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Understanding the Direct Action Statute and Insurance Disputes

Louisiana has a Direct Action Statute that allows injured third parties to sue an insurance company directly when the insurance company’s insured causes an injury. For example, if you are involved an automobile accident where you are not at fault, you can sue the at-fault driver’s insurance company directly instead of suing the at-fault driver themselves. The Direct Action Statute is beneficial because it gives injured third parties access to the entity that will actually pay compensation for the injuries. It can be especially helpful where the insured fails to file a claim with their insurance company themselves. However, the injured third-party’s ability to sue the insurance company directly is limited by the insurance contract between the insurance company and the insured.

Despite the fact that the insurance contract is between the insurance company and the insured, an injured third party must still comply with most of the terms of the contract. This overarching rule applies specifically to whether the policy covers the insured and whether the policy covers a particular event. The insurance company will ask: Did this person have coverage when this accident happened? and Does this policy cover this type of event? For example, in insurance contracts limited to specific times, the insurance company will not cover a claim that occurred outside the time frame of the contract, regardless of who brings the claim. In a related example, automobile coverage that is limited to only certain vehicles will cover only those vehicles, regardless of who brings the claim. That is, the injured third party can have no greater rights than the insured would have had if he or she brought the complain themselves.

In a United States Fifth Circuit Court of Appeals case, the court determined that specific requirements of the contract also extend to injured third parties. That case involved a “claims-made-and-reported” policy. That type of policy not only requires that a claim arise within the policy period, but also that the insured (or another party under the Direct Action Statute) had to have reported the claim within the policy period. This type of notice requirement helps insurance companies avoid claims that are reported years after they happen; instead, this policy requires notice within a certain amount of time.

The case in the Fifth Circuit involved a Lawyers Professional Liability Policy that covered Titan, L.L.C. (“Titan”) for a period of one year. The policy stated that it would cover damages and expenses resulting from “a claim that is both first made against [Titan] and reported in writing to [CNA] during the policy period.” The policy requires that Titan must “immediately give written notice to [CNA] during the policy period . . . of any claim made against [Titan].”

A lawsuit was filed against Titan while Titan was issuing title insurance policies on behalf of First American. The claim was filed within the policy period, but it was not reported within the policy period. Since Titan was acting on behalf of First American, First American was also injured by Titan’s actions. In order to avoid some liability, First American notified the insurance company (CNA) of the suit, but it was about six months after Titan’s policy had expired.

The court determined that since neither Titan nor First American gave “written notice . . . within the policy period” as the policy required, then First American did not have a claim, regardless of the Direct Action Statute in Louisiana. Essentially, the court determined that the reporting requirement that Titan was subjected to also applied to First American, who was not a party to the insurance contract. Although First American may have been unaware of the terms of the contract, the court determined that to rule otherwise would give First American broader powers against the insurance company than Titan would have had.

As someone that might be injured by an insured, it is important to make yourself aware of potential pitfalls like these in the insurance policy. Reporting claims right away can help avoid this type of situation. Navigating insurance contracts and insurance claims can be tricky. Contact The Berniard Law Firm at 1-855-550-5000, and we would be happy to help you with your legal questions and concerns.