Homestead Insurance v. Guarantee Mutual Life Co.

Citation: 459 F. App'x 398Docket: No. 10-31099

Court: Court of Appeals for the Fifth Circuit; January 25, 2012; Federal Appellate Court

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Edward C. Prado, Circuit Judge, addressed an appeal following a district court's judgment related to a prior ruling in Homestead Insurance Co. v. Guarantee Mutual Insurance Co. Homestead Insurance Company (Homestead) appealed the determination that Guarantee Mutual Insurance Company (Guarantee) did not act in bad faith, as per Louisiana Revised Statutes 22:1973 and its predecessor. Guarantee cross-appealed concerning the district court's award of $50,527.16 in attorney’s fees to Homestead. The court affirmed the finding of no bad faith but vacated the attorney’s fees award.

The case originated when Tonti Development Corporation (Tonti) purchased a worker’s compensation policy from Guarantee and an employer’s liability policy from Homestead. After Tonti employee Julie Green injured another employee, James Payne, in a golf cart incident, Payne filed a worker’s compensation claim that Guarantee defended. He also pursued a tort action against Tonti and Green, claiming intentional harm. Guarantee initially defended Tonti without reserving its rights but later withdrew, citing lack of coverage for the allegations.

Subsequently, Homestead provided a defense while reserving rights, arguing that if the tort was proven, it would not be covered under Tonti's policy. After extensive state litigation, Tonti and Homestead were ultimately exonerated. Homestead then sought a federal declaratory judgment to clarify that Payne’s damages were not covered by its policy and later amended its complaint to hold Guarantee liable for Tonti's attorney’s fees. Tonti later stipulated a judgment, assigning its rights to Homestead against Guarantee for any penalties or fees resulting from Guarantee's noncompliance with policy obligations.

In 2007, Homestead and Guarantee engaged in cross-motions for summary judgment regarding Guarantee's liability for Tonti’s defense in Payne’s state court suit. The district court initially ruled that Guarantee had no obligation to defend Payne, but this decision was reversed on appeal. The appellate court determined that Guarantee waived its policy defense by defending Tonti for over twenty months without a reservation of rights. It also validated the assignment of rights from Tonti to Homestead, allowing Homestead to assert Tonti’s claims against Guarantee. The case was remanded, resulting in the district court granting Homestead's motion for summary judgment regarding Guarantee’s full liability for Tonti’s defense costs.

On September 23, 2010, the district court found Guarantee liable for $98,993 in defense costs, entitled Homestead to pre-judgment interest on attorney’s fees from the date of judicial demand, and ruled Guarantee owed Homestead $50,527.16 for Tonti’s attorney’s fees in the declaratory judgment action. However, Homestead was not granted pre-judgment interest on these fees and was denied 'bad faith' damages under La.Rev.Stat. 22:1220, as Guarantee was found not to have acted in bad faith. The appellate court has jurisdiction under 28 U.S.C. 1291 and follows Louisiana law for substantive issues while applying federal review standards. It reviews the bad faith determination de novo and the attorney’s fees award for abuse of discretion, affirming the district court’s findings that Guarantee acted without bad faith under La.Rev.Stat. 22:1220.

Subsection A of La.Rev.Stat. 22:1220 establishes that insurers have a duty of good faith and fair dealing, requiring them to adjust claims fairly, promptly, and reasonably. Subsection B outlines actions that constitute a breach of this duty, including the misrepresentation of relevant facts or policy provisions. Louisiana case law interprets "bad faith" as insurers' failure to fulfill their statutory obligations under Subsection A, which can involve any of the six specified acts in Subsection B. Misrepresentation can occur through false statements or the omission of pertinent information to the insured.

Several court rulings illustrate breaches of Subsection B(1) through failures to communicate coverage policies or settlement offers effectively. The term "penal" applies to Subsection B(1), necessitating strict construction.

In the case presented, Guarantee Insurer is accused of acting in bad faith by withdrawing its defense of Tonti after initially providing defense for twenty months. Guarantee contends that its withdrawal was justified due to an amendment in Payne’s complaint alleging an intentional tort, which was not covered under its policy. However, Homestead claims that the original complaint already included this allegation, suggesting there was no valid reason for Guarantee's withdrawal. Homestead argues that the district court's conclusion—that the amended complaint was the first indication of the policy exclusion—was based on an incorrect understanding of the facts, thereby warranting a reversal of the district court's determination regarding bad faith.

