Sandefer Oil & Gas, Inc. v. AIG Oil Rig of Texas Inc.

Decision Date06 June 1988
Docket NumberNo. 87-4491,87-4491
Citation846 F.2d 319
PartiesSANDEFER OIL & GAS, INC., Plaintiff-Appellant, v. AIG OIL RIG OF TEXAS INC., et al., Defendants-Appellees.
CourtU.S. Court of Appeals — Fifth Circuit

Richard L. Lagarde, Fisher, Gallagher, Perrin & Lewis, Houston, Tex., for plaintiff-appellant.

Harold K. Watson, Jane Militello, Liddell, Sapp & Zivley, Houston, Tex., for defendants-appellees.

Appeal from the United States District Court for the Western District of Louisiana.

Before WISDOM, REAVLEY, and JOLLY, Circuit Judges.

WISDOM, Circuit Judge:

This appeal presents a choice of law question: is the interpretation of certain insurance contract notice provisions governed by Louisiana law or Texas law? The district court held that Texas law applied, and the court granted the defendants' motion for summary judgment because the plaintiff-insured, under Texas law, failed to give the defendants reasonably prompt notice of its losses. We apply Louisiana choice of law principles and Texas insurance law, and we find no error in the district court's judgment.

I. FACTS AND PRIOR PROCEEDINGS

Between 1980 and 1984 Sandefer Oil & Gas, Inc., an oil and gas exploration company, obtained insurance policies for various oilfield risks. The policies were obtained through Sandefer's broker, the Houston office of Marsh & McLennan, Inc., and were delivered by the broker to Sandefer in Houston. In July 1985 Sandefer submitted six claims under these policies. Three of the claims, which are the subject of this lawsuit, arose in Louisiana; the others arose in Texas and Oklahoma. The losses for which Sandefer sought coverage occurred in 1982 and 1983. The claims were denied because of Sandefer's failure to give reasonably prompt notice of the losses. 1

Sandefer contends that its delay in submitting notices of loss was excusable, because it was unaware that such losses were covered by the policies. Sandefer sought coverage for underground blowouts or uncontrolled subsurface flows. Although some oilfield risk policies provide coverage only for above ground blowouts, the policies in this case were amended to provide coverage for costs related to any "out of control" well. 2 Sandefer admits contemporaneous knowledge of the subsurface blowouts, but Sandefer contends that it filed the notices of loss as soon as practicable, that is, after discovery of coverage for the blowouts.

Sandefer filed two suits, one in Louisiana and one in Texas. This suit was filed in Louisiana state court and was removed to federal court under diversity jurisdiction. Sandefer is a Texas corporation. The defendant insurance companies are domiciled in New Hampshire, New York, Canada, Norway, and Sweden. 3 The Texas suit was stayed pending resolution of this case.

The district court, upon the recommendation of a magistrate, granted the defendants' motion for summary judgment. The magistrate determined that Texas law governed this case and that Texas law barred recovery because of the plaintiff's unreasonable delay in filing its notices of loss. The plaintiff appeals, challenging both of the magistrate's determinations.

II. THE CONFLICT OF LAWS

In this case there is a conflict of laws. The plaintiff argues that Louisiana law determines the reasonableness of the plaintiff's notices of loss. Under Louisiana law, the insurer cannot escape liability because of the insured's failure to give notice of loss as soon as practicable; to avoid coverage the insurer must demonstrate prejudice caused by the insured's delay. 4 The defendants counter that Texas law governs, and under Texas law "the failure of the insured to give notice 'as soon as practicable' is a valid defense under the policy, regardless of whether any loss or damage to the insurer resulted from the delay". 5 The magistrate correctly recommended to the district court that in this diversity case the court is bound to follow the conflicts of law principles of the forum state, 6 Louisiana.

Both the plaintiff and defendants argue that a literal application of Louisiana Civil Code article 15 7 solves this choice of law problem. The defendants argue that Texas law governs because these contracts were executed in Texas, and article 15 states: "The form and effect of public and private written instruments are governed by the laws and usages of the places where they are passed or executed." The plaintiff points out, however, that the insurance policies provide coverage for risks located in Louisiana. The plaintiff argues that these Louisiana "effects" mandate the application of Louisiana law, because article 15 also provides that "the effect of acts passed in one country to have effect in another country, is regulated by the laws of the country where such acts are to have effect".

