Lundberg, Robert H.

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North Dakota Law Review Volume 29 Number 2 Article 8 1953 Insurance - Constitutional and Statutory Provisions - Direct Actions against Insurance Companies Robert H. Lundberg Follow this and additional works at: https://commons.und.edu/ndlr  Part of the Law Commons Recommended Citation Lundberg, Robert H. (1953) "Insurance - Constitutional and Statutory Provisions - Direct Actions against Insurance Companies," North Dakota Law Review: Vol. 29 : No. 2 , Article 8. Available at: https://commons.und.edu/ndlr/vol29/iss2/8 This Case Comment is brought to you for free and open access by the School of Law at UND Scholarly Commons. It has been accepted for inclusion in North Dakota Law Review by an authorized editor of UND Scholarly Commons. For more information, please contact und.commons@library.und.edu. NORTH DAKOTA LAW REVIEWpast activity in a disloyal group bears a reasonable relationship to presentfitness for public office. If the court finds the relationship reasonable, pastloyalty oath statutes are valid as merely setting a standard. But if no reason-able relationship is found, depriving a man of public office for past activityin disloyal groups is punishment, and renders the statutes void as ex postfacto laws and bills of attainder.ROBERT M. FAIRINSURANCE - CONSTITUTIONAL AND STATUTORY PROVISIONS - DIRECTACTIONS AGAINST INSURANCE COIIPANIES. - A, a resident of Texas, was in-jured in an automobile accident in Louisiana through the negligence of B,also a resident of Texas. A brought suit directly against B's insurance com-pany, a Swiss corporation which had entered the insurance contract with Bin Texas. In similar situations Texas permits no direct action against an in-surance company, but a Louisiana statute allows a direct action if the acci-dent occurs in Louisiana, even though the policy may contain a provisionforbidding such action.1 The court held that the Louisiana statute could notbe applied to contracts consummated outside the state, without giving itextra-territorial effect and depriving the insurer of its property without dueprocess of law. Mayo v. Zurich General Accident & Liability Ins. Co., 106 F.Supp. 579 (W.D. La. 1952).Statutory attempts to deal with the problem of compensation for auto-mobile accident victims have taken three main forms: (1) the enactmentof "Financial Responsibility Acts;" 2 (2) compulsory insurance require-snents; 3 and (3) statutes permitting direct actions against insurers.4 The1. La. Acts 1950, No. 541. "No policy or contract of liability insurance shallbe issued "or delivered in this state, unless it contains provisions to the effect that theinsolvency or bankruptcy of the insured, shall not release the insurer from the paymentof damages for injuries sustained or loss occasioned during the existence of the policy,and any judgment . . . against the insured for which the insurer is liable . . . shall bedeemed prima facie evidence of the insolvency of the insured, and an action maythereafter he maintained . . . against the insurer. The injured person . . . shallhave a right of direct action against the insurer . . . in the parish where the accidentoi injury occurred or in the parish where the insured has his domicile, and saidaction may be brought against the insurer alone or against both the insured and theinsurer. . . . This right of direct action shall exist whether the policy of insurancesued upon was written or delivered in the State of Louisiana or not and whetheror not such policy contains a provision forbidding such direct action, provided theaccident or injury occurred within the State of Louisiana .. "2. Such laws usually contain provisions: (1) Requiring proof of financial respon-sibility following a conviction of violation of certain motor vehicle laws. (2) Requiringproof of financial responsibility following non-payment of a motor vehicle accidentjudgment. (3) Suspending the right to operate a motor vehicle until satisfaction ofsuch judgment. Braun, The Financial Responsibility Law, 3 Law & Contemp. Prob.505 (1936).3. Massachusetts, first in this field provided in 1925, that no motor vehicle ortrailer could be registered unless an insurance company authorized to do business inthe state certified that a liability insurance policy had been issued covering the vehiclein question. Braun, supra note 2, at 537. While compulsory insurance for all vehiclesis a rarity, many states require it for common carriers. N.D. Rev. Code 149-183.