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Smith v. Citadel Insurance Co.

Supreme Court of Louisiana

October 22, 2019




         We granted this writ application to determine whether a first-party bad faith claim against an insurer is a delictual action subject to a one-year prescriptive period, or whether it is a contractual claim subject to a ten-year prescriptive period. Finding the bad faith claim arises as a result of the insured's contractual relationship with the insurer, we hold it is subject to a 10-year prescriptive period.


         This litigation arises from a suit filed by plaintiff, Beverly Smith, against Darlene Shelmire and her insurer, GoAuto Insurance Company ("GoAuto"), [2] as a result of an automobile accident on July 27, 2010. On February 26, 2015, following a trial on the merits, the district court entered judgment in favor of plaintiff against Ms. Shelmire and GoAuto in an amount in excess of the insurance policy limits. The judgment was noticed and mailed to all counsel on March 5, 2015. GoAuto devolutively appealed that judgment, but Ms. Shelmire did not file an appeal. The court of appeal ultimately affirmed the district court's judgment on March 10, 2016. Thereafter, Ms. Shelmire assigned her rights to pursue a bad faith action against GoAuto to Ms. Smith.

         Through her assignment of rights, Ms. Smith filed the instant suit against GoAuto on March 10, 2017, and amended her petition on September 27, 2017, asserting a bad faith claim based on GoAuto's violation of its duties under La. R.S. 22:1973(A) as well as the jurisprudentially recognized duty of good faith pre-existing the statute. GoAuto answered the petitions and subsequently filed an exception of prescription. In its exception, GoAuto argued the prescriptive period for a bad faith claim against an insurer is a delictual action and is subject to a one-year prescriptive period. Plaintiff opposed the exception arguing a bad faith claim against an insurer is a contractual action and subject to a ten-year prescriptive period.

         Following a hearing, the district court overruled GoAuto's exception of prescription, reasoning in part:

The Court, after consideration of the arguments of counsel, along with what's been submitted to the Court, and the Court's review of the jurisprudence on the issue, finds that the nature of the duty of the insurer to its insured or the assignee of the insured is a contractual duty; and - -and, therefore, the claim for breach of contractual duties the insurer owes to an insured under 22:1973 is subject to the ten-year prescriptive period. Court's going to deny the exception.

         GoAuto sought review of the district court's judgment, and the court of appeal denied writs on the showing made. Smith v. Citadel Ins. Co., 18-1227 (La.App. 1 Cir. 12/10/18) (unpublished).[3] GoAuto filed a writ application with this court, which we granted. Smith v. Citadel Ins. Co., 19-0052 (La. 5/20/19), 271 So.3d 203.


         As an initial matter, we briefly address GoAuto's argument that Ms. Smith does not have a cause of action. Citing King v. Illinois Nat. Ins. Co., 08-1491 (La. 4/3/09), 9 So.3d 780, GoAuto argues the right to file a lawsuit is a strictly personal right, creating a strictly personal obligation, and thus cannot be assigned pursuant to La. C.C. art. 2642 ("All rights may be assigned, with the exception of those pertaining to obligations that are strictly personal. The assignee is subrogated to the rights of the assignor against the debtor."). GoAuto concedes it did not raise this issue in the lower courts, nor did it assign this issue as error in its writ application to this court. Ordinarily we would refuse to consider an issue raised for the first time in this court, however this court has previously explained:

An appellate court has the right to consider an issue even though there was no assignment of error in that regard. See La. C.C.P. art. 2164, comment (a) ("an appellate court [has] complete freedom to do justice on the record irrespective of whether a particular legal point or theory was made, argued, or passed on by the court below."); Georgia Gulf Corp. v. Board of Ethics, 96-1907 (La. 5/9/97), 694 So.2d 173, 176; Safeway Insurance Co. of Louisiana v. State Farm Mut. Auto. Ins. Co., 36, 853 (La.App. 2 Cir. 3/5/03), 839 So.2d 1022, 1027; Wheeler v. Kelley, 28, 379 (La.App. 2 Cir. 11/7/95), 663 So.2d 559, 561, writ denied, 95-2721, 664 So.2d 404 (La.1995).

