Shockley v. Sallows

• Decision Date: 08 April 1980
• Docket Number: No. 78-1480,78-1480
• Citation: 615 F.2d 233
• Parties: Frederick W. SHOCKLEY, etc., Plaintiff-Appellant, v. Ralph M. SALLOWS, et al., Defendants, Colonial Penn Insurance Company, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 233

615 F.2d 233

Frederick W. SHOCKLEY, etc., Plaintiff-Appellant, v. Ralph M. SALLOWS, et al., Defendants Colonial Penn Insurance Company, Defendant-Appellee.

No. 78-1480.

United States Court of Appeals Fifth Circuit.

April 8, 1980.

Charles R. Brackin, Lake Providence, La., for plaintiff-appellant.

Davenport, Files, Kelly & Marsh, William G. Kelly, Jr., Monroe, La., for Colonial Penn Ins. Co.

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

Before AINSWORTH and HENDERSON, Circuit Judges, and HUNTER, ^* District Judge.

PER CURIAM:

The appeal in this diversity case concerns the rescission of an automobile liability insurance contract. Mrs. Judith Shockley, wife of Frederick Shockley and mother of two minor children, was killed in an automobile accident in Louisiana on November 7, 1975. On November 12, 1975 Shockley, individually and as natural tutor of the minor children, filed a wrongful death action against Ralph Sallows and his insurer, Colonial Penn Insurance Company. The action against the insurer was brought under the Louisiana Direct Action Statute (La.R.S. 22:655). The District Court held that the occurrence of the accident and the filing of the suit by plaintiff did not necessarily preclude the insurer from subsequently rescinding the policy.

The issue of the right to rescind was presented to the jury on an interrogatory: "Did Mr. Sallows conceal a material fact from Colonial Penn?" ¹ The jury answered in the affirmative, and on the basis of that response a verdict was entered "that the policy of automobile liability insurance issued to Sallows by Colonial Penn on or about October 28, 1975, was null and void from its inception." Appellant does not attack the trial procedures, the instructions to the jury, the propriety of the interrogatories, or the sufficiency of the evidence upon which the jury based its verdict. The policy was issued to conform to the requirements of North Dakota. It was delivered to the insured in North Dakota. Both plaintiff and defendants argued that North Dakota law should determine the validity of the contract of insurance, and the district court so held. We agree. Aetna Casualty & Surety Company v. Evers, 590 F.2d 600 (5th Cir. 1979).

On this appeal plaintiff relies on two North Dakota statutes to buttress his argument that rescission was expressly prohibited under the facts of this case. These statutes are 39-16.1-11 6(a), North Dakota Century Code, which provides:

"6. Every motor vehicle liability policy shall be subject to the following provisions which need not be contained therein:

a) The liability of the insurance carrier with respect to the insurance required by this chapter shall become absolute whenever injury or damage covered by said motor vehicle liability policy occurs; * * *. " (underscoring ours).

Also, 26-02-29, N.D.C.C., which provides:

Whenever a right to rescind a contract of insurance is given to the insurer by any provision of this title, such right may be exercised at any time previous to the commencement of an action on the contract.

The District Judge rejected the applicability of each statute and concluded that neither constituted a legal impediment to rescission. From that judgment Shockley appealed. We reverse.

DID THE COMPANY HAVE THE RIGHT TO RESCIND THE POLICY AFTER

THE ACCIDENT?

An evaluation of the company's contention that it had the right to rescind ab initio after the accident requires consideration of the Financial Responsibility Act of North Dakota, 39-16 and 39-16.1 of the North Dakota Century Code. ²

No useful purpose would be served by a verbatim recitation of these statutes, but a brief explanation is appropriate. The North Dakota financial responsibility laws consist of two chapters. Chapter 39-16, entitled Financial Responsibility of Owners and Operators, is composed of 37 subsections cited in the North Dakota Century Code as 39-16 through 39-16-37. Chapter 39-16.1, entitled Proof of Responsibility for the Future is composed of 11 subsections cited in the Code as 39-16.1 through 39-16.1-11.

