National Surety Corporation v. Wells

Decision Date07 March 1961
Docket NumberNo. 18363.,18363.
Citation287 F.2d 102
PartiesNATIONAL SURETY CORPORATION, Appellant, v. L. E. WELLS, Sr., V. R. Hopfe, and Ella Hopfe, and L. E. Wells, Jr., a Minor, Appellees.
CourtU.S. Court of Appeals — Fifth Circuit

COPYRIGHT MATERIAL OMITTED

B. Jeff Crane, Jr., Vinson, Elkins, Weems & Searls, Houston, Tex., for appellant.

James H. Wright, Ben G. Sewell, Miller, McClure, Lucas & Wright, Houston, Tex., for appellees, V. R. Hopfe and wife, Ella Hopfe.

Before RIVES, BROWN and WISDOM, Circuit Judges.

JOHN R. BROWN, Circuit Judge.

The problem here has to do with timeliness of transmission to an insurer of a copy of the court process when the assured is not only an additional assured under the Omnibus Clause, but is a minor as well. The District Court held the notice timely and sufficient. We agree.

Squeezing out all insignificant contradictions, the facts are neither complex nor conflicting and may be simply stated. Doing so, however, highlights the technical nature of the defense which the insurer urges upon us.

Wells, Jr., then sixteen, on August 18, 1957 was driving the car belonging to his father, Wells, Sr. He had a collision with the Hopfe's car causing them property and personal injuries. Wells, Sr., as a soliciting insurance agent selling automobile insurance under this Insurer's policies to the public, had obtained one covering his own car. It was the usual Texas Standard Automobile Policy and contained the traditional Omnibus Clause — well known to those in the insurance trade, to some lawyers and perhaps fewer judges, but hardly within the speaking acquaintance of a 16-year-old high school student. Wells, Sr. gave immediate notice of the occurrence to the Insurer. The Insurer proceeded to investigate the case with a thoroughness which it now acknowledges to have been completely ample. That investigation included an interview with young Wells, Jr. at which time he gave a detailed written statement. The facts showed without controversy that he was driving his father's car with permission and whether this lad knew it or not, the law and the policy regarded him as an additional assured. As such an assured, the Insurer owed him the absolute duty of defense. American Fidelity & Casualty Co. v. Pennsylvania Threshermen & Farmers' Mutual Casualty Co., 5 Cir., 1960, 280 F.2d 453. It undertook to supply that defense and actually carried on negotiations with the Hopfes looking toward settlement. In early October it received an official information copy of a claim letter written by the Hopfes' counsel to Wells, Sr. demanding satisfactory disposition and warning of a suit if settlement were not forthcoming. Up to this time the Insurer knew everything it possibly could have known had Junior, not Senior, been the instigator of notice. There had, therefore, been literal, full, substantial and complete compliance with the policy requirement of notice of the occurrence.1

About October 25 the Hopfes then filed in the Texas State Court what we call the first suit against Senior and Junior. Citation was served on each. The boy turned his citation over to his father thinking that not only would his father handle it for him, but even more understandably, that his father would have to bear the responsibility for what he had done.2

But Wells, Sr. did not forward the citation to the Insurer. It is undisputed that this was inadvertent for no suggestion has ever been faintly uttered that the Wellses, Senior or Junior, father or son, agent or assured, have failed to cooperate. But no harm was yet done for no default judgment had been taken by the Hopfes. During a routine conversation between Wells, Sr. and the Insurer's adjustor about January 2, the Insurer learned that this first suit had been filed. It asked for the papers but carefully stated that in view of the delay the Houston office would be guided by superior instructions. These were soon received, the substance being that there was no coverage since the policy had been breached for failure of the Assured to "immediately forward" the citation after service about November 5.3 The Insurer, thereafter, through its attorneys, refused to file an answer in the first suit noting that an answer had already been filed by Wells, Sr's. personal attorney. About this time, and before any judgment had been obtained or trial had, the Hopfes dismissed the first suit without prejudice as the Texas Rules permit as a matter of right. Tex.R.Civ.P. 164.

