Beverly Smith v. Citadel Insurance Company as Successor to Gramercy Insurance Company and Goauto Insurance Company

FOR IMMEDIATE NEWS RELEASE NEWS RELEASE #45
FROM: CLERK OF SUPREME COURT OF LOUISIANA
The Opinions handed down on the 22nd day of October, 2019, are as follows:

BY JOHNSON, C.J.:
2019-CC-00052 BEVERLY SMITH VS. CITADEL INSURANCE COMPANY AS SUCCESSOR
TO GRAMERCY INSURANCE COMPANY AND GOAUTO INSURANCE
COMPANY (Parish of East Baton Rouge)
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 district court correctly overruled
GoAuto’s exception of prescription.
AFFIRMED.
Chief Judge Susan M. Chehardy of the Court of Appeal, Fifth Circuit, appointed as
Justice pro tempore, sitting for the vacancy in the First District.
Retired Judge Michael Kirby appointed Justice ad hoc, sitting for Clark, J.
Weimer, J., concurs in the result and assigns reasons.
10/22/19

SUPREME COURT OF LOUISIANA

No. 2019-CC-00052

BEVERLY SMITH

VS.

CITADEL INSURANCE COMPANY AS SUCCESSOR TO GRAMERCY
INSURANCE COMPANY AND GOAUTO INSURANCE COMPANY

ON SUPERVISORY WRIT TO THE 19TH JUDICIAL DISTRICT COURT,
PARISH OF EAST BATON ROUGE

JOHNSON, Chief Justice1

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.

FACTS AND PROCEDURAL HISTORY

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

1
Chief Judge Susan M. Chehardy of the Court of Appeal, Fifth Circuit, appointed as Justice
pro tempore, sitting for the vacancy in the First District. Retired Judge Michael Kirby appointed
Justice ad hoc, sitting for Justice Clark.
2
Gramercy Insurance Company was initially named as a defendant. Citadel Insurance
Company, doing business as GoAuto Insurance Company, was deemed the legal successor to
Gramercy. For the sake of convenience, we will refer to the insurers collectively as “GoAuto.”

1
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.

DISCUSSION

3
Judge McClendon dissented, indicating she would refer the matter for en banc
consideration.

2
 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,

3
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

4
See infra for full statutory text.
5
See also, Pontchartrain Gardens, Inc. v. State Farm General Ins. Co., 2009 WL 86671, *5
(E.D. La. 2009); Steirwald v. Phoenix Ins. Co., 2001 WL 617542, *3 (E.D. La. 2001); Johno v. Doe,
15-0737 (La. App. 4 Cir. 3/9/16), 187 So. 3d 581, 583; Falco-Lime, Inc. v. Plaquemine Contracting
Co., Inc., 95-1784 (La. App. 1 Cir. 4/4/96), 672 So. 2d 356, 360; Maryland Cas. Co. v. Dixie Ins.
Co., 622 So. 2d 698, 700–01, 703 (La. App. 1st Cir. 1993); Keith v. Comco Ins. Co., 574 So. 2d 1270,
1275–76 (La. App 2nd Cir. 1991); Younger v. Lumbermens Mut. Cas. Co., 174 So. 2d 672, 674 (La.
App. 3rd Cir. 1965); Wood v. Zor, Inc., 154 So. 2d 632, 635 (La. App. 4th Cir. 1963).

4
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.

5
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

6
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. 22:19736 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 these duties shall be liable
for any damages sustained as a result of the breach.

B. Any one of the following acts, if knowingly committed or performed
by an insurer, constitutes a breach of the insurer’s duties imposed in
Subsection A of this Section:

(1) Misrepresenting pertinent facts or insurance policy provisions
relating to any coverages at issue.
(2) Failing to pay a settlement within thirty days after an agreement is
reduced to writing.
(3) Denying coverage or attempting to settle a claim on the basis of an

6
Renumbered from R.S. 22:1220 by 2008 La. Acts 415, § 1.

7
 application which the insurer knows was altered without notice to, or
knowledge or consent of, the insured.
(4) Misleading a claimant as to the applicable prescriptive period.
(5) Failing to pay the amount of any claim due any person insured by the
contract within sixty days after receipt of satisfactory proof of loss from
the claimant when such failure is arbitrary, capricious, or without
probable cause.
(6) Failing to pay claims pursuant to R.S. 22:1893 when such failure is
arbitrary, capricious, or without probable cause.

