Bossier Bank & Trust Company. To obtain the loan from Bossier, Barlow executed a deed of trust, but forged his wife's name on the document. The forgery took place on July 30, 1980, and the deed of trust securing the promissory note of $41,000 was executed on August 13, 1980. Finally, on August 12, 1980, Barlow executed a fourth deed of trust on the property. This deed of trust was to his mother, Edna Earl Barlow, for the stated purpose of securing previous loans from her totalling $48,000. Barlow stopped making payments to Merchants and VSBIC in August 1980. He made no payments to Bossier or Edna Barlow.
On December 14, 1981, Barlow purchased from the defendant, American Security Insurance Company, a $245,000.00 casualty insurance policy on the house and contents. Barlow was under indictment for the forgery of the deed of trust to Bossier when the policy was purchased. Merchants, Bossier, VSBIC, and Margaret C. Weems 1 were listed as loss-payees on the policy, but Edna Barlow's name was omitted. Barlow contends that he requested American to place her name on the policy but it failed to do so.
Sometime after the issuance of the policy Barlow was convicted of forgery and served time in the Mississippi state penitentiary. On March 26, 1982, while Barlow was still in prison, his house was totally destroyed by fire. Soon afterward, Barlow and the beneficiaries of the policy took action to obtain payment for their loss. Barlow filed a proof of loss and submitted to a deposition under oath by American, but was never paid. Edna Barlow gave a deposition under oath concerning her lien and claim against the policy, but American also never paid her. Merchants tried to establish its right to payment through its vice president, John Byram, who wrote a letter to American on April 2, 1982 stating that Merchants was the first mortgagee on the property. He advised American of the principal and interest due Merchants, and requested that it contact Barlow if further information was needed. After twenty days passed with no response, Merchants again wrote to American demanding payment. American responded by letter, stating that the policy had been "bordereauxed" to Southeastern Fire Insurance Company. Southeastern later contacted Merchants and requested a sworn statement by Byram. Byram provided the sworn statement, but Southeastern provided the proof of loss form only after repeated demands by Merchants. Although Merchants returned the completed proof of loss statement, Southeastern did not pay its claim or request any additional information. A representative of Bossier also gave American a deposition under oath relative to its lien and claim against the policy, but American failed to pay its claim and did not request further information.
Barlow filed suit in Warren County Circuit Court against American to recover under the policy, naming as additional defendants Edna Barlow, Merchants, VSBIC and Bossier because of their interests in the property. Bossier and Edna Barlow cross-claimed against American for failure to pay under the policy. Separate suits, also in state court, were brought by Merchants and VSBIC against both Southeastern and American for failure to pay under the policy and for punitive damages. In a later amended complaint Merchants requested punitive damages for the negligent investigation of its claim. American and Southeastern removed the suits to federal district court and all of the actions were consolidated at trial. The district court directed a verdict against Bossier and John and Edna Barlow and denied Merchants's request for an instruction on punitive damages. The jury returned a verdict for Merchants and VSBIC on their loss claims. John and Edna Barlow, along with Merchants and Bossier, appeal.
A number of issues have been raised here and in the district court. Some issues have been abandoned by the parties. Some are without substantial merit, not requiring our attention. We address only those issues that have merit and affect the outcome of this appeal. Because of the number of issues and parties involved, we will address each issue as it applies to each particular appellant.
(1)
We begin by addressing the issues raised by Merchants. It contends that American had no legitimate or arguable reason to deny its claim, and that the district court therefore erred in refusing to submit a punitive damage instruction to the jury. 2 Because we are bound by Erie to apply the law of the forum state to this diversity action, we look to the substantive law of Mississippi for resolution of this issue.
The Mississippi Supreme Court has recently recognized the confusion in its precedent as to when a punitive damage instruction should be granted in a bad-faith case. Reserve Life Insurance Co. v. McGee, 444 So.2d 803, 809-10 (Miss.1983). In Reserve, the court sought to resolve this problem by setting forth a three-part test. Initially, the trial court should examine whether as a matter of law the insurer has a legitimate or arguable reason to deny the claim. Should the court find that there is a legitimate or arguable reason for the denial, a punitive damage instruction should not be given; if, however, reasonable minds could differ as to whether there is a legitimate or arguable reason, the court must next consider whether there is evidence of gross negligence or intentional misconduct in the denial of the claim. Id. at 809-10. 3 If there is sufficient evidence to indicate that the insurer had no legitimate or arguable reason to deny the claim and that the insurer acted intentionally or was grossly negligent, a punitive damage instruction should be granted.
Here, the district court did not make its decision by applying the Reserve test but rather denied the instruction because it believed such instructions could only be given when expressly authorized by Congress or a state legislature. The district court erred in this regard.
American argues that it had a legitimate or arguable reason to deny the claim, and thus the trial court properly refused to grant the punitive damage instruction, albeit on erroneous grounds. It contends that Merchants withheld material information concerning John Barlow, thus violating the terms of the policy and state law. 4 Specifically, it argues that Merchants knew, and did not disclose, that Barlow was behind in his mortgage payments and was in poor financial condition; that he was the subject of official...
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