Section 39-16.1-11 6(a) provides that the liability of the insurance carrier becomes absolute whenever injury or damage covered by the motor vehicle liability policy occurs. Colonial Penn's position, which was essentially adopted by the District Court, is that the particular policy would be governed by the financial responsibility laws only when such policy was "certified" as such when the "insured" motorist was required to submit proof of financial responsibility. ³ 39-16.1-11 N.D.C.C. The Supreme Court of North Dakota, in Hughes v. State Farm Mut. Auto. Ins. Co., 236 N.W.2d 870 (1976), carefully examined the "financial responsibility laws" in effect at the time of this accident. (Chapters 39-16 and 39-16.1, North Dakota Century Code). ⁴ The Court stated:

"The basic purpose for the Legislature's enactment of financial responsibility laws was to protect innocent victims of motor vehicle accidents from financial disaster. * * *

"We are not required, however, to base our conclusion solely on an application of the clear public policy expressed by the Legislature's enactment of the financial responsibility laws. We conclude that our laws are different from statutes commonly found in other jurisdictions, because the provisions dealing with financial responsibility for a driver's first accident (§ 39-16-05, N.D.C.C.) include as a basic point of reference the definition of a 'motor vehicle liability policy' contained in § 39-16.1-11.

"Having in mind such rule, as well as the public policy hereinbefore discussed, we conclude that the 'Conformity Clause' in the insurance policy * * * , although somewhat artfully drawn with an apparent intention to restrict coverage as much as possible, is a sufficient basis on which to hold that such a clause does indeed warrant that the policy in question, whether 'certified' or not, complies with any applicable financial responsibility laws. . . . We further conclude that the certification prerequisite set forth in the Conformity Clause refers only to certification under Chapter 39-16.1, N.D.C.C., and that such certification is not required under Chapter 39-16, N.D.C.C."

It is agreed that the financial responsibility laws are applicable to a policy issued and certified under 39-16.1. We interpret Hughes as authority for the proposition that all automobile liability contracts in North Dakota, whether or not "certified," are controlled by the Financial Responsibility Act, provided that the policies purchased voluntarily afford substantially the same coverage as do policies issued in conformity with the mandatory requirements of 39-16.1.

The policy in the instant case afforded substantially the same coverage as do policies issued in conformity with the mandatory requirements of 39-16.1. The policy here was obviously intended to permit the owner who was involved in the accident to exempt himself from the provisions of 39-16-05. By its very terms the policy purports to comply with any state "financial responsibility laws," when applicable, although the language of the clause is couched in terms of future financial responsibility, and purports to operate only when certified by the insurance company as proof of financial responsibility. The policy issued by Colonial Penn contains what is commonly referred to as a "Conformity Clause" which warrants to the policyholder that under certain conditions, the policy is in compliance with and conforms to the requirements of the state's financial responsibility laws. The language utilized in the instant policy's "Conformity Clause" is almost identical to that contained in Hughes, 236 N.W.2d 870 at 877.

The defense which the company here asserts misrepresentation in applying for the policy is different from that held unavailable in Hughes. However, the public policy of North Dakota as there enunciated by its Supreme Court, and the broad construction placed upon its financial responsibility laws, convinces us that the courts of North Dakota would hold that the company's liability to Sallows under the policy became absolute upon the occurrence of the accident which resulted in the death of Mrs. Shockley, notwithstanding the company's subsequent discovery of Sallows' misrepresentation of a material fact in applying for the policy. The policy in the instant case is governed by the financial responsibility laws of North Dakota and cannot be voided after the accident occurred.

DID THE DIRECT ACTION SUIT AGAINST THE INSURER CONSTITUTE AN

ACTION ON THE INSURANCE CONTRACT?

If the answer to our inquiry is "yes", then the effort to rescind after the commencement of that action is barred under the statute. 26-02-29 N.C. Century Code. The District Court rejected this contention, pointing out that an action on the contract in North Dakota can occur only after the liability of the insured has been fixed by final judgment or compromise. Contrary to this contractual "no action" clause, the Louisiana Direct Action Statute permits injured persons to sue a liability insurer before such final determination. As to injuries occurring in Louisiana, one provision of the statute permits the direct suit on the insurance contract, even though that contract is written in another state and contains a clause forbidding such direct actions. Watson v. Employers' Liability Assurance Corp., 348 U.S. 66, 75 S.Ct. 166, 99 L.Ed. 74 (1955); Webb v. Zurich Insurance Co., 251 La. 558, 588, 205 So.2d 398 (1967); Talbot v. Allstate Insurance Co., 76 So.2d 76 (La.App.1955). The statute is explicit * * * The injured person or his or her survivors or heirs hereinabove referred to, at their option, shall have a right of direct action against the insurer within the terms and limits of the policy; and such action may be brought against the insurer alone, or against both the insured and insurer jointly and in solido, * * * . This right of direct action shall exist...