Quinlan v. Liberty Bank and Trust Co.

• Decision Date: 12 March 1990
• Docket Number: No. 89-C-1644,89-C-1644
• Citation: 575 So.2d 336
• Parties: Bill QUINLAN, Pat Quinlan, Lennard Lapuyade, Johanna Lapuyade, Fabio J. Canton on Behalf of and/or Michael McCullar, F. King McGoey, Karen McGoey, Justin J.W. Hendricks and Matthew F. Rice, Jr. on Behalf of his minor son, Bryan M. Rice, v. LIBERTY BANK AND TRUST COMPANY and the St. Paul Insurance Company, Houston, Texas. 575 So.2d 336
• Court: Louisiana Supreme Court

Page 336

575 So.2d 336

Bill QUINLAN, Pat Quinlan, Lennard Lapuyade, Johanna

Lapuyade, Fabio J. Canton on Behalf of and/or Michael

McCullar, F. King McGoey, Karen McGoey, Justin J.W.

Hendricks and Matthew F. Rice, Jr. on Behalf of his minor son, Bryan M. Rice, v. LIBERTY BANK AND TRUST COMPANY and the St. Paul Insurance

Company, Houston, Texas.

No. 89-C-1644.

575 So.2d 336

Supreme Court of Louisiana.

March 12, 1990.

Rehearing Granted Sept. 13, 1990.

On Rehearing March 11, 1991.

William W. Miles, Lemann, O'Hara & Miles, New Orleans, for all plaintiff-applicants.

Harvey C. Koch, Gary J. Rouse, Mishthi G. Ratnesar, Koch & Rouse, New Orleans, for St. Paul Fire & Marine Ins. Co., defendant-respondent.

Stephen G. Bullock and Cecilia C. Woodley, New Orleans, amicus curiae.

WATSON, Justice.

The issue is whether plaintiffs have a right of direct action against defendant, St. Paul Insurance Company, under the Louisiana Direct Action Statute ¹ in connection with a "Directors' and Officers' Liability Policy" ² issued by St. Paul to Liberty Bank and Trust Company.

FACTS

Plaintiffs filed suit alleging that the bank and its directors and officers' liability insurer were liable for negligent management of their funds by an officer of the bank, Rehm Winters. St. Paul filed an exception of no right of action on the ground that its policy was an indemnity policy which is not subject to the Louisiana Direct Action Statute.

The trial court sustained the exception of no right of action and dismissed plaintiffs' direct action against St. Paul. The court of appeal affirmed on the ground that the policy is one of indemnity, excluded from the scope of the direct action statute. ³ A writ was granted to consider the judgment of the court of appeal. ⁴

The bank's directors' and officers' liability policy provides two types of coverage: "A. Corporate Indemnification;" and "B. Directors' and Officers' Liability." Under Section B, St. Paul agrees to pay on behalf of the insured bank any claims against its directors and officers for loss "caused by any negligent act, any error, any omission or any breach of duty while acting in their capacities as Directors or Officers or any matter claimed against them solely by reason of their being Directors or Officers." ⁵

As its caption indicates, this insurance policy is a policy of liability insurance. ⁶ Liability insurance is any insurance protection which indemnifies liability to third persons. Black's Law Dictionary 824 (5th ed. 1979). In Louisiana, liability insurance, including that which purports to be indemnity, must protect the public as well as the insured. Olympic Towing Corporation v. Nebel Towing Company, 419 F.2d 230 (5th Cir.1969), cert. denied, 397 U.S. 989, 90 S.Ct. 1120, 25 L.Ed.2d 396 (1970). All liability insurance comes within the provisions of the Louisiana Direct Action Statute, LSA-R.S. 22:655.

The court of appeal erred in sustaining the exception of no right of action on behalf of St. Paul. For the foregoing reasons, the judgment of the court of appeal is reversed and the matter is remanded for further proceedings.

REVERSED AND REMANDED.

LEMMON, J., concurs and assigns reasons.

MARCUS, J., dissents for reasons assigned by COLE, J.

COLE, J., dissents and assigns reasons.

COLE, Justice, dissenting.

I respectfully dissent.

The issue before this court is whether the Directors and Officers Insurance Policy issued by St. Paul to Liberty Bank is a liability policy or an indemnification policy. Plaintiffs filed a lawsuit against Liberty Bank and Trust Company, Rehm Winters, an officer of Liberty, and St. Paul Insurance Company, the insurer of the officers and directors of Liberty, alleging that Winters negligently breached his fiduciary duty to them under a limited partnership agreement pursuant to which Winters, as the general partner, was to invest funds deposited by plaintiffs, the limited partners. ¹ Plaintiffs assert a direct right of action against St. Paul under La.R.S. 22:655 which provides for a direct right of action by a third party against an insurance company where the policy sued upon is a liability policy. ²

St. Paul filed the peremptory exception raising the objection of no right of action, ³ arguing plaintiffs could not sue St. Paul directly under Louisiana's Direct Action Statute because the statute covers only liability policies, and the policy sued upon is an indemnity policy. The trial court sustained the exception, and the court of appeal affirmed. 545 So.2d 1140 (La.App. 4th Cir.1989). We granted plaintiffs' application for a writ of review. 550 So.2d 637 (La.1989). The policy at issue is clearly an indemnification policy and thus not covered by Louisiana's Direct Action Statute. Therefore, I dissent.

