Death in the City: Gorman's Flawed Application of the Direct Action Statute to Insured Political Subdivisions

Death in the City: Gorman ’s Flawed Application of the Direct Action Statute to Insured Political Subdivisions TABLE OF CONTENTS Introduction .................................................................................. 584 I. History of the Direct Action Statute ............................................. 587 A. The Legislature Seeks to Protect the Public from Insolvent Tortfeasors .............................................................. 587 B. Amendments and Jurisprudential Interpretations Further Public Policy Considerations ..................................... 589 II. Death in the City: Facts and Procedural History of Gorman v. City of Opelousas ....................................................... 592 III. Dissecting Gorman ’s Understanding of the Direct Action Statute ........................................................................................... 596 A. Does the Direct Action Statute Grant a Procedural or Substantive Right? .................................................................. 597 1. The Gorman Opinions Rely on Jurisprudence to Come to Different Conclusions ....................................... 597 2. The Supreme Court Has Interpreted the Direct Action Statute as Granting a Procedural Right for Over 60 Years ........................................................................... 598 B. How Does the Direct Action Statute Affect Claims-Made-and-Reported Policies?................................................. 601 1. Gorman ’s View on the Relevance of the Distinctions Between Occurrence Policies and Claims-Made-and-Reported Policies in Light of the Direct Action Statute ............................................. 601 2. Coverage Under Different Types of Policies is Triggered in Different Manners ....................................... 602 3. The Coverage for Which the Parties Bargained Determines the Insurer’s Obligation................................ 604 C. Does the Notice Requirement in the City’s Policy Violate Public Policy? ............................................................ 606 1. Gorman Finds the City’s Policy Is Permissible Under the Direct Action Statute ................................................. 606 2. Insured Political Subdivisions Are Analogous to Insolvent Insureds ............................................................ 608 584 LOUISIANA LAW REVIEW [Vol. 76 3. Political Subdivisions Are More Likely to Mistakenly Fail to Report Claims to Their Insurers than Individuals or Corporations ............................................. 610 IV. Legislative Solution: An Amendment to the Insurance Code ...... 613 Conclusion .................................................................................... 616 INTRODUCTION The Opelousas police arrested Brian Armstrong on the evening of September 27, 2009, for “disturbing the peace due to intoxication” after he disrupted an Alcoholics Anonymous meeting. 1 By sunrise, he was dead. 2 No policeman stopped by Mr. Armstrong’s cell, which held three other inmates, between midnight and six o’clock. 3 During the time when the police left the cell unattended, two of the inmates attacked and killed Mr. Armstrong, while the other inmate yelled for a policeman to help. 4 No help arrived. 5 Mr. Armstrong’s mother, Ms. Joyce Gorman, sued the city of Opelousas and the Opelousas Police Department 6 for their role in her son’s death. 7 In December 2010, Ms. Gorman asked the City to identify its liability insurer. 8 After failing to comply with discovery requests for seven months, the City finally named Lexington Insurance Company as its liability insurer. 9 In September 2011, Ms. Gorman joined Lexington as a defendant in her lawsuit against the City. 10 Lexington moved for summary judgment, contending that the claims Ms. Gorman asserted were not covered under the City’s claims-made-and-reported policy, because the City had not provided Lexington with written notice of her claim until after the policy had expired. 11 The trial court granted Lexington’s motion for summary Copyright 2015, by GRANT TOLBIRD. 1. State v. King, 124 So. 3d 623, 625 (La. Ct. App. 3d 2013). 2. Id. at 626. 3. Id. 4. Id. 5. Id. 6. Both defendants are referred to as “the City” throughout this Note. 7. Gorman v. City of Opelousas, 148 So. 3d 888, 890 (La. 2014). 8. Id. 9. Id. 10. Id. 11. Id. at 890–91 (The policy stated as follows: “The wrongful act [for which the City is liable] shall take place on or after the retroactive date, but before the end of the policy period, and shall arise solely in your capacity as a law enforcement agency. A claim for a wrongful act shall be first made against the 2015] COMMENT 585 judgment. 12 The court of appeal reversed, holding that “the contractual notice provision cannot be used to deprive Gorman of her vested rights under the direct action statute [sic].” 