IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 11–31134

TIM SOSEBEE; MARK WRITESMAN; DALE PATILLO,

Plaintiffs - Appellees

v.

STEADFAST INSURANCE COMPANY,

Defendant - Appellant

Appeal from the United States District Court 

for the Eastern District of Louisiana

Before JONES, GARZA, and PRADO, Circuit Judges.

GARZA, Circuit Judge:

Appellant Steadfast Insurance Co. (“Steadfast”) appeals from the district

court’s order denying Steadfast summary judgment and granting summary

judgment to Appellees Sosebee, Writesman, and Patillo (“Sosebee”). The district

court held Steadfast waived its coverage defense. We REVERSE and render

summary judgment in favor of Steadfast. 

I

Tim Sosebee, Mark Writesman, and Dale Patillo were passengers on a

chartered fishing boat insured by St. Paul Fire when they were involved in an

accident with a utility boat owned by non-party Harvest Oil (“Harvest”) and

United States Court of Appeals

Fifth Circuit

F I L E D

November 27, 2012

Lyle W. Cayce

Clerk

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No. 11–31134

insured by Steadfast Insurance Company (“Steadfast”). One week after the

accident St. Paul Fire initiated a declaratory judgment action against Sosebee

and the owner and operator of the fishing boat. Sosebee filed a third-party

complaint against Harvest, alleging substantial personal injuries. Harvest

answered the complaint on December 3, 2008 through Slattery, Marino &

Roberts, its corporate counsel. 

After Steadfast became aware of the accident and the lawsuit, Harvest

received a letter, dated February 23, 2009, titled: “Reservation of Rights: Please

read carefully.” The letter is on the letterhead of Zurich North America, and is

signed, “Sincerely, Zurich American Insurance Company.” The letter contains

the name Zurich American Insurance Company (“Zurich”) five times and the

name Steadfast two times. The letter refers to Sosebee’s complaint and thirdparty complaint against Harvest in the 2008 case, cites the Steadfast policy

number, quotes the watercraft exclusion in the policy, and states the exclusion

“might apply.” The parties do not dispute that the plain language of the

watercraft exclusion quoted in the letter would exclude coverage for Sosebee’s

claims. The letter requests additional information regarding the ownership and

length of the vessel involved in the accident. The letter states Zurich will

“proceed with investigation of the case and allegations subject to a full

Reservation of Rights.” 

Zurich is a separate insurance company, and both Zurich and Steadfast

are members of Zurich North America. Zurich North America handles insurance

claims for its member companies, including Zurich and Steadfast. At the time

of the accident Harvest had a comprehensive general liability policy and an

umbrella policy with Steadfast, as well as a commercial auto liability policy with

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Zurich. 

On March 31, 2009 Saratoga Resources, Inc., a Texas corporation and sole

member of Harvest, filed for bankruptcy under Chapter 11. Harvest is 1

represented in its bankruptcy case by its own counsel. At the time Harvest filed

for bankruptcy, all of the twenty largest unsecured claims against Harvest were

for “Vendor/Trade Debt”, not tort liability. Creditors have a total of 207 claims

against Harvest, totaling $226,754,130.85 in secured claims and $20,592,114 in

unsecured claims. Harvest’s personal property totals $25,659,388 and its real

property totals $146,118,745. On August 9, 2009, Sosebee filed a claim against

Harvest in the bankruptcy case for an amount “to be determined.” Harvest

immediately filed an objection to Sosebee’s claim. The court has not yet held an

adversary proceeding to quantify Sosebee’s claim. 

On April 14, 2009, Harvest filed a notice of filing of bankruptcy in

Sosebee’s case against Harvest. On April 22, 2009, Harvest moved to change its

counsel from Slattery, Marino & Roberts to a firm employed by Steadfast,

Anderson, Stephens & Grace (hereinafter Stephens & Grace). On the same day

the court held a status conference with the parties and stayed and

administratively closed the case because of Harvest’s bankruptcy filing. 

On June 17, 2009, Sosebee filed this suit against the owner and operator

of the boat, St. Paul, and Steadfast, alleging substantial personal injuries. 

Sosebee did not include Harvest in this suit because Harvest had filed for

Pursuant to FED. R. EVID. 201(b), we are entitled to take judicial notice of adjudicative 1

facts from reliable sources “whose accuracy cannot reasonably be questioned.” But “[i]f the

court takes judicial notice before notifying a party, the party, on request, is still entitled to be

heard.” FED. R. EVID. 201(e). 

