Appellant Steadfast Insurance Co. ("Steadfast") appeals from the district court's order denying Steadfast summary judgment and granting summary judgment to Appellees Sosebee, Writesman, and Patillo ("Sosebee"). The district court held Steadfast waived its coverage defense. We REVERSE and render summary judgment in favor of Steadfast.
Tim Sosebee, Mark Writesman, and Dale Patillo were passengers on a chartered fishing boat insured by St. Paul Fire when they were involved in an accident with a utility boat owned by non-party Harvest Oil ("Harvest") and insured by Steadfast Insurance Company ("Steadfast"). One week after the accident St. Paul Fire initiated a declaratory judgment action against Sosebee and the owner and operator of the fishing boat. Sosebee filed a third-party complaint against Harvest, alleging substantial personal injuries. Harvest answered the complaint on December 3, 2008 through Slattery, Marino & Roberts, its corporate counsel.
After Steadfast became aware of the accident and the lawsuit, Harvest received a letter, dated February 23, 2009, titled: "Reservation of Rights: Please read carefully." The letter is on the letterhead of Zurich North America, and is signed, "Sincerely, Zurich American Insurance Company." The letter contains the name Zurich American Insurance Company ("Zurich") five times and the name Steadfast two times. The letter refers to Sosebee's complaint and third-party complaint against Harvest in the 2008 case, cites the Steadfast policy number, quotes the watercraft exclusion in the policy, and states the exclusion "might apply." The parties do not dispute that the plain language of the watercraft exclusion quoted in the letter would exclude coverage for Sosebee's claims. The letter requests additional information regarding the ownership and length of the vessel involved in the accident. The letter states Zurich will "proceed with investigation of the case and allegations subject to a full Reservation of Rights."
Zurich is a separate insurance company, and both Zurich and Steadfast are members of Zurich North America. Zurich North America handles insurance claims for its member companies, including Zurich and Steadfast. At the time of the accident Harvest had a comprehensive general liability policy and an umbrella policy with Steadfast, as well as a commercial auto liability policy with Zurich.
On March 31, 2009 Saratoga Resources, Inc., a Texas corporation and sole member of Harvest, filed for bankruptcy under Chapter 11.
On April 14, 2009, Harvest filed a notice of filing of bankruptcy in Sosebee's case against Harvest. On April 22, 2009, Harvest moved to change its counsel from Slattery, Marino & Roberts to a firm employed by Steadfast, Anderson, Stephens & Grace (hereinafter Stephens & Grace). On the same day the court held a status conference with the parties and stayed and administratively closed the case because of Harvest's bankruptcy filing.
On June 17, 2009, Sosebee filed this suit against the owner and operator of the boat, St. Paul, and Steadfast, alleging substantial personal injuries. Sosebee did not include Harvest in this suit because Harvest had filed for bankruptcy. Stephens & Grace, the same firm employed by Steadfast to represent Harvest in the 2008 case, represented Steadfast in this case. Stephens & Grace also represented a Harvest employee in a deposition taken by the owner and operator of the fishing boat. In its initial answer to the complaint Steadfast asserted no affirmative defenses and made no mention of the watercraft exclusion. When Sosebee asked Steadfast to produce any insurance policies that would provide coverage for Sosebee's injuries, Steadfast produced its primary and umbrella policies. At this time Steadfast was unaware that its policy excluded coverage because three separate Steadfast insurance adjusters mistakenly interpreted Steadfast's policy as covering Harvest's claim. The court set a trial date for October 18, 2010, and then granted motions to continue the trial to August 15, 2011.
On September 29, 2010, Sosebee received leave to file a first amended complaint, adding a claim against Steadfast under Harvest's umbrella policy. On April 1, 2011, after an insurance adjuster discovered Steadfast's policy excluded coverage, Steadfast filed an answer to the amended complaint, asserting for the first time the watercraft exclusion.