13 The Louisiana Supreme Court, in a four-to-three opinion, reversed the court of appeal and reinstated the trial court’s grant of Lexington’s motion for summary judgment. 14 Like the circuit split that existed prior to Gorman , 15 the majority opinion and the dissent wildly diverged on basic application of the Direct Action Statute, 16 which permits an injured plaintiff to sue the tortfeasor’s insurer directly. 17 Ultimately, the Court deprived Ms. Gorman of her ability to recover against Lexington, because the City refused to provide Lexington with notice of Ms. Gorman’s claim. 18 Ms. Gorman was thus forced to settle her lawsuit against the City, 19 as no court could compel the City to pay her any damages that a court may have awarded her. 20 The competing opinions in Gorman reveal the deep disagreement over the application of the Direct Action Statute within the Louisiana Supreme Court, among the lower courts, and between the state and federal courts. The majority and the dissent differed substantially on the resolution of the following three issues: (1) whether the Direct Action Statute grants a Insured and reported to us in writing during the policy period . . . .”) (emphasis in original). 12. Id. at 891. 13. Gorman v. City of Opelousas, No. 12-1468, 2013 WL 1831075, at *3 (La. Ct. App. 3d May 1, 2013), rev’d , 148 So. 3d 888 (La. 2014). 14. Gorman , 148 So. 3d at 898 (“The City’s failure to report Gorman’s claim to Lexington during the applicable policy period as required precludes coverage. Absent coverage, Gorman was not deprived of a right under the Direct Action Statute.”). 15. See, e.g. , Murray v. City of Bunkie, 686 So. 2d 45, 50 (La. Ct. App. 3d 1996) (finding that the notice requirement in a claims-made-and-reported policy was unenforceable); but see Reichert v. Bertucci, 650 So. 2d 821, 823 (La. Ct. App. 4th 1995) (finding that the notice requirement in a claims-made-and-reported policy did not violate public policy). 16. Gorman , 148 So. 3d at 895–96 (citing Hood v. Cotter, 5 So. 3d 819, 829 (La. 2008)). The majority asserted that the Direct Action Statute confers “a procedural right of action,” allowing an injured third person to sue the tortfeasor’s insurer directly. Id. at 896. The dissent argued that the Direct Action Statute bestows on injured third persons a substantive cause of action against the tortfeasor’s insurer. See id. at 898 (Knoll, J., dissenting). 17. LA. REV. STAT. ANN. § 22:1269(B)(1) (2009). 18. Gorman , 148 So. 3d at 898. 19. Motion to Dismiss, Gorman v. City of Opelousas, No. 10-C-4849-D (La. Dist. Ct. Sept. 29, 2014). 20. LA. CONST. art. XII, § 10(C); LA. REV. STAT. ANN. § 13:5109(B)(2) (2012) (“Any judgment rendered in any suit filed against . . . a political subdivision . . . shall be exigible, payable, and paid only . . . out of funds appropriated for that purpose by the named political subdivision . . . .”). 586 LOUISIANA LAW REVIEW [Vol. 76 substantive right to an injured plaintiff; 21 (2) whether the distinction between occurrence policies and claims-made-and-reported policies is relevant to the outcome of the case; 22 and (3) whether the notice requirement in a claims-made-and-reported policy violates the public policy considerations underlying the Direct Action Statute. 23 The prior cases that applied the Direct Action Statute are not uniform in their answers, and unfortunately Gorman ’s reasoning fails to adequately settle these issues. Because Gorman ’s reasoning is insufficient, this Comment will explain how the Court should have resolved these three contentious issues by analyzing how prior courts have applied the Direct Action Statute and the public policy considerations inherent in that law. Part I of this Comment will clarify the history behind Louisiana’s Direct Action Statute and explain how the courts have historically interpreted that law. Part II will discuss the facts behind Ms. Gorman’s lawsuit, the procedural history, and the Supreme Court’s ultimate holding in Gorman . Part III will analyze the majority and dissenting opinions in Gorman and discuss what the correct outcome should have been in light of the relevant jurisprudence and public policy. Part IV will propose a legislative solution to rectify the injustice of the majority’s overly broad holding. This proposed legislation will amend the Insurance Code to prohibit insurance companies from issuing claims-made-and-reported policies 24 to political subdivisions of the state, so that these political subdivisions cannot avoid liability by 21. Gorman , 148 So. 3d at 895–96 (citing Hood , 5 So. 3d at 829). The majority contended that the Direct Action Statute does not confer any substantive rights on an injured third person. Id. The dissent argued that the Direct Action Statute gives an injured third person a substantive right against the insurer that vests at the time of injury. Id. at 900 (Knoll, J., dissenting). 22. Id. at 897. The majority believed that extending coverage under the Lexington policy to Ms. Gorman’s claims would transform “the City’s claims-made-and-reported policy into an occurrence policy.” Id. at 897 (cit...