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bankruptcy. Stephens & Grace, the same firm employed by Steadfast to

represent Harvest in the 2008 case, represented Steadfast in this case. Stephens

& Grace also represented a Harvest employee in a deposition taken by the owner

and operator of the fishing boat. In its initial answer to the complaint Steadfast

asserted no affirmative defenses and made no mention of the watercraft

exclusion. When Sosebee asked Steadfast to produce any insurance policies that

would provide coverage for Sosebee’s injuries, Steadfast produced its primary

and umbrella policies. At this time Steadfast was unaware that its policy

excluded coverage because three separate Steadfast insurance adjusters

mistakenly interpreted Steadfast’s policy as covering Harvest’s claim. The court

set a trial date for October 18, 2010, and then granted motions to continue the

trial to August 15, 2011. 

On September 29, 2010, Sosebee received leave to file a first amended

complaint, adding a claim against Steadfast under Harvest’s umbrella policy. 

On April 1, 2011, after an insurance adjuster discovered Steadfast’s policy

excluded coverage, Steadfast filed an answer to the amended complaint,

asserting for the first time the watercraft exclusion. 

On April 14, 2011, the district court granted Steadfast’s motion to

substitute new counsel in place of Stephens & Grace. Stephens & Grace sent a

letter to Harvest on April 21, 2011 stating that:

As you know, this firm was assigned to represent [Harvest]

and [Steadfast] in the Sosebee Writesman and Patillo suit pending

in the United States District Court for the Eastern District of

Louisiana. The lawsuit has been proceeding forward against

Steadfast only under the direct action statute after the notice of

bankruptcy of Harvest. Steadfast has decided to assert policy

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defenses and they have reassigned their defense . . .

WE WILL NO LONGER REPRESENT HARVEST OR

STEADFAST IN THIS MATTER. WE STRONGLY URGE YOU TO

CONSULT YOUR OWN ATTORNEY TO PROTECT YOUR

INTERESTS. 

On April 19, 2011, Sosebee moved to strike Steadfast’s amended answer,

arguing Steadfast did not assert the watercraft exclusion in a timely manner. 

The district court denied the motion on the basis that the amended answer was

not so untimely as to prejudice Sosebee. The district court continued the trial

date to permit Sosebee to take discovery related to the watercraft exclusion. 

In a deposition in this case, Harvest’s designated representative, Brian

Daigle, testified that the entire time Stephens & Grace represented Harvest,

Harvest was unaware that Steadfast intended to invoke the exclusion. Mr. 2

The relevant portion of Mr. Daigle’s deposition is excerpted below: 2

Q. Now did Steadfast Insurance Company ever send you a reservation

of rights letter similar to the one that Zurich American Insurance

Company sent you?

A. No. 

. . .

Q. Did Steadfast Insurance Company ever inform you that they were

reserving their rights to coverage on this particular claim?

A. The only letter I received was from Zurich right there. 

Q. Okay. At some point, did Harvest Oil eventually learn that Steadfast

was being sued directly by the plaintiffs in this case on this particular

claim?

A. At some point, yeah. 

. . . 

Q. So if we talked about earlier May 1st of 2008 is when the accident

occurred– at any point in 2008, did Steadfast inform Harvest that this

particular accident may not be covered under its policies? 

A. Not that I’m aware of. 

Q. Okay. At any point in 2009, did Steadfast inform Harvest that this

accident may not be covered under its policies? 

A. No. 

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Daigle testified Harvest was under the impression the February 23, 2009

reservation of rights letter related to Harvest’s policies with Zurich, not

Steadfast. Mr. Daigle further testified Steadfast never informed Harvest that

Steadfast contested coverage for Sosebee’s claim. 

Steadfast moved for summary judgment arguing because Steadfast did not

owe coverage to Harvest, Sosebee cannot recover from Steadfast. Sosebee moved

for summary judgment arguing Steadfast waived its coverage defense. Holding

Steadfast waived its right to assert the watercraft exclusion as a defense, the

district court denied Steadfast summary judgment and granted summary

judgment for Sosebee. Steadfast appealed.

II

To determine whether Steadfast waived its coverage defense the district

court applied a two-prong test, asking (1) whether Steadfast’s conduct was so

inconsistent with asserting the exclusion as to induce a reasonable belief that

Steadfast relinquished its right to assert the exclusion, see Steptore v. Masco

Q. At any point in 2010, did Steadfast inform Harvest that this accident

may not be covered under its policies? 

