In Re: Katrina Canal

Filing

In Re: Katrina Canal

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Case: 09-30485

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Date Filed: 07/28/2010

IN THE UNITED STATES COURT OF APPEALS United States Court of Appeals FOR THE FIFTH CIRCUIT Fifth Circuit FILED
July 28, 2010 N o . 09-30485 Lyle W. Cayce Clerk

-----------------------------------------------------------------------------------------------------------I N RE: KATRINA CANAL BREACHES LITIGATION -----------------------------------------------------------------------------------------------------------L O U I S I A N A STATE, Individually and on behalf of State of Louisiana, D iv is io n of Administration, Office of Community Development ex rel; JAMES D CALDWELL, also known as Buddy Caldwell, proper plaintiff p a r ty , in place of Charles C. Foti, Jr., Plaintiffs-Appellees v.

ANPAC LOUISIANA INSURANCE COMPANY; AMERICAN NATIONAL GENERAL INSURANCE COMPANY; AMERICAN NATIONAL PROPERTY & CASUALTY COMPANY; REPUBLIC FIRE AND CASUALTY INSURANCE COMPANY; AUTO CLUB FAMILY INSURANCE COMPANY; AEGIS SECURITY INSURANCE COMPANY; AIG CENTENNIAL INSURANCE COMPANY; AIU INSURANCE COMPANY; ALLSTATE INDEMNITY COMPANY; ALLSTATE INSURANCE COMPANY; AMERICA FIRST INSURANCE COMPANY; AMERICAN BANKERS INSURANCE COMPANY OF FLORIDA; AMERICAN FAMILY INSURANCE; AMERICAN GENERAL PROPERTY INSURANCE COMPANY; AMERICAN INSURANCE COMPANY; AMERICAN MANUFACTURERS MUTUAL INSURANCE COMPANY; AMERICAN MODERN INSURANCE GROUP; AMERICAN MODERN SURPLUS LINES INSURANCE COMPANY; AMERICAN RELIABLE INSURANCE COMPANY; AMERICAN SECURITY INSURANCE COMPANY; AMERICAN SUMMIT INSURANCE COMPANY; AMERICAN SOUTHERN HOME INSURANCE COMPANY; AMERICAN WESTERN HOME INSURANCE COMPANY; AMICA MUTUAL INSURANCE COMPANY; ARMED FORCES INSURANCE EXCHANGE; ASSURANCE COMPANY OF AMERICA; AUDUBON INSURANCE COMPANY; BALBOA INSURANCE COMPANY; CERTAIN UNDERWRITERS AT LLOYDS OF