On April 14, 2011, the district court granted Steadfast's motion to substitute new counsel in place of Stephens & Grace. Stephens & Grace sent a letter to Harvest on April 21, 2011 stating that:
On April 19, 2011, Sosebee moved to strike Steadfast's amended answer, arguing Steadfast did not assert the watercraft exclusion in a timely manner. The district court denied the motion on the basis that the amended answer was not so untimely as to prejudice Sosebee. The district court continued the trial date to permit Sosebee to take discovery related to the watercraft exclusion.
In a deposition in this case, Harvest's designated representative, Brian Daigle, testified that the entire time Stephens & Grace represented Harvest, Harvest was unaware that Steadfast intended to invoke the exclusion.
Steadfast moved for summary judgment arguing because Steadfast did not owe coverage to Harvest, Sosebee cannot recover from Steadfast. Sosebee moved for summary judgment arguing Steadfast waived its coverage defense. Holding Steadfast waived its right to assert the watercraft exclusion as a defense, the district court denied Steadfast summary judgment and granted summary judgment for Sosebee. Steadfast appealed.
To determine whether Steadfast waived its coverage defense the district court applied a two-prong test, asking (1) whether Steadfast's conduct was so inconsistent with asserting the exclusion as to induce a reasonable belief that Steadfast relinquished its right to assert the exclusion, see Steptore v. Masco Constr. Co., 643 So.2d 1213, 1216 (La.1994); Emery v. Progressive Cas. Ins. Co., 49 So.3d 17, 21 (La.App.Ct.2010), and (2) whether Steadfast's inconsistent conduct prejudiced Harvest. Scottsdale Ins. Co. v. Gulf Sea Temporaries, Inc., No. 98-1364, 1999 WL 130633, at *5 (E.D.La. Mar. 10, 1999). On appeal Steadfast contends the district court erred in answering both prongs affirmatively and holding Steadfast thereby waived its coverage defense. Sosebee contends the district court erred in holding Steadfast's February 23, 2009 letter was a valid reservation of rights. Sosebee contends Steadfast never reserved its right to assert the exclusion as a coverage defense.
We review the district court's grant of summary judgment de novo. Am. Nat'l Gen. Ins. Co. v. Ryan, 274 F.3d 319, 323 (5th Cir.2001). "The district court's interpretation of an insurance contract is a question of law that we also review de novo." Id. Summary judgment is appropriate only if the evidence in the record shows "there is no genuine dispute as to
Steadfast contends it properly reserved its rights to assert the watercraft exclusion as a defense to coverage. We address the issue of Steadfast's reservation of rights letter before the question of waiver because under Louisiana law waiver of noncoverage defenses is automatic and requires no showing of prejudice where the insurer assumed the insured's defense without first issuing a reservation of rights letter. See Steptore, 643 So.2d at 1216.
Sosebee contends the district court erred in holding Steadfast's February 23, 2009 letter reserved its rights under the watercraft exclusion. Sosebee contends Steadfast's letter to Harvest on February 23, 2009 failed to reserve Steadfast's rights under the policy for two reasons. First, Sosebee asserts Zurich authored the letter and reserved Zurich's rights rather than Steadfast's rights. Sosebee maintains the references to Zurich are not mere typographical errors. At the time of the boat accident, Harvest had policies with both Steadfast and Zurich. Sosebee thus maintains that the letter did not sufficiently apprise Harvest of which insurer was waiving its rights with respect to which policy. Second, Sosebee cites a Sixth Circuit case for the proposition that a reservation of rights that only refers to an investigation of an accident will not function as a reservation of rights with respect to a defense of the matter. Transamerica Ins. Group v. Beem, 652 F.2d 663, 666-67 (6th Cir.1981). According to the court in Transamerica, if the initial letter does not mention a defense, the insurer must issue a second reservation of rights letter if it undertakes to defend the insured. Id.
