ROSS NEELY SYSTEMS, INC., Plaintiff-Appellant,
v.
OCCIDENTAL FIRE & CASUALTY COMPANY OF NORTH CAROLINA, Defendant-Appellee.
No. 98-6817.
United States Court of Appeals,
Eleventh Circuit.
Dec. 3, 1999.
Appeal from the United States District Court for the Northern District of Alabama. (No. CV-96-B-2865-S),
Sharon L. Blackburn, Judge.
Before BLACK and WILSON, Circuit Judges, and RONEY, Senior Circuit Judge.
WILSON, Circuit Judge:
Ross Neely Systems, Inc. ("Ross Neely") sued its insurance company, Occidental Fire & Casualty
Co. of North Carolina ("Occidental"), for coverage of a punitive damages award. The district court granted
summary judgment in favor of Occidental. We affirm.
BACKGROUND
Ross Neely is a trucking company that bought business auto insurance from Occidental. The policy
covered "all sums the insured legally must pay as damages because of bodily injury or property damage to
which this insurance applies, caused by an accident." Occidental also promised to defend Ross Neely against
accident claims. These broad provisions were modified by two pertinent endorsements.
First was a punitive damages exclusion: "This insurance does not apply to punitive and/or exemplary
damage except in cases of wrongful death."1 Ross Neely knew of this exclusion, for it unsuccessfully
bargained to remove it. Ross Neely's insurance consultant told Ross Neely that Occidental would not offer
the policy without the punitive damages exclusion. Indeed, he wrote, "I honestly do not know of any carrier
1
This exclusion was deemed approved by the Alabama Department of Insurance effective August 1, 1992.
actively writing liability in this state who offers coverage against punitive damages." Despite this exclusion,
Ross Neely argues that the policy was ambiguous in light of a second endorsement.
This endorsement, called a "Form F" endorsement, provided coverage "to the extent of the coverage
and limits of liability required" by Alabama motor carrier law and Alabama Public Service Commission
(PSC) regulations. These PSC regulations required coverage for not only negligence, but also wanton acts.
For bodily injuries to one person, the coverage required was $100,000. See Ala. Pub. Serv. Comm'n R. 4.3.
If Occidental paid claims that would not have been covered but for the Form F endorsement, Ross Neely
promised to reimburse Occidental.
In light of these two endorsements, Ross Neely argues that Occidental should have indemnified Ross
Neely and defended it from punitive damages awarded in a tort suit arising from an accident. The accident
occurred shortly after midnight when a Ross Neely truck rear-ended a car stopped at a traffic light. Ross
Neely notified Occidental of the accident. Occidental hired an independent adjusting company to interview
the drivers, appraise property damage, obtain a copy of the police accident report, and investigate medical
claims.
The car's driver, Truss, suffered soft tissue injuries and three to four thousand dollars in medical
expenses. Two of the passengers, whose injuries and medical expenses were greater than Truss's, settled with
Occidental for $33,000 and $165,000 respectively. Truss, however, rejected Occidental's offer of $22,500
and sued.
Truss's complaint stated that he was "knocked, shocked, bruised and contused" and sought over one
million dollars in compensatory and punitive damages. Occidental referred the defense of the case to outside
counsel Curtis Wright.
Occidental wrote Ross Neely about the suit, denying coverage for punitive damages and noting that
Truss's complaint sought damages in excess of the $1,000,000 policy limits. Occidental's letter confirmed
that Wright would defend Ross Neely against all claims, but that Ross Neely had the right to engage separate
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counsel to defend it against punitive damages and liability in excess of one million dollars. Ross Neely
decided to rely on Wright to defend it against all claims. Wright did not notify Ross Neely that his
representation was limited to defense of covered claims. In particular, Wright did not tell Ross Neely that
he was not defending the punitive damage claims, and indeed Wright moved for a directed verdict and
submitted a posttrial motion on punitive damages.
After filing his tort suit, Truss offered to settle for $150,000. Wright informed Occidental of the offer
and recommended rejection. During the course of the suit, Occidental offered to settle for $30,000—$35,000.
Truss rejected these offers. His last offer to settle, for $95,000, was rejected and the case went to trial. Ross
Neely agreed that up until the day of trial, Truss's case did not appear to have much merit.
The trial did not go well for Ross Neely. The investigating police officer, who had not been
interviewed by either Occidental or Ross Neely's lawyer, testified that the truck had been traveling fast
enough—and stopped late enough—to support an inference that the truck driver had been asleep at the wheel.
Truss presented evidence that Ross Neely had violated federal regulations by requiring its driver to remain
on duty for thirty-six hours, twenty-one of which were spent driving. To make matters worse, the truck driver
testified in a manner that contradicted his deposition testimony and fell asleep during the trial in front of the
jury.
The jury awarded Truss $45,000 in compensatory damages and $250,000 in punitive damages. Ross
Neely moved to remit the punitive damages award. The state court denied the motion, finding Ross Neely
"reprehensibl[y]" violated federal hours-of-service regulations by failing to monitor its drivers' compliance
with the regulations and by requiring its driver to drive excessive hours.