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LONDON, London Market Insurers; CHUBB INDEMNITY INSURANCE COMPANY; CHUBB CUSTOM INSURANCE COMPANY; CHUBB NATIONAL INSURANCE COMPANY; CLARENDON NATIONAL INSURANCE COMPANY; ECONOMY PREMIER ASSURANCE COMPANY; EMPIRE FIRE & MARINE INSURANCE COMPANY; EMPIRE INDEMNITY INSURANCE COMPANY; ENCOMPASS INSURANCE COMPANY OF AMERICA; ENCOMPASS PROPERTY AND CASUALTY COMPANY; FARMERS INSURANCE EXCHANGE; FEDERAL INSURANCE COMPANY; FIDELITY AND DEPOSIT INSURANCE COMPANY OF MARYLAND; FIDELITY NATIONAL INSURANCE COMPANY; FIDELITY NATIONAL PROPERTY AND CASUALTY INSURANCE COMPANY; FIREMAN'S FUND INSURANCE COMPANY; GREAT NORTHERN INSURANCE COMPANY; HANOVER AMERICAN INSURANCE COMPANY; HANOVER INSURANCE COMPANY; HARTFORD ACCIDENT & INDEMNITY COMPANY; HARTFORD CASUALTY INSURANCE COMPANY; HARTFORD FIRE INSURANCE COMPANY; HARTFORD INSURANCE COMPANY OF THE MIDWEST; HARTFORD INSURANCE COMPANY OF THE SOUTHEAST; ET AL; HOMESITE INSURANCE COMPANY; HORACE MANN INSURANCE COMPANY; HORACE MANN PROPERTY AND CASUALTY INSURANCE COMPANY; LAFAYETTE INSURANCE COMPANY; LEXINGTON INSURANCE COMPANY; LIBERTY MUTUAL FIRE INSURANCE COMPANY; LIBERTY MUTUAL INSURANCE COMPANY; LOUISIANA FARM BUREAU MUTUAL INSURANCE COMPANY; LOUISIANA FARM BUREAU CASUALTY INSURANCE COMPANY; MASSACHUSETTS BAY INSURANCE COMPANY; MERASTAR INSURANCE COMPANY; MERITPLAN INSURANCE COMPANY; METROPOLITAN CASUALTY INSURANCE COMPANY; METROPOLITAN PROPERTY AND CASUALTY INSURANCE COMPANY; NATIONAL LLOYDS INSURANCE COMPANY; NATIONAL SECURITY FIRE & CASUALTY COMPANY; NATIONAL UNION FIRE INSURANCE COMPANY OF LOUISIANA; NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PENNSYLVANIA; OMEGA ONE INSURANCE COMPANY; SCOTTSDALE INSURANCE COMPANY; SECURITY PLAN FIRE INSURANCE COMPANY; SHELTER GENERAL INSURANCE COMPANY; SHELTER MUTUAL INSURANCE COMPANY; SOUTHWEST BUSINESS CORPORATION; STANDARD FIRE INSURANCE COMPANY; STATE FARM FIRE & CASUALTY COMPANY; STATE FARM GENERAL INSURANCE COMPANY; TRINITY UNIVERSAL INSURANCE

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COMPANY; UNION NATIONAL FIRE INSURANCE COMPANY; UNITED FIRE AND CASUALTY COMPANY; UNITED FIRE AND INDEMNITY COMPANY; UNITED SERVICES AUTOMOBILE ASSOCIATION; UNITRIN AUTO AND HOME INSURANCE COMPANY; UNITRIN PREFERRED INSURANCE COMPANY; USAA; CASUALTY INSURANCE COMPANY; USAA GENERAL INDEMNITY COMPANY; USAA; VIGILANT INSURANCE COMPANY; VOYAGER INDEMNITY INSURANCE COMPANY; VOYAGER PROPERTY AND CASUALTY INSURANCE COMPANY; ZC STERLING CORPORATION; ZC STERLING INSURANCE AGENCY INC; ZURICH AMERICAN INSURANCE COMPANY; ZURICH NORTH AMERICA; METLIFE INC,
D e fe n d a n t s -A p p e lla n t s

A p p e a l from the United States District Court fo r the Eastern District of Louisiana

B e fo r e JONES, Chief Judge, PRADO, Circuit Judge, and O'CONNOR, District J u d g e .* E D I T H H. JONES, Chief Judge: I n this interlocutory appeal, the Defendants--over 200 insurance c o m p a n ie s -- c h a lle n g e approximately 151,000 homeowner's insurance claims b r o u g h t by the State of Louisiana based upon policyholders' purported a s s ig n m e n t s of policy rights to the State. Because no controlling Louisiana S u p r e m e Court precedent has determined whether an insurance contract's antia s s ig n m e n t clause prohibits post-loss assignments of policy rights, because this is s u e is case-dispositive, and because either the State or the insurers stand to lo s e billions of dollars in claims, we certify the post-loss assignment question to t h e Louisiana Supreme Court.

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District Judge, Northern District of Texas, sitting by designation.