Under Louisiana law, an insurer can waive any provision of an insurance contract even if it has the effect of bringing within coverage risks originally excluded under the policy. Steptore, 643 So.2d at 1216. If an insurer with knowledge of facts indicating noncoverage assumes an insured's defense without first reserving its rights to assert a noncoverage defense, the insurer waives its right to assert the defense. Id. If an insurer assumes an insured's defense with knowledge of facts indicating noncoverage without first obtaining a non-waiver agreement, the insured may assume the insurer is acting in the insured's best interest with respect to coverage defenses the insurer has seemingly relinquished. Arceneaux v. Amstar Corp., 66 So.3d 438, 451 (La.2011). Thus, "the insurer's notice of its intent to avail itself of the defense of noncoverage must be timely." Scottsdale, 1999 WL 130633, at *3. Courts must apply waiver principles stringently to prevent conflicts of interest between insurer and insured that could potentially affect legal representation. Steptore, 643 So.2d at 1216. Courts should not, however, require overly technical or talismanic language for insurers to effectively reserve their rights. See F.D.I.C. v. Duffy, 47 F.3d 146, 151 (5th Cir.1995) (rejecting assertion that insurer must state in reservation of rights that insurer "reserved its rights to void the policy").
Steadfast reserved its watercraft exclusion defense through its letter to Harvest on February 23, 2009. The letter unambiguously refers to the policy that Steadfast issued to Harvest, cites the watercraft exclusion in the policy, and reserves rights under the exclusion. Even though Steadfast's February 23, 2009 letter to Harvest was on Zurich's letterhead,
Because we hold Steadfast validly reserved its right to assert the watercraft exclusion, we must now address whether Steadfast waived its reservation of rights. Though Steadfast concedes Sosebee has standing under the Louisiana Direct Action Statute to raise the issue of waiver, our waiver analysis is complicated by the fact Harvest, not a party to this case, is currently in bankruptcy. Moreover, Harvest was in Chapter 11 bankruptcy at all times relevant to Sosebee's claim that (1) Steadfast engaged in conduct inconsistent with asserting a noncoverage defense and (2) Steadfast's inconsistent conduct prejudiced Harvest. The Louisiana Direct Action Statute explicitly states that when an insured is in bankruptcy, an injured person or his survivors may bring an action directly against the insurer without joining the insured. LA.REV.STAT. § 22:1269(B)(1) (Supp.2012). We have held a direct action claimant may assert waiver even where the insured is not a party to the litigation and has received a discharge in bankruptcy. Duffy, 47 F.3d at 149-50; F.D.I.C. v. Duffy, 835 F.Supp. 307, 308, n. 1 (E.D.La. 1993), aff'd, 47 F.3d 146 (5th Cir.1995) ("Duffy received a discharge in bankruptcy, which relieved him of any potential liability .... Hence the sole defendant remaining in this proceeding is Duffy's alleged insurer"). Whether an insurer may waive its coverage defenses through its conduct in a direct action suit in which the insured is not a party while the insured is in bankruptcy is, however, a question of first impression.
In order to determine if Steadfast waived its noncoverage defenses vis-à-vis Harvest through its conduct in this case we must we must examine (1) the protections Louisiana Direct Action statute provides to Sosebee and (2) the protections the Bankruptcy Code provides to Harvest while it is in Chapter 11 bankruptcy.
The purpose of Louisiana's Direct Action statute is to safeguard the rights of injured persons. Duffy, 47 F.3d at 150. The Louisiana direct action statute creates a "contractual relationship which inures to the benefit of any and every person who might be negligently injured by the insured as completely as if such injured person had been specifically named in the policy." Id. (quoting Shockley v. Sallows, 615 F.2d 233, 238 (5th Cir.1980)). Section 655 of Title 22, Louisiana Revised Statutes, provides in part:
LA.REV.STAT. § 22:1269 (Supp.2012). The plain language of the statute evinces Louisiana's intent for the insolvency of the insured not to "release the insurer from the payment of damages" to injured parties. Id. Section 22:1269 is crafted to protect Louisiana's vital interest in liability insurance that covers injuries to people in the state. Watson v. Emp'rs Liab. Assur. Corp., 348 U.S. 66, 73, 75 S.Ct. 166, 99 L.Ed. 74 (1954). The Supreme Court held even where an insurance contract expressly prohibited direct actions before a determination of the insured's liability, Louisiana's interest in protecting injured parties under Section 22:1269 overrode Massachusetts's interest in enforcing its contract rules. Watson, 348 U.S. at 72-73, 75 S.Ct. 166 (holding Louisiana direct action did not deny due process to foreign liability insurer even where contract of insurance prohibited direct action and was drafted and executed in Massachusetts).
