St. Paul Ins. Co. of Bellaire, Texas v. AFIA Worldwide Ins. Co.

• Citation: 937 F.2d 274
• Decision Date: 07 August 1991
• Docket Number: No. 89-3554,89-3554
• Parties: ST. PAUL INSURANCE COMPANY OF BELLAIRE, TEXAS, Plaintiff-Appellant, v. AFIA WORLDWIDE INSURANCE COMPANY, Insurance Company of North America, et al., Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 274

937 F.2d 274

ST. PAUL INSURANCE COMPANY OF BELLAIRE, TEXAS, Plaintiff-Appellant, v. AFIA WORLDWIDE INSURANCE COMPANY, Insurance Company of North America, et al., Defendants-Appellees.

No. 89-3554.

United States Court of Appeals Fifth Circuit.

Aug. 7, 1991.

James D. Carriere, Habans, Bologna & Carriere, New Orleans, La., Risley C. Triche, Triche, Sternfels & Nail, Napoleonville, La., for plaintiff-appellant.

James M. Garner, Dermot S. McGlinchey, Eve Barrie Masinter, McGlinchey, Stafford, Mintz, Cellini & Lang, New Orleans, La., for AFIA & INA.

W.K. Christovich, New Orleans, La., for Deutsch, Kerrigan.

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

Before BROWN, JOHNSON, and BARKSDALE, Circuit Judges.

JOHN R. BROWN, Circuit Judge:

Introduction

This is a suit by an excess liability insurance carrier, St. Paul Insurance Company of Bellaire, Texas (Excess Insurer), against the primary liability insurance carrier, AFIA Insurance Company (Primary Insurer), ¹ and Deutsch, Kerrigan, and Stiles law firm (Deutsch), attorneys for Primary Insurer. Excess Insurer claims that Primary Insurer and Deutsch negligently and in bad faith failed to settle the claims of William Warnes against Offshore Logistics, Inc., the carriers' common insured (Insured), resulting in a large judgment and subsequent recovery for Warnes. Excess Insurer's action against Primary Insurer is based on (i) a duty it asserts Primary Insurer owes to it in its representation of the Insured, and (ii) Excess Insurer's position as subrogee to the Insured's rights by virtue of payment Excess Insurer made as a contribution to the Insured's settlement with Warnes. Its claim against Deutsch is premised on a similar theory. After a hearing, the trial court granted motions filed by Primary Insurer and Deutsch to dismiss the case pursuant to F.R.Civ.P. 12(b, c) or alternatively under F.R.Civ.P. 56(c).

As to the merits, we agree that Excess Insurer's suit against Deutsch based upon either a third-party beneficiary theory or a claimed duty between primary and excess insurers may not be maintained and affirm that portion of the trial court's judgment. However, since the trial court took its action, the Louisiana Supreme Court has recognized that an excess insurer may become subrogated to an insured's rights against its primary insurer to assert bad faith failure to settle a claim, which ultimately results in the excess insurer's making a payment on behalf of the insured. See Great Southwest Fire Insur. Co. v. CNA Insurance Cos., 557 So.2d 966 (La.1990). The trial court's action, which predated Great Southwest, is suspect under the Louisiana Court's application of subrogation in this context. Therefore, concluding that the trial court dismissed Primary Insurer on summary judgment, we reverse and remand the case to the district court for consideration in light of Great Southwest.

I. How It All Began

(a) The Warnes Litigation

Warnes is an Australian engineer who brought suit under the Jones Act and general maritime law against Offshore for injuries he sustained in June 1980 while working aboard the M/V VOLUNTEER, which was being operated by Offshore in the Atlantic Ocean off the coast of Brazil. Primary Insurer, which afforded the Insured $1 million in coverage, appointed Deutsch to represent the Insured in the suit. The parties made several offers to compromise the suit in the range of $200,000 to $450,000, all of which were ultimately rejected, and the case proceeded to trial on November 13, 1984. Excess Insurer, which afforded Offshore $9 million in coverage for judgments or compromises in excess of the $1 million underlying policy, alleges that it was not notified that the Insured was being sued until the next day, November 14, 1984. At that time, Excess Insurer reserved its rights to deny coverage to the Insured and advised Primary Insurer to settle the case within the primary policy limits. Excess Insurer further alleges that during the trial Primary Insurer and its counsel Deutsch rejected an offer to settle the suit for $335,000, and it did so without informing Offshore of this offer and rejection.

In December 1984, the jury returned a verdict in Warnes's favor and awarded him $3 million in general and special damages. The trial court subsequently remitted this amount to $1 million.

(b) Excess Insurer Files Suit

Following the trial court's remittitur ruling, Warnes offered to settle all outstanding claims against the Insured for $1.1 million, which Primary Insurer and the Insured ultimately accepted on February 28, 1985. As Primary Insurer had expended nearly $114,000 under its obligation to defend the action, it demanded that Excess Insurer respond to the portion of the settlement exceeding the primary limits. Reserving its rights to deny coverage, Excess Insurer agreed and contributed $213,314.94 to the settlement amount.