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No. 09-30485 I . Factual Background and Procedural History T o provide relief in the aftermath of hurricanes Katrina and Rita, C o n g r e s s appropriated federal funds, administered by the Department of H o u s in g and Urban Development (HUD), to affected states. Louisiana

d is t r ib u t e d some of those funds via the "Road Home" program, which provided g r a n t s of up to 150,000 dollars to Louisiana homeowners to repair uninsured or u n d e r -in s u r e d property damage. Purporting to fulfill an obligation under federal la w to "prevent recipients from receiving any duplication of benefits," 1 the State requ ired Road H om e grant recipients to execute a "Lim i t e d

S u b r o g a tio n /A s s ig n m e n t Agreement." It stated, in pertinent part: I /w e hereby assign to the State of Louisiana . . . to the extent of the g r a n t proceeds awarded or to be awarded to me under the [Road H o m e ] Program, all of my/our claims and future rights to r e im b u r s e m e n t and all payments hereafter received or to be r e c e iv e d by me/us: (a) under any policy of casualty or property d a m a g e insurance or flood insurance on the residence, excluding c o n t e n t s ("Residence") described in my/application for Homeowner's A s s is t a n c e under the Program ("Policies"): (b) from FEMA, Small B u s in e s s Administration, and any other federal agency, arising out o f physical damage to the Residence caused by Hurricane Katrina a n d /o r Hurricane Rita. A c c o r d in g to the State, the Road Home program created perverse in c e n t iv e s for insurance companies and insured homeowners--some insurers in a d e q u a t e l y adjusted and paid grant-eligible homeowners' claims, and some g r a n t -e lig ib le homeowners had little motivation to file claims or challenge low in s u r a n c e settlements.
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Consequently, Road Home applications and grant

The State cites to 72 Fed. Reg. 70,472-01 (Dec. 11, 2007) to support its statement that "[f]ederal law demanded that States disbursing these funds "[e]stablish procedures to prevent recipients from receiving any duplication of benefits." The regulation, however, allocates this responsibility to the Secretary of HUD and outlines five steps HUD was taking to satisfy the directive. Louisiana's obligation derived from its HUD-approved Road Home Action Plan, which stated that "the State must not duplicate insurance of any type . . . or other payments received by the homeowner for structural repairs required for . . . damages [incurred during hurricanes Katrina and Rita]."

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No. 09-30485 a m o u n t s drastically increased, creating a one billion dollar projected shortfall in the program. To remedy this situation, and pursuant to the assignment agreements, the State sued the Defendants--allegedly all of the insurers who wrote property in s u r a n c e in Louisiana at the time of the hurricanes--in state court in Orleans P a r is h . The State sought to recover the funds expended and anticipated to be e x p e n d e d under the Road Home program and a declaration of the insurers' d u t ie s under the "all risk" policies they had issued to Road Home applicants. T h e Defendants successfully removed the case to federal district court u n d e r the Class Action Fairness Act (CAFA).2 According to the Defendants, the in s u r a n c e industry has paid more than 40 billion dollars to homeowners as a r e s u lt of Katrina and Rita losses. The insurers argue that the State's suit is an a t t e m p t to obtain yet more money from the insurers, even in situations where t h e homeowner was satisfied with the amount paid, had already filed a lawsuit a g a in s t the insurer, or had reached a settlement agreement. Moreover, the S t a te brought suit without investigating whether the Defendants had actually fa ile d to make sufficient payment on individual homeowners' claims. The Defendants subsequently filed a Rule 12(b)(6) motion to dismiss, a r g u in g , inter alia, that (1) the State's claims failed as a matter of law because a n t i-a s s ig n m e n t clauses in the homeowner's policies invalidated the purported

The State used the class action device because, at the time suit was filed, thousands of Road Home grant applications were pending and these future recipients had not yet executed assignments. The class was defined as: All current and former citizens of the State of Louisiana who have applied for and received or will receive funds through the Road Home Program, and who have executed or will execute a subrogation or assignment in favor or the State, and to whom insurance proceeds are due and/or owed for damages sustained to any such recipient's residence as a result of any natural or man made occurrence associated with Hurricanes Katrina and/or Rita under any policy of insurance . . . .

