MILCHEM, INCORPORATED v. MA Smith Well Service, Inc.

• Decision Date: 11 December 1972
• Docket Number: Civ. A. No. 70-2219.
• Citation: 351 F. Supp. 1307
• Parties: MILCHEM, INCORPORATED, Plaintiff, v. M. A. SMITH WELL SERVICE, INC., Defendant.
• Court: U.S. District Court — Eastern District of Louisiana

351 F. Supp. 1307

MILCHEM, INCORPORATED, Plaintiff, v. M. A. SMITH WELL SERVICE, INC., Defendant.

Civ. A. No. 70-2219.

United States District Court, E. D. Louisiana.

December 11, 1972.

H. Gordon Hartman, Many, Hartman & LoCoco, New Orleans, La., for plaintiff.

Wood Brown, III, Montgomery, Barnett, Brown & Read, New Orleans, La., for M. A. Smith Well Service, Inc.

James J. Morse, Bruce J. Borrello, Robert J. Neal, New Orleans, La., for Liberty Mut. Ins. Co.

CASSIBRY, District Judge:

The issue presented by this suit grows out of the total destruction of a degasser and a hoist during a misguided attempt to make the degasser secure prior to the onslaught of Hurricane Camille. I found that this loss was due to the negligence of defendant M. A. Smith Well Service, Inc. The hoist was owned by Milchem, Inc., the plaintiff in this action. The degasser in question was the property of Southern Fleet Leasing Corp., and at the time of the incident M. A. Smith was operating the equipment as a sub-lessee. This property was insured against "all risks" by one of two policies carried by Southern Fleet. The problem remaining in this case is that the insurer, Liberty Mutual Insurance Company, seeks to recover by way of subrogation against M. A. Smith, who contends that this is not permissible as it is an insured under the policies in question and that an insurer may not recover against its own assured under Louisiana law. Lanasse v. Travelers Insurance Co., 450 F.2d 580, 585 (5th Cir. 1971); Boston Insurance Co. v. Pendarvis, 195 So.2d 692 (La.App.1967).

Whether M. A. Smith is an insured is not easily answered. Southern Fleet carried two policies on its equipment, a "single interest floater," and a "dual interest floater." The latter contains the following language:

I. NAMED INSURED

The "Named Insured" in this policy is Southern Fleet Leasing Corporation and all wholly owned subsidiary companies thereof, as now or may hereafter be constituted, hereinafter called the "Insured."

II. INTERESTS INSURED

This policy covers the interests of the Insured, and any lessee as their respective interests may appear.

M. A. Smith admittedly does not fall within the definition of a "named insured" under this policy. It claims the status of an assured, however, because its "interest" as a "lessee" is insured under the policy.

The fact that M. A. Smith is not a named insured is not absolutely fatal to its claim to the status of an assured under the policy, for there are cases holding that the parties having that position are to be determined by construing the policy as a whole.¹ Nevertheless, in this case the circumstances pointing to M. A. Smith being an insured are rather weak. The definitional section in which the "Named Insured" is specified and said thereafter to be called "the Insured" would seem to exclude the possibility that other, unnamed parties should be accorded the status of assureds by implication. Essentially, exclusive reliance is placed on the "as their respective interests may appear" language of the dual interest floater. Not to read that section as conferring the status of assured on lessees, M. A. Smith asserts, would write it out of the policy.

On the view I take of this case, I need not decide that question for I am of the opinion that the language M. A. Smith relies on actually does not apply to it. The dual interest floater here insures the interests of Southern Fleet "and any lessee, as their respective interests may appear." While this language seems rather straightforward, it takes on puzzling aspects when one attempts to harmonize it with other provisions of the policy, and in particular with the single interest floater. The difficulty that arises is what the difference is between these two floaters from the point of view of the party taking out the insurance, the lessor Southern Fleet. In contrast to the dual interest floater, the single interest floater covers "only the interests of the insured," yet each applies to "all property leased by the Insured except the same specified exclusions"² and each does so "continuously from the time title of property is acquired by the Insured and leaves the Insured's premises until satisfaction of the lease agreement."³ This last provision is most significant, since it is the type of time period that would be adopted were lessees intended to be covered under these floaters, since it makes the policy effective only for that period during which lessees would have a possessory estate in the acquired property. Yet each floater covers the interests of the lessor fully while only one covers the interests of lessees. The question arises why a lessor would bother to take out both?

The insurer Liberty Mutual's explanation of this is that the single interest floater is intended to cover straight leasing arrangements while the dual interest floater is to apply only to those lessees who enter into lease-purchase agreements with Southern Fleet. Only ownership interests in the property insured are covered, Liberty maintains, and lessee-purchasers acquire an ownership interest in the property as they make their payments, while ordinary lessees do not. Thus the dual interest floater covers the lease-purchaser's interest pro rata with that retained by the lessor-owner, while an ordinary lessee having acquired no such interest is not an assured under the single interest floater. Were this construction to be followed, M. A. Smith would come under the single interest floater, as neither it nor the parties from whom it leased were operating the equipment under lease-purchase agreements with Southern Fleet. Hence M. A. Smith would not be covered at all under the policy and subrogation against it would clearly be appropriate.

The difficulty with this construction is that the policy itself does not make any distinction between lease-purchasers and straight lessees, but instead lumps the interests of all lessees together in the dual interest floater. Thus to follow the insurance company's reading I would be obliged to interpolate language into the policy in a fashion which would cut back on rather than expand the coverage evident upon a literal reading of just the dual interest floater. In addition to this objection, M. A. Smith points out that lease-purchase agreements are not recognized as such under the law of Louisiana. That is, every such purported transfer of chattel is classified either as a lease or as a purchase, and ownership rights pass only to those "lease purchasers" who are assigned the status of purchasers.⁴ Defendant also notes that insurance on property does not automatically pass with title thereto, but that instead there must be a separate agreement by the carrier to that effect.⁵ From this M. A. Smith would have me infer that the very class of entities that Liberty Mutual claims are protected by the policy ("lessees" with options to...