Taylor v. Lloyd's Underwriters of London

United States Court of Appeals,

Fifth Circuit.

No. 91–3629.

Albert TAYLOR, Jr., et al., Plaintiffs,

Mrs. Albert Taylor, Jr., Plaintiff–Appellant,

v.

LLOYDS UNDERWRITERS OF LONDON, et al., Defendants,

Stewart Arthur Holmes, as representative of Certain Underwriters at Lloyds, London,
Defendant–Appellee.

Sept. 24, 1992.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before SMITH and EMILIO M. GARZA, Circuit Judges, and RAINEY,** District Judge.

EMILIO M. GARZA, Circuit Judge:

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On October 16, 1985, the DMC–1—a liftboat chartered to Drynorth—capsized in the Gulf

of Mexico. As a result of the capsize, Taylor and several other seamen were injured. Alleging that

the DMC–1 was unseaworthy, Taylor brought suit against Drynorth in federal court under general

maritime law. Following trial, the jury returned a verdict, assessing $751,780 in compensatory

damages and $500,000 in punitive damages against Drynorth. Drynorth has not operated since 1986

and, at all times relevant to the events surrounding this dispute, Drynorth has been insolvent.

Accordingly, Drynorth's insurers paid the majority of the compensatory damages award and will be

responsible for the payment of any punitive damages award.

Taylor subsequently filed a declaratory judgment action in Louisiana state court against

*
District Judge of the Southern District of Texas, sitting by designation.
1
Mr. Taylor has since passed away, and Mrs. Taylor is pursuing this action. The plaintiffs will
be referred to as "Taylor".
Lloyd's, seeking a declaration that the three insurance policies2 Lloyd's issued to Drynorth provide

coverage for punitive damages and that Lloyd's is required to pay the damages award assessed against

Drynorth. Lloyd's removed the case to federal court, and the parties filed cross motions for summary

judgment. Lloyd's argued that coverage for punitive damages does not exist under any of the three

insurance policies covering Drynorth at the time of the DMC–1's capsize. Taylor maintained,

however, that the Comprehensive General Liability Insurance (CGL) policy provides coverage for

punitive damages.3

Although the district court set forth the language of the CGL policy in its Order and Reasons,

the district court did not analyze the language of any of the insurance policies to determine whether

the language provided coverage for punitive damages; instead, the district court concluded that it

had to first determine whether to apply Louisiana state law or general maritime law to the dispute.

Concluding that general maritime law applies and that maritime law disallows the recovery of punitive

damages from an insurance company, the district court granted Lloyd's motion for summary

judgment.

II

Taylor argues that, because Lloyd's removed this case to federal court on the basis of diversity

2
The three insurance policies are: (i) Policy/Certificate number 22191—the Comprehensive
General Liability Insurance policy; (ii) Policy/Certificate number 11877—the Excess Marine
Liability Insurance policy; and (iii) Policy/Certificate number 22188—the Protection and
Indemnity Insurance policy.
3
The CGL policy states in part that:

The company will pay on behalf of the insured all sums which the insured
shall become legally obligated to pay as damages because of [a] bodily injury or [b]
property damages to which this insurance applies, caused by an occurrence ..., but
the company shall not be obligated to pay any claim or judgment or to defend any
suit after the applicable limit of the company's liability has been exhausted by
payment of judgments or settlements.

Record Excerpts at tab 5, Taylor v. Lloyd's, No. 91–3629 (5th Cir. filed Oct. 22, 1991).
jurisdiction, the district court, in its capacity as an Erie4 court, should have applied Louisiana law.

Taylor argues that the district court erred in applying maritime law and in granting Lloyd's motion

for summary judgment. Lloyd's, on the other hand, maintains that the dispute is a maritime matter,

and contends that the district court properly applied general maritime law to disallow the collection

of the punitive damages award from Lloyd's.

In determining the applicable law governing the interpretation of the CGL policy, our analysis

begins with Wilburn Boat Co. v. Fireman's Fund Ins. Co., 348 U.S. 310, 75 S.Ct. 368, 99 L.Ed. 337

(1955).5 In Wilburn Boat, the Supreme Court determined that there was no federal admiralty rule

regarding the breach of warranties in marine insurance policies and that the Court would not fashion

one, but would instead apply state law. Id. at 315–16, 75 S.Ct. at 371. Since 1955, this court, in

addressing maritime cases, has interpreted Wilburn Boat to require "the application of state insurance

law principles if there is no specific and controlling federal rule." Truehart v. Blandon, 884 F.2d at

226, citing Transco Exploration Co. v. Pacific Employers Ins. Co., 869 F.2d 862, 863 (5th

Cir.1989); see also Ingersoll–Rand Fin. Corp. v. Employers Ins., 771 F.2d 910, 911–12 (5th

Cir.1985), cert. denied, 475 U.S. 1046, 106 S.Ct. 1263, 89 L.Ed.2d 573 (1986) ("[T]he

interpretation of a contract of marine insurance is—in the absence of a specific and controlling federal

rule—to be determined by reference to appropriate state law."), citing Wilburn Boat, supra.

