Bad Faith Action Brought Against an Insurer Less than Ten Years after the Date of Loss Dismissed As Prescribed

Primary insurance policies include the duty to defend aninsured in connection with a covered loss. The insurer is sometimes presentedwith the question of whether a defense is owed when many of the allegations arenot apparently covered by a particular policy. In this circumstance, how doesan insurer determine its obligation? The law provides the answer: the “eightcorners” rule—do the four corners of the policy unambiguously exclude coveragein all respects when viewed within the context of the four corners of thepetition? If the answer is “no,” the duty to defend arises. Mossy Motors,Inc. v. Cameras America, 2004-0726 (La. App. 4 Cir. 3/2/05), 898 So.2d 602,606.

Courts generally hold that the duty to defend the caseextends to ALL claims, not just the covered claims. This duty can often provequite costly, especially when non-covered claims are high-value or involveextensive factual development or testimony to defend. In some instances, theanswer under the eight corners analysis is not so clear. The safe choice forthe insurer is to provide a defense and hire separate counsel to handle thecoverage side of the case.

In this scenario, where an insurer has serious coveragedefenses, but agrees to provide the defense, when does the duty to defend terminate?The Louisiana First Circuit Court of Appeal recently ruled on this issue againin Ponchartrain Natural Gas System, K/D/S Promix, L.L.C. and Acadian GasPipeline System v. Texas Brine Company, L.L.C., No. 2018 CA 0254 (La. App.12/12/19), stating:

“Our previous decisions in the related sinkhole appeals clearly set out the well-established rule of law that an insurer' s duty to defend terminates once the undisputed facts establish, or a judicial determination is made, that the claims asserted are not covered under the policy. See Florida Gas, 272 So. 3d at 551; Pontchartrain, 264 So.3d at 553- 54; Crosstex, 240 So.3d at 1032.”

So, the duty to defend ends when undisputed facts establishOR a judicial determination is made that the asserted claims are not covered.Of course, who is to say that the facts are “undisputed” without a judicialdetermination that confirms this conclusion. An insurer couldunilaterally determine that facts are undisputed and terminate the defensebefore a judicial determination, but if the court does not agree, the insurermay have issues. Accordingly, the safe course is to await a judicialdetermination before an insurer terminates the defense.

It is important to distinguish the duty of an excess carrierbecause such policies generally do not provide an obligation to defend.Instead, the excess carrier may exercise its “right to defend.”

The Louisiana Supreme Court recently addressed the impact of contractual "errors" in Cynthia Fry Perionnet and Elizabeth Fry Franklin v. Matador Resources Company, 2012-2292, 2012-2377, -- So. 3d --.

The Perionnet case involved a dispute over the intent of a contract to extend a mineral lease. The property owners believed that the lease was extended as to only 168.95 acres of nonproducing land. The defendant/lessors argued that the contract contemplated that the lease would extend to the entire 1850.34 acres to include producing wells. Plaintiffs/property owners argued that their unilateral error regarding the terms of the contract was ground for rescission. The jury ruled in favor of the defendant/lessors. The Court of Appeal reversed. The Supreme Court granted writs.

The Perionnet Court began its opinion with an overview of basic tenets of contract law. The Louisiana Civil Code defines a contract as "an agreement by two or more parties whereby obligations are created, modified, or extinguished." La. C.C. art. 1906. Contracts are formed through offer and acceptance. La. C.C. art. 1927. Once formed, contracts have "the effect of law for the parties and may be dissolved only through the consent of the parties or on grounds provided by law." La. C.C. art. 1983. One such "ground" under Louisiana law is "error." La. C.C. art. 1948.

The Louisiana Civil Code recognizes two forms of error: mutual error (both parties are mistaken) or unilateral error (only one party is mistaken). However, for either error to cause the dissolution of a contract, the error (1) must effect the cause of the obligation and (2) the other party must have known that the matter impacted by the error was the reason for the contract. La. C.C. art. 1949. In a case of mutual error, the court can reform the contract. Either partial or full rescission is the only remedy available for unilateral error. La. CC. art. 1952.

A party challenging a contract for unilateral error must also prove that the error was excusable. "Louisiana jurisprudence is sprinkled with cases which deny relief to the parties who claim an agreement should be invalidated because of unilateral error which is caused, in large part, by the complaining party's inexcusable ignorance, neglect or want of care." Id. p. 25.

The Perionnet Court found that the plaintiffs' alleged mistake was inexcusable. The defendants demonstrated that: 1) plaintiffs could show no excuse for failing to read and understand the contract; 2) plaintiffs' agents who negotiated and reviewed the contract were self-proclaimed experts in oil and gas; and 3) the original lease was on the plaintiffs' agent's own forms. The Court found a "sea of flags" in the written agreement that should have notified the experienced plaintiffs that the agreement extended to the entire property. Therefore, the Court found that the mistake was easily detectable and could have been rectified by a minimal amount of care, i.e. "by simply reading the document and/or requesting simple changes to the written offer before acceptance." Id. at 30.

The Supreme Court's Perionnet decision serves as a healthy reminder of a basic concept - read your contracts. Although to err may be human, it can affect your bottom line.

The Louisiana Supreme Court in Petit- Blanc vs. Charles and State Farm, 2021-CC-00094 (La. 4/20/21), ____ So. 3d ______ reaffirmed a strict reading of La. R.S. 13:850. This statute allows the filing of pleadings with a Clerk of Court by facsimile transmission. As currently drafted, the statute provides that the parties shall “deliver” the original document to the clerk within 7 days of the facsimile transmission. In Petit-Blanc, the Supreme Court considered what happens when the original pleading is sent through the mail but not received by the clerk within the 7-day period. Under the facts of the case, the plaintiff’s suit would be prescribed if the act of mailing was insufficient delivery.

Citing Black’s Law Dictionary, the Court found that “delivery” is defined as “the act by which the res or substance thereof is placed within the actual or constructive possession or control of another.” The Court concluded that “merely transmitting an original document within the deadline is insufficient; rather, a litigant must establish the document was delivered to the clerk within the deadline.”

The Court noted that, while the plaintiff established she sent her original petition to the clerk’s office well within the 7-day deadline, “she cannot establish the petition was placed in the actual or constructive possession of the clerk’s office” in a timely manner. As such, the Court found that the “facsimile filing is without force and effect and could not serve to interrupt the prescriptive period.” Accordingly, the Supreme Court granted the writ filed by the defendants, maintained their peremptory exception of prescription, and dismissed the plaintiff’s lawsuit with prejudice.