Nationwide Mut. Ins. Co. v. Evans

• Decision Date: 15 November 1989
• Docket Number: No. 07-58634,07-58634
• Parties: NATIONWIDE MUTUAL INSURANCE COMPANY v. John L. EVANS.
• Court: Mississippi Supreme Court

Page 1117

553 So.2d 1117

NATIONWIDE MUTUAL INSURANCE COMPANY v. John L. EVANS.

No. 07-58634.

Supreme Court of Mississippi.

Nov. 15, 1989.

Raymond L. Brown, Brown & Associates, P.A., Pascagoula, for appellant.

James H. Heidelberg, Bryant Stennis & Colingo, Pascagoula, for appellee.

Before DAN M. LEE, P.J., and PRATHER and ROBERTSON, JJ.

ROBERTSON, Justice, for the Court:

I.

This case presents an appeal and a cross-appeal arising out of a hotly disputed action regarding the rights and responsibilities of the parties to an automobile insurance contract. In the end, the Circuit Court dismissed the insurer's declaratory judgment complaint and the insured's bad faith counterclaim without prejudice and then assessed against each substantial sanctions under Rule 11(b), Miss.R.Civ.P., payable to the other.

We hold that the Circuit Court employed incorrect legal standards in considering the Rule 11 issues. Moreover, when the correct standards are applied, neither sanction order may stand. We reverse and render on both direct and cross-appeal.

II.

All else was inchoate until April 30, 1985, when Ida Rose Yocum slipped and fell in the bumper area of a 1970 Ford truck, actually a mail van, and broke her leg. Yocum was operating the truck as a driver for John L. Evans who held a contract with the U.S. Postal Service to deliver mail and also owned the truck. At the time, Evans held a liability insurance policy with Nationwide Mutual Insurance Company covering the truck.

On January 10, 1986, Yocum filed suit against Evans charging negligence and her personal injuries. Evans notified Nationwide of the suit and Nationwide in turn employed counsel to defend.

In point of fact, the Nationwide policy contained an employee exclusion, that is, the policy provided that the insured, Evans, would have no liability coverage in the event of personal injury claims which may be asserted by someone who was Evan's employee which arose out of an incident occurring in the course and scope of such employment.

In her complaint Yocum had alleged that "she was employed by the defendant, John L. Evans, for the purpose of delivering mail," that "she was going about her ordinary and customary job duties ... and was operating as his [Evans'] servant, agent and employee in carrying out the duties of her employment at the time of the accident...." The complaint further charged that Evans "had not secured Workmen's Compensation insurance for and on her behalf."

At that time, Nationwide's file reflected facts which would suggest that Yocum was not an employee. When Evans originally reported the claim, he had talked with Nationwide claims representative Debbi George and had stated Yocum was not his employee. George had made a note to the file to this effect. Evans apparently regarded Yocum as a substitute mail carrier. He paid Yocum $25.00 a day each day she delivered the mail for him.

In this state of the matter, Nationwide sent Evans a "Reservation of Rights" letter and retained counsel to institute the present action, a declaratory judgment action, against Evans on the question of coverage. In fact, on February 19, 1986, Nationwide Mutual Insurance Company commenced the present action by filing in the Circuit Court of Jackson County its Complaint for Declaratory Judgment asking that the Court construe "the provisions of the policy of insurance." Rule 57, Miss.R.Civ.P. Nationwide put at issue the effect of the employee exclusion.

On September 19, 1986, following Evans' deposition, Nationwide amended its complaint and thereupon alleged that Evans had failed to disclose material facts in procuring the policy and that, if Evans had disclosed the correct facts, Nationwide would either not have issued the policy in question or would have issued a different kind of coverage.

Evans answered the complaint and asserted a counterclaim, originally on March 21, 1986, charging Nationwide with bad faith and demanding $50,000.00 in actual damages and $7,000,000.00 in punitive damages.

At trial the Circuit Court ultimately bifurcated the proceedings on Nationwide's claim for declaratory judgment and Evans' bad faith counterclaim. The Court then directed a verdict for Evans on Nationwide's declaratory judgment action and, most important for the present appeal, imposed sanctions on Nationwide under Rule 11, Miss.R.Civ.P. In its subsequent written ruling, the Court held that Plaintiff Nationwide had

mistakenly relied solely upon the company files and failed to inquire of the agent as to any knowledge which the agent may have had which would contradict or affirm the information in the files, and, as a result, the pleading before this Court is frivolous.

