Simon v. Maryland Casualty Company

• Decision Date: 23 November 1965
• Docket Number: No. 22073.,22073.
• Citation: 353 F.2d 608
• Parties: L. G. SIMON, doing business as Simon Electric Company, Appellant, v. MARYLAND CASUALTY COMPANY, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

353 F.2d 608 (1965)

L. G. SIMON, doing business as Simon Electric Company, Appellant, v. MARYLAND CASUALTY COMPANY, Appellee.

No. 22073.

United States Court of Appeals Fifth Circuit.

November 23, 1965.

COPYRIGHT MATERIAL OMITTED

W. C. Peticolas, El Paso, Tex., for appellant.

William Duncan, El Paso, Tex., for appellee.

Before HUTCHESON, BROWN and COLEMAN, Circuit Judges.

JOHN R. BROWN, Circuit Judge:

The question in this case is whether the defense coverage provisions and no action clause of a general liability policy are to be read so literally that an assured, who in an adversary proceeding has been adjudicated guilty of negligence by a constitutional court,¹ is denied any coverage because the suit was by, not against, him and no affirmative monetary judgment was rendered against him. The District Court in this declaratory judgment action held no coverage. We disagree and reverse.

The facts, neither complex nor conflicting, may be briefly capsulated to reveal this controversy which is now in its second decade. In May 1953 Douglas Bros., Inc., the Contractor, executed a contract with the United States to convert an electrical system at Holloman Air Force Base, New Mexico, from a low to a higher voltage. The contract prescribed that the Contractor should be responsible for all damages to property resulting from its negligence. In June the Contractor sublet the labor on this contract to the Assured-subcontractor.² A few days later the general liability policy was issued by the Insurer³ to the Assured-subcontractor. On September 26, 1953, the employees of the Assured-subcontractor during performance of the contract made a bad mistake. They connected a live wire of the new secondary, so we are told, to a neutral wire of the service drops to two buildings causing, not unnaturally, extensive fire damage to both buildings.

The Government through its Contracting Officer withheld from Contractor $32,247.82 from the amount due on the contract as damages caused by negligence of the employees of Contractor and Assured-subcontractor. The Contractor, in turn, withheld from the Assured-subcontractor the sum of $7,886.83 otherwise admittedly due. The Government, by contract and probably by statute,⁴ had a bird-in-the-hand, as did the Contractor vis-a-vis the smaller Assured-subcontractor bird. Of course the Government did not have the right arbitrarily to withhold the funds. It could lawfully continue to do so only if the damages represented thereby had been caused by the negligence of the Contractor (and Assured-subcontractor). But to resolve that question, the pursued had become pursuer. Faced with the Government's claim of negligence and the immediate loss of the use of $7,886.83 thus withheld, the Assured-subcontractor, having earlier given full notice of the occurrence and likely claim, formally requested the Insurer to protect the Assured's interest by participating with the Contractor in administratively and judicially challenging the Government's claim and retention. The Insurer declined on the ground that no suit had been filed against the Assured. The victim now of the Government's permissible self-help and no aid forthcoming from its Insurer, the Assured followed suit and resorted to its own self-help as would a prudent uninsured person. It authorized the Contractor and Contractor's attorneys to act on its behalf and expressly agreed to share costs and attorneys' fees. Although the Insurer was kept fully posted, it adhered to its denial of coverage. After exhausting all administrative remedies, the Contractor sued the Government in the Court of Claims. On July 12, 1963, the Court found that the employees of the Assured-subcontractor had negligently caused the damage and remanded the case to the Trial Commissioner to determine the amount of damage. Douglass Bros., Inc. v. United States, 1963, 319 F.2d 872, 162 Ct.Cl. 289.⁵

Supplementing this self-help, the Assured about this same time instituted on September 22, 1955, the present suit for a judgment declaring the Insurer's obligation to protect the Assured's interests. Presumably to await the Court of Claims decision, all hands apparently acquiesced in letting this declaratory judgment suit lie fallow until June 1964 when it was tried below.⁶

Several things stand out sharply. First, the Assured-subcontractor has suffered the irretrievable, permanent loss of $7,886.83 plus its share of legal costs. Second, this loss was the direct result of operational negligence of its employees. And third, and perhaps more decisive, a full-fledged court having jurisdiction over the subject matter⁷ and the parties in a genuine no-holds-barred-adversary proceeding necessarily determined that the conduct of the Assured-subcontractor was negligent. In a word, the Insurer got every protection it would have obtained had the suit been United States v. Simon or Douglass Bros., Inc. v. Simon. The question is, therefore, whether by any reasonable construction of the policy, it ought to bear the same liabilities.

