RENTER BEWARE: Hidden Risks in Lease Agreements

In a first-party action obtained by assignment for excess liability against an insurer, the Louisiana Supreme Court in Smith v. Citadel Insurance,19-00052 (La. 10/22/19) ruled that the claim against the carrier is subject to the 10-year contract prescription period under La. law, stating:

“For the above reasons, we hold an insurer’s duty of good faith owed to its insured under La. R.S. 22:1973 does not exist separate and apart from an insurer’s contractual obligations. The duty of good faith is codified in La. R.S. 22:1973, but this duty is an outgrowth of the contractual and fiduciary relationship between the insured and the insurer, and the duty of good faith and fair dealing emanates from the contract between the parties. Thus, first-party bad faith claims against an insurer are governed by the ten-year prescriptive period set forth in La. C.C. art. 3499. Consequently, Ms. Smith’s first-party bad faith claim against GoAuto, brought pursuant to an assignment of rights from the insured, was subject to a 10-year prescriptive period and is not prescribed.”

The concurring justice noted that it was not necessary to engage in the protracted discussion concerning the duties of insurers relative to first-party claims. Nevertheless, the court offered an in-depth discussion of these duties.

Uninsured/underinsured motorist coverage (“UM coverage”) is included in all automobile liability policies by Louisiana law unless the insured “rejects [UM] coverage, selects lower limits, or selects economic only coverage.” What constitutes an adequate rejection of UM coverage has been the crux of countless lawsuits across the state. Recently, in Havard v. Jeanlouis, et al, 2021-C-00810 (La. 6/29/22), the Louisiana Supreme Court examined the validity of a corporate representative’s signature in the context of execution of a UM waiver form. Louisiana courts have found that without a valid signature, UM coverage generally may not be waived.

The Havard court recognized that a corporation cannot “sign” its own name, and that an authorized representative must act on its behalf. Under the facts of this case, an administrative assistant attempted to execute a UM waiver form at the corporate representative’s direction with a stamp of the representative’s signature. The plaintiff argued that the use of the stamp did not meet the requirements for proper execution of the UM waiver form at issue.

Considering these facts, the court noted that Louisiana law of mandate provides that “when the law prescribes a certain form for an act, a mandate authorizing the act must be in that form.” The court continued: “Accordingly, where one individual signs a UM form on behalf of another individual and authority is not conferred by law, our Civil Code requires this authority be in writing.”

While the corporate representative in Havard verbally instructed his administrative assistant to complete the waiver with his signature stamp, no written mandate existed between the representative and the assistant to confirm this authority. Absent the written mandate, the court disregarded the express intention of the corporate representative and held the form invalid.

The court recognized the impracticality of its holding. However, it also commented “Concerns over the practical impact within the insurance industry in scrutinizing stamped signed UM forms are unavailing. Inconvenience is not absurdity. The insurer has the authority, opportunity, and responsibility to assure the UM form is completed properly. … Practical considerations regarding increased due diligence requirements are matters of policy best directed to the legislature.”

Cases involving UM waiver forms are fact-sensitive. Havard involved unique facts where the company’s authorized agent did not sign the UM waiver form personally. While Havard may be limited to its facts, it reminds that proper execution of a UM waiver form is necessary for UM coverage to be properly waived.

Louisiana Supreme Court Provides Updated Guidance on Execution of UM Waiver Forms

Intuitively, contracting parties in commercial transactions understand that legal consequences follow a breach of contract: If a party fails to deliver a product as promised, the breaching party can be liable for the cost to correct the breach; but what is that cost?

Say, for example, a business cancels an order to provide parts to a long-time customer because the relationship has gone sour. Legally, the liability for that breach of contract may extend beyond the cost of the order. A breaching party is liable for damages that are a direct consequence of the failure to perform and that were foreseeable at the time the contract was made, which may include lost profit. If the breach was intentional or malicious, the party's liability may extend even to direct damages that were not foreseeable.

The business that cancelled the order now faces a jury’s decision to identify the direct and foreseeable losses, a decision that, by its nature, is vague. However, the law imposes a limit on the jury’s prerogative to decide the damages. Even for a bad faith breach of contract, liability arises only for the direct, immediate consequences of the breach and there should be no liability for damages determined to be remote, indirect, or that have no necessary relation to the breach.

In a recent case, a jury found that a defendant boat engine manufacturer breached its contract with plaintiff boat manufacturer by cancelling a purchase order for engines, and further, that the engine manufacturer was in bad faith. The jury awarded $1.8 million in foreseeable lost revenues and $1.3 million in unforeseeable lost profits. The trial court threw out the “unforeseen” portion of the award because it was not a direct damage, and emphasized that a breaching party does not “become the insurer for all misfortunes that may arise from the breach.”

The boat manufacturer had argued that the cash flow expected from the sale of the boats rendered engine-less by the breach would have been invested in more personnel and capital to grow its northwest division. But, because of depleted cash flow from lost sales, that opportunity was lost. The court found, as a matter of law, that this loss was not a direct consequence of the breach, and thus, regardless of the bad faith, was not a recoverable contract damage. Simply, loss of cash flow in one part of the business that had a ripple effect in a separate division was too indirect to be a recoverable damage. See Marine Power Holding, LLC v. Malibu Boats, LLC, 2016 WL 7241560 (E.D. La. 12/15/2016).

By contrast, courts have found that loss of cash flow is recoverable where directly related to the damages suffered, such as where breach of a contract to deliver chickens to a chicken farmer caused the forced sale of the chicken farm. See Volentine v. Raeford Farms of La., 50-698 (La.App. 2 Cir. 8/15/16), 201 So.3d 325.

Failure to perform on a contract exposes a business to more than it may realize. Understanding this risk allows for smarter decisions before the breach.