C. In addition to any general or special damages to which a claimant is
entitled for breach of the imposed duty, the claimant may be awarded
penalties assessed against the insurer in an amount not to exceed two
times the damages sustained or five thousand dollars, whichever is
greater. Such penalties, if awarded, shall not be used by the insurer in
computing either past or prospective loss experience for the purpose of
setting rates or making rate filings.

In Theriot v. Midland Risk Ins. Co., 95-2895 (La. 5/20/97), 694 So. 2d 184, this court

considered the proper interpretation and application of La. R.S. 22:1220 (now La.

R.S. 22:1973), relative to the rights of third-party claimants under the statute. In

discussing the duties imposed on the insurer by the statute, this court stated “[t]he

first sentence of Subsection A of the statute recognizes the jurisprudentially

established duty of good faith and fair dealing owed to the insured, which is an

outgrowth of the contractual and fiduciary relationship between the insured and

insurer.” 694 So. 2d at 187. Further, in explaining the extent to which insureds and

third-party claimants could pursue damages and penalties under the statute, this court

stated:

While this court has never defined the precise basis of the duties owed
by an insurer to its insured, we have held that they are fiduciary in
nature and include the duty to discharge policy obligations to the insured
in good faith, to defend the insured against covered claims and to
consider the interests of the insured as paramount in every settlement.
Pareti v. Sentry Indemnity Co., 536 So.2d 417, 423 (La.1988). It is
generally agreed that an insurer’s duties run primarily in favor of its
insured as an outgrowth of duties that have their foundation in the
contract between the parties. It is the relationship of the parties that
gives rise to the implied covenant of good faith and fair dealing. The
relationship between the insurer and third-party claimant is neither
fiduciary nor contractual; it is fundamentally adversarial. For that

8
 reason, a cause of action directly in favor of a third-party claimant
against a tort-feasor’s insurer is not generally recognized absent
statutory creation.

Id. at 193.

In Kelly, supra, we again focused on the relationship between the insurer and

the insured to explain the different application of La. R.S. 22:1973 to insureds and

to third parties. This court stated third parties have no cause of action under La. R.S.

22:1973(A), but noted La. R.S. 22:1973(B) “contains an exclusive list of actionable

breaches of those duties for which third-party claimants can recover.” 169 So. 3d at

335. In finding only an insured has a cause of action under La. R.S. 22:1973(A), we

relied on our rationale in Theriot that “the first sentence of Subsection A of the statute

recognizes the jurisprudentially established duty of good faith and fair dealing owed

to the insured, which is an outgrowth of the contractual and fiduciary relationship

between the insured and insurer.” Id. at 336 (citing Theriot, 694 So. 2d at 187).

Additionally, we acknowledged the reasoning in Stanley v. Trinchard, 500 F.3d 411

(5th Cir. 2007), in which the federal court explained “[i]nasmuch as it is not the statute

that creates the insured’s cause of action against the insurer, the bases for an insured’s

cause of action for a breach of the implied covenant of good faith and fair dealing are

not limited to the prohibited acts listed in La. R.S. 22:[1973](B).” Id. (quoting

Stanley, 500 F.3d at 427).

Although the duty of good faith owed by the insurer to the insured is codified

in La. R.S. 22:1973, the bad faith cause of action by an insured against the insurer

does not rest solely on this statute. Gourley v. Prudential Prop. & Cas. Ins. Co.,

98-0934 (La. App. 1 Cir. 5/14/99), 734 So. 2d 940, 945 (citing Smith v. Audubon

Insurance Company, 94-1571 (La. App. 3 Cir. 5/3/95); 656 So. 2d 11, 14, rev’d on

other grounds, 95-2057 (La. 9/5/96), 679 So. 2d 372). The duty of good faith is an

9
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. In the absence of a contractual obligation, the duty of good faith

does not exist. See La. C.C. art. 1759 (“Good faith shall govern the conduct of the

obligor and the obligee in whatever pertains to the obligation.”); La. C.C. art. 1983

(“Contracts have the effect of law for the parties and may be dissolved only through

the consent of the parties or on grounds provided by law. Contracts must be

performed in good faith.”). Because we find an insurer’s bad faith is a breach of its

contractual obligation and fiduciary duty, we hold the insured’s cause of action is

personal and subject to a ten-year prescriptive period. See also 15 William McKenzie

& H. Alston Johnson, Louisiana Civil Law Treatise: Insurance Law and Practice §

11:25 (4th ed. 2018) (“Unless otherwise provided by statute, claims under the penalty

statutes prescribe in ten years.”).