(1943). The Statute expressly forbids joinder of the insurer in the action so as to exposethe fact of insurance to the jury. However, James v. Young, 77 N.D. 451, 43 N.W.2d692, allowed such joinder under other statutes; cf. N.D. Rev. Code 328-0206 and§28-0703 (1943).4.. What Louisiana did by legislation other states have done by judicial inter-pertation. Kansas treats an automobile liability policy as a third party beneficiarycontract creating a direct right against the insurer where the insured is a motor carrier;RECENT CASESremedy of a direct action against the insurer where the insured proves in-solvent or bankrupt has been provided in many states.5 The hardship to theinjured party is manifest in the situation which occurs when, after a judge-ment against the negligent party has been returned unsatisfied because of hisinsolvency, the injured party is left without redress because the insurancepolicy provides for payment to the insured only after the insured has paid theclaim.( Statutes allowing a direct action against the insurance company inthe absence of the insured's insolvency or bankruptcy are more rare, and theirapplication and effect has created many unusual problems.Louisiana first enacted a direct action statute in 1930, but by its termsthat statute was applicable only to contracts made within the state.7 Thatsuch a statute is constitutional has been definitely settled.8 In 1950, however,Louisiana amended its statute in an attempt to extend its force to all con-tracts of insurance, regardless of where they were entered, so long as the acci-dent occurred in Louisiana. o The instant case reiterates the decision of atleast one previous case that insofar as the statute attempts to govern contractsmade in other jurisdictions it is unconstitutional.10The problem of adjudicating foreign contracts where the laws of the statesare in conflict is always a perplexing one, especially where the subject in-volved is one as controversial as the right of direct action against an insurancecompany. Most of the cases involving the direct action statute have been in-stances where the suit was brought, on Louisiana insurance contracts in juris-dictions forbidding direct actions against insurers. The primary question in-volved in these cases has been whether the Louisiana statute was to be con-sidered procedural or substantive by the forum, since if considered substan-tive in character the statute should be applied by the forum while if consider-ed procedural it would not be applicable." Recent decisions by the Louisianasee, e.g., State Highway Commission v. American Mut. L. Ins. Co., 146 Kan. 187,70 P.2d 20 (1937); Dunn v. Jones, 143 Kan. 218, 53 P.2d 918 (1936); AetnaCasualty & Surety Co. v. Gentry, 191 Okla. 659, 132 P.2d 326 (1942). 'Wisconsinallows joinder of the insurer openly in the trial court under a statute allowing joinderof all parties having an interest in the controversy. Wis. Stats. §260.11 (1949).This statute was construed to be procedural by a Minnesota court, Anderson v. StateFarm Mut. Automobile Ins. Co., 222 Minn. 428, 24 N.W.2d 836 (1946), so as notto divest the insurer of his rights under the "no action" clause of the policy eventhough the accident occurred in Wisconsin. In anqther case with identical facts (acci-dent and contract in Wisconsin, suit brought in Minnesota) Minnesota however appliedWisconsin law on the ground that the policy in question did not contain a "no action"clause which could be enforced in Minnesota. Kertson v. Johnson, 185 Minn. 591,242 N.W. 329 (1932).5. These statutes arose becaase of strict judicial enforcement of "no action"clauses requiring actual payment of the claim by the insured before he in turn couldcollect from the insurer and limiting the injured party's right of action to the insuredonly. The technical difference between a policy of liability and one of indemnityis important. The former gives rise to a cause of action as soon as the injury occurs,the latter merely indemnifies the insured after he has satisfied the claim. 