Although there might be some doubt as to legal fees and costs, the answer is clear as to the money loss sustained through this court-enforced retention of funds. We need here only make shorthand reference to the dual, and frequently distinctive, nature of the coverage: (1) to pay sums for which the Assured is legally obligated⁸ and (2) to defend any suit.⁹ See American Fid. & Cas. Co. v. Pennsylvania Threshermen & Farmers' Mut. Cas. Inc. Co., 5 Cir., 1960, 280 F.2d 453; Green v. Aetna Ins. Co., 5 Cir., 1965, 349 F.2d 919; Burton v. State Farm Mut. Auto. Ins. Co., 5 Cir., 1964, 335 F.2d 317; National Sur. Corp. v. Wells, 5 Cir., 1961, 287 F.2d 102.

Once it is recognized, as it must be, that having taken over and directly participated in the direction, control, and financing of the "defense" against the Government's claim of negligence, the Assured-subcontractor became as bound by the judgment as the named party,¹⁰ the situation is within the literal terms of Coverage I (note 8, supra). The Assured-subcontractor has "become legally obligated to pay" money "as damages" for injury to property. Of course, the literal terms of the No-Action Clause¹¹ might first seem to support the defense so successfully urged by the Insurer below. But a moment's reflection demonstrates the contrary. On the Insurer's approach an assured would never have the judicial means of bringing a reluctant, recalcitrant insurer to account. And yet there is a vast body of case law in which disputes over coverage — precisely the issue here — are adjudicated in declaratory actions long before final judgment in the third-party damage action and frequently even in advance of a trial. See e. g., American Fid. & Cas. Co. v. Pennsylvania Threshermen & Farmers' Mut. Cas. Ins. Co., supra; Burton v. State Farm Mut. Auto. Ins. Co., supra.

The fact is that for most situations the No-Action Clause in a liability, as distinguished from an indemnity, policy is directed at the injured third party, not the assured. See 8 Appleman, Insurance Law and Practice § 4851, at 256, 259, § 4854, at 264, 268 (1962). Courts have sometimes pointed out that the function of the clause is (1) to avoid joinder of the insurer by the injured person in the action against the assured, and (2) to prevent suit against the insurer for a money judgment by the injured party or the assured until the damages have been fixed by final judgment or agreed settlement. And as an obvious elaboration to that may be added that the clause eliminates out-of-court settlements made between the assured and the damage claimant without the consent of the insurer. But even this restraint is limited since an assured is entitled to exercise the judgment of a prudent uninsured person in compromising the claim when the insurer repudiates coverage. United States Auto. Ass'n v. Russom, 5 Cir., 1957, 241 F.2d 296, 301; National Surety Corp. v. Wells, 5 Cir., 1961, 287 F.2d 102.

Furthermore, both as to Coverage II (Defense) and as to the No-Action Clause, this decision of the Court of Claims satisfies the sense, purpose and true meaning of a "suit against the insured" (note 9, supra) and a "Judgment against the insured" (note 11, supra). A suit is against an assured when, in a judicial proceeding to which he is a party (or deemed by the law to be a party), a definable claim or contention is asserted that the assured has a legal liability for damage or injury to person or property. Similarly, it is a judgment against an assured where, in such a situation, the tribunal renders an enforceable decree adjudging that the assured has a legal obligation to pay, reimburse or bear, the loss sustained by the third party. Thus, for example, a claim by way of offset, not an affirmative counterclaim, F.R.Civ.P. 13, or...