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No. 09-30485 a s s ig n m e n t s to the State,3 and (2) the State's claims are time-barred by the c o n t r a c tu a l suit limitation period in the policies if the insured did not sue the in s u r e r or the State did not obtain an assignment within two years of the loss. M a k in g an Erie guess,4 the district court denied the motion to dismiss, h o ld in g that the contractual anti-assignment provisions did not bar post-loss a s s ig n m e n t s under Louisiana law and that the State's filing of the putative class a c t io n lawsuit tolled the contractual suit limitation periods in the policies. The d i s t r ic t court also denied the Defendants' motion for reconsideration, but c e r t ifie d that order for interlocutory appeal pursuant to 28 U.S.C. § 1292(b). This appeal followed.5 I I . Discussion T h e parties have not moved this court to certify the post-loss assignment q u e s t io n to the Louisiana Supreme Court, but the State did not object to c e r t ific a t io n when questioned at oral argument. Moreover, Louisiana Supreme C o u r t Rule XII, section 2, provides that certification "may be invoked by . . . any c ir c u it court of appeal of the United States upon its own motion . . . ." We are a c u t e ly aware that "[c]ertification is not a panacea for resolution of those c o m p le x or difficult state law questions which have not been answered by the h ig h e s t court of the state," Transcon. Gas Pipeline Corp. v. Transp. Ins. Co., 9 5 8 F.2d 622, 623 (5th Cir. 1992), but "certification may be advisable where
The language of the various anti-assignment clauses is not identical. Many clauses state that "[a]ssignment of this policy will not be valid unless we give our written consent," and others state that "[n]o interest in this policy can be transferred without our written consent." The parties nonetheless agree that all of the insurance contracts contain an antiassignment clause that, by its plain terms, purports to bar any assignment. The State does not contend that the insurers consented to the assignments.
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Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817 (1938).

The parties briefed and argued whether the limitations issue was properly before this court pursuant to the § 1292(b) certification order and, reaching the merits, whether the insurance contracts' suit limitation provisions bar some or all of the State's claims. For reasons of judicial economy, this court does not address these questions at this time.

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No. 09-30485 im p o r t a n t state interests are at stake and the state courts have not provided c le a r guidance on how to proceed." Free v. Abbott Labs., Inc., 164 F.3d 270, 274 (5 t h Cir. 1999) (citing Transcon., 958 F.2d at 623). Certification is advisable h ere. A . Louisiana Civil Code Article 2653 " W h e n faced with unsettled questions of Louisiana law, [federal courts] a d h e r e to Louisiana's civilian decision-making process, by first examining p r im a r y sources of law: the constitution, codes, and statutes." Moore v. State F a r m Fire & Cas. Co., 556 F.3d 264, 270 (5th Cir. 2009). To determine whether t h e insurance contracts' anti-assignment clauses bar post-loss assignments to t h e State, the Defendants contend that Louisiana Civil Code article 2653 is the b e g in n in g and end of the matter. Article 2653 provides that "[a] right cannot be a s s ig n e d when the contract from which it arises prohibits assignment of that r ig h t ." Because the policies' anti-assignment clauses broadly prohibit any

a s s ig n m e n t without the insurers' consent, the insurers argue that the post-loss a s s ig n m e n t s to the State are invalid. T h e State responds, and we agree, that Article 2653 begs the question p r e s e n t e d in this case: whether Louisiana courts would interpret the antia s s ig n m e n t clauses in these homeowner's insurance policies as prohibiting postlo s s assignments. Louisiana interpretive rules provide that "[w]hen the words o f a contract are clear and explicit and lead to no absurd consequences, no fu r t h e r interpretation may be made in search of the parties' intent." LA. CIV. C ODE ANN. art. 2046. The anti-assignment clauses at issue here are broadly w o r d e d and clearly do not exclude post-loss assignments from the prohibition, b u t , like Article 2653, Article 2046 does not end the inquiry because even u n a m b ig u o u s insurance contract provisions cannot conflict with statutory law o r public policy. See 15 WILLIAM SHELBY MCKENZIE & H. ALSTON JOHNSON, III, L A. CIV. L. TREATISE, Insurance Law and Practice § 4 (3d ed. 2006). Thus, the 7