Shortly thereafter, on February 1, 1958, an identical action, which we call the second suit, was filed in the State Court against Wells, Sr. and Junior. Citations were served upon each and these were immediately forwarded to the Insurer by registered mail. Just how it could distinguish between the duty to defend Wells, Sr. and Wells, Jr. has never been made to appear, but the Insurer did just that. Through its counsel the Insurer advised Wells, Sr. (but not Junior) that it would undertake his defense only under a non-waiver agreement. But Wells, Sr., who had obtained his own counsel during the first suit, American Fidelity & Casualty Co. v. Pennsylvania Threshermen & Farmers' Mutual Casualty Co., 280 F.2d 453, 456, rejected the offer. Despite this, the Insurer did enter an appearance and file an answer in the second suit on behalf of Wells, Sr. Wells, Jr. stood undefended until on suggestion of this Insurer the Court appointed a guardian ad litem. There matters stood at the time this Federal Court action for declaratory judgment was tried and determined.4

In assaying the correctness of the District Court's disposition we start with the acceptance of the Insurer's assertion that with respect to forwarding legal process, just as in the situation concerning notice of the occurrence, Texas regards as immaterial a showing of prejudice. New Amsterdam Casualty Co. v. Hamblen, 1945, 144 Tex. 306, 190 S.W. 2d 56, 59; Klein v. Century Lloyds, 1955, 154 Tex. 160, 275 S.W.2d 95, affirming Tex.Civ.App., 275 S.W.2d 91. If the condition of the policy is not satisfied, the contract is treated as breached and the Assured fails, not because what he did or did not do injured the insurer, but rather because the assured did not perform his contractual obligations.

But the apparent severity of this approach is ameliorated in many ways. First "immediate" (note 3, supra) is not immediate in the sense of an instantaneous transmission of the process the moment the constable departs. Uniformly this, as in the case of notice of the occurrence (note 1, supra), is treated as requiring transmission within a reasonable time considering all of the circumstances. 8 Appleman, Insurance Law & Practice § 4734 (1942).5 A significant circumstance, as we shall discuss later, may be the age and capacity for understanding of the assured. So, too, may be knowledge that the coverage exists in one's favor. In other situations conduct of the insurer will be treated as a waiver of the breach. 8 Appleman § 4692. And here we have the unique situation of a first suit being dismissed before it ripened into any legal effectiveness followed thereafter by a second suit as to which process was forwarded without delay.

In our solution of this case, there are several questions vigorously argued which we need not finally determine. One relates to waiver by the Insurer in view of its active, open defense of Wells, Sr. in the second suit after rejection by him of the proffered non-waiver agreement. The authorities certainly point in the direction of waiver. 8 Appleman §§ 4692, 4747 at pp. 49, 148; Indemnity Company of America v. Pitts, Tex.Com. App. 1933, 58 S.W.2d 53; Schmidt v. National Automobile & Casualty Insurance Co., 8 Cir., 1953, 207 F.2d 301, 38 A.L.R.2d 1142; Miller v. Union Indemnity Co., 1924, 209 App.Div. 455, 204 N.Y.S. 730. We have recently explored at some length the serious and correlative obligations and implications of the insurer's duty to defend. American Fidelity & Casualty v. Pennsylvania Threshermen & Farmers' Mutual Casualty Co., 5 Cir., 1960, 280 F.2d 453, 460. And if this amounted to a waiver, there is the further problem whether this rubbed off onto Wells, Jr. Likewise, there is the question whether an assumed failure properly to forward process in the first suit may have been cured effectively by the dismissal of that suit and the commencement of the second suit in which citation was quickly transmitted. One case does hold that the failure is not cured by the subsequent suit.6 But it has been sharply criticized.7 To the contrary are the Arkansas cases which measure both the duty to defend and timeliness of transmission of process in respect of the particular suit rather than in terms of a prior dismissed action. M. F. A. Mutual Insurance Co. v. White, Ark.1960, 334 S.W.2d 686, 688; Southern Surety Co. v. Puryear-Meyer Grocer Co., 1922, 151 Ark. 480, 236 S.W.2d 841. Much can be said in favor of this approach. Certainly (assuming no other breach) the mere failure of the assured to forward process in one case would not, for example, terminate coverage or duty to defend in suits thereafter instituted by other damage plaintiffs in a multiparty accident. Nor would it as to the same injured person (e. g., a minor or a decedent) where the first suit under local practice was a nullity because brought by the wrong party or in the wrong court. Nor would it as to a suit which failed to set forth adequately an occurrence within the coverage, 8 Appleman § 4683-6, which might be remedied by an amended complaint served and promptly forwarded to the insurer. 8 Appleman § 4740 at 127; Press Pub. Co. v. General Accident, Fire & Life Assurance Corp., 1916, 160 App.Div. 537, 145 N.Y.S. 711, affirmed 217 N.Y. 648, 112 N.E. 1072. But Texas has not yet made a choice and on the equivocal materials now available to us, Bernhardt v. Polygraphic Co. of America, 1956, 350 U.S. 198, 76 S.Ct. 273, 100 L.Ed. 199, 206, 208-210, the expressions...

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