David Cloud v. National Automotive Insurance Co.

STATE OF LOUISIANA
COURT OF APPEAL, THIRD CIRCUIT

03-1438

DAVID CLOUD

VERSUS

NATIONAL AUTOMOTIVE INSURANCE CO.

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APPEAL FROM THE
NATCHITOCHES CITY COURT
PARISH OF NATCHITOCHES, NO. 21,334
HONORABLE FRED S. GAHAGAN, CITY COURT JUDGE

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ELIZABETH A. PICKETT
JUDGE

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Court composed of Sylvia R. Cooks, Billie Colombaro Woodard, Marc T. Amy, and
Elizabeth A. Pickett, Billy H. Ezell, Judges.

AFFIRMED IN PART, REVERSED IN PART AND RENDERED.

Cooks, J., dissents and assigns written reasons.
Woodard, J., dissents for the reasons assigned by Judge Cooks.

Kenneth E. Pickering
Pickering & Cotogno
301 Magazine St.
New Orleans, LA 70130
(504) 581-1222
Counsel for Defendant Appellant:
National Automotive Insurance Co.

Robert Stuart Wright
Attorney at Law
P.O. Box 1156
Natchitoches, LA 71458-1156
(318) 352-9950
Counsel for Plaintiff Appellee:
David Cloud

PICKETT, JUDGE.

The appellant, National Automotive Insurance Company, appeals a judgment

of the trial court construing certain language in an insurance contract as ambiguous.

The appellee answers the appeal, asking that the trial court’s ruling denying an award

of penalties and attorney fees be reversed.

FACTS

On August 4, 2002, a 1996 Nissan Maxima owned by David Cloud was

involved in a collision. The car was insured by National Automotive Insurance

Company (National). The car was determined to be a total loss.

The insurance policy contained the following provision:

Limit of Liability – The limit of the Company’s liability for loss will be
the lesser of the:
(1) actual cash value of the stolen or damaged property.
(2) the purchase price of the stolen or damaged property.
(3) or amount necessary to repair or replace the property with other like
kind and quality.

Cloud had purchased the car in March 2002 for $5000.00. National made an offer to

settle the claim for $4500.00 (the amount of the purchase price less a $500.00

deductible) on August 23, 2002. In a letter from his attorney dated September 3,

2002, Cloud refused the offer, claiming he was entitled to recover the full book value

of the car, which was $7160.00. On October 30, 2002, National tendered a check for

$4200.00, which was the amount claimed not in dispute. Cloud filed the instant suit,

seeking the book value of the car as well as penalties and attorneys fees for failure to

timely pay the claim.

The matter was submitted to the trial court on briefs; no testimony was taken.

The trial court found that the clause at issue would lead to absurd consequences and

was therefore legally ambiguous. The trial court found that National was required to

pay the fair market value of the car. It declined to award penalties and attorney fees,

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finding that National was not arbitrary and capricious (See La.R.S. 22:658) and acted

in good faith (See La.R.S. 22:1220).

National appeals the finding that the contract was legally ambiguous. Cloud

answers the appeal seeking attorneys fees and penalties.

ASSIGNMENTS OF ERROR

National asserts two assignments of error:

1. The record is devoid of any proof that the language of the contract of insurance
leads to an absurd consequence, and it was manifestly erroneous, clearly wrong,
and legal error for the trial court to alter the terms of the contract between the
parties.
2. The record is devoid of any proof that the limitation of liability and
coverage set forth in the contract between the parties conflicts with any
statutory law or public policy, and it was manifestly erroneous, clearly
wrong, and legal error for the trial court to set aside the limitation.

Answering the appeal, Cloud asserts the trial court erred in not awarding

penalties and attorneys fees pursuant to La.R.S. 22:658 and 22:1220.

DISCUSSION

The supreme court recently set forth the rules for interpreting a contract of

insurance in Cadwallader v. Allstate Ins. Co., 02-1637, pp.3-4 (La. 6/27/03), 848

So.2d 577, 580.

An insurance policy is a contract between the parties and should
be construed by using the general rules of interpretation of contracts set
forth in the Louisiana Civil Code. Carbon v. Allstate Ins. Co., 97-3085,
p. 4 (La.10/20/98), 719 So.2d 437, 439; Louisiana Ins. Guar. Ass'n v.
Interstate Fire & Cas. Co., 93-0911, p. 5 (La.1/14/94), 630 So.2d 759,
763. The judiciary’s role in interpreting insurance contracts is to
ascertain the common intent of the parties to the contract. See La.
Civ.Code art. 2045; Carbon, 719 So.2d at 439; Louisiana Ins., 630
So.2d at 763.