The Louisiana Supreme Court has held that "the direct action statute does not create an independent cause of action against the insurer, it merely grants a procedural right of action against the insurer where the plaintiff has a substantive cause of action against the insured." Descant v. Adm'rs of Tulane Educ. Fund, 639 So.2d 246, 249 (La.1994). Under Section 22:1269, insurers may raise any defenses that arise from the nature of the obligation, that are personal to the insurer, or "that are common to all the solidary obligors." Id. 249-50. Insurers may not, however, raise defenses to liability that are personal to the insured, such as the fact the insured is in bankruptcy. Id. at 250 n. 9. Thus, if there is coverage for Sosebee's claim, the fact Harvest is in bankruptcy should not affect Steadfast's obligation to pay on the claim. This does not mean Steadfast may not raise the fact Harvest is in bankruptcy as a defense to waiver. The question of waiver is, of course, antecedent to coverage.
Because Harvest has been in Chapter 11 bankruptcy at all times relevant to Sosebee's claim of waiver, we must consider how the protections of bankruptcy might affect our waiver analysis. Chapter 11 provides robust protections to debtors while bankruptcy is ongoing, but strikes "a balance between a debtor's interest in reorganizing and restructuring its debts and the creditors' interest in maximizing the value of the bankruptcy estate." Florida Dept. of Revenue v. Piccadilly Cafeterias, Inc., 554 U.S. 33, 51, 128 S.Ct. 2326, 171 L.Ed.2d 203 (2008) (internal citations omitted). Unlike Chapter 7 bankruptcy, the goal of which is liquidation of the debtor's assets, Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd., 507 U.S. 380, 389, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993), the goal of Chapter 11 bankruptcy is to marshall the debtor's resources "to provide the best possible opportunity for a successful rehabilitation
When a debtor files for bankruptcy, an estate is created under 11 U.S.C. §§ 541, 541(a) (2006). Except as otherwise provided in the statute, the estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). We have held that while insurance policies are generally property of the estate, the proceeds of liability insurance policies, unlike first party policies, generally are not.
In re Edgeworth, 993 F.2d 51, 55-56 (5th Cir.1993) (footnotes and internal quotation marks omitted); accord In re Sfuzzi, Inc., 191 B.R. 664, 666 (Bankr.N.D.Tex.1996) (holding liability insurance proceeds not property of bankruptcy estate). Only in the limited instance of a mass tort action where hundreds or thousands of claims against the debtor's insurer might exhaust insurance proceeds and thus threaten the debtor's estate over and above limits of liability insurance policies have courts held the proceeds of liability insurance policies are property of the bankruptcy estate. E.g., MacArthur Co. v. Johns-Manville Corp., 837 F.2d 89, 92 (2d Cir.1988), ("Manville's insurance policies and their proceeds were substantial property of the Manville estate which will be diminished if and to the extent that third party direct actions against the insurance carriers result in plaintiffs' judgments.") (internal citation and quotation marks omitted); Edgeworth, 993 F.2d at 56 n. 21 ("In the mass tort context, the decisions by several courts to include the proceeds as property of the estate appear to be motivated by a concern that the court would not otherwise be able to prevent a free-for-all against the insurer outside the bankruptcy proceeding."). At the time Harvest filed for bankruptcy, all of the twenty largest unsecured claims against Harvest were for "Vendor/Trade Debt", not tort liability. Sosebee's personal injury claim against Harvest is the result of an isolated accident to which the mass tort precedents are inapplicable. There is no evidence that numerous
Because liability insurance proceeds are generally not property of the bankruptcy estate, if a direct action claimant succeeds in obtaining a judgment against an insurer, the claimant recovers from the insurer directly rather than from the bankruptcy estate. See Landry v. Exxon Pipeline Co. 260 B.R. 769, 779 (Bankr.M.D.La.2001).
