United States: Third Party Claimant Denied Action For Bad Faith Without Valid Assignment Against Insurer

Case: Johno v. Doe
Louisiana Fourth Circuit Court of Appeal
2015-0737 (La. App. 4 Cir. 03/09/16)

Plaintiff Dana Johno sued the Plaquemines Parish Government, its contractor Leon Duplessis & Sons, Inc. and its subcontractors HardRock Construction and Pro Tree Services, for demolishing his rental home, damaged during Hurricane Katrina, without his consent. Johno settled with Duplessis and the Plaquemines Parish Government. At the same time, Scottsdale Insurance, who allegedly insured Duplessis, refused to participate in the settlement. As part of the settlement with Duplessis, the settlement agreement executed by the parties included an assignment to Johno of Duplessis' "contractual rights" against HardRock and Scottsdale. (Although not clear from the court's opinion, it appears that HardRock's was the Named Insured on Scottsdale's Policy and there may have been an additional insured endorsement in favor of Duplessis as the contractor of HardRock). Johno then amended his petition to add claims against Scottsdale, including a claim that Scottsdale had committed bad faith in failing to settle with Johno on behalf of Duplessis. Scottsdale challenged whether Johno had a cause of action against it for bad faith failure to settle.

The Fourth Circuit Court of Appeal first noted that a claim for bad faith failure to settle arises under Louisiana Revised Statute 22:1973. Section A of that statute establishes that an insurer owes its insured a duty of good faith and fair dealing, the breach of which makes the insurer liable for damages sustained as a result of the breach. Section B of the statute provides a list of six acts, which, if committed knowingly by the insurer, subject it to penalties equal to the greater of two times the damages sustained or $5,000, in addition to damages for breach of the insurer's duty. The Louisiana Supreme Court has specifically held that third-party claimants, like Johno, may assert private claims against an insurer for the acts enumerated in Section B, but they have no cause of action against an insurer for violation of Section A's general duty. Moreover, Section B(5) identifies one of those acts as failing to "pay the amount of any claim due any person insured by the contract" within 60 days after receipt of satisfactory proof of loss from the claimant, when such failure is arbitrary, capricious or without probable cause. Various Louisiana appellate courts have concluded that this provision, although part of Section B, does not give a third-party claimant a cause of action because the claimant does not qualify as a "person insured by the contract" to which Section B(5) refers. Accordingly, the Fourth Circuit concluded that Johno only had a claim for bad faith failure to settle if he was "advancing Duplessis' claim as assigned to him."

The Court began its analysis by stating that the settlement agreement signed by Johno and Duplessis, as a contract, was the law between the parties and its clear and unambiguous terms governed. In the agreement, the parties had specifically defined the word "Claim" broadly to include every kind of claim "arising out of tort, contract, statute, regulation or otherwise, including contractual claims, extracontractual claims, claims for indemnity, claims for insurance coverage, and claims for violation of any code, statute, including but not limited to claims under R.S. 22:1973 (formerly 22:1220), statutory or contractual penalties, and bad faith damages." The Court held that Johno had released all of the "Claims" against Duplessis, but Duplessis had not assigned all "Claims" it had against others including Scottsdale. Instead, the assignment portion of the settlement agreement stated that "DUPLESSIS agrees to assign to RELEASOR [Johno] all contractual rights DUPLESSIS has or may have against HARDROCK, its subcontractors and their insurers, including but not limited to, the indemnity claims asserted by DUPLESSIS in the Demand and any additional rights DUPLESSIS has or may have under the HARDROCK CONTRACT ...", except past indemnity claims Duplessis and its insurer Hanover had to recover defense costs.

The Court of Appeal held that the bad faith failure to settle claims arise from the statute, not the contract of insurance and therefore were not part of the "contractual rights" that Duplessis had assigned to Johno. Further, the use of the word "indemnity" to modify "claims" limited the assignment to claims for indemnity for settlement or costs of defense. Thus, Duplessis had assigned only some of its contractual rights, including the right to seek indemnity from Duplessis' insurer for the settlement paid to Johno, but Duplessis did not assign any statutory claims for bad faith that it may have had against Scottsdale. Considering that the settlement agreement released all "claims" against Hanover as insurer of Duplessis, which explicitly included statutory claims under 1973, the Court concluded that the parties were "amply able to clearly express" an assignment of such claims against Scottsdale if they had intended to do so. Thus, the Court of Appeal concluded that the unambiguous terms of the settlement agreement did not include any assignment of statutory claims against Scottsdale. As a result, Johno did not have a cause of action against Scottsdale for bad faith failure to settle under R.S. 22:1973.

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