A. No. 

. . . 

Q. At any point during that process of assisting in coordination of

depositions, did anyone from Steadfast Insurance Company or their

attorneys inform you that this claim might not be covered? 

A. No. 

. . .

Q. Had Steadfast brought this coverage issue to Harvest’s attention any

time between 2008 and 2011, what if anything would have Harvest

done? 

A. We would have immediately contacted our corporate attorneys first. 

Daigle Dep. 45:17–51:14, July 20, 2011. 

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Constr. Co., 643 So. 2d 1213, 1216 (La. 1994); Emery v. Progressive Cas. Ins. Co.,

49 So. 3d 17, 21 (La. App. Ct. 2010), and (2) whether Steadfast’s inconsistent

conduct prejudiced Harvest. Scottsdale Ins. Co. v. Gulf Sea Temporaries, Inc., 

No. 98-1364, 1999 WL 130633, at *5 (E.D. La. Mar. 10, 1999). On appeal

Steadfast contends the district court erred in answering both prongs

affirmatively and holding Steadfast thereby waived its coverage defense. 

Sosebee contends the district court erred in holding Steadfast’s February 23,

2009 letter was a valid reservation of rights. Sosebee contends Steadfast never

reserved its right to assert the exclusion as a coverage defense. 

We review the district court’s grant of summary judgment de novo. Am.

Nat’l Gen. Ins. Co. v. Ryan, 274 F.3d 319, 323 (5th Cir. 2001). “The district

court’s interpretation of an insurance contract is a question of law that we also

review de novo.” Id. Summary judgment is appropriate only if the evidence in

the record shows “there is no genuine dispute as to any material fact and the

movant is entitled to judgment as a matter of law.” FED. R. CIV. P. 56(a). The

parties agree Louisiana law governs the dispute. 

III

Steadfast contends it properly reserved its rights to assert the watercraft

exclusion as a defense to coverage. We address the issue of Steadfast’s

reservation of rights letter before the question of waiver because under

Louisiana law waiver of noncoverage defenses is automatic and requires no

showing of prejudice where the insurer assumed the insured’s defense without

first issuing a reservation of rights letter. See Steptore, 643 So. 2d at 1216. 

Sosebee contends the district court erred in holding Steadfast’s February

23, 2009 letter reserved its rights under the watercraft exclusion. Sosebee

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contends Steadfast’s letter to Harvest on February 23, 2009 failed to reserve

Steadfast’s rights under the policy for two reasons. First, Sosebee asserts Zurich

authored the letter and reserved Zurich’s rights rather than Steadfast’s rights. 

Sosebee maintains the references to Zurich are not mere typographical errors. 

At the time of the boat accident, Harvest had policies with both Steadfast and

Zurich. Sosebee thus maintains that the letter did not sufficiently apprise

Harvest of which insurer was waiving its rights with respect to which policy. 

Second, Sosebee cites a Sixth Circuit case for the proposition that a reservation

of rights that only refers to an investigation of an accident will not function as

a reservation of rights with respect to a defense of the matter. Transamerica

Ins. Group v. Beem, 652 F.2d 663, 666–67 (6th Cir. 1981). According to the

court in Transamerica, if the initial letter does not mention a defense, the

insurer must issue a second reservation of rights letter if it undertakes to defend

the insured. Id. 

Under Louisiana law, an insurer can waive any provision of an insurance

contract even if it has the effect of bringing within coverage risks originally

excluded under the policy. Steptore, 643 So. 2d at 1216. If an insurer with

knowledge of facts indicating noncoverage assumes an insured’s defense without

first reserving its rights to assert a noncoverage defense, the insurer waives its

right to assert the defense. Id. If an insurer assumes an insured’s defense with

knowledge of facts indicating noncoverage without first obtaining a non-waiver

agreement, the insured may assume the insurer is acting in the insured’s best

interest with respect to coverage defenses the insurer has seemingly

relinquished. Arceneaux v. Amstar Corp., 66 So. 3d 438, 451 (La. 2011). Thus,

“the insurer’s notice of its intent to avail itself of the defense of noncoverage

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must be timely.” Scottsdale, 1999 WL 130633, at *3. Courts must apply waiver

principles stringently to prevent conflicts of interest between insurer and

insured that could potentially affect legal representation. Steptore, 643 So. 2d

at 1216. Courts should not, however, require overly technical or talismanic

language for insurers to effectively reserve their rights. See F.D.I.C. v. Duffy, 47

F.3d 146, 151 (5th Cir. 1995) (rejecting assertion that insurer must state in

reservation of rights that insurer “reserved its rights to void the policy”). 