Our decision is in line with the majority of jurisprudence from our state

appellate courts and the federal courts which have considered the proper prescriptive

period for actions under the insurance penalty statutes. In 1989, the First Circuit

applied a ten-year prescriptive period to an insured’s action against the insurer for

penalties under La. R.S. 22:658 (now La. R.S. 22:18927) in Cantrelle Fence and

Supply Co. v. Allstate Insurance Co., 550 So. 2d 1306, 1308 (La. App. 1st Cir. 1989),

writ denied, 559 So. 2d 123 (La. 1990) (“[f]inding no other prescriptive period

specifically established for La. R.S. 22:658 actions, we apply the prescriptive period

of ten years, established by La. [Civ. Code] art. 3499.”). Similarly, in 1991, the

Second Circuit found a ten-year prescriptive period was applicable to an insured’s (by

assignment of rights) bad faith failure to settle claim against the insurer under La.

7
The statute generally imposes penalties for an insurer’s failure to timely adjust and pay
claims.

10
R.S. 22:1220 (now La. R.S. 22:1973). Keith v. Comco Insurance Co., 574 So. 2d

1270, 1276 (La. App. 2nd Cir. 1991), writ denied, 577 So. 2d 16 (La. 1991) (“An

action against an insurer for failure to defend a claim or settle within policy limits is

in contract. It therefore prescribes in 10 years. La. [Civ. Code] art. 3499.” (Internal

citation removed)); see also We Sell Used Cars, Inc. v. United National Insurance

Co., 30,671 (La. App. 2 Cir. 6/24/98), 715 So. 2d 656.

However, in 1993, the First Circuit issued an opinion in Zidan v. USAA

Property and Casualty Insurance Co., 622 So. 2d 265 (La. App. 1st Cir. 1993), writ

denied, 629 So. 2d 1138 (La. 1993). In Zidan, the plaintiff (guest passenger) filed suit

against the tortfeasor and his insurer, as well as the driver of the vehicle in which he

was a passenger and his insurer, Liberty Lloyds, a year and a day after the accident.

The district court sustained Liberty Lloyds’ exception of prescription. On appeal, the

plaintiff argued his claim was not prescribed because the doctrine of contra non

valentem should apply based on Liberty Lloyds’ misrepresentation and concealment

of coverage in violation of La. R.S. 22:1220 (now La. R.S. 22:1973). The court of

appeal affirmed the district court’s sustaining the exception of prescription,

concluding the facts supported the district court’s finding that plaintiff did not

exercise reasonable diligence in seeking the relevant information. Although the First

Circuit did not directly address or analyze the issue of the proper prescriptive period

applicable to a bad faith claim, by rejecting the contra non valentem argument and

affirming the district court’s sustaining the peremptory exception of prescription, the

appellate court effectively applied a one-year prescriptive period to the plaintiff’s

claim under La. R.S. 22:1220 [now La. R.S. 22:1973]. 622 So. 2d at 268.

More recently, the issue was considered by the Third Circuit in Fils v. Starr

Indem. & Liab. Co., wherein the court held, on rehearing, that “the appropriate

11
prescriptive period for bad faith claims arising out of a contract of insurance is the

ten-year prescriptive period found in La. Civ. Code art. 3499.” 17-896 (La. App. 3

Cir. 5/9/18), 263 So. 3d 1157, 1163, on reh’g (2/4/19). In its original opinion, the

court relied on Zidan to affirm the district court’s judgment that a one-year

prescriptive period applied to an insured’s bad faith claims against the insurer.

However, on rehearing, the court found that was error because Zidan was

distinguishable as the plaintiff in that case was a third-party claimant and not a party

to the contract of insurance. Id. at 1169. In holding the ten-year prescriptive period

applied, the court, on rehearing, reasoned in part:

An insured’s claim for bad faith ordinarily is based upon the obligation
that arises from the relationship between the insurer and insured.
Plaintiff argues because bad faith claims are derived from contractual
obligations and fiduciary duties owed by the insurer pursuant to the
contract of insurance between the parties, they are appropriately
governed by the ten-year prescriptive period which governs contracts.
***
It follows, but for the existence of the insurance contract between [the
insured] and [the insurer], there would be no claim. Likewise, all
obligations of [the insurer] in this case originate and flow from the
insurance contract.
***
Because any bad faith on an insurer’s part is a breach of a contractual
duty, it necessarily follows the cause of action is personal and subject to
the ten-year prescriptive period found in La. Civ. Code art. 3499.
Louisiana Civil Code Article 1759 provides that “[g]ood faith shall
govern the conduct of the obligor and obligee in whatever pertains to the
obligation.” Thus, the breach of the duty of good faith, which the insurer
owes, is the breach of an obligation that flows from the insurance
contract.