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No. 09-30485 is s u e before this court is whether the Louisiana Supreme Court would hold that a contractual prohibition on post-loss assignments violates public policy. The Louisiana Supreme Court has not answered this question, so we "look t o the decisions of intermediate state courts for guidance," Terrebonne Parish S c h . Bd. v. Columbia Gulf Transmission Co., 290 F.3d 303, 317 (5th Cir. 2002) (c it a t io n s omitted). Unfortunately, the Louisiana appellate decisions conflict. B . Geddes & Moss, Lucien Tile, and the Majority Rule T h e State points to a 1936 Louisiana appellate court case, Geddes & Moss U n d e r ta k in g & Embalming Co. v. Metro. Life Ins. Co., 167 So. 209 (La. Ct. App. 1 9 3 6 ), which invalidated an anti-assignment clause as applied to a post-loss a s s ig n m e n t of the right to life insurance proceeds. Geddes & Moss cited the " g r e a t weight of authority" in other jurisdictions and reflected in leading treatise s that anti-assignment clauses are contrary to public policy when applied t o post-loss assignments. Id. at 210. Indeed, the general majority rule supports t h e Geddes & Moss conclusion. See 44 Am. Jur. 2d Insurance § 787 (2009) (" G e n e r a l stipulations in policies prohibiting their assignment except with the in s u r e r 's consent . . . apply only to assignments before loss, and accordingly do n o t prevent an assignment of a claim or an interest in insurance money then d u e . . . . [A] provision against an assignment after loss is generally held u n e n fo r c e a b le , as inconsistent with the covenant of indemnity or the right to a s s ig n a claim for money due, and as contrary to public policy."); 3 Couch on Ins. § 35:7 (". . . the great majority of courts adhere to the rule that general s t ip u la t io n s in policies prohibiting assignments thereof except with the consent o f the insurer apply only to assignments before loss . . . the assignment before lo s s involves a transfer of a contractual relationship while the assignment after lo s s is the transfer of a right to a money claim.") According to the cases, the p r e d o m in a n t purpose of a no-assignment clause is to protect the insurer from u n a n t ic ip a t e d underwriting exposure, but "after events giving rise to the 8

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No. 09-30485 in s u r e r 's liability have occurred, the insurer's risk cannot be increased by a c h a n g e in the insured's identity." Id. T h e Defendants, however, direct this court's attention to R. L. Lucien Tile C o . v. Am. Sec. Ins. Co., 8 So. 3d 753 (La. App. 4th Cir. 2009), a case decided s h o r t ly after the district court denied the insurers' Motion to Dismiss but which t h e district court declined to follow in refusing to reconsider. Lucien Tile

in v o lv e d property insurance covering wind and rain damage from Hurricane K a t r in a . The court enforced an anti-assignment clause to invalidate a post-loss a s s ig n m e n t of all claims "against anyone . . . arising out of the ownership of" the in s u r e d property.6 Id. at 756. The court did so without identifying any public p o lic y grounds that would justify narrowly construing the anti-assignment c la u s e to allow post-loss assignments. Moreover, Lucien Tile is consistent with s e v e r a l cases from other jurisdictions that effectuate anti-assignment clauses a g a in s t post-loss assignments. See Del Monte Fresh Produce (Haw.) Inc. v. F ir e m a n 's Fund Ins. Co., 183 P.3d 734, 747 (Haw. 2007); Holloway v. Republic I n d e m . Co., 147 P.3d 329, 334 (Or. 2006); Conoco, Inc. v. Republic Ins. Co., 8 1 9 F.2d 120, 124 (5th Cir. 1987) (applying Texas law). T h u s , far from providing clear guidance as to how the Louisiana Supreme C o u r t would proceed, Louisiana appellate court decisions, as well as the cases o f other jurisdictions, are inconsistent. C . Public Policy Implications C o m p lic a t in g matters further, it is not clear to us that the facts of this case c o m p o r t with the policy considerations underlying the majority rule. Unlike

