Conoco, Inc. v. Republic Insurance Co.
1987 U.S. App. LEXIS 7535, 819 F.2d 120, 1987 A.M.C. 2975 (1987)
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Rule of Law:
Under an indemnity insurance policy, which requires the insured to have actually paid a loss before seeking reimbursement, an insolvent and assetless insured's execution of a promissory note that it has no ability or intention to honor does not constitute a 'payment' or 'actual expense' sufficient to trigger the insurer's duty to indemnify.
Facts:
- Conoco operated an offshore drilling rig and chartered a vessel, the Aqua Safari, from Bonanza Corp.
- Republic Insurance Co. issued a marine protection and indemnification policy covering the Aqua Safari, naming both Bonanza and Conoco as assureds.
- Due to the negligence of the vessel's master, the Aqua Safari sank underneath Conoco's rig on January 1, 1977.
- Bonanza refused to remove the wreck, so in March 1977, Conoco paid for the raising and removal of the sunken vessel.
- From the date of the sinking onward, Bonanza was insolvent and had no assets.
- Years after a previous court ruling, the insolvent Bonanza executed a demand promissory note in favor of Conoco for the cost of the vessel's removal.
- Concurrently, Bonanza executed an assignment of any potential insurance proceeds from Republic to Conoco.
- Conoco assured Bonanza’s president it would not attempt to collect on the note, and Bonanza's president testified that the company had no assets, intentions, or ability to ever pay the note.
Procedural Posture:
- Conoco sued Bonanza and Republic Insurance Co. in the U.S. District Court for the Southern District of Texas for salvage costs.
- The district court initially held that Conoco could recover its costs directly from the insurer, Republic.
- On appeal, the U.S. Court of Appeals for the Fifth Circuit, sitting en banc, reversed, holding that Conoco could not recover under the insurance policy as a co-assured.
- Following the en banc decision, Conoco initiated the instant action against Republic in the district court, arguing the new promissory note and assignment triggered the policy.
- The district court granted summary judgment in favor of Conoco.
- Republic Insurance Co., the defendant-appellant, appealed the grant of summary judgment to the U.S. Court of Appeals for the Fifth Circuit.
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Issue:
Does an insolvent and assetless insured's execution of a promissory note, which it has no ability or intention to pay, constitute an 'actual expense' or 'payment' sufficient to trigger the insurer's duty to reimburse under an indemnity insurance policy?
Opinions:
Majority - Jerre S. Williams
No. The execution of a worthless promissory note by an insolvent and defunct insured does not constitute 'payment' under an indemnity policy. The court distinguished between a liability contract, where an insurer pays upon the establishment of liability, and an indemnity contract, where the insurer reimburses the insured only after the insured has actually paid an expense. The central question was whether Bonanza's promissory note was an 'actual expense.' The court found it was not, as the test is whether the insured 'has actually in good faith sustained the loss for which reimbursement is sought.' Unlike in prior cases where an insolvent but operational company financed a payment, Bonanza was completely assetless, dormant, and had no intention or capability of ever honoring the note. Therefore, Bonanza sustained no actual loss, and the note was not a transfer of anything of value. Additionally, the court held that Conoco could not sue Republic directly as a third-party beneficiary or as an assignee because the insurance contract contained explicit, enforceable clauses prohibiting both third-party actions and the assignment of claims.
Analysis:
This decision reinforces the critical distinction between liability and indemnity insurance contracts, preventing the circumvention of an indemnity policy's 'actual payment' requirement through sham transactions. It establishes that a 'payment' must be a good faith transfer of actual value, not merely a symbolic gesture like a worthless promissory note from a defunct entity. The ruling protects indemnity insurers from claims where their insured has not suffered a real financial loss. Furthermore, the decision affirms the enforceability of 'no-assignment' and 'no third-party action' clauses, thereby limiting the avenues for non-parties to sue an insurer directly under the policy.