Wegener v. Lafayette Ins. Co., 10-0810 (La. 3/15/11), 60 So.3d 1220, 1232, n. 11. We also recognize that an exception of no cause of action can be noticed by an appellate court on its own motion. La. C.C.P. art. 927; see also Langsford v. Flattman, 03-0189 (La. 1/21/04), 864 So.2d 149, 151. Since we have freedom to do justice on the record, irrespective of whether the issue was raised in the lower courts or whether there was an assignment of error, we have examined whether Ms. Smith has a cause of action and find that issue has no merit. First, GoAuto's reliance on King is misplaced. King considered whether an individual's unexercised right to institute litigation through the filing of a lawsuit could be involuntarily seized by a writ of fieri facias. King did not involve a voluntary assignment of rights. Moreover, this court in King specifically declined to address whether an unexercised right to institute a lawsuit could be assigned, as that issue was not before the court. King, 9 So.3d at 786. La. C.C. art. 2642 allows for the assignment of all rights, except those "pertaining to obligations that are strictly personal." Following King, this court implicitly recognized that the assignment of an insured's cause of action resulting from the insurer's bad faith is permissible under Article 2642. Kelly v. State Farm Fire & Cas. Co., 14-1921 (La. 5/5/15), 169 So.3d 328, 334. In Kelly, this court answered two certified questions related to an insurer's liability under La. R.S. 22:1973.[4] In so doing, we referenced La. C.C. art. 2642 and explained the plaintiff, Kelly, had been assigned the insured's causes of action (resulting from an excess judgment against the insured):

[W]e must emphasize that Kelly does not seek to recover directly for his own damages. Instead, Kelly has been assigned [the insured's] causes of action, as might have been available to [the insured], for State Farm's actions which allegedly subjected [the insured] to the judgment in excess of [the insured's] insurance policy limits. Therefore, the causes of action asserted by Kelly are not those of a third-party claimant, but rather those of an insured.

Kelly, 169 So.3d at 334, 335 n. 24. Thus, we find Ms. Shelmire's right to file a lawsuit against GoAuto could be validly assigned to Ms. Smith pursuant to Article 2642.[5]

         As a final preliminary matter, we reject Ms. Smith's argument that this court need not reach the legal issue of whether a ten-year or a one-year prescriptive period applies in this case. According to Ms. Smith, her suit was timely even if filed under a one-year prescriptive period because she brought suit within one year of the accrual of her cause of action. Ms. Smith contends her cause of action did not accrue until GoAuto's asserted policy defense was finally resolved when the court of appeal affirmed the district court's judgment on March 10, 2016. We disagree. In this case, judgment was entered on February 26, 2015. The notice of judgment was mailed on March 5, 2015. La. C.C.P. art. 2123 provides, in relevant part, that a suspensive appeal must be taken within thirty days of the expiration of the delay for applying for a new trial. Thus, in this case, the deadline to file a suspensive appeal expired on April 15, 2015. Ms. Shelmire did not appeal the judgment against her. GoAuto filed a devolutive appeal pursuing its coverage defenses. Liberative prescription commences when injury or damage is sustained. La. C.C. art. 3492. After the delay for a suspensive appeal has elapsed, a judgment creditor is entitled to execute on the judgment. La. C.C.P. art. 2252. Thus, after April 15, 2015, the excess judgment against Ms. Shelmire could have been enforced against her at any time. GoAuto's pending devolutive appeal did not prevent the judgment against Ms. Shelmire from becoming executory. Ms. Shelmire suffered injury when she was exposed to an excess judgment. See Mathies v. Blanchard, 06-0559 (La.App. 1 Cir. 2/21/07), 959 So.2d 986, 988-89. We hold that Ms. Shelmire's bad faith action (and thus Ms. Smith's action, by assignment) accrued on April 15, 2015, when Ms. Shelmire, as the judgment debtor, was exposed to an excess judgment. Ms. Smith's suit, filed on March 10, 2017, was not timely under a one-year prescriptive period.