On February 24, 1987, the Court entered judgment in favor of Evans and against Nationwide in the sum $22,283.58.

The Circuit Court further ordered Evans to pay Nationwide Mutual some $13,462.55 in Rule 11 sanctions, the particulars of which we consider in Section IV below.

III.

Rule 11, Miss.R.Civ.P., ¹ vests in our trial courts discretionary authority to impose sanctions upon parties or attorneys. Where the trial court has employed the correct legal standards, we may reverse only where we find an abuse of discretion. Tricon Metals & Services, Inc. v. Topp, 537 So.2d 1331, 1336 (Miss.1989) and Dethlefs v. Beau Maison Development Corp., 511 So.2d 112, 118 (Miss.1987). Where the court has exercised its discretionary authority against a substantial misperception of the correct legal standards, our customary deference to the trial court is pretermitted, Burkett v. Burkett, 537 So.2d 443, 446 (Miss.1989); Gibson v. Manuel, 534 So.2d 199, 204 (Miss.1988), for the error has become one of law. Boggs v. Eaton, 379 So.2d 520, 522 (Miss.1980); S & A Realty Co. v. Hilburn, 249 So.2d 379, 382 (Miss.1971).

Quite apparently, the portion of Rule 11 implicated here is the last sentence of Rule 11(b) which provides:

If any party files a motion or pleading which, in the opinion of the court, is frivolous or is filed for the purpose of harassment or delay, the court may order such party to pay to the opposing party or parties the reasonable expenses incurred by such other parties and by their attorneys, including reasonable attorneys fees.

This portion of the rule thus contains twin standards, first, frivolousness, and, second, harassment or delay. These standards should not be read as another instance of the legal mind's inability to use one word where two or three will do as well, and there is no reason we should not take seriously the disjunctive "or". A filing not technically frivolous but nevertheless filed for harassment or delay is subject to the rule and to imposition of sanctions.

The record makes clear that the Circuit Court proceeded only according to the frivolousness standard. That standard is an objective one.

Our question is whether [the litigant], giving it the benefit of reasonably competent legal advice, had any hope of success on its claim.... Our inquiry is an objective one to be exercised from the vantage point of a reasonable party in [the litigant's] position as it filed ... its claim.

Tricon, 537 So.2d at 1335. (Emphasis added)

It is important to determine or isolate the point in time upon which our Rule 11 focus must be placed. In the language of the sentence of the rule here at issue we find "If any party files a motion or pleading...." (Emphasis added) Filing is that which triggers the possibility of sanctions. ² It would hardly be irrational for the Court to provide that parties and attorneys are under a continuing duty to monitor their pleadings and motions and if subsequent events or information coming to their attention suggest that a claim or defense is frivolous, they should be required to abandon it. For better or for worse, no such "continuing duty" may be found in the language of the rule. Our enforcement of the rule must be consistent with its language. We must take the rule as given, not as we wish it were. Candor requires the concession that the "continuing duty of inquiry" is not there.

There are two factual predicates for the Circuit Court's imposition of sanctions upon Nationwide. First is the testimony of Michael J. Goodwin, a former Nationwide agent, who had in fact issued the policy to Evans. Second is a certificate of insurance issued by the office of Fletcher Songe, Nationwide's agent at the time of the underlying accident, to the United States Postal Service, and which Evans produced at trial to the apparent surprise of all.

Notwithstanding Rule 11(b) standard of objective frivolousness, a word may be of value on the former agent of whom the Court said Nationwide should have inquired. Goodwin had been Evans' insurance agent for many years, first as an independent insurance agent in the 1970s, thereafter while he was employed with Nationwide for some five years, and subsequently in his present capacity as an Allstate agent. Goodwin testified that he issued the policy to Evans and that Nationwide actually knew the true facts because he had told them from the beginning; that is, Goodwin had told Nationwide that Evans was using the truck as a mail truck. This testimony if believed would certainly call into question Nationwide's position on its amendment to the complaint alleging material misrepresentations. The documentation in Nationwide's files, however, wholly fails to reflect Goodwin's testimony. Beyond this, it is quite clear that (a) Goodwin left Nationwide on less than amicable terms and (b) Goodwin is still serving as Evans' agent, now representing Allstate, and has a motive to want to retain Evans' business. More to the point, Evans is not armed with any finding by the Court that Nationwide's representatives were lying, as in Tricon, 537 So.2d at 1336.

Our cases are numerous holding that an insurer of right may avoid coverage upon proof the insured in the policy application made a substantial misrepresentation of a material fact. Sanford v. Federated...