Id. Thus, in this direct action case Sosebee is seeking recovery from the proceeds of the insurance policy, not from Harvest's bankruptcy estate.
Pursuing a direct action claim against a liability insurer is not the only recovery option available to a personal injury claimant when the insured is in bankruptcy: a personal injury claimant may make a claim against the debtor in the bankruptcy case. See Sikes v. Global Marine, Inc., 881 F.2d 176 (5th Cir.1989). Sosebee has also filed a claim against Harvest in the bankruptcy case. If, as in this case, the debtor objects to the claim, the court must quantify the claim by lifting the bankruptcy stay so that a personal injury action may proceed. See, e.g., id. (lifting bankruptcy stay to permit personal injury action to proceed). To discourage forum shopping and prevent a party "from receiving a windfall merely by reason of the happenstance of bankruptcy," state law applies in the adversary proceeding unless an overriding bankruptcy policy requires otherwise. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) (citing Lewis v. Mfrs. Nat'l Bank, 364 U.S. 603, 609, 81 S.Ct. 347, 5 L.Ed.2d 323 (1961)). If the personal injury claimant succeeds in proving the debtor is liable on the claim and there is liability insurance coverage, the insurer will pay the claimant directly, rather than the bankruptcy estate. See Landry, 260 B.R. at 800. The money paid under the liability policy is the money of the insurance company. Id. If, however, the court finds the debtor is liable but there is no insurance coverage, the claimant must seek a payout from the bankruptcy estate. See Fogel v. Zell, 221 F.3d 955, 960 (7th Cir.2000) (citing 11 U.S.C. § 101(10)) (tort victim is creditor of bankruptcy estate if victim had claim against bankruptcy estate that arose no later than the filing of petition). Because tort victims are only unsecured creditors, they are disadvantaged vis-à-vis the debtor's secured creditors who have a higher priority in the payout. See 11 U.S.C. §§ 725-26, 507 (2006); see, e.g., In re Chance Indus., Inc., 367 B.R. 689, 696 (Bankr.D.Kan.2006) ("No funds were recovered and available for distribution to unsecured creditors."). Thus, if there is no coverage for Sosebee's claim, Sosebee must seek a payout from the bankruptcy estate. In Harvest's bankruptcy, the claims against the estate amount to tens of
When a debtor files for bankruptcy under Chapter 11, an automatic stay goes into effect under 11 U.S.C. § 362 and suspends nonbankruptcy courts' authority to continue judicial proceedings then pending against the debtor including
11 U.S.C. § 362. This stay goes into effect without any action required by the bankruptcy court. 3 Collier on Bankruptcy, ¶ 362.02 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.2011). Parties need not receive formal service of process in order to be subject to the stay. Id. Unless a court grants relief from the stay, the stay continues until the property at issue is no longer property of the bankruptcy estate or until the bankruptcy case is closed or dismissed. 11 U.S.C. § 362(c).
The automatic stay does not generally apply to third parties such as debtors' codefendants or guarantors, Travelers Indem. Co. v. Bailey, 557 U.S. 137, 166, 129 S.Ct. 2195, 174 L.Ed.2d 99 (2009) (Stevens, J., dissenting), but some courts have held the stay applies to the debtor's insurers. 3 Collier on Bankruptcy, ¶ 362.03 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2011). In MacArthur Co. v. Johns-Manville Corp., the Second Circuit held the liability insurance proceeds constituted property of the estate and therefore actions by third parties against debtor-insurers were automatically stayed when the debtor filed its bankruptcy petition. 837 F.2d at 92 (citing In re Johns-Manville Corp., 40 B.R. 219 (S.D.N.Y.1984)). Where a court finds insurance proceeds to be property of the bankruptcy estate the automatic stay will apply to direct actions against insurers, see 11 U.S.C. § 362(a)(3), but where the proceeds of the insurance policies are not property of the bankruptcy estate, direct actions against insurers will not be affected by the stay. See 11 U.S.C. § 362. Therefore, because the proceeds from Steadfast's policy are not property of Harvest's bankruptcy estate, the automatic stay does not apply to the direct action in this case. Because the automatic stay did, however, apply to Sosebee's claim against Harvest in the 2008 case, that case has remained stayed since Harvest filed for bankruptcy and the court cannot lift the stay until the bankruptcy court closes or dismisses Harvest's bankruptcy case.