Words and phrases used in an insurance policy are to be construed
using their plain, ordinary and generally prevailing meaning, unless the
words have acquired a technical meaning. See La. Civ Code art. 2047;
Peterson v. Schimek , 98-1712, p. 5 (La.3/2/99), 729 So.2d 1024,
1028-29; Carbon, 719 So.2d at 440-441; Reynolds, 634 So.2d at 1183.
An insurance contract, however, should not be interpreted in an
unreasonable or strained manner under the guise of contractual

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interpretation to enlarge or to restrict its provisions beyond what is
reasonably contemplated by unambiguous terms or achieve an absurd
conclusion. Carrier v. Reliance Ins. Co., 99-2573, p. 11 (La.4/11/00),
759 So.2d 37, 43; Peterson, 729 So.2d at 1029. The rules of
construction do not authorize a perversion of the words or the exercise
of inventive powers to create an ambiguity where none exists or the
making of a new contract when the terms express with sufficient
clearness the parties’ intent. Succession of Fannaly v. Lafayette Ins. Co.,
01-1355, p. 4 (La.1/15/02), 805 So.2d 1134, 1138; Peterson, 729 So.2d
at 1029.

Ambiguous policy provisions are generally construed against the
insurer and in favor of coverage. La. Civ.Code art. 2056; Carrier, 759
So.2d at 43; Louisiana Ins., 630 So.2d at 764. Under this rule of strict
construction, equivocal provisions seeking to narrow an insurer's
obligation are strictly construed against the insurer. Carrier, 759 So.2d
at 43. That strict construction principle applies only if the ambiguous
policy provision is susceptible to two or more reasonable interpretations;
for the rule of strict construction to apply, the insurance policy must be
not only susceptible to two or more interpretations, but each of the
alternative interpretations must be reasonable. Carrier, 759 So.2d at
43-44, (emphasis in original); Louisiana Ins., 630 So.2d at 770.

If the policy wording at issue is clear and unambiguously
expresses the parties' intent, the insurance contract must be enforced as
written. Fannaly, 805 So.2d at 1137; Louisiana Ins., 630 So.2d at 764.
Courts lack the authority to alter the terms of insurance contracts under
the guise of contractual interpretation when the policy's provisions are
couched in unambiguous terms. Peterson, 729 So.2d at 1029; Louisiana
Ins., 630 So.2d at 764. The determination of whether a contract is clear
or ambiguous is a question of law. Louisiana Ins., 630 So.2d at 764.

Furthermore, in Doerr v. Mobil Oil Corp., 00-947, p.6 (La. 12/19/00), 774 So.2d 119,

124, the supreme court held:

The Civil Code is clear that if a contract does not lead to absurd
consequences it will be enforced as written. See La.Civ.Code art. 2046.
When absurd results are possible from such a reading, however, the
contract is ambiguous, and the courts must construe the provision in a
manner consistent with the “nature of the contract, equity, usages, the
conduct of the parties before and after the formation of the contract, and
of other contracts of a like nature between the same parties.”
La.Civ.Code art. 2053; accord La.Rev.Stat. 22:654.

As noted in Cadwallader, interpretation of a contract is a question of law. On review,

the proper standard is whether the trial court was legally correct. Weeks v. T.L. James

& Co., Inc., 626 So.2d 420 (La.App. 3 Cir.1993), writs denied, 93-2909, 93-2936

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(La.1/28/94), 630 So.2d 794.

The plaintiff argued, and the trial court agreed, that while the wording of the

contract was clear, there could be a situation in which a literal reading would lead to

absurd consequences, rendering the language in question legally ambiguous.

Doerr,774 So.2d 119. The trial court’s written reasons for judgment explain his

finding:

The Court determines that in fact the literal reading of this part of
National’s policy would in fact lead to absurd consequences. Mr.
Cloud’s brief gives one example of absurd consequences in that a father
donates a vehicle to his child, then under a literal reading of the collision
damage coverage, there would be nothing owed by the insurer. What if
someone purchased a 1957 Chevrolet Impala from a junkyard for
$250.00, spent two years refurbishing the same, and now has a vehicle
that is worth $10,000.00. Under the policy, all he would be entitled to,
if that vehicle were destroyed, would be $250.00. The bottom line is that
if you read the policy as written, there are many occasions in which
someone would purchase and pay for collision damage coverage and
actually not be covered at all. This is an absurd consequence. The Court
therefore determines that the language in National’s policy limiting them
to the sales price is legally ambiguous and must be read to reflect that the
insurance company is obligated to pay the fair market value of the
automobile.

The appellant claims that the flaw in the trial court’s reasoning is the fact that

the hypothetical situations should not have been considered because they were not in

evidence. In fact, Cloud does not claim that a literal reading of the policy leads to an

absurd consequence in this case. The trial court erred in finding the wording of the

policy legally ambiguous under the facts before us, which is all we can consider.

While a set of facts could be imagined wherein the policy language would lead to an

absurd result, it does not lead to an absurd result in this case. The parties are bound

by the policy.

As to the appellant’s second assignment of error, there was no indication that

the trial court found that the policy terms conflicted with any statutory law or public

policy. His ruling was based on the fact that he found legally ambiguous language.

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The second assignment of error has no basis in the record.

The appellant’s answer to the appeal is predicated on two separate statutes.