The district court incorrectly believed that the amended complaint included the first allegation of an intentional tort, but its ruling that Guarantee did not violate La.Rev.Stat. 22:1220(B)(1) is upheld. Homestead failed to provide evidence that Guarantee knowingly misrepresented facts regarding coverage. Although Guarantee initially defended Tonti, there was no indication that it was aware of an intentional tort allegation in the original complaint. Even if there were a misrepresentation regarding coverage, it was not shown to be made knowingly. Upon receiving the amended complaint, Guarantee recognized the intentional tort allegation for the first time and subsequently withdrew its defense, informing Tonti that the amended complaint alleged an action outside of coverage, which was a truthful statement as the policy did not cover intentional injuries. Homestead's claims of knowing misrepresentation lack substantiation. Consequently, Guarantee did not act in bad faith under La.Rev.Stat. 22:1220.

Regarding the cross-appeal, the district court's award of $50,527.16 in attorney's fees to Homestead was deemed an abuse of discretion. The court had ruled that Tonti, and by assignment, Homestead, was entitled to recover attorney's fees incurred while defending against the declaratory judgment action. The court found Guarantee had a contractual obligation to defend Tonti and breached that obligation, leading to damages. However, it was determined that attorney's fees could not be compensated as damages resulting from Guarantee's breach, as there was no statutory or contractual basis for such an award.

Attorney’s fees in Louisiana are recoverable only when explicitly authorized by statute or contract, as established in multiple cases including Sher v. Lafayette Ins. Co. and Hernandez v. Harson. Courts consistently maintain that attorney’s fees cannot be assessed as damages unless there is clear legal or contractual provision. A breach of contract does not create an implied obligation for attorney’s fees unless specifically stated. Additionally, attorney’s fees statutes are strictly construed due to their exceptional and penal nature. In this instance, there is no contractual basis for awarding attorney’s fees to Tonti, as the district court failed to identify any contractual provision necessitating Guarantee to cover these fees in the context of Homestead’s declaratory judgment action. The insurance contract did not require the insurer to pay attorney’s fees related to the coverage issue. Furthermore, Louisiana Civil Code Articles 1994 and 1995 do not permit the recovery of attorney’s fees as breach of contract damages; Article 1996 limits liability for good faith breaches, while Article 1997 addresses bad faith breaches but does not support attorney’s fees claims. The Louisiana Supreme Court has reinforced that attorney’s fees are not recoverable unless specifically authorized, reaffirming that neither the statute nor the insurance contract contained provisions for such fees.

The court found that Articles 1994 et seq. do not authorize the awarding of attorney’s fees in breach of contract cases, as these articles merely reflect fundamental contract law principles without specific mention of such fees. The Louisiana Supreme Court's reasoning indicates that unless there is explicit contractual or statutory authorization, attorney’s fees cannot be awarded. The court highlighted that other statutes in Louisiana expressly provide for attorney’s fees, demonstrating the legislature’s intent to include them where appropriate. As a result, the district court incorrectly concluded that Article 1994 could support an attorney’s fee award, and it abused its discretion in awarding Tonti $50,527.16 in fees related to Homestead's declaratory judgment action. The ruling on bad faith against Guarantee was affirmed, but the award of attorney’s fees was vacated. The opinion is not to be published as precedent. Additionally, it notes that the renumbering of La.Rev.Stat. 22:1220 to La.Rev.Stat. 22:1973 in January 2009 did not change its content.

The district court inaccurately stated that Guarantee withdrew from Tonti's defense after an amended complaint from Payne, which allegedly included an intentional tort claim. In reality, the original complaint already contained this allegation. Guarantee recognized that the claims might not be covered under its policy due to a specific exclusion for intentional acts. The court affirmed that Guarantee did not act in bad faith under La.Rev.Stat. 22:1220(B)(1), thus not addressing the issue of "bad faith damages." It also agreed that Guarantee's actions did not constitute a breach in bad faith under La.Rev.Stat. 22:1220, rendering Homestead's claim for attorney’s fees under the same statute unnecessary. Prior to the Sher decision, Louisiana courts consistently ruled that good-faith contractual breaches under Articles 1995 and 1996 did not warrant attorney’s fees, as these articles do not mention such fees, nor did the relevant contracts. Even a bad-faith breach under Article 1997 was generally not seen as grounds for attorney’s fees, although some minority cases acknowledged bad faith as an exception to this rule, reaffirming that good-faith breaches could not lead to fee awards.

Louisiana courts have established that Articles 1934 and 1997 do not permit the awarding of attorney's fees as damages in breach of contract cases. This conclusion is supported by a line of cases that overruled earlier minority opinions, specifically rejecting the notion that attorney's fees could be included as part of breach of contract damages, regardless of whether the breach was in bad faith. Key rulings include Lloyd v. Merit Loan Company, which clarified that Article 1934 does not reference attorney's fees, and subsequent cases reaffirming this position. The ruling in Sher further solidified this legal stance, indicating that Articles 1994 and following do not authorize attorney's fees in breach of contract claims. However, certain statutes do allow for the recovery of attorney's fees in specific contexts, such as actions against contractors for fraud, claims by creditors against sureties, and cases of frivolous employment discrimination.