Id. at 1166–67.

The Louisiana federal courts are split on the issue. The Federal District Court

for the Eastern District of Louisiana has applied a one-year prescriptive period to

these claims, primarily relying on Zidan. In Brown v. Protective Life Insurance Co.,

353 F.Supp. 2d 739, 743 (E.D. La. 2004), the court, citing Zidan, found an insured’s

claims against the insurer alleging fraudulent behavior under La. R.S. 22:1220 (now

12
La. R.S. 22:1973) is subject to a one-year liberative prescriptive period. See also Naz,

LLC v. United National Insurance Co., 2018 WL 3997299 (E.D. La. 2018)

(acknowledged the law is unsettled regarding whether an insured’s claim for an

insurer’s bad faith are subject to a prescriptive period of one or ten years, but noted

courts in that district have consistently applied a one-year prescriptive period); Ross

v. Hanover Insurance Co., 2009 WL 2762713 (E.D. La. 2009) (applied a one-year

prescriptive period to an insured’s claim against the insurer under La. R.S. 23:1973,

relying on Brown for jurisprudential support); Harrell v. Fid. Sec. Life Ins. Co., 2008

WL 170269 (E.D. La. 2008) (citing Brown, held “a violation of [La. R.S. 22:1973]

is delictual in nature and therefore subject to the one year prescriptive period.”).

Conversely, the United States District Court for the Western District of

Louisiana has found that a claim against an insurer for breach of the duty owed to its

insured is subject to a ten-year prescriptive period. In Aspen Specialty Insurance Co.

v. Technical Industries, Inc., the court declined to follow the Zidan line of cases,

noting Zidan involved a third-party claim, and concluded a ten-year prescriptive

period applied to the bad faith claim against the insurer:

It is logical that the claim by a third party to an insurance contract
against an insurer would be classified as a tort and subject to the
one-year prescriptive period for delictual actions, but it is not logical
that a first-party claim, that is, a claim by an insured against its insurer,
would be classified as a delictual claim. A first-party claim arises out of
the relationship created by the insurance contract and, therefore, is either
contractual or quasi-contractual in nature. Indeed, Section 1973
“recognizes the jurisprudentially established duty of good faith and fair
dealing owed to the insured, which is an outgrowth of the contractual
and fiduciary relationship between the insured and the insurer.” Both
contractual and quasi-contractual claims are classified, under Louisiana
law, as personal actions subject to a liberative prescription of ten years.

Aspen Specialty Ins. Co., 2015 WL 339598, *2 (W.D. La. 2015). See also

Prudhomme v. Geico Ins. Co., 2015 WL 2345420 (W.D. La. May 14, 2015) (finding

a first-party claim for bad faith under La. R.S. 22:1973 was a contractual claim

13
subject to 10-year prescriptive period).

The United States Fifth Circuit Court of Appeals has not expressly resolved the

conflict in the federal courts. In Belanger v. GEICO Gen. Ins. Co., 623 F. App’x 684

(5th Cir. 2015), the court applied a one-year prescriptive period to a first-party bad

faith claim brought under La. R.S. 22:1220 (now La. R.S. 22:1973). In so ruling, the

court noted there was authority in support of a ten-year prescriptive period but found

the plaintiff had unequivocally waived that argument. Specifically, the plaintiff

conceded in the district court that the one-year prescriptive period applied. The Fifth

Circuit, finding our state court jurisprudence uncertain, held it could not grant

plaintiff relief under plain error review. 623 F. App’x at 691.

Other than the cases relying on Zidan, the body of jurisprudence addressing

this issue favors application of a ten-year prescriptive period to first-party bad faith

claims. We endorse this jurisprudence, and particularly the reasoning of the Third

Circuit in Fils (on rehearing). The federal cases applying a one-year prescriptive

period have repeatedly relied on Zidan, which is easily distinguishable and thus not

directly applicable. As noted by the federal court in Aspen Specialty Ins. Co. and

recognized by the court in Fils, Zidan involved a bad faith claim asserted by a third

party, not the insured. There is no contractual relationship between a third party and

an insurer.8

Finally, we note our holding in this case is not inconsistent with our earlier

opinions in Durio v. Horace Mann Ins. Co., 11-0084 (La. 10/25/11), 74 So. 3d 1159,

Wegener v. Lafayette Ins. Co., supra, or Manuel v. Louisiana Sheriff’s Risk

Management Fund, 95-0406 (La. 11/27/95), 664 So. 2d 81. In those cases, this court

made general statements that the duties of an insurer under La. R.S. 22:1220 (now La.