7 Apple-man Ins. L. & P. §4261 (1942).6. N.D. Rev. Code §39-1433 (1943).7. La. Acts 1930, No. 55.8. Lewis v. Manufacturer's Casualty Ins. Co., 107 F. Supp. 465 (1952) (noexpansion of jurisdiction of federal courts); Gager v. Teche Transfer Co., 143 So.62 (La.App. 1932) (not an impairment of a contract); Rossville Com'l. Alcohol Corp. v.Dennis Sheen Trans. Co., 18 La. App. 725, 138 So. 183 (1931).9. See note 1 supra.10. Bayard v. Traders & General Ins. Co., 99 F. Supp. 343 (W.D. La. 1951).11. Wells v. American Employers Ins. Co., 132 F.2d 316 (5th Cir. 1942)(in a suit originally brought in Texas .the Federal court hel4 in a 2-1 decision thatthe right to sue directly was procedural and Texas law governed).184 NORTH DAKOTA LAW REVIEWcourts have. held the statute substantive in character, 12 although the 1930statute had previously been held procedural by the Louisiana courts. 1  Theholding that the 1930 statute was procedural caused the Mississippi court,which had at first applied the statute to local suits on Louisiana insurancecontracts," to reverse itself and refuse to apply the statute on the ground thatthe Louisiana construction of the statute as procedural should be accepted asbinding.1 5 A not unlikely situation may be imagined in which a court, at-tempting to apply a foreign action statute, might find that the courts of theforeign state have declared their statute to be substantive while a local lawforbidding direct actions against insurance companies has been held proce-dural. The court would appear to be confronted with two diametrically op-posed rules, both equally binding.!6 In such a situation, the problem whetherthe foreign statute is to be considered procedural or substantive would appearsoluble only by application of the law of the fornm, and this solution is theone generally adopted.'7An argument' used by some courts in applying the Louisiana direct actionstatute even where it conflicts with local law is that the application of such astatute does not violate the public policy of the forum.ls The possibility thatanother state would refuse to apply a direct action statute on the groundsof public policy would appear to be a consideration of rapidly decreasingweight, since in the light of increasing legislation requiring compulsory in-surance coverage of automobile drivers it may be presumed that juries inmost suits involving motor vehicle accidents proceed on the assumption thatinsurance is present in the case."' However where the law of the forum ex-pressly provided that the insurer's interest should not be exposed to the jury,one court declared a direct action law violative of local public policy.20The point of interest in the present case is to be found in the holdingthat Louisiana's statute could not constitutionally be applied to the insurersince the contract of insurance was entered in Texas and the rights arisingunder it were therefore governed by Texas law. It may be pointed out thatthe rule that contracts are governed by the lex loci contractus is simply oneof three rules which have been heretofore applied by courts in making achoice of the law applicable to the construction of contracts.2'12. Lewis v. Manufacturers Casualty Ins. Co., 107 F. Supp. 465 (W.D. La.1952); Bayard v. Traders & General Ins. Co., 99 F. Supp. 343 (W.D. La. 1951);West v. Monroe Bakery, 217 La. 189, 46 So.2d 122 (1950).13. Robbins v. Short, 165 So. 512 (La. 1936); Lowery v. Zorn, 157 So. 826(La. 1934).14. Burkett v. Globe Indemnity Co., 182 Miss. 423, 181 So. 316 (1938)(Mississippi court declared the Louisiana statute to be procedural).15. MacArthur v. Maryland Casualty Co., 184 Miss. 663, 186 So. 305 (1939)(construction of a statute by the state that enacted it is binding).16. For the possibility of such a problem arising in North Dakota in applying aLouisiana insurance policy see N.D. Rev. Code §39-1611 (Supp. 1949).17. 