Lloyd's has presented this court with three cases in support of the proposition that general

maritime law prohibits the collection of punitive damages from an insurance company. See Dubois

v. Arkansas Valley Dredging Co., 651 F.Supp. 299 (W.D.La.1987); Smith v. Front Lawn

Enterprises, Inc., No. 83–5147, 1987 AMC 1130 (E.D.La., Sept. 29, 1986); Northwestern Nat'l

4
Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938).
5
Because the CGL policy "insures against certain maritime risks and losses," it provides
maritime insurance within the meaning of Wilburn Boat, supra. See Truehart v. Blandon, 884
F.2d 223, 226 (5th Cir.1989) (Because the "policy insures against certain maritime risks and
losses ... we conclude that it provides maritime insurance within the meaning of Wilburn
Boat....").
Casualty Co. v. McNulty, 307 F.2d 432 (5th Cir.1962). However, these cases do not establish a

specific and controlling federal rule disallowing the recovery of punitive damages from an insurance

company.

In Smith, the district court considered whether the Protection & Indemnity policy provided

coverage for punitive damages claims and, after examining the insurance policy, the court found that

the insurance policy in question did not provide coverage for punitive damage claims.6 The Smith

court based its decision to disallow the recovery of punitive damages on the specific language of the

insurance policy at issue, reasoning that "the clear language of this portion of the policy is that

payment will be made for injury or illness, thus suggesting compensatory damages." Smith, 1987

AMC at 1130. The district court addressed t he quest ion whether public policy should permit an

insurance company to pay for punitive damages only in the penultimate paragraph of the two-page

opinion. That paragraph states: "In conclusion, the Court notes that it has been held, in relation to

an automobile liability policy, that public policy forbids an insurer and an insured to enter into an

insurance contract covering punitive damages." Id. at 1131, citing McNulty, 307 F.2d at 432.

The issue whether punitive damages may be collected from an insurance company was also

addressed by the district court in Dubois v. Arkansas Valley Dredging Co., 651 F.Supp. 299

(W.D.La.1987). The Dubois court hypothesized that all requisites to a recovery of punitive damages

were satisfied—that is, t hat the assured's actions were willful and wanton and that the insurance

policy provided coverage for punitive damages—but then held that, in any event, "enforcement of the

insuring provisions of the policy would be contrary to public policy." Id. at 302. Relying on McNulty

6
The policy in Smith did not expressly enumerate coverage for punitive damage liability. The
policy language read in part:

this Company hereby undertakes to pay such sums as the assured ... shall have
become legally liable to pay and shall have paid on account of: Loss of life of, or
injury to, or illness of, any person.

Smith, 1987 AMC at 1130.
and Smith, the Dubois court concluded that general maritime law prohibits the collection of punitive

damages from an insurance company, reasoning that public policy disallows recovery of punitive

damages from an insurance company. Id. at 302–03.

Both district court cases rely heavily on McNulty7 to arrive at their conclusion that punitive

damages are not recoverable against an insurance company under general maritime law. The

thirty-year old McNulty decision did not even involve federal law; it was a diversity case, where the

district court interpreted the public policy of Virginia and Florida. Additionally, McNulty, involved

automobile insurance, not maritime insurance. The Smith court, then, while purporting to rely on

McNulty, nevertheless primarily based its decision on the express policy language, buttressing its

opinion with a citation to McNulty. Similarly, in Dubois, the court relied on both McNulty and Smith

to reach its conclusion that maritime law prohibits the recovery of punitive damages from an

insurance company. See Dubois, 651 F.Supp. at 299.

We find that these cases have not established a specific and controlling federal rule disallowing

the recovery of punitive damages from an insurance company. The district court, therefore, should

have applied the law of the state having the greatest interest in the resolution of the issues. See

Truehart v. Blandon, 884 F.2d 223, 226 (5th Cir.1989) ("In identifying the appropriate state law to

apply, we look to the state having the greatest interest in the resolution of the issues."), citing

Transco Exploration Co. v. Pacific Employers Ins. Co., 869 F.2d 862, 863 (5th Cir.1989).

Accordingly, we find that the district court erred in granting summary judgment in favor of Lloyd's

on the basis of maritime law.

7
In McNulty, after examining an automobile liability policy in a diversity case, the court
articulated the policy behind disallowing wrongdoers to insure themselves against punitive
damages, stating:

It is not disputed that insurance against criminal fines or penalties would be void as
violative of public policy. The same public policy should invalidate any contract of
insurance against the civil punishment that punitive damages represent.

McNulty, 307 F.2d at 440.
 III

For the foregoing reasons, we REVERSE and REMAND to the district court to determine

whether punitive damages may be recovered under the appropriate state law.