Occidental refused to pay the punitive damage award. Ross Neely borrowed $250,000, paid the
verdict, then sued Occidental. Ross Neely moved for partial summary judgment, arguing that the punitive
damages exclusion was contrary to Alabama public policy, that the Form F endorsement nullified the punitive
damages exclusion, and that Occidental breached its duty of good faith. Pursuant to Rule 18, Alabama Rules
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of Appellate Procedure, the district court certified to the Alabama Supreme Court the question of whether
Alabama public policy required coverage of punitive damages. The Alabama Supreme Court declined to
answer the question. Occidental moved for summary judgment. The district court denied Ross Neely's
motion and granted Occidental's motion. Ross Neely appealed.
DISCUSSION
This court reviews the district court's grant of summary judgment de novo, applying the same
standards used by the district court. See Killinger v. Samford Univ., 113 F.3d 196, 198 (11th Cir.1997).
Summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the
moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. Rule 56(c). An issue of fact is material
and genuine if a rational factfinder could find for the nonmoving party on a fact necessary to establish an
element of the claim under applicable substantive law. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
In reviewing an insurance policy, an unambiguous endorsement supplants conflicting general terms.
See Commercial Std. Ins. Co. v. General Trucking Co., 423 So.2d 168 (Ala.1982). Although this court should
construe exclusions narrowly, it must not favor an insured contrary to the policy's clear meaning. See, e.g.,
Wakefield v. State Farm Mut. Auto. Ins. Co., 572 So.2d 1220, 1222 (Ala.1990); State Farm Mut. Auto. Ins.
Co. v. Lewis, 514 So.2d 863, 865 (Ala.1987). Likewise, an unambiguous contract must be enforced as
written. See Kinnon v. Universal Underwriters Ins. Co., 418 So.2d 887, 888 (Ala.1982). The Occidental
policy clearly and unambiguously excludes punitive damages: "This insurance does not apply to punitive
and/or exemplary damage except in cases of wrongful death." Therefore, Occidental need not cover Ross
Neely's punitive damage award unless the exclusion is contrary to public policy or was nullified by a contrary
provision elsewhere in the policy.
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Under these circumstances, we cannot say that Alabama public policy bars Occidental from
excluding coverage of punitive damages. Although no Alabama cases have reached the issue, other courts
have approved similar exclusions. See, e.g., Lincoln Nat'l Health & Cas. Ins. Co. v. Brown, 782 F.Supp. 110
(M.D.Ga.1992); Hodgin v. Allstate Ins. Co., 935 S.W.2d 614 (Ky.Ct.App.1996). The Alabama agency
responsible for regulating insurance specifically allows insurers to file for approval of policies containing
punitive damages exclusions. See Rate Bulletin No. 245, Ala. Dept. of Ins. (Dec.1991-Feb.1992).2 In fact,
the particular exclusion at issue was deemed approved by the Alabama Department of Insurance. See, e.g.,
Jameson v. Mutual Life Ins. Co., 292 F.Supp. 834, 836 (E.D.Tex.1968) (when rider was approved by state
department of insurance, it was lawfully part of the policy), aff'd in pertinent part, 415 F.2d 1017 (5th
Cir.1969).
Ross Neely argues that Alabama public policy bars an insurer from excluding punitive damages in
the specific instance when the insured is an innocent employer only vicariously liable. Cf. McNulty, 307 F.2d
at 440. Its argument fails in light of the state court verdict finding Ross Neely liable for punitive damages.
As the state court noted in denying Ross Neely's posttrial motions, substantial evidence backed the verdict.
For example, Ross Neely directed its driver to continue driving for hours before and after the accident (up
to twenty-one of thirty-six hours). The court also noted that Ross Neely inadequately monitored its
employees' compliance with hours-of-driving regulations. In light of these facts, this court declines to
speculate as to Alabama public policy regarding this specific issue, particularly when the Alabama Supreme
Court has declined to rule on the issue.
2
Alabama insurers must cover punitive damages for wrongful death. This is due to a quirk in Alabama
law, which considers all damages for wrongful death punitive. Unless Alabama law required coverage,
decedents' estates would lose access to insurance proceeds, even if the insured was merely negligent. To
avoid this forfeiture, Alabama law requires coverage of punitives for wrongful death. See, e.g., Northwestern
Nat'l Cas. Co. v. McNulty, 307 F.2d 432, 439 (5th Cir.1962) (partially superseded by statute on other grounds,
United Servs. Auto. Ass'n v. Webb, 235 Va. 655, 369 S.E.2d 196, 197 (1988)).
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Neither did the Form F endorsement obligate Occidental to cover punitive damages. Form F
required Occidental to provide $100,000 in coverage as required by Alabama statutes and regulations. The
statute required coverage for negligence. Ala.Code § 37-3-18 (1975). The regulations required coverage for
wanton acts as well as negligence. The district court ruled that the Alabama PSC exceeded its authority in
expanding coverage. See Freeman v. City of Mobile, 193 F.3d 1179 (11th Cir.1999) (agency cannot amend
or supplant act of Alabama legislature); Ex parte State Dept. of Human Resources, 548 So.2d 176 (Ala.1988)
(statute prevails over conflicting regulation). See also Timmons v. City of Montgomery, 641 So.2d 1263, 1266
(Ala.Crim.App.1993). We need not reach the issue because even if the PSC could require coverage for
wanton acts, Occidental's duty to pay was never triggered.