3 Beale, Conflict of Laws 1601 (1935).18. Floyd v. Vicksburg Cooperage Co., 156 Miss. 567, 126 So. 395 (1930)(Louisiana statute not repugnant to Mississippi public policy; see Restatement, Conflict ofLaws §612 (1934).19. Since North Dakota now has a state Unsatisfied Judgment Fund providingcompensation for injured persons where the negligent driver is uninsured, the problemseems of reduced significance. N.D. Rev. Code 139-1703 (Supp. 1949). The rightof recovery has been extended to cases where the negligent party causing the injuryis an unascertained 'lsit and run driver". N.D. Sess. L. 1951 c.258.20. "Lieberthal v. Glens Falls Indem. Co.. 316: Mich. 37, 24 N.W.2d 547 (1946).21 See. 2 Beale, Conflict of Laws 1090 (1935'); Goodrich, Conflict of Laws321 (3rd ed. 1949).RECENT CASES 185A second rule. enunciated is that the validity of contracts is governed bythe law the parties intended to govern.2 2 Under the third rule, the law ofthe state contemplated as the place of perfornmiance governs. 23 In the instantcase it is arguable that the parties intended to be governed by the law ofthe state where the insured contracted liability. Application of either of thelatter two rules might require a result different from that reached by thiscourt. However, the opinion rendered appears sound on principle. The rulemost generally accepted governs contracts according to the law of the placewhere they are entered. This nile has the additional merits of simplicity andcertainty in most cases.2 4ROBERT H. LUNDBERGINTERNAL REVENUE - DEPRECIATION - RIGHTS OF LIFE TENANTS TO)EPRECIATE IMPROVEMENTS. - Petitioner and her husband entered into atrust agreement whereby certain real property was conveyed as a gift intrust to a daughter, subject to a life estate in themselves and the survivor.Subsequently, after the death of her husband and at the age of 73, thepetitioner razed an unproductive building on the property and built a newoffice building so that she might profit from her life estate. The useful life ofthe building was 50 years and her life expectancy was then 7.26 years. Peti-tioner claimed a deduction for depreciation based on her life expectancy inher income tax returns. The Court of Appeals held that depreciation was tobe computed over the life of the property and not over the life expectancyof the tenant for life, Penn v. Commissioner of Internal Reventw, 199 F.2d210 (8th Cir. 1952).Depreciation, a matter of legislative grace,' is allowed as a deductionfrom gross income in determining the net taxable income.2 The allowanceapplies only to property used in the trade or business of the taxpayer pro-vided he has supplied the capital which has gone into the property. 3 A de-22, This view has been reiected by text writers. 2 Beale, Conflict of Laws 1079(1935); Goodrich, Conflict of Laws 325 (3rd ed. 1949); and by the courts, New York LifeIns. Co. v. Cravens 178 U.S. 389 (1900); Ragsdale v. Brotherhood of RailroadTrainmen, 229 Mo. App. 545, 80 S.W.2d 272 (1934).23. See 2 Beale, Conflict of Laws 1086 (1935); Goodrich, Conflict of Laws324 (3rd ed., 1949).24. See 2 Beale, Conflict of Laws 1090 (1935); see Note 16 A.L.R.2d 881, 890(1951).1. See Sunray Oil Co. v. Commissioner, 147 F.2d 962, 965 (10th Cir. 1945),cert. denied, 325 U.S. 861 (1945); Detroit Edison Co. %,. Commissioner, 131 F.2d619, 622 (6th Cir. 1942), aff'd, 319 U.S. 98 (1943) "Like all other deductions. theallowance is a matter of legislative grace."2. Int. Rev. Code §23 (1): "In computing net income there shall be allowed asdeductions:(1) Depreciation.-A reasonable allowance for the exhaustion, wear and tear(including a reasonable allowance for obsolescence)-(1) of property used in the trade or business, or(2) of property held for the production of income."3. City Nat. Bank Bldg. Co. v. Helvering, 98 F.2d 216, 219 (D.C. App. 1938),"The test is, can the cleimant, whatever his relationship to the property - as owner,lessee, lessor, etc., - show a depreciating capital investment? The purpose of thedepreciation allowance is to permit a person whose money is invested to recover throughannual deduction an amount equal to the original outlay." See Weiss v. Weiner,279 U.S. 333 (1929) (99 year lessee not permited to depreciate lessor's property);see Century Electric .Co,, 15 T.C. 581, 585 (1950); Gladling Dry Goods Co., 2B.T.A. 336, 338 (1925) (the important question is who made the investment to herecovered over the period of depreciation).

Insurance - Constitutional and Statutory Provisions - Direct Actions against Insurance Companies

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Insurance - Constitutional and Statutory Provisions - Direct Actions against Insurance Companies

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