On March 7, 1985, subsequent to the Warnes parties' agreement on a compromise, Excess Insurer filed suit against Primary Insurer. The complaint alleged that Primary Insurer had acted negligently and in bad faith in failing to settle Warnes's personal injury claims against the Insured within the primary coverage limits. ² Excess Insurer stated that it sought recovery for its potential losses from the judgment against the Insured. The complaint inexplicably alleged that the Insured, Primary Insurer, and Warnes had not yet reached a compromise on the underlying litigation. ³

As its "First Cause of Action," Excess Insurer asserted that Primary Insurer breached a duty it owed to Excess Insurer "not to unreasonably fail to settle claims within the primary limit," that Primary Insurer's failure to settle was "unreasonable, arbitrary, and in bad faith[,]" and that Primary Insurer was thereby "required to indemnify [Excess Insurer] against the excess of any judgment." As a "Second Cause of Action," Excess Insurer complained that Primary Insurer "owe[d] a duty to its assureds and the excess carrier to provide an adequate and competent defense to all claims[,]" and that Primary Insurer failed that duty, for which Excess Insurer was entitled to indemnity for any excess judgment rendered against the Insured.

In January 1987, Excess Insurer filed its "First Supplemental and Amending Complaint," adding Deutsch as a defendant. Excess Insurer asserted "third-party beneficiary" malpractice claims against the firm, alleging that it had provided an inadequate defense to the Insured. Excess Insurer did not mention in its Second Amended Complaint or in subsequent pleadings ⁴ the otherwise uncontradicted fact of the $1.1 million settlement with Warnes and the $213,314.94 contribution to this amount by Excess Insurer.

"Alternative" Motions

In late 1988 Primary Insurer and Deutsch filed separate "Motion[s] to Dismiss and Alternative Motion[s] for Summary Judgment." They argued that Louisiana does not recognize a duty between primary and excess insurers with regard to settlement of claims against a common insured. Deutsch argued separately that it had no attorney-client relationship with Excess Insurer and that Excess Insurer could not be a third-party beneficiary to Deutsch's relationship with the Insured under Louisiana law. Excess Insurer responded: (i) Primary Insurer and Deutsch breached duties, including a good-faith duty to settle within the primary limits, which it owed to both the Insured and to Excess Insurer to provide the Insured with an adequate defense; and (ii) it had contributed $213,314.94 to the $1.1 million compromise of the underlying Warnes suit, by virtue of which it was subrogated to the Insured's claim against Primary Insurer and Deutsch for negligent and bad faith duty to settle within the primary limits.

Without specifying the method by which it was proceeding, Rule 12 or Rule 56, the trial court granted Primary Insurer's and Deutsch's motions on December 21, 1988, dismissing both parties with prejudice. Excess Insurer subsequently filed a Motion for Reconsideration, reurging the two contentions above, including a right of subrogation, and the trial court denied the motion. By its order dated August 14, 1989, disposing of all outstanding issues, the court entered judgment in the defendants' favor. Excess Insurer brings this appeal.

II. The Effect of Great Southwest

To arrive at its conclusion that Excess Insurer's cause of action could not be sustained, the trial court relied on Laper v. Board of Commissioners, 523 So.2d 926 (La.App. 4th Cir.), writ denied, 531 So.2d 275 (La.1988), which held that a primary insurer, in handling the defense of the claim against the insured, owes no duty whatsoever to the excess insurer. ⁵ Prior to Laper, only one other Louisiana court had considered the question whether any duty exists between primary and excess insurers. See Southern American Insur. Co. v. Hartford Accident & Indem. Co., 498 So.2d 280 (La.App. 1st Cir.1986), writ denied, 500 So.2d 425 (La.1987); see also Laper, 523 So.2d at 929-30 (Plotkin, J., dissenting); McKenzie and Johnson, Louisiana Civil Law Treatise: Insurance Law and Practice Sec. 221 at 405-07. In Southern American, the Louisiana Court of Appeal for the First Circuit followed the federal court for the Eastern District of Louisiana, which had earlier concluded that the primary insurer owes a duty to the excess carrier in the representation of a common insured. See Southern American, 498 So.2d at 282 (citing Utica Mutual Insur. Co. v. Coastal Marine, Inc., 578 F.Supp. 1376 (E.D.La.1984)). Despite this apparent conflict, the trial court relied on the more recent decision in Laper and found no duty, and therefore no cause of action, in the instant case.

An intervening case has changed the contours of Louisiana law in this area. One year after the trial court entered its judgment in this case, the Louisiana Supreme Court in Great Southwest recognized a remedy for a party situated in Excess Insurer's present...