Pareti v. Sentry Indem. Co.

• Decision Date: 12 December 1988
• Docket Number: No. 88-C-0262,88-C-0262
• Citation: 536 So.2d 417
• Parties: Mary and Paul PARETI v. SENTRY INDEMNITY COMPANY.
• Court: Louisiana Supreme Court

Page 417

536 So.2d 417

Mary and Paul PARETI v. SENTRY INDEMNITY COMPANY.

No. 88-C-0262.

Supreme Court of Louisiana.

Dec. 12, 1988.

Dominic Ovella, Hailey, McNamara, Hall, Larmann & Papale, Metairie, for applicant.

Frank Zaccaria, Sr., Frank Zaccaria, Jr., Zaccaria & Zaccaria, Gretna, for respondent.

CALOGERO, Justice.

In this case, the liability insurer's full policy limits were paid out in settlement of a single claim after a lawsuit had been filed against the insurer and its insured. The issue presented is whether the liability insurer had a continuing duty, after the exhaustion of its policy limits through settlement, to defend its insured in another claim arising from the same accident.

The liability policy promises that the insurer "will settle or defend ... any claim or suit" brought against its insured for damages covered by the policy. However, the policy also states that the insurer's "duty to settle or defend ends when our limit of liability for this coverage has been exhausted."

Finding this policy language ambiguous, the court of appeal concluded that the insurer's duty to defend was not terminated when it exhausted its policy limits through settlement. ¹ We granted the liability insurer's writ application, ² and now reverse.

The policy's limitation on the insurer's duty to defend is not ambiguous. Further, there is no indication from the record that the insurer did not act in good faith when it settled the personal injury claim for the limits of its liability policy. Nor do we accept the insureds' argument that the express contractual limitation on the insurer's duty to defend should be stricken for reasons of public policy.

We hold, therefore, that once the liability insurer exhausted its policy limits through a good faith settlement, it was no longer obligated to defend the insured in the separate action based on the same accident. We do not suggest, however, that a liability insurer's duty to defend its insured will always be discharged by exhaustion of its policy limits. As discussed further below, our holding today is premised upon both the language of the policy before us and the facts of this particular case.

(I) FACTS AND PROCEEDINGS BELOW

On July 19, 1984, an automobile operated by Mary Pareti was struck in the rear by a vehicle operated by Mrs. Edward J. Schneller. Pareti and her husband later filed suit against Schneller and her husband for personal injuries sustained in the accident. Also named as defendants were the Schnellers' automobile liability insurer, Pennsylvania General Insurance Company, and the plaintiffs' uninsured motorist carrier, Sentry Indemnity Company. Because of its policy obligations, Pennsylvania retained an attorney to defend the Schnellers (and Pennsylvania, of course).

On July 30, 1985, Sentry filed a cross-claim against the Schnellers, seeking indemnity for all amounts that Sentry might be required to pay under the U.M. policy to pay its insureds, the Paretis.

Two days later, August 1, 1985, Mr. and Mrs. Pareti executed a compromise and release agreement with the Schnellers and Pennsylvania, whereby they released those defendants from all further liability in exchange for $50,000 tendered in settlement by Pennsylvania. $50,000 was the limit of Pennsylvania's "per person" liability for the accident. In the compromise agreement, the Paretis reserved their rights against Sentry, their own underinsured motorist carrier. At the time that this settlement was executed, Sentry had not made any payments to the Paretis under its U.M. policy.

In November, 1985, the Schnellers, still represented by the attorney retained by Pennsylvania, moved for a summary judgment dismissal of Sentry's cross-claim against the Schnellers. The motion asserted that "[u]nder the jurisprudence of this state" the U.M. carrier's claim for subrogation was lost when the plaintiffs released the tortfeasors. The leading cases in support of the Schnellers' position included Pace v. Cage, 419 So.2d 443 (La.1982), Bond v. Commercial Union Assurance Co., 407 So.2d 401 (La.1981) and Niemann v. Travelers Ins. Co., 368 So.2d 1003 (La.1979). In those cases, this Court held that once the injured plaintiff releases the uninsured-underinsured motorist, the U.M. carrier has no right, either by statute or by conventional subrogation, to collect from the underinsured motorist benefits paid to the plaintiff under its policy.

Had the district court applied Bond, Pace, and Niemann, Sentry's cross-claim would have been dismissed and the present duty-to-defend dispute would not have arisen. However, in February, 1986, the district court denied summary judgment, without written reasons. Apparently the trial court based its denial of summary judgment on reasons similar to those employed shortly thereafter by the Fifth Circuit court of appeal in Moncrief v. Panepinto, 489 So.2d 938 (La.App. 5th Cir.1986). In Moncrief the court of appeal held, notwithstanding the aforementioned jurisprudence, that the U.M. carrier has an "independent" statutory cause of action against the tortfeasor for recovery of benefits paid to its insured. Moncrief was later overruled by this Court's decision in Bosch v. Cummings, 520 So.2d 721 (La.1988), but, unfortunately for the Schnellers, Bosch was not decided until long after they had defended, and chosen to settle Sentry's cross-claim.

Two weeks after the trial court denied the motion to dismiss the cross-claim, Pennsylvania advised the Schnellers by letter that because the company's policy limits had been exhausted in the settlement with the plaintiffs, it would no longer provide them with a defense against the cross-claim. Shortly thereafter Pennsylvania's attorney withdrew from the litigation, and the Schnellers retained an attorney at their own expense to defend the cross-claim. That attorney sought a supervisory writ from the court of appeal in an effort to secure dismissal of Sentry's cross-claim, but that writ was denied.

The Schnellers then filed a cross-claim of their own against Pennsylvania, asserting that Pennsylvania had breached its duty to defend them against the Sentry cross-claim, and therefore should be held liable to them for all attorney fees and costs which they had or would incur in defense of that claim. Pennsylvania answered with a general denial, asserting that its duty to defend the Schnellers had terminated when it exhausted its policy limits in the settlement with the plaintiffs.

The Schnellers again sought summary judgment dismissing Sentry's cross-claim, and again their motion was denied. Shortly before the case was scheduled to be tried, the plaintiffs settled their U.M. claim against Sentry for $42,500. Sentry thereupon settled its corresponding cross-claim against the Schnellers for just $2,500, a sum paid by the Schnellers personally.

The only matter which was not compromised was the Schnellers' cross-claim against Pennsylvania for breach of the asserted duty to defend. After a hearing, the trial court dismissed the cross-claim and ruled that Pennsylvania's duty to defend the Schnellers terminated when it exhausted its policy limits through settlement.

The court of appeal reversed, on the ground that the provisions of the policy which pertain to the insurer's obligation to defend its insured are ambiguous. 519 So.2d at 227-28. Citing the well-recognized rule than an ambiguity in an insurance contract must be construed in favor of the insured, the court of appeal determined that Pennsylvania's duty to defend the Schnellers did not terminate when its policy limits were exhausted. Finding that Pennsylvania had breached its continuing duty to defend the Schnellers, the court of appeal found the company liable for the attorney fees that the Schnellers incurred defending the Sentry cross-claim.

(II) LAW AND ANALYSIS

The pertinent portion of Pennsylvania's liability policy reads as follows:

We will pay damages for bodily injury or property damage for which any covered person becomes legally responsible because of an auto accident. We will settle or defend, as we consider appropriate, any claim or suit asking for these damages. In addition to our limit of liability, we will pay all defense costs we incur. Our duty to settle or defend ends when our limit of liability for this coverage has been exhausted.

We first consider the court of appeal's conclusion that the above stated policy language is ambiguous.

There are certain elementary legal principles which apply to the interpretation of insurance policies. An insurance policy is a contract and, as with all other contracts, it constitutes the law between the parties. Carney v. American Fire & Indemnity Co., 371 So.2d 815 (La.1979). If the policy wording at issue is clear and expresses the intent of the parties, the agreement must be enforced as written. Albritton v. Fireman's Fund Ins. Co., 224 La. 522, 70 So.2d 111 (La.1953).

An insurance contract is to be construed as a whole, and one portion thereof should not be construed separately at the expense of disregarding another. Benton Casing Service, Inc., v. Avemco Ins., 379 So.2d 225 (La.1979). If there is an ambiguity in a policy, then that ambiguity should be construed in favor of the insured and against the insurer. Albritton, 70 So.2d at 111. However, courts have no authority to alter the terms of policies under the guise of contractual interpretation when the policy provisions are couched in unambiguous language. Monteleone v. American Emp. Ins. Co., 239 La. 773, 120 So.2d 70 (La.1960); Edwards v. Life & Cas. Ins. Co. of Tenn., 210 La. 1024, 29 So.2d 50 (La.1946).

The court of appeal concluded that the policy is ambiguous because it states that the insurer will defend or settle "any claim," yet also states that the duty to defend ends when coverage is exhausted. 519 So.2d at 228. When the paragraph of the policy containing this language (cited in full at the outset of this discussion) is read as a whole, there is no ambiguity. The ...