The purpose of Form F is only to serve as a guarantee to the public that the insurer will be liable for
any damages awarded if the insured is unable to pay. Form F does not alter the relationship between the
insured and the insurer. Therefore, Occidental served only as a surety to Ross Neely's performance. See, e.g.,
Command Transp., Inc. v. B.J.'s Wholesale Club, Inc., 62 F.3d 18, 20 (1st Cir.1995). Since Ross Neely was
able to borrow the money and pay Truss his punitive damages, Occidental's duty to pay never arose. See, e.g.,
Service Stages v. Central Sur. & Ins. Co., 231 Ala. 417, 165 So. 248 (1936); Fidelity & Cas. Co. v. Jacks,
231 Ala. 394, 165 So. 242 (1936). Further, even if Occidental had paid, Ross Neely would have been
required to reimburse Occidental. Therefore, even if Occidental theoretically breached a duty to pay, Ross
Neely suffered no damages.
The court also found that there was no genuine issue of material fact as to whether Occidental
fulfilled its duty of good faith in defending Ross Neely. In defending an insured under a reservation of
rights,3 an insurer has a potential conflict of interest. Because the insured may face greater liability than the
3
Occidental wrote Ross Neely, "punitive damages were not contemplated nor coverage afforded therefore
by this Policy of Insurance. Thus, at the present time, we will provide you with the defense, but will not
indemnify you for punitive damage awards if any be rendered against you." Noting that the complaint sought
in excess of $1,000,000, Occidental stated, "This amount exceeds the coverage afforded by our policy ..."
Ross Neely's Complaint treated this letter as a reservation of rights. Even though Occidental's letter did not
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insurer, whose liability is capped by policy exclusions and limits, the insurer's duty of good faith includes four
elements: (1) the insurer must thoroughly investigate the cause of the accident and the severity of the
plaintiff's injuries; (2) the insurer must retain competent defense counsel who will represent only the insured;
(3) the insurer must fully inform the insured of all developments relevant to its coverage and the progress of
the lawsuit, including all settlement offers; and (4) the insurer must refrain from any action that demonstrates
a greater concern for the insurer's monetary interest than for the insured's financial exposure. See L&S
Roofing Supply Co. v. St. Paul Fire & Marine Ins. Co., 521 So.2d 1298, 1303 (Ala.1987).
There is no issue of material fact as to whether Occidental conducted an adequate investigation.
Occidental hired independent investigators who interviewed witnesses, investigated the accident scene,
examined the police report, and obtained medical records. Ross Neely argues the investigation was
insufficient because no one interviewed the state trooper who investigated the accident. This interview would
have supposedly revealed that Ross Neely's driver was driving approximately fifty miles per hour in a forty
mile-per-hour zone, that his line of sight was unrestricted for 2500 feet, and that skid marks showed he started
to brake only thirty feet from the car. All this information was available from Occidental's investigation or
from Ross Neely's own sources. The failure to interview the police officer does not create a material issue
of fact as to the adequacy of the investigation.
The second element is the duty to engage adequate defense counsel. Ross Neely does not dispute
that Wright defended it adequately. The evidence shows that Wright properly regarded his client to be Ross
Neely, not Occidental.
Third is the duty to keep Ross Neely informed about the progress of the case, including settlement
offers. Occidental told Ross Neely that it was not planning to cover punitive damages and that Ross Neely
should consider hiring its own counsel to represent it on the punitive damages claims. As the lawsuit
specifically reserve its rights, it notified the insured that Occidental was not planning to pay the entire
damages Truss sought. This suffices to trigger the enhanced duty of good faith.
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progressed, Occidental informed Ross Neely of two settlement demands from the tort plaintiff, and Ross
Neely agreed those demands should be rejected.
As for the fourth element—acting with a greater concern for Occidental's interest than Ross
Neely's—there is no material issue of fact. Merely refusing to settle does not mean the insurer breached its
duty. See Universal Underwriters Ins. Co. v. East Cent. Ala. Ford-Mercury, Inc., 574 So.2d 716, 726
(Ala.1990). Occidental settled the claims of two passengers with more serious injuries than Truss's. As the
district judge noted, both Ross Neely and Occidental considered the financial risk in proceeding to trial to
be slight. Events proved them wrong. Occidental's decision not to settle before trial must be viewed in light
of the facts available to it at the time, not in hindsight. When Occidental and Wright evaluated the
advisability of settling, it appeared Truss had no basis for punitive damages. Ross Neely concurred in this
assessment at the time.
Nor is an insurer under a duty to settle a compensatory damage award merely to minimize its
insured's exposure to punitive damages. See Lira v. Shelter Ins. Co., 913 P.2d 514, 516 (Colo.1996). Ross
Neely has presented no evidence to create a material issue of fact that Occidental breached its enhanced duty
of good faith. The district court correctly granted summary judgment.
AFFIRMED.
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