         We now move on to consider the primary legal issue before this court-the proper prescriptive period applicable to a first-party bad faith claim against an insurer. Questions of law are reviewed de novo, with the judgment rendered on the record, without deference to the legal conclusions of the tribunals below. Wooley v. Lucksinger, 09-0571 (La. 4/1/11), 61 So.3d 507, 554. All personal actions, including an action on a contract, are subject to a liberative prescription of ten years, unless otherwise provided by legislation. La. C.C. art. 3499; Roger v. Dufrene, 613 So.2d 947, 948 (La. 1993). Delictual actions are subject to a liberative prescription of one year. La. C.C. art. 3492. The nature of the duty breached determines whether the action is in tort or in contract. Roger, 613 So.2d at 948; Dean v. Hercules, Inc., 328 So.2d 69, 70 (La. 1976). "The classic distinction between damages ex contractu and damages ex delicto is that the former flow from the breach of a special obligation contractually assumed by the obligor, whereas the latter flow from the violation of a general duty owed to all persons." Thomas v. State Employees Grp. Benefits Program, 05-0392 (La.App. 1 Cir. 3/24/06), 934 So.2d 753, 757. See also, Certain Underwriters at Lloyd's, London v. Sea-Lar Mgmt., 00-1512 (La.App. 4 Cir. 5/9/01), 787 So.2d 1069, 1074; 6 Saul Litvinoff & Ronald J. Scalise Jr., Louisiana Civil Law Treatise, Law of Obligations § 5.2 (2d ed. 2018) ("Fault is contractual when it causes a failure to perform an obligation that is conventional in origin, that is, an obligation created by the will of the parties, while fault is delictual when it causes the dereliction of one of those duties imposed upon a party regardless of his will, such as a duty that is the passive side of an obligation created by the law.").

         Ms. Smith brought a bad faith claim against GoAuto pursuant to an assignment of rights from the named insured. Thus, the causes of action asserted by Ms. Smith are those of an insured. Louisiana courts have long recognized that an insurer owes its insured a duty of good faith. See, e.g., Roberie v. S. Farm Bureau Cas. Ins. Co., 250 La. 105, 194 So.2d 713 (La. 1967) (recognizing the responsibility of a liability insurer to deal in good faith with a claim against its insured); Davis v. Maryland Cas. Co., 133 So. 769 (La.App. 2nd Cir. 1931) (recognizing an insurer's duty to respond to settlement offers in good faith). In Holtzclaw v. Falco, Inc., this court explained:

It is generally accepted that an insurer must carefully consider the interests of its insured, instead of only consulting its own self-interests, when handling and settling claims in order to protect the insured from exposure to excess liability. While the nature of the insurer's obligations toward the insured is not clearly defined, this Court has recognized that a liability insurer owes its insured a minimum duty to act in good faith and to deal fairly. Some Louisiana court of appeal decisions indicate the imposition of a greater duty based upon a combined requirement to act in good faith and to use reasonable care and skill in settlement of claims. Language in one appellate opinion and a scholarly writing suggest the insurer should be regarded as a fiduciary or a mandatary responsible not only for unfaithfulness in management of claims but also for his fault or neglect.

355 So.2d 1279, 1283-84 (La. 1977). The insurer's duty to act in good faith includes the duty to deal fairly in handling claims. Smith v. Audubon Ins. Co., 95-2057 (La. 9/5/96), 679 So.2d 372, 376. Additionally, this court has stated that "... in every case, the insurance company is held to a high fiduciary duty to discharge its policy obligations to its insured in good faith-including the duty to defend the insured against covered claims and to consider the interests of the insured in every settlement." Pareti v. Sentry Indem. Co., 536 So.2d 417, 423 (La. 1988).

         La. R.S. 22:1973[6] was enacted in 1970 and provides, in relevant part:

A. An insurer, including but not limited to a foreign line and surplus line insurer, owes to his insured a duty of good faith and fair dealing. The insurer has an affirmative duty to adjust claims fairly and promptly and to make a reasonable effort to settle claims with the insured or the claimant, or both. Any insurer who breaches ...

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