United States District Court, W.D. Louisiana, Lafayette Division
PATRICK J. HANNA, Magistrate Judge.
During the course of oral argument on the parties' pending motions for summary judgment and for partial summary judgment with regard to the claims asserted in defendant Technical Industries, Inc.'s cross-claim against Aspen Specialty Insurance Company and its third-party demand against Evanston Insurance Company, it became evident that a threshold issue in this case is which state's law should be applied. Although the parties to a lawsuit have "an obligation to call the applicability of another state's law to the court's attention in time to be properly considered, " no party to this suit has filed a motion expressly raising a choice-of-law issue. Having found no prohibition against raising the choice-of-law issue sua sponte, the Court finds it necessary to determine whether Louisiana law or Texas law should be applied in resolving the claims asserted in Aspen's main demand and in Technical's crossclaim and third-party demand.
To that end, the Court ordered the parties to submit briefs "addressing whether the actions of Aspen Specialty Insurance Company and Evanston Insurance Company, which occurred during the prosecution of the underlying lawsuit and are alleged by Technical Industries, Inc. to be the basis of bad faith claims, should be viewed as being governed by Louisiana law or Texas law." (Rec. Doc. 113). The parties complied with the order and submitted briefs. (Rec. Docs. 120, 121, 122). The Court now finds, for the following reasons, that Louisiana law applies.
This lawsuit presents an insurance coverage dispute and arises out of another, earlier lawsuit that was filed in Texas state court in April 2011 and settled in October 2012 ("the underlying litigation"). The facts of the underlying litigation are not complicated. North American Interpipe, Inc. ("NAI") manufactures casing that is used in drilling wells for hydrocarbon production. Gulf Coast Tubulars, Inc. distributes and sells NAI's casing. Alta Mesa Holdings, LP purchased casing from Gulf Coast, and used it in drilling a well. Before it was purchased, the casing was inspected by Technical. The casing failed, and Alta Mesa had to abandon the well it was drilling and sidetrack the hole. Alta Mesa sued Gulf Coast, NAI, and Technical, seeking to recover its alleged damages.
Technical tendered its defense to Evanston Insurance Company under a commercial general liability insurance policy. Evanston denied coverage on the erroneous basis that the policy was a claims-made-and-reported policy and the claim was asserted outside of the policy period. Technical then tendered its defense to Aspen Specialty Insurance Company. Aspen undertook Technical's defense without a reservation of rights. Some time later, Aspen advised Technical that it intended to continue the defense but pursuant to a reservation of rights. Before the underlying litigation was settled, Aspen filed this lawsuit, seeking to be absolved of the duty to defend and indemnify Technical in the underlying litigation. After this suit was filed, it was discovered that Evanston's insurance policy contains an extended reporting period provision and the claim actually was timely reported. When the underlying litigation settled, Evanston and Aspen each contributed fifty percent of Technical's share of the settlement funds.
In this lawsuit, which was originally filed in a federal court in Texas while the underlying litigation was ongoing, Aspen seeks a declaration that it had no duty to defend or indemnify Technical in the underlying litigation. Technical responded to Aspen's complaint with a motion to transfer the case from the Southern District of Texas to this Court on the basis of forum non conveniens under 28 U.S.C. § 1404(a). (Rec. Doc. 6). The motion was granted, and the case was transferred. (Rec. Doc. 11). Technical then answered the complaint and asserted claims against Aspen and Evanston, seeking to recover damages for the insurers' alleged bad faith and their alleged violation of La. R.S. 22:1892 and La. R.S. 22:1973 in their handling of the claims asserted against Technical in the underlying litigation. (Rec. Doc. 16).
In this action, Aspen has asked this Court to determine whether it had a duty to defend or indemnify its insured with regard to the claims asserted against Technical in the underlying litigation. In its complaint, Aspen did not expressly identify the state whose laws it desires this Court to use in deciding that issue, but it is not required to do so. By filing a suit based on diversity in a federal court in Texas, Aspen implied that Texas law should apply.
In its claims against Aspen and Evanston, Technical has asked this Court to decide whether the insurers violated duties owed under specific Louisiana statutes or imposed on insurers by Louisiana courts. Thus, Technical implied that Louisiana law should apply.
The original complaint filed in this action alleged that the United States District Court for the Southern District of Texas had subject-matter jurisdiction over this action on the basis of diversity of citizenship. The pleadings show that Aspen is a North Dakota corporation with its principal place of business in Connecticut. (Rec. Doc. 1 at 1). Although Aspen originally alleged that Technical is a Louisiana corporation with its principal place of business in Texas (Rec. Doc. 1 at 1), Technical stated, in support of its motion to transfer venue, that it is a wholly-owned subsidiary of Energy & Technology Corp., both of which have their principal places of business in Louisiana. (Rec. Doc. 6-2 at 2; Rec. Doc. 6-4 at 1). The Texas federal court noted that Aspen did not challenge Technical's proof that its principal place of business is in Louisiana and found that "as Aspen is a citizen of Connecticut and North Dakota... complete diversity is present whether Technical is a citizen of Texas or Louisiana." (Rec. Doc. 11 at 4 n. 2). Upon transfer of the action to this Court, subject-matter jurisdiction remained based upon the parties' complete diversity in citizenship. The addition of Evanston to the suit did not destroy diversity, since Evanston is an Illinois corporation with its principal place of business in Illinois. (Rec. Doc. 122 at 4).
In a diversity case, a district court applies state substantive law to the issues before the court. In support of its motion to transfer venue, however, Technical argued that Louisiana law governed its claims. (Rec. Doc. 6-2 at 9). In response, Aspen did not dispute that Louisiana law was applicable, apparently acquiescing in Technical's argument that Louisiana law governs their dispute. (Rec. Doc. 9). In its recent submission in response to the Court's order, however, Aspen argued that it "believed and anticipated that Texas law could apply to all issues of coverage and the duty to defend." (Rec. Doc. 121 at 2, 5). The use of the word "could" rather than the word "would" - not once but twice - indicates that Aspen believes there is a possibility but not a certainty that Texas law is applicable to the claims it asserted in this lawsuit.
Whether Texas law or Louisiana law applies is a significant issue in this case because the laws of Louisiana and Texas differ with regard to allegations of an insurer's bad faith in handling coverage disputes. Of particular importance in this case is the difference between Texas law and Louisiana law with regard to an insurer's assumption and continuation of an insured's defense in light of facts indicating a right to deny coverage - a distinction that was noted by Technical in its memorandum in support of its motion to transfer venue (Rec. Doc. 6-2 at 9-10) and by Aspen in its submission with regard to choice of law (Rec. Doc. 121 at 3-4). The states' law also differ with regard to bad faith penalties - a distinction noted by Evanston in its briefing. (Rec. Doc. 122 at 2).
To determine which state's law controls, the court must apply the choice-of-law rules of the forum state. When a case is transferred from one federal district court to another, the choice-of-law rules of the original forum continue to govern the selection of the appropriate state substantive law. ...