The State incorrectly describes Lucien Tile as "simply ruling that the two documents at issue failed to assign Lucien Tile any rights under the ASIC policy." It is true that an initial assignment was held not to apply to the insurance policy, but Lucien Tile never ruled that the second, broader assignment of all claims "against anyone . . . arising out of ownership of" the insured property was insufficient potentially to assign rights against the insurer. The court held flatly that the assignment, lacking the insurer's consent, was invalid.

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No. 09-30485 G e d d e s & Moss, this case does not involve a simple transfer of a right to claim a n undisputed amount of money due. Here, more akin to pre-loss assignments, c o n t r a c tu a l duties are indeed transferred to the State because the policies im p o s e reciprocal duties on insureds to provide timely notice, substantiate their c la im s , and mitigate losses. Nor does this case contemplate a simple change in t h e insured's identity, resulting in no increased risk to the insurer. Instead, the S t a t e seeks to re-litigate claims that may have already been pursued by the in s u r e d , subjecting the Defendants to multiple lawsuits by a third party whose o n ly evidence of underpayment is that Road Home applications increased to the p o in t of a projected budget shortfall. When certifying an insurance interpretation to the Supreme Court of A la b a m a , this court explained that "[w]hen the state law is in doubt especially o n the underlying public policy aims, it is in the best administration of justice t o afford the litigants a consistent final judicial resolution by utilizing the c e r t ific a t io n procedure." Barnes v. Atl. & Pac. Life Ins. Co. of Am., 514 F.2d 704, 7 0 6 (5th Cir. 1975). We follow that admonition here and certify the question. C E R T IF IC A T IO N B e c a u s e interpretation of the policy provisions at issue is a matter of L o u is ia n a law that will determine the outcome of this case and because there are n o clear controlling precedents in the decisions of the Louisiana Supreme Court, w e hereby invoke the certification privilege granted by Louisiana Supreme Court R u le XII.7

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Louisiana Supreme Court Rule XII, section 1 reads:

When it appears to the Supreme Court of the United States, or to any circuit court of appeal of the United States, that there are involved in any proceedings before it questions or propositions of law of this state which are determinative of said cause independently of any other questions involved in said case and that there are no clear controlling precedents in the decisions of the supreme court of this state, such federal court before rendering a decision may certify such questions or propositions of law of this state to the Supreme Court of Louisiana for rendition of a judgment or opinion

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No. 09-30485 W e certify the following question to the Louisiana Supreme Court: 1) Does an anti-assignment clause in a homeowner's insurance policy, w h i c h by its plain terms purports to bar any assignment of the p o lic y or an interest therein without the insurer's consent, bar an in s u r e d 's post-loss assignment of the insured's claims under the p o lic y when such an assignment transfers contractual obligations, n o t just the right to money due?

I f the Louisiana Supreme Court accepts this certificate, the answers p r o v id e d will determine the outcome of this appeal. We disclaim any intent that t h e Louisiana Supreme Court confine its reply to the precise form or scope of the le g a l questions certified. We retain cognizance of this appeal while it is pending b e fo r e the Louisiana Supreme Court and transfer the record and appellate briefs w it h our certification to the Supreme Court of Louisiana. Q U E S T I O N CERTIFIED.

concerning such questions or propositions of Louisiana law. This court may, in its discretion, decline to answer the questions certified to it.

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