Steadfast reserved its watercraft exclusion defense through its letter to

Harvest on February 23, 2009. The letter unambiguously refers to the policy

that Steadfast issued to Harvest, cites the watercraft exclusion in the policy, and

reserves rights under the exclusion. Even though Steadfast’s February 23, 2009

letter to Harvest was on Zurich’s letterhead, Zurich signed it, and the letter

mentioned Zurich’s name multiple times, the letter nevertheless put Harvest on

notice that Steadfast was reserving its rights under the policy listed in the letter. 

The letter referred to the policy issued by “Steadfast Insurance Company” and

listed the policy number and dates of coverage. The letter reproduced verbatim

the watercraft exclusion from Steadfast’s policy. The letter did not include any

reference to policies issued by Zurich and the letter referenced the lawsuit

against Harvest by name. The letter stated Zurich would proceed with the

“investigation of the case and allegations subject to a full [r]eservation of

[r]ights.” Because Louisiana follows a functional approach to the reservation of

rights and we have rejected requirements for technical language, see Duffy, 47

F.3d at 151, the fact that Steadfast did not explicitly state it was reserving its

rights with respect to the defense of Harvest did not render the reservation of

rights void once Steadfast undertook to defend Harvest. Therefore, Sosebee’s

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contention that Steadfast failed to reserve its rights with respect to the

watercraft exclusion is without merit. 

IV

Because we hold Steadfast validly reserved its right to assert the

watercraft exclusion, we must now address whether Steadfast waived its

reservation of rights. Though Steadfast concedes Sosebee has standing under

the Louisiana Direct Action Statute to raise the issue of waiver, our waiver

analysis is complicated by the fact Harvest, not a party to this case, is currently

in bankruptcy. Moreover, Harvest was in Chapter 11 bankruptcy at all times

relevant to Sosebee’s claim that (1) Steadfast engaged in conduct inconsistent

with asserting a noncoverage defense and (2) Steadfast’s inconsistent conduct

prejudiced Harvest. The Louisiana Direct Action Statute explicitly states that

when an insured is in bankruptcy, an injured person or his survivors may bring

an action directly against the insurer without joining the insured. LA. REV.

STAT. § 22:1269(B)(1) (Supp. 2012). We have held a direct action claimant may

assert waiver even where the insured is not a party to the litigation and has

received a discharge in bankruptcy. Duffy, 47 F.3d at 149–50; F.D.I.C. v. Duffy,

835 F. Supp. 307, 308, n.1 (E.D. La. 1993), aff’d, 47 F.3d 146 (5th Cir. 1995)

(“Duffy received a discharge in bankruptcy, which relieved him of any potential

liability . . . . Hence the sole defendant remaining in this proceeding is Duffy’s

alleged insurer”). Whether an insurer may waive its coverage defenses through

its conduct in a direct action suit in which the insured is not a party while the

insured is in bankruptcy is, however, a question of first impression. 

A

In order to determine if Steadfast waived its noncoverage defenses vis-à10

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vis Harvest through its conduct in this case we must we must examine (1) the

protections Louisiana Direct Action statute provides to Sosebee and (2) the

protections the Bankruptcy Code provides to Harvest while it is in Chapter 11

bankruptcy. 

The purpose of Louisiana’s Direct Action statute is to safeguard the rights

of injured persons. Duffy, 47 F.3d at 150. The Louisiana direct action statute

creates a “contractual relationship which inures to the benefit of any and every

person who might be negligently injured by the insured as completely as if such

injured person had been specifically named in the policy.” Id. (quoting Shockley

v. Sallows, 615 F.2d 233, 238 (5th Cir. 1980)). Section 655 of Title 22, Louisiana

Revised Statutes, provides in part: 

A. No policy or contract of liability insurance shall be issued or

delivered in this state, unless it contains provisions to the effect

that the insolvency or bankruptcy of the insured shall not release

the insurer from the payment of damages for injuries sustained or

loss occasioned during the existence of the policy . . .

B. (1) The injured person or his survivors or heirs . . . shall have

a right of direct action against the insurer within the terms and

limits of the policy . . . however, such action may be brought

against the insurer alone only when at least one of the following

applies:

(a) The insured has been adjudged bankrupt by a court of

competent jurisdiction or when proceedings to adjudge an

insured bankrupt have been commenced before a court of

competent jurisdiction . . . .

LA. REV. STAT. § 22:1269 (Supp. 2012). The plain language of the statute evinces

Louisiana’s intent for the insolvency of the insured not to “release the insurer

from the payment of damages” to injured parties. Id. Section 22:1269 is crafted

to protect Louisiana’s vital interest in liability insurance that covers injuries to

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people in the state. Watson v. Emp’rs Liab. Assur. Corp., 348 U.S. 66, 73 (1954). 

The Supreme Court held even where an insurance contract expressly prohibited

direct actions before a determination of the insured’s liability, Louisiana’s

interest in protecting injured parties under Section 22:1269 overrode

Massachusetts’s interest in enforcing its contract rules. Watson, 348 U.S. at

72–73 (holding Louisiana direct action did not deny due process to foreign

liability insurer even where contract of insurance prohibited direct action and

was drafted and executed in Massachusetts). 

The Louisiana Supreme Court has held that “the direct action statute does

not create an independent cause of action against the insurer, it merely grants

a procedural right of action against the insurer where the plaintiff has a

substantive cause of action against the insured.” Descant v. Adm’rs of Tulane

Educ. Fund, 639 So. 2d 246, 249 (La. 1994). Under Section 22:1269, insurers may

raise any defenses that arise from the nature of the obligation, that are personal

to the insurer, or “that are common to all the solidary obligors.” Id. 249–50. 

Insurers may not, however, raise defenses to liability that are personal to the

insured, such as the fact the insured is in bankruptcy. Id. at 250 n.9. Thus, if

there is coverage for Sosebee’s claim, the fact Harvest is in bankruptcy should not

affect Steadfast’s obligation to pay on the claim. This does not mean Steadfast

may not raise the fact Harvest is in bankruptcy as a defense to waiver. The

question of waiver is, of course, antecedent to coverage. 

Because Harvest has been in Chapter 11 bankruptcy at all times relevant

to Sosebee’s claim of waiver, we must consider how the protections of bankruptcy

might affect our waiver analysis. Chapter 11 provides robust protections to

debtors while bankruptcy is ongoing, but strikes “a balance between a debtor’s

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interest in reorganizing and restructuring its debts and the creditors’ interest in

maximizing the value of the bankruptcy estate.” Florida Dept. of Revenue v.

Piccadilly Cafeterias, Inc., 554 U.S. 33, 51 (2008) (internal citations omitted). 

Unlike Chapter 7 bankruptcy, the goal of which is liquidation of the debtor’s

assets, Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd., 507 U.S. 380, 389

(1993), the goal of Chapter 11 bankruptcy is to marshall the debtor’s resources

“to provide the best possible opportunity for a successful rehabilitation which will

ultimately redound to the benefit of all creditors.” In re Colortex Indus., Inc., 19

F.3d 1371, 1377 (11th Cir. 1994); accord Pioneer Inv. Servs., 507 U.S. at 389. 

When a debtor files for bankruptcy, an estate is created under 11 U.S.C.

§§ 541, 541(a) (2006). Except as otherwise provided in the statute, the estate

includes “all legal or equitable interests of the debtor in property as of the

commencement of the case.” 11 U.S.C. § 541(a)(1). We have held that while

insurance policies are generally property of the estate, the proceeds of liability

insurance policies, unlike first party policies, generally are not. 

[The] definition [of the bankruptcy estate] is intended to be

broadly construed, and courts are generally in agreement that an

insurance policy will be considered property of the estate. Insurance

policies are property of the estate . . . . Any rights the debtor has

against the insurer, whether contractual or otherwise, become

property of the estate.

Acknowledging that the debtor owns the policy, however, does

not end the inquiry. The question is not who owns the policies, but

who owns the liability proceeds . . . .

The overriding question when determining whether insurance

proceeds are property of the estate is whether the debtor would have

a right to receive and keep those proceeds when the insurer paid on

a claim . . . .

Examples of insurance policies whose proceeds are property of

the estate include casualty, collision, life, and fire insurance policies

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in which the debtor is a beneficiary. Proceeds of such insurance

policies, if made payable to the debtor rather than a third party such

as a creditor, are property of the estate and may inure to all

bankruptcy creditors. But under the typical liability policy, the debtor

will not have a cognizable interest in the proceeds of the policy. Those

proceeds will normally be payable only for the benefit of those harmed

by the debtor under the terms of the insurance contract.

In re Edgeworth, 993 F.2d 51, 55–56 (5th Cir. 1993) (footnotes and internal

quotation marks omitted); accord In re Sfuzzi, Inc., 191 B.R. 664, 666 (Bankr.

N.D. Tex. 1996) (holding liability insurance proceeds not property of bankruptcy

estate). Only in the limited instance of a mass tort action where hundreds or

thousands of claims against the debtor’s insurer might exhaust insurance

proceeds and thus threaten the debtor’s estate over and above limits of liability

insurance policies have courts held the proceeds of liability insurance policies are

property of the bankruptcy estate. E.g., MacArthur Co. v. Johns-Manville Corp.,

837 F.2d 89, 92 (2d Cir. 1988), (“Manville’s insurance policies and their proceeds

were substantial property of the Manville estate which will be diminished if and

to the extent that third party direct actions against the insurance carriers result

in plaintiffs’ judgments.”) (internal citation and quotation marks omitted);

Edgeworth, 993 F.2d at 56 n.21 (“In the mass tort context, the decisions by

several courts to include the proceeds as property of the estate appear to be

motivated by a concern that the court would not otherwise be able to prevent a

free-for-all against the insurer outside the bankruptcy proceeding.”). At the time

Harvest filed for bankruptcy, all of the twenty largest unsecured claims against

Harvest were for “Vendor/Trade Debt”, not tort liability. Sosebee’s personal

injury claim against Harvest is the result of an isolated accident to which the

mass tort precedents are inapplicable. There is no evidence that numerous tort

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claims threaten the limits of Harvest’s liability insurance or that Steadfast needs

to be protected from a siege of tort claims under Harvest’s policy. Therefore, the

proceeds of the policies at issue in this case are not the property of Harvest’s

bankruptcy estate. 

Because liability insurance proceeds are generally not property of the

bankruptcy estate, if a direct action claimant succeeds in obtaining a judgment

against an insurer, the claimant recovers from the insurer directly rather than

from the bankruptcy estate. See Landry v. Exxon Pipeline Co. 260 B.R. 769, 779

(Bankr. M.D. La. 2001). 

[R]ecovery against the Insurers causes a dollar for dollar reduction

of any obligation on the part of [the debtor] to repair any damage

suffered by the Plaintiffs. In turn, the value of the remaining

claims against the assets of [the debtor] increases by the amount of

the diminished liability of [the debtor]. Recovery against the

Insurers lessens the sum total of claims for which the estate is or

may be liable, while at the same time potentially increases the pro

rata recovery of creditors that are situated, as a matter of priority,

the same as the Plaintiffs’ claims (or that are situated in a position

of lesser priority), but are not afforded by applicable

non-bankruptcy law the right to liability insurance coverage. 

Id. Thus, in this direct action case Sosebee is seeking recovery from the proceeds

of the insurance policy, not from Harvest’s bankruptcy estate. 

Pursuing a direct action claim against a liability insurer is not the only

recovery option available to a personal injury claimant when the insured is in

bankruptcy: a personal injury claimant may make a claim against the debtor in

the bankruptcy case. See Sikes v. Global Marine, Inc., 881 F.2d 176 (5th Cir.

1989). Sosebee has also filed a claim against Harvest in the bankruptcy case. 

If, as in this case, the debtor objects to the claim, the court must quantify the

claim by lifting the bankruptcy stay so that a personal injury action may

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proceed. See, e.g., id. (lifting bankruptcy stay to permit personal injury action

to proceed). To discourage forum shopping and prevent a party “from receiving

a windfall merely by reason of the happenstance of bankruptcy,” state law

applies in the adversary proceeding unless an overriding bankruptcy policy

requires otherwise. Butner v. United States, 440 U.S. 48, 55 (1979) (citing Lewis

v. Mfrs. Nat’l Bank, 364 U.S. 603, 609 (1961)). If the personal injury claimant

succeeds in proving the debtor is liable on the claim and there is liability

insurance coverage, the insurer will pay the claimant directly, rather than the

bankruptcy estate. See Landry, 260 B.R. at 800. The money paid under the

liability policy is the money of the insurance company. Id. If, however, the court

finds the debtor is liable but there is no insurance coverage, the claimant must

seek a payout from the bankruptcy estate. See Fogel v. Zell, 221 F.3d 955, 960

(7th Cir. 2000) (citing 11 U.S.C. § 101(10)) (tort victim is creditor of bankruptcy

estate if victim had claim against bankruptcy estate that arose no later than the

filing of petition). Because tort victims are only unsecured creditors, they are

disadvantaged vis-à-vis the debtor’s secured creditors who have a higher priority

in the payout. See 11 U.S.C. §§ 725–26, 507 (2006); see, e.g., In re Chance Indus.,

Inc., 367 B.R. 689, 696 (Bankr. D. Kan. 2006) (“No funds were recovered and

available for distribution to unsecured creditors.”). Thus, if there is no coverage

for Sosebee’s claim, Sosebee must seek a payout from the bankruptcy estate. In

Harvest’s bankruptcy, the claims against the estate amount to tens of millions

of dollars more than the assets of the estate, and the amount Harvest owes to

secured creditors dwarfs the amount Harvest owes to unsecured creditors. If

there is no coverage, Sosebee may receive only a fraction of the amount Harvest

owes it from the bankruptcy payout. Conversely, if there is insurance coverage,

Sosebee would be able to recover the judgment amount directly from Steadfast,

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see Landry, 260 B.R. at 800, leaving more money in the bankruptcy estate for 

Harvest’s other creditors. 

When a debtor files for bankruptcy under Chapter 11, an automatic stay

goes into effect under 11 U.S.C. § 362 and suspends nonbankruptcy courts’

authority to continue judicial proceedings then pending against the debtor

including 

(1) the commencement or continuation. . . [of a] proceeding against

the debtor that was or could have been commenced before the

commencement of the case . . . 

(3) any act to obtain possession of property of the estate or of

property from the estate or to exercise control over property of the

estate

(6) any act to collect, assess, or recover a claim against the debtor

that arose before the commencement of the case under this title

11 U.S.C. § 362. This stay goes into effect without any action required by the

bankruptcy court. 3 Collier on Bankruptcy, ¶ 362.02 (Alan N. Resnick & Henry

J. Sommer eds., 16th ed. 2011). Parties need not receive formal service of

process in order to be subject to the stay. Id. Unless a court grants relief from

the stay, the stay continues until the property at issue is no longer property of

the bankruptcy estate or until the bankruptcy case is closed or dismissed. 11

U.S.C. § 362(c). 

The automatic stay does not generally apply to third parties such as 

debtors’ codefendants or guarantors, Travelers Indem. Co. v. Bailey, 557 U.S.

137, 166 (2009) (Stevens, J., dissenting), but some courts have held the stay

applies to the debtor’s insurers. 3 Collier on Bankruptcy, ¶ 362.03 (Alan N.

Resnick & Henry J. Sommer eds., 16th ed. 2011). In MacArthur Co. v.

Johns-Manville Corp., the Second Circuit held the liability insurance proceeds

constituted property of the estate and therefore actions by third parties against

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debtor-insurers were automatically stayed when the debtor filed its bankruptcy

petition. 837 F.2d at 92 (citing In re Johns-Manville Corp., 40 B.R. 219

(S.D.N.Y. 1984). Where a court finds insurance proceeds to be property of the

bankruptcy estate the automatic stay will apply to direct actions against

insurers, see 11 U.S.C. § 362(3), but where the proceeds of the insurance policies

are not property of the bankruptcy estate, direct actions against insurers will not

be affected by the stay. See 11 U.S.C. § 362. Therefore, because the proceeds

from Steadfast’s policy are not property of Harvest’s bankruptcy estate, the

automatic stay does not apply to the direct action in this case. Because the

automatic stay did, however, apply to Sosebee’s claim against Harvest in the

2008 case, that case has remained stayed since Harvest filed for bankruptcy and

the court cannot lift the stay until the bankruptcy court closes or dismisses

Harvest’s bankruptcy case. 

B

Also relevant to Sosebee’s claim of waiver is the possible res judicata or

collateral estoppel effect a judgment in this case would have on Sosebee’s claim

in the bankruptcy case. 

Federal courts look to the law of state in which the federal diversity court

sat to determine the preclusive effect of a federal diversity judgment. Hartsel

Springs Ranch of Colo., Inc. v. Bluegreen Corp., 296 F.3d 982, 986 (10th Cir.

2002). If claim preclusion applies in a bankruptcy case the judgement in the

prior action would be dispositive as to the existence and amount of the debtor’s

obligation to the particular creditor, see, e.g., In re Comer, 723 F.2d 737, 739–40

(9th Cir. 1984), but not as to the dischargeability of the debt. Brown v. Felson,

442 U.S. 127, 129 (1979). “The four prerequisites for the application of res

judicata are: (1) the parties must be identical in both suits, or in privity; (2) the

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prior judgment must have been rendered by a court of competent jurisdiction; (3)

there must be a final judgment on the merits; and (4) the same claim or cause

of action must be involved in both cases.” Schneidau v. Vanderwall, 17 So. 3d

61, 64 (La. Ct. App. 2009); LA. REV. STAT. ANN. § 13:4231. In this case Harvest

is not a party, so for claim preclusion to apply there must be privity between

Steadfast and Harvest. Louisiana courts have interpreted privity to mean “a

person whose liability is purely derivative from the act of another person, or a

person who is the primary actor in creating this kind of liability, such as in cases

of employer-employee and lessor-lessee relationships.” Baker v. WhelessDrilling

Co., 303 So. 2d 511, 515 (La. Ct. App. 1974). Insurers may be in privity with the

insured when the injured party sues the under the Louisiana Direct Action

Statute, but only where the policy limits are not exceeded and the interests of

the insurer and the insured are aligned. See Cornish v. Freeman, 451 So. 2d

148, 150 (La. Ct. App. 1984); Roland v. Owens, 786 So. 2d 167, 170 (La. Ct. App.

2001) (“The insured and the insurer not only share the same quality as parties,

but in essence their identities are virtually merged into one, to the extent of the

policy limits.”) (emphasis added) (internal citation and quotation marks

omitted). Because Steadfast has asserted policy defenses in this case, there is

no credible argument that the interests of Harvest and Steadfast are sufficiently

aligned to establish privity for purposes of res judicata. Thus, claim preclusion

will not apply to Sosebee’s claim against Harvest in the bankruptcy case. 

Issue preclusion will likewise not bar Harvest from relitigating the issues

decided in this case in the bankruptcy case. Louisiana requires four elements

to be met “before an earlier valid and final judgment will preclude relitigation

of an issue: (1) the parties must be identical; (2) the issue to be precluded must

be identical to that involved in the prior action; (3) the issue must have been

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actually litigated; and (4) the determination of the issue in the prior action must

have been necessary to the resulting judgment.” Sevin v. Parish of Jefferson,

632 F. Supp. 2d 586, 594–95 (E.D. La. 2008) (internal citations and quotation

marks omitted). Because Steadfast and Sosebee are not identical parties,

collateral estoppel will not prevent relitigation of the waiver issue in the

adversary action. Unlike the federal issue preclusion rules, Louisiana still

requires mutuality for issue preclusion. Williams v. City of Marksville, 839 So.

2d 1129, 1132 (La. Ct. App. 2003). Therefore, neither claim preclusion nor issue

preclusion will prevent Harvest from relitigating the issues decided in this case. 

C

Waiver requires (1) misleading conduct on the part of the insurer and (2)

prejudice to the insured. Emery, 49 So. 3d at 21; Scottsdale, 1999 WL 130633,

at *5. The burden of proving waiver is on the party claiming waiver. Duffy, 47

F.3d at 150. 

i

Steadfast contends the district court erred in holding Steadfast’s conduct

was so inconsistent with asserting the exclusion as a defense as to reasonably

lead Harvest to believe Steadfast relinquished its right to assert the exclusion. 

Steadfast claims it never informed Harvest it was withdrawing its reservation

of rights or covering Sosebee’s claims. Steadfast admits three of its insurance

adjusters misinterpreted Steadfast’s policy as covering Harvest’s claims, but

maintains Steadfast never communicated the mistaken interpretation to

Harvest. Steadfast maintains Louisiana case law has restricted waiver to cases

where the insurer fails to issue a reservation of rights before providing a defense

to the insured. 

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Steadfast extensively relies on F.D.I.C. v. Duffy, 47 F.3d 146 (5th Cir.

1995) for the proposition that an insurer cannot waive its reservation of rights

through delay in asserting policy defenses against the injured