Intentional Act Can Never be Basis for Defense or Indemnity from Insurer
Liability insurance, by definition, will only respond to provide defense or indemnity to an insured who has caused injury to a third person of the injury was the result of a contingent or unknown event. If the injury was, on the other hand, caused intentionally, there can never be coverage. Regardless, litigants will gamble on giving up the chance to collect from the defendant by taking an assignment against an insurer. The odds are usually slightly better than the odds of winning the lottery.
In Bradley W. Smith v. Shelter Mutual Insurance Company, No. 18-30858, United States Court of Appeals for the Fifth Circuit (April 10, 2019) Bradley Smith contended that the district court erred by granting Shelter Mutual Insurance Company’s summary judgment motion based on res judicata. When Paul Babin, intentionally caused injury to Smith, his insurer claimed to have no obligation to defend or indemnify Babin.
In 2001, Paul Babin, whom Shelter insured, hit Smith while driving his car. After the incident, Smith sued Babin in state court. Babin then brought a cross-claim against Shelter alleging that Shelter had refused to defend or indemnify him in bad faith and seeking damages for Shelter’s alleged policy misrepresentations.
Following a trial in state court, the court found that (1) Shelter did not have a duty to defend Babin and that (2) ‘Shelter was not . . . in any way in bad faith in making its decision that it did not have coverage. . . . [, as] there was no failure in any part of the duties of the insurer. Accordingly, the court ordered that “with respect to the cross[-]claims of Paul A. Babin, the claims for duty to defend against Shelter Mutual Insurance Company be and hereby are dismissed, with prejudice.” The court further ordered that “with respect to the cross-claim of Paul Babin, the claims for bad faith insurance practices under La. R.S. 22:1892 and 1973 against Shelter Mutual Insurance Company be and hereby are dismissed, with prejudice.”
After the state court proceedings concluded, Smith sued in federal court against Shelter on an assignment of Babin’s rights. Smith, standing in Babin’s shoes, sought to recover bad faith damages and the excess amount of the state court judgment beyond Babin’s insurance policy limits, alleging that Shelter (1) misrepresented its policy and (2) unreasonably failed to settle.
After discovery, Shelter re-filed a motion for summary judgment—grounded on res judicata—seeking dismissal of the remaining failure to settle claim. Agreeing that res judicata principles applied, the district court granted Shelter’s motion and dismissed this suit.
Except as otherwise provided by law, a valid and final judgment is conclusive between the same parties, except on appeal or other direct review, to the extent that a judgment in favor of either the plaintiff or the defendant is conclusive, in any subsequent action between them, with respect to any issue actually litigated and determined if its determination was essential to that judgment.
Plaintiff contends that the district court erred by dismissing his case based on res judicata. Under Louisiana law, “[r]es judicata is [both] an issue and claim preclusion device. . . .” The district court granted Defendant’s summary judgment motion primarily based on claim preclusion principles and issue preclusion bars this federal suit.
Under La. Rev. Stat. § 13:4231(3), the three requirements for issue preclusion are “(1) a valid and final judgment; (2) [same] identity of the parties; and (3) an issue that has been actually litigated and determined if its determination was essential to the prior judgment.” The first two requirements are met. The Fifth Circuit focused on the third factor. Under issue preclusion, “once a court decides an issue of fact or law necessary to its judgment, that decision precludes relitigation of the same issue in a different cause of action between the same parties.” At issue is whether the state court’s finding that Shelter did not owe the insured a duty to defend necessarily found Shelter did not owe the insured a duty to settle, which is the basis for an excess judgment liability claim before the Fifth Circuit.
The state court dismissed Babin’s claims for duty to defend and found no bad faith. Specifically, the state court reasoned: “When I read the four corners of the petition and the facts that are alleged, and I read the policy, clearly and unambiguously intentional acts are the facts that are being alleged. At the time the decision was made, there was no duty to defend. There was no coverage. . . . Shelter was not arbitrary, capricious, or in any way in bad faith making its decision that it did not have coverage, nor did it have a duty to defend. . . . [T]here was no failure in any part of the duties of the insurer. The four corners of the petition and in the policy clearly were met. They were within their right to deny coverage and deny counsel and representation.” (emphasis added)
Under the issue preclusion doctrine, the Fifth Circuit was required to find that the Louisiana trial court’s judgment in Smith v. Babin, et al bars this subsequent federal suit. The state court’s ruling—that Shelter did not violate its duty to defend—necessarily decided that Shelter did not violate its duty to settle. Accordingly, the Fifth Circuit concluded that issue preclusion forecloses Smith’s case.
Babin, personally responsible for the intentional injury of Smith, took advantage of Smith by avoiding paying for the damages himself and convincing Smith that he could get his damages plus bad faith damages, if he gave up his rights against Babin and assumed Babin’s rights against Shelter. Babin had no rights. Smith gave up his rights for nothing. After litigation and appeals Smith found himself paying to litigate twice to the Fifth Circuit to receive absolutely nothing. Greed is not good. The effort Smith took only would be partially worth the effort if Babin was totally judgment proof. Too much court time, lawyer time and money were wasted on an intentional act that could never be the subject of a viable insurance claim.
© 2019 – Barry Zalma
This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and firstname.lastname@example.org.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 51 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.
Passover Seder for Americans
Passover is one of the many holidays Jewish people celebrate to help them remember the importance of G_d in their lives. We see the animals, the oceans, the rivers, the mountains, the rain, sun, the planets, the stars, and the people and wonder how did all these wonderful things come into being?
All Jewish fathers are required to teach their children, at least once a year at the Passover holiday, about the exodus from slavery in Egypt. For American Jews who have difficulty understanding Hebrew and complicated books describing the Exodus, my wife and I wrote this book to use for our own Seder where each member of the family reads part of the book.