LAW

Plaintiffs argue the policy at issue is a liability policy, and alternatively, that the term "liability insurance" as it is used in the Direct Action Statute includes "indemnity" insurance. The latter argument is also advanced in the amicus brief. Liability and indemnity policies have been distinguished by this court as follows:

An indemnity agreement is a specialized form of contract which is distinguishable from a liability insurance policy. A cause of action under a liability insurance policy accrues when the liability attaches. Appleman, Insurance Law and Practice (Buckley ed.) Sec. 4261. However, an insurer's duty to defend arises whenever the pleadings against the insured disclose a possibility of liability under the policy. (citations omitted). On the other hand, an indemnity agreement does not render the indemnitor liable until the indemnitee actually makes payment or sustains loss. BLACK'S LAW DICTIONARY 692-93 (5th ed. 1979); Appleman, Insurance Law and Practice (Buckley ed.) Secs. 4261, 6668.

Meloy v. Conoco, Inc., 504 So.2d 833, 839 (La.1987).

In Arrow Trucking Co. v. Continental Ins. Co., 465 So.2d 691 (La.1985), we declined to allow a direct action by an insured against its insurer's reinsurer where the reinsurance agreement was in the nature of indemnity rather than liability. We stated in Arrow, "The Direct Action Statute, La.R.S. 22:655, applies only to 'polic[ies] or contract[s] of liability insurance.' " Id. at 700. Plaintiffs' argument that the definition of liability insurance, as used in the Direct Action Statute, may be construed to include indemnity insurance is without merit.

The history of the Direct Action Statute, as well as the difference between the terms of general liability policies and Directors' and Officers' (D & O) liability policies, provide ample support for distinguishing between the two. In 1918, the Louisiana legislature passed the first act which eventually led to the present version of La.R.S. 22:655, the Direct Action Statute. ⁴ Prior to the passage of this act, insurance policies typically provided only for indemnification of the insured for loss actually sustained. Coverage under such policies was not triggered until the insured tortfeasor had suffered an actual loss through payment of a judgment to the victim. If the insured failed to make payment on the judgment due to insolvency or bankruptcy, he suffered no actual loss and no amount was collectible by the victim from the insurer. ⁵

In enacting the Direct Action Statute, "[t]here is little doubt that the legislators were thinking of ordinary tort-induced injuries resulting from automobile accidents," ⁶ where victims were left uncompensated, and insured tortfeasors without the means to pay a judgment received no benefit in exchange for premiums paid to insurers. See Webb v. Zurich Insurance Co., 251 La. 558, 205 So.2d 398 (1967).

The public policy behind the Direct Action Statute was made clear when it was amended in 1956 to provide:

It is also the intent of this Section that all liability policies ... are executed for the benefit of all injured persons, his or her survivors or heirs, to whom the insured is liable; and that it is the purpose of all liability policies to give protection and coverage to all insureds, ... for any legal liability said insured may have as or for a tort-feasor within the terms and limits of said policy.

Added by Act 475 of 1956, Sec. 1. The policy of protecting automobile accident victims from insolvent tortfeasors is further evidenced by the requirement that every motor vehicle (with the exception of a few) be covered by an automobile liability policy. ⁷

Although there is certainly a need to protect investors from the negligence or misconduct of corporate officers and directors, the public policy behind indemnification of officers and directors is that "people who serve in these positions should, in the absence of certain conduct (fraud, breach of fiduciary duties, etc.) be free from personal liability for corporate acts." J. Bishop, "The Law of Corporate Officers and Directors: Indemnification and Insurance," (1981, cum. supp. 1989), ch. 6, p. 8, Sec. 6.02. See also 9 to 5 Fashions, Inc. v. Spurney, 538 So.2d 228, 232 (La.1989), in which we recognized this policy. This public policy is fueled by the need to induce competent people to serve as corporate officers and directors. Since indemnification by the corporation is often discretionary, ⁸ "[l]arge corporations ... need ... [insurance] protection, in order to attract and retain directors of substance and prominence." W. Knepper, "Liability of Corporate Officers and Directors," 4th ed. at 749. D & O insurance comports with public policy by protecting officers and directors not only from personal liability, but from the costs incurred in defending lawsuits against them. Evidently, the protection at which D & O policies are aimed differs substantially from the protection at which other types of liability insurance are aimed. Also, unlike automobile liability insurance and other types of insurance which provide coverage for physical injury or damage to property, D & O insurance has only recently become prevalent. Although a form of D & O coverage...