When applying Louisiana conflicts of law principles, this Court has noted that article 15 is not to be applied literally. 8 Article 15 begs the question. If only the state where the contract was executed has an interest, then that state's law is to be applied. When does that state have such an exclusive interest; when does the contract have "effects" in Louisiana? The answer to this question can be found only by using Louisiana's choice of law interest analysis. 9

In Jagers v. Royal Indemnity Co., 10 the Louisiana Supreme Court adopted a new method for resolving Louisiana choice of law problems, but the court was ambiguous in its choice of "interest analysis". As Professor Couch has noted, 11 the court cited both Professor Brainerd Currie's governmental interest analysis 12 and the Second Restatement 's "most significant relationship" approach. 13 Although some confusion remains, 14 a close examination of the Jagers opinion and subsequent Louisiana and federal cases suggests that Louisiana's choice of law approach is a combination of the Currie and Second Restatement methods.

Judge Rubin carefully summarized the Louisiana choice of law approach in Ardoyno v. Kyzar. 15 The court must first decide, using Currie's analysis, whether a false or true conflict exists. If there is a false conflict, the court must apply the law of the interested jurisdiction. In a true conflict case, the court uses the Second Restatement 's method to determine the applicable law.

A. Currie's Analysis of True and False Conflicts

Professor Currie's interest analysis examines the policies of each states' laws. 16 If the state's relationship to the dispute is within the scope of the state's policy, then the state has a legitimate "interest" in the application of its law to resolve the dispute. In a conflict between two states, if each state has such an interest, then a true conflict exists; whereas if only one state has an interest, a false conflict exists. The unprovided-for case, under Currie's analysis, is where neither state has an interest.

The plaintiff contends that Louisiana has an interest in this case under the reasoning of Champion v. Panel Era Mfg. Co. 17 In Champion the court was faced with a very similar choice between Texas and Louisiana law. The issue was whether an insured's failure to give prompt notice of a suit voided coverage. The court found that the following state laws were implicated:

Under Texas law, the failure to perform the condition of giving notice of the claim to the insurer as soon as practicable constitutes an absolute defense to coverage absent a waiver or other special circumstances. Breach of the condition voids policy coverage.... The rule in Louisiana is that an insurer must prove actual prejudice in order to deny a claim on the basis of not receiving notification as stipulated in the policy contract. 18

Three parties were involved in the controversy: a Texas insurer, a Texas insured, and a Louisiana injured plaintiff suing under a direct action statute. The court found that Louisiana's law was designed "to prevent insurers from using the notice requirement to evade the fundamental protective purpose of the insurance contract and to assure payment of liability claims up to the policy limits for which they collected premiums". 19 Louisiana had a legitimate interest, because its resident, the injured plaintiff suing under the direct action statute, was protected by the Louisiana policy.

In this case Louisiana law serves the same policy, but no Louisiana residents are involved. The injured party is the insured, Sandefer, a Texas resident. The losses for which coverage is sought occurred in Louisiana, but there is no evidence that any resident of Louisiana will be affected by a denial of coverage. These policies provided reimbursement for expenses already incurred by Sandefer. The plaintiff contends that Louisiana has an interest in keeping its oil wells operating so that the state can collect tax revenues, but there is no showing that Louisiana's general policy enunciated in West v. Monroe Bakery 20 was designed to promote such a special interest. The plaintiff was also free to use its insurance proceeds in states other than Louisiana. Louisiana does not have an interest in this case.

The defendants argue that Texas is the only state with an interest in applying its law, but this argument is similarly flawed. Texas allows insurers to require immediate notices of loss to protect Texas insurers from having to pay stale claims, which are much more difficult to investigate and value. None of the defendant insurance companies in this case, however, are domiciled in Texas. Texas does not have an interest in this case. This analysis, therefore, results in the unprovided for case under Currie's analysis, where neither state has an interest.

The defendants could argue that the law of Texas is designed to protect any insurance company doing business in Texas, but the plaintiff could make the same argument for the Louisiana law because the plaintiff does business in Louisiana. 21 If we assume that Texas's policy protects nonresident insurers doing business in Texas, then we must assume that...

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