8
As indicated, the plaintiff here, although not a party to the contract, was assigned the rights
of a party to the contract at issue.

14
R.S. 22:1973) are separate and distinct from its duties under the insurance contract.

However, none of those cases addressed the prescriptive period for bad faith claims,

nor did those cases seek to ascertain the nature of the insurer’s duty relative to a first-

party bad faith claim.

In Durio, this court addressed the proper calculation of penalties under La. R.S.

22:1220 (now La. R.S. 22:1973). In so doing, this court stated that La. R.S. 22:1220

refers to a breach of the duty of good faith and fair dealing, not a breach of the

insurance contract. 74 So. 3d at 1170. Our holding in Durio was based on the premise

that it is a violation of the statute, not a breach of the insurance contract, which

triggers the statutory penalty provision. Our opinion did not address prescription of

bad faith claims, and did not consider the underlying nature of a bad faith action.

In Wegener, this court considered whether La. C.C. art. 1998, which would

require an obligee to prove an obligor intended to aggrieve them in order to recover

nonpecuniary damages, was applicable to an action against an insurer under La. R.S.

22:1220 (now La. R.S. 22:1973) for emotional distress/mental anguish. In holding

Article 1998 was not applicable, this court stated that the insureds’ claim for mental

distress did not arise from a breach of their insurance contract, rather it was based on

the insurer’s alleged violation of its statutory duty under La. R.S. 22:1220 (now La.

R.S. 22:1973). 60 So. 3d at 1229. Wegener addressed particular damages authorized

by La. R.S. 22:1220 (now La. R.S. 22:1973), and nothing in that decision addressed

or altered the underlying nature of the bad faith claim against an insurer as one rooted

in contract.

Finally, in Manuel, this court considered whether La. R.S. 22:1220 (now La.

R.S. 22:1973) could be applied regarding settlement proceeds of an insurance policy

that was issued before the statute was enacted, when the bad faith conduct occurred

15
after the statute’s effective date. In finding the statute applicable, this court held there

was no contractual impairment, noting the subject matter of the statute was unrelated

to that of the contract. However this court went on to explain:

[T]he statute provides a method by which insured and non-insured
claimants can recover for damages caused by insurers. R.S. 22:1220
merely provides a means by which insured and third-party claimants can
exercise their rights under insurance policies “executed for the benefit
of all injured persons.” R.S. 22:655(D). Because of this public policy,
La. R.S. 22:1220 is remedial in nature and applicable to all pre-existing
insurance policies.

Manuel, 664 So. 2d at 85. Nothing in Manuel dictates we reach a different result in

this case.

CONCLUSION

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. 3499.9

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 district court correctly overruled

GoAuto’s exception of prescription.

DECREE

AFFIRMED.

9
The issue of the proper prescriptive period for third-party bad faith claims against an insurer
is not before the court, and our opinion does not purport to address that issue.

16
10/22/19

SUPREME COURT OF LOUISIANA

No. 2019-CC-00052

BEVERLY SMITH

VERSUS

CITADEL INSURANCE COMPANY AS SUCCESSOR TO GRAMERCY
INSURANCE COMPANY AND GOAUTO INSURANCE COMPANY

ON SUPERVISORY WRITS TO NINETEENTH JUDICIAL DISTRICT COURT,
PARISH OF EAST BATON ROUGE

WEIMER, J., concurs.

I concur in the result in this case. I write separately to question the majority’s

discussion of Ms. Smith’s claim that her suit was filed within one year of the accrual

of her cause of action, as I believe this discussion is dicta. Smith v. Citadel

Insurance Company as Successor to Gramercy Insurance Company and GoAuto

Insurance Company, 19-0052, slip op. pp. 4-5 (La. __/__/19). Because the majority

correctly holds that the applicable prescriptive period is the ten-year period set forth

in La. C.C. art. 3499, I believe it is unnecessary to address the thorny question of

when Ms. Shelmire first suffered damages as a result of the excess judgment against

her.