Also relevant to Sosebee's claim of waiver is the possible res judicata or collateral estoppel effect a judgment in this case would have on Sosebee's claim in the bankruptcy case.
Issue preclusion will likewise not bar Harvest from relitigating the issues decided in this case in the bankruptcy case. Louisiana requires four elements to be met "before an earlier valid and final judgment will preclude relitigation of an issue: (1) the parties must be identical; (2) the issue to be precluded must be identical to that involved in the prior action; (3) the issue must have been actually litigated; and (4) the determination of the issue in the prior action must have been necessary to the resulting judgment." Sevin v. Parish of Jefferson, 632 F.Supp.2d 586, 594-95 (E.D.La.2008) (internal citations and quotation marks omitted). Because Steadfast and Sosebee are not identical parties, collateral estoppel will not prevent relitigation of the waiver issue in the adversary action. Unlike the federal issue preclusion rules, Louisiana still requires mutuality for issue preclusion. Williams v. City of Marksville, 839 So.2d 1129, 1132 (La.Ct. App.2003). Therefore, neither claim preclusion nor issue preclusion will prevent Harvest from relitigating the issues decided in this case.
Waiver requires (1) misleading conduct on the part of the insurer and (2) prejudice to the insured. Emery, 49 So.3d at 21; Scottsdale, 1999 WL 130633, at *5.
Steadfast contends the district court erred in holding Steadfast's conduct was so inconsistent with asserting the exclusion as a defense as to reasonably lead Harvest to believe Steadfast relinquished its right to assert the exclusion. Steadfast claims it never informed Harvest it was withdrawing its reservation of rights or covering Sosebee's claims. Steadfast admits three of its insurance adjusters misinterpreted Steadfast's policy as covering Harvest's claims, but maintains Steadfast never communicated the mistaken interpretation to Harvest. Steadfast maintains Louisiana case law has restricted waiver to cases where the insurer fails to issue a reservation of rights before providing a defense to the insured.
Steadfast extensively relies on F.D.I.C. v. Duffy, 47 F.3d 146 (5th Cir.1995) for the proposition that an insurer cannot waive its reservation of rights through delay in asserting policy defenses against the injured party. In Duffy, we examined the issue of whether an insurer waived its defense that the policy was void ab initio. Id. at 150. Steadfast cites language from Duffy for the proposition that waiting four years after the grounds for a defense arises to assert a noncoverage defense does not place an insurer in danger of waiving its reservation of rights. Duffy does not support this proposition. The insurer in Duffy waited four years to raise its affirmative defense because the court dismissed the suit sua sponte before the insurer had the opportunity to file responsive pleadings. F.D.I.C. v. Duffy, 835 F.Supp. 307, 325 (E.D.La.1993), aff'd, 47 F.3d 146 (5th Cir.1995). The insurer only had the opportunity to assert its noncoverage defense four years later on remand, at which time the insurer immediately filed responsive pleadings denying coverage. Id. Therefore Duffy does not support Steadfast's contention that voluntarily waiting years to assert a noncoverage defense in a direct action suit could never waive an otherwise valid reservation of rights.
In Steptore, the Louisiana Supreme Court held that for an insurer to waive a provision of an insurance contract through its inconsistent conduct the insurer must either have "an actual intention to relinquish the right" or the conduct must be "so inconsistent with the intent to enforce the right so as to induce a reasonable belief that the right has been relinquished." Steptore, 643 So.2d at 1216; Emery, 49 So.3d at 21 (rejecting contention that insured could not waive coverage defense through subsequent conduct after issuing reservation of rights letter). An insurer may waive a reservation of rights unintentionally, even without explicitly withdrawing its reservation of rights. Steptore, 643 So.2d at 1216.