Louisiana Revised Statute 22:658 provides that failure to pay a claim within thirty

days from the receipt of satisfactory proof of loss is subject to penalties and attorney

fees if that failure is found to be arbitrary, capricious, or without probable cause. The

plaintiff has the burden of proving the failure to pay. Wyble v. Allstate Ins. Co., 581

So.2d 325 (La.App. 3 Cir. 1991). The record reflects that National and Cloud entered

into negotiations in an attempt to settle the claim. On October 21, Cloud, through his

attorney, rejected an offer of $5000.00 to settle the claim, and National issued a check

on October 30, 2002. The trial court’s conclusion is based on a finding of fact, and

on appeal the trial court’s factual findings should not be disturbed absent manifest

error. Rosell v. ESCO, 549 So.2d 840 (La.1989). The trial court was not wrong in

refusing to award penalties and attorney fees based on La.R.S. 22:658.

Cloud also claims he should be awarded penalties and attorney fees pursuant

to La.R.S. 22:1220. This statute imposes upon the insurer a duty of good faith and fair

dealing. Specifically, La.R.S. 22:1220(B)(5) states that the insurer breaches this duty

if it fails to pay a claim within sixty days “if such failure is arbitrary, capricious, or

without probable cause.” Again, the trial court found that these conditions were not

met, and that finding should not be disturbed as it is supported by the record.

CONCLUSION

The ruling of the trial court is reversed as to its finding that the policy is legally

ambiguous. The trial court’s judgment is affirmed as to the denial of penalties and

attorney fees. The costs of this appeal are to be divided equally between the appellant

and the appellee.

AFFIRMED IN PART, REVERSED IN PART AND RENDERED.

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STATE OF LOUISIANA

COURT OF APPEAL, THIRD CIRCUIT

03-1438

DAVID CLOUD

VERSUS

NATIONAL AUTOMOTIVE INSURANCE, CO.

COOKS, J., dissents.

I agree with the decision of the trial court and find the contract of insurance, as

written, leads to absurd consequences and is against public policy. The trial court

concluded “if you read the policy as written, there are many occasions in which

someone would purchase and pay for collision damage coverage and actually not be

covered at all. This is an absurd consequence. The Court therefore determines that

the language in National’s policy limiting them to the sales price is legally ambiguous

and must be read to reflect that the insurance company is obligated to pay the fair

market value of the automobile.” The reasoning of the trial court is consistent with

established jurisprudence, cited in National’s brief, which holds recovery of damages

under collision policies are limited to either the cost of repair or the actual cash value

of the vehicle at the time of the accident, less salvage. See Giles Lafayette v. State

Farm Mutual Automobile Insurance Co., 467 So.2d 1309 (La.App. 3 Cir.)writ not

considered, 472 So.2d 1305 (La. 1985); Holt v. Rapides Parish Police Jury, 574 So.2d

525 (La.App. 3 Cir. 1991). Unlike most policies, the language in the National policy

allows it to collect premiums for coverage it is not providing. This is the public policy

issue and one which the majority opinion fails to address. The trial court cited two

instances when this situation occurs. One would be if the automobile were donated

to the owner and the other would be if the owner purchased an automobile from a

junkyard and then rebuilt it. In both these instances, an insured would be paying

premiums based on the value of the car and would reasonably believe the vehicle was

covered up to the market value. The majority incorrectly dismisses these situations as

“hypothetical” and chastises the trial court for considering facts not in evidence. It is

the majority opinion which fails to grasp the public policy issue squarely before us.

As in the two other “hypothetical” situations, Mr. Cloud obtained his vehicle for less

than market value but National was collecting premiums based on market value. In

other words, he was paying insurance premiums for coverage he did not have.

Additionally, in this case, Mr. Cloud reasonably believed he would recover the market

value of his car if it was destroyed. Mr. Cloud purchased his 1996 Nissan Maxima for

$5,000.00. The blue book value was $7,160.00. National Automotive Insurance

Company issued a policy of insurance and Mr. Cloud paid premiums, based on the

value of $7,160.00, not the purchase price of $5,000.00. I believe it is more than fair

to require National to pay the actual cash value of the car. To allow National to

escape its responsibility would “overlook the nature and function of insurance

companies.” Sharp v. Daigre, 555 So.2d 1361, 1364 (La.1990). In Sharp, the

Louisiana Supreme Court addressed the question of whether an insured may recover

punitive damages assessed against the tortfeasor from his UM carrier. In holding the

UM carrier responsible for punitive damages, the Court recognized the quid pro quo

relationship between an insurer and insured and stated:

In exchange for providing this guarantee of protection to
thousands of motorists, they earn a profit. Having accepted insurance
premiums from Harvey Sharp, they must fulfill their side of the bargain.
Cf Lavender v. State Farm Mutual Automobile Insurance Co., 828 F.2d
1517 (11th Cir. 1987).

Id. at 1364.

I respectfully disagree with the majority opinion and would find National is

required to pay for the actual value of the vehicle.