Peavey Co. v. M/V ANPA, 91-3827

Citation971 F.2d 1168
Decision Date14 September 1992
Docket NumberNo. 91-3827,91-3827
PartiesPEAVEY COMPANY, Plaintiff, v. M/V ANPA, in rem, et al., Defendants. DEGESCH AMERICA, INC., Defendant in Cross Claim--Appellee Plaintiff in Counter Claim, v. ZURICH INSURANCE COMPANY, Plaintiff in Cross Claim--Appellant Defendant in Counter Claim.
CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)

Thomas L. Gaudry, Jr., Frederick H. Dwyer, Windhorst, Gaudry, Talley & Ranson, Harvey, La., for Zurich Ins. Co.

Ralph E. Smith, New Orleans, La., for Degesch America, Inc.

Appeals from the United States District Court for the Eastern District of Louisiana.

Before BROWN, KING and WIENER, Circuit Judges.

JOHN R. BROWN, Circuit Judge:

Where We Are Now

Zurich Insurance Co. appeals a judgment in favor of Degesch America, Inc. for failure of Degesch, the insured, to furnish timely notice of the occurrence. 773 F.Supp. 832. Applying Louisiana law, we agree with the District Court that Zurich was not prejudiced by Degesch's untimely notice of its claim and, alternatively, that Zurich has waived its right to raise any defense of noncoverage. We concur with the District Court that Zurich is obligated to pay the coverage fees and outstanding attorney's fees. We do not, however, agree with the District Court that Zurich's suit is against public policy and thereby find that Zurich should not be penalized. We therefore affirm in part and reverse in part.

Where It All Began

On March 12, 1989, the M/V ANPA, while down-bound on the Mississippi River, lost electrical power and struck the Nashville Avenue Wharf in New Orleans, Louisiana. 1 The allision caused damage to the wharf, the vessel and its wheat cargo. ANPA claimed that the power loss resulted from its temporary cargo fumigation system installed by Degesch America, Inc. 2

Five days following, on March 17, 1989, the ANPA's owners informed Degesch that they intended to hold Degesch fully responsible for the allision and all resulting damages. Upon being notified, Degesch took certain actions to discover the exact nature of the allision. It retained Ralph E. Smith of Deutsch, Kerrigan & Stiles as counsel and experts who conducted investigations. But it failed to give notice of any kind to Zurich, its insurer, of the occurrence. During the five days between the allision and the notice to Degesch, other events had occurred: (i) the cargo from the ANPA's hold was discharged; (ii) surveys were conducted by the representatives of the ANPA and the wharf; and (iii) neither Degesch nor Zurich was notified of these surveys or invited to participate. The ANPA remained in New Orleans undergoing repairs. On April 20, 1989, the vessel sailed from the Port of New Orleans and was never seen in New Orleans again. The ANPA was sold by Seaport to Beogradska Polividba, an agency of the government of Yugoslavia.

On January 2, 1990, Zurich's claim representative in Dallas finally was notified of the matter. 3 After obtaining and reviewing Degesch's investigative reports, he concluded that no other actions were necessary pending further developments.

On March 9, 1990, Exportkhleb 4 filed suit against ANPA, Seaport Shipping, Transmed Shipping, Degesch, and ABC Insurance Co. 5 Degesch informed Zurich of the suit on March 12, 1990. On March 26, 1990, instead of reserving its rights or raising any question about compliance with policy terms, Zurich assigned the case to Ralph Smith of Deutsch, Kerrigan & Stiles, who initially was Degesch's counsel, thereby retaining Ralph Smith as its own counsel. It was not until May 29, 1990 that Zurich finally issued a reservation of rights letter to Degesch, claiming a late notice defense. In the meantime, Ralph Smith continued to act as counsel for Degesch and Zurich.

Smith answered Exportkhleb's complaint although he knew about the reservation of rights defense. As before, Smith continued to act as counsel for Zurich, until November 8, 1990 when Zurich finally filed a motion to substitute counsel.

In a consolidated proceeding, Zurich reached a settlement with all the parties involved. Zurich then filed a cross-claim against Degesch for recovery of the $675,000.00 Zurich paid in settlement and for counsel fees it incurred in defense of the suit. Zurich contended that it had been prejudiced by Degesch's delay in reporting the occurrence. In its answer, Degesch counterclaimed for un-reimbursed defense costs and penalties.

Applying Louisiana law, the District Court found that Zurich was not prejudiced by Degesch's untimely notice. Alternatively, the Court also decided that Zurich had waived any defense of late notice. Aside from determining that Zurich was obligated to provide Degesch with coverage under its insurance policy, the District Court also stated that Zurich's suit against its own insured was against public policy and thus imposed a penalty.

Which Law Should Apply?