Sosebee's claim of waiver revolves entirely around Steadfast's conduct in this suit, to which Harvest is not a party. Both parties are in agreement that Steadfast's delay in asserting the watercraft exclusion as a defense in this case was the result of multiple Steadfast policy adjusters misreading the policy. Steadfast did not act with a knowing intention to relinquish its right to assert the watercraft exclusion.
Because Steadfast had no intention to relinquish its right to assert the exclusion, we must examine whether Steadfast's conduct was sufficiently inconsistent with asserting the exclusion to induce a reasonable belief in Harvest that Steadfast had relinquished its right to assert the exclusion. Louisiana law implies
Regarding the objective component, Sosebee alleges Steadfast's conduct in this case was inconsistent with an intention to assert the watercraft exclusion as a defense vis-à-vis Harvest. In Steadfast's initial answer to Sosebee, Steadfast pled no affirmative policy defenses. Only after its right to amend its answer as a matter of course passed, see FED.R.CIV.P. 15(a)(1), did Steadfast move to amend its answer to add policy defenses. When Sosebee asked Steadfast to produce any insurance policies that would provide coverage for Sosebee's injuries, Steadfast produced the applicable policies covering Harvest. Although a judgment in this case would have no preclusive effect in the bankruptcy case, Harvest might have viewed failure to timely assert the watercraft exclusion in this case as inconsistent with an intention to assert the exclusion as a defense in future litigation.
Regarding the subjective component, the deposition testimony of Harvest's representative, Brian Daigle, never references Steadfast's conduct in this case as a reason for Harvest's belief that Steadfast was not asserting policy defenses. Mr. Daigle suggests Harvest believed Steadfast was covering Sosebee's claim because (1) it read the February 23, 2009 reservation of rights letter as only pertaining to Harvest's policies with Zurich and (2) Steadfast never informed Harvest that Steadfast would not be providing coverage for Sosebee's claim. Mr. Daigle did not claim Steadfast employees informed Harvest that Steadfast would be covering Sosebee's claim, only that Steadfast employees never informed Harvest that Steadfast would not be covering Sosebee's claim. As discussed in our analysis of the February 23, 2009 reservation of rights letter, that letter references Harvest's policy with Steadfast by number and reproduces verbatim the text of the watercraft exclusion. In this letter Steadfast properly reserved its rights to assert the watercraft exclusion as a defense. Once Steadfast reserved its rights under the watercraft exclusion, it did not need to again inform Harvest that it might not be covering Sosebee's claim. Mr. Daigle's deposition strongly suggests that it was a careless reading of the reservation of rights letter, rather than Steadfast's conduct in this case that misled Harvest as to coverage. To establish waiver Louisiana
Even if Sosebee had produced sufficient evidence of inconsistent conduct to survive summary judgment, Sosebee produced no evidence that Steadfast's conduct in this case prejudiced Harvest.
Steadfast contends the district court erred in holding Steadfast's conduct prejudiced Harvest. In support of this contention Steadfast states that Harvest was never a defendant in this case and Sosebee's case against Harvest is stayed pending the resolution of Harvest's bankruptcy case. Steadfast maintains its conduct could not have prejudiced Harvest when Sosebee has no active lawsuits pending against Harvest. Steadfast stresses Harvest provided the information with respect to the vessel involved in the accident prior to the time Steadfast assumed Harvest's defense. Thus, Steadfast asserts the documents and fact witnesses Harvest provided to Steadfast after Steadfast assumed its defense did not give Steadfast any information Steadfast could use against Harvest.
The party asserting waiver must prove the insurer's inconsistent conduct prejudiced the insured. Scottsdale, 1999 WL 130633, at *5. If the injured party raises the issue of waiver pursuant to a claim under the Louisiana Direct Action statute, the relevant question remains whether the insurer's conduct prejudiced the insured. See Todd v. Steamship Mut. Underwriting Ass'n, No. 08-1195, 2011 WL 1226464, at *6 (E.D.La. Mar. 28, 2011) (citing LA.REV.STAT. § 22:1269(B)(1) (2009)) (holding direct action plaintiff has no independent cause of action against insurer but merely stands in shoes of insured). The question of whether an insurer's conduct prejudiced the injured party is irrelevant to the question of whether the insurer waived its reservation of rights vis-à-vis the insured.
This appeal raises the question of whether the party asserting waiver may, under Louisiana law, prove prejudice to the insured without showing actual harm. Louisiana case law addressing the prejudice prong of waiver does not clarify whether the insured must have detrimentally relied on the insurer's misleading conduct to prove prejudice. Cf. Tudor Ins. Co. v. First Advantage Litig. Consulting, LLC, No. 11 CIV. 3567 KBF, 2012 WL 3834721, at *11 (S.D.N.Y. Aug. 21, 2012) (citing Federated Dep't. Stores, Inc. v. Twin City Fire Ins. Co., 28 A.D.3d 32, 37, 807 N.Y.S.2d 62 (N.Y.App.Div.2006)) ("Moreover, `a key element of common-law estoppel' is a showing by the insured of prejudice, or detrimental reliance, from the belated disclaimer."); Pennsylvania Nat. Mut. Cas. Ins. Co. v. Kitty Hawk Airways, Inc., 964 F.2d 478, 480 (5th Cir. 1992) (requiring insured show actual harm to prove prejudice under Texas law). In Arceneaux, the court discusses but does not decide whether actual harm is required to prove the insured was prejudiced. 969 So.2d at 767 (citing 14 Couch on Ins.3d §§ 202:67-69) (some jurisdictions hold "the loss of the right of the insured to control and manage the defense is, in itself, prejudice without any further proof.") (internal quotation marks omitted). Keeping in
Louisiana case law suggests there are two ways to prove an insurer's misleading conduct prejudiced the insured. First, an insurer may prejudice an insured by depriving the insured of the opportunity to assume and manage its own defense. Arceneaux, 66 So.3d at 452. Louisiana case law does not clearly define the contexts in which this form of prejudice may occur.
Arceneaux v. Amstar Corp., 969 So.2d at 768 (internal citations omitted). Second, an insurer prejudices an insured if the insured was actually harmed by the insurer's inconsistent conduct. See Scottsdale, 1999 WL 130633, at *5. In Scottsdale the insured's claim of waiver was not based on delay in asserting a policy defense, but based on a claimed conflict of interest. Id. at *4. The court held the insurer indeed created a conflict of interest by retaining the same attorney to represent itself and the insured even though the insurer raised policy defenses. Id. at *5. Nevertheless the court held the insured was not prejudiced by this conflict of interest because the insurer also defended the claim on the merits and there was no evidence that the settlement was unfair to the insured. Id.
Sosebee failed to show evidence either of Arceneaux or "real harm" prejudice. Steadfast did not deprive Harvest of the opportunity to assume and manage its own defense. Stephens & Grace did not begin representing Harvest until after the district court stayed Sosebee's claim against Harvest pursuant to 11 U.S.C. § 362. This case remained stayed the entire time Stephens & Grace was representing Harvest. While it is true that Sosebee has filed a claim against Harvest in the bankruptcy case that may evolve into an adversary proceeding, Harvest's own counsel represents Harvest in the bankruptcy case. Further, neither claim preclusion nor issue preclusion will apply to prevent relitigation in the impending adversary proceeding of the coverage issue or the merits of Sosebee's claim against Harvest. Therefore, Harvest will have an opportunity to defend itself both from Sosebee's personal injury claim and Steadfast's claim of waiver. The only evidence Sosebee provided of prejudice to Harvest was that Harvest cooperated with Steadfast to aid Steadfast in defending Sosebee's claim against Steadfast by making its personnel available to Steadfast for questions, allowing Stephens & Grace to represent a Harvest employee in a deposition taken by the
For these reasons, we REVERSE and render summary judgment for Steadfast.
Daigle Dep. 45:17-51:14, July 20, 2011.