A threshold question in this case is whether Virginia law or Louisiana law governs the consequences of failure to give timely notice. Quite naturally, Zurich argues that the District Court should have applied Virginia law. Whether we should apply Virginia or Louisiana law presents a choice of law analysis.

Since jurisdiction in this case was based on diversity, the District Court was correct in applying the conflicts of law principle of the forum state, Louisiana. Klaxon Co. v. Stentor Elec. Mfg. Co., Inc., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021, 85 L.Ed. 1477, 1480 (1941). Louisiana courts have adopted a combination of Professor Brainerd Currie's interest analysis and the Second Restatement's "most significant relationship" test in choice of law contexts. See generally, B. Currie, Selected Essays on the Conflict of Laws (1963); Sandefer Oil & Gas v. AIG Oil Rig of Texas, Inc., 846 F.2d 319, 322 (5th Cir.1988). While we agree with the District Court's finding that Louisiana law applies, we believe that it warrants more precise reasoning.

Under Louisiana's choice of law principle, the first inquiry is whether there is a true or false conflict of interest. Sandefer, 846 F.2d at 322; Fallon v. Superior Chaircraft Corp., 884 F.2d 229, 231 (5th Cir.1989). A false conflict exists when only one state has a legitimate interest in the application of its law to resolve the issue. A true conflict exists when each state has such an interest. To determine whether a state has a legitimate interest in requiring that its laws be applied, one must examine whether "the state's relationship to the dispute is within the scope of the state's policy." Sandefer, 846 F.2d at 322. If there is a false conflict, one must apply the law of the state with the interest. If there is a true conflict or an unprovided for case in the interest analysis principle, a situation where neither state has an interest, then one must look to the Second Restatement. 6 Id.

According to Louisiana's conflict of law principles, we must first apply Professor Currie's interest analysis. Under Louisiana law, the insurer cannot deny coverage merely because its insured failed to give notice of loss as soon as practicable. Sandefer, 846 F.2d at 321. Rather, to deny coverage on the basis that it did not receive notice as stipulated in the policy, the insurer must show "actual prejudice". Id.; Elevating Boats, Inc. v. Gulf Coast Marine, Inc., 766 F.2d 195, 198 (5th Cir.1985); Champion v. Panel Era Mfg. Co., 410 So.2d 1230, 1236 (La.App. 3d Cir.1982). Essentially, Louisiana's policy "interest underlying its rule involves not only protection of its insured residents, but protection of Louisiana plaintiffs and the general public as well." Champion, 410 So.2d at 1237. Louisiana's rule of requiring proof of actual prejudice aims to prevent insurers from avoiding their contractual obligations and thus to assure payment of liability claims up to the policy limits. Id., citing Fakouri v. Insurance Co. of N.A., 378 So.2d 1083, 1086-87 (La.App. 3d Cir.1979) and Miller v. Marcantel, 221 So.2d 557, 559 (La.App. 3d Cir.1969).

In this case, the insured is a Louisiana resident. The District Court found that "Degesch is a corporation organized under the laws of Delaware, having an office and a principal place of business in Weyers Cave, Virginia and Reserve, Louisiana." Since Degesch is a Louisiana resident, Louisiana has an interest in seeing that Degesch's insurance coverage is protected and that Zurich should be able to avoid its contractual obligations only if it can show actual prejudice.

Virginia does not have an interest in seeing that its law is applied in this matter. In Virginia, the insured's timely notice to the insurer is a condition precedent to coverage. State Farm Fire and Casualty Co. v. Scott, 236 Va. 116, 372 S.E.2d 383, 385 (1988); State Farm Mut. Auto. Ins. Co. v. Porter, 221 Va. 592, 272 S.E.2d 196, 199 (Va.1980). The insurer does not need to show that it was actually prejudiced by the insured's untimely notice. Scott, 372 S.E.2d at 385; Porter, 272 S.E.2d at 199. Unlike Louisiana's policy, Virginia's underlying policy is to protect Virginia insurers from stale claims. Lord v. State Farm Mut. Auto. Ins. Co., 224 Va. 283, 295 S.E.2d 796, 799 (1982).

In this case, Zurich is neither a domiciliary nor a resident of Virginia. Zurich does not have its principal place of business in Virginia. 7 In Sandefer, we held that Texas policy regarding immediate notice of loss to protect Texas insurers was not applicable because none of the defendant insurance companies were domiciled in Texas. Thus, in Sandefer, we held that Texas did not have an interest in the issue. Sandefer, 846 F.2d at 323. Accordingly, Virginia does not have an interest in seeing that its law is applied in this matter. 8

This is a false conflict of interest case. We agree with the District Court that only Louisiana has an interest in this matter. So we must apply Louisiana law.

Actual Prejudice

We now reach the issue whether Zurich can deny Degesch's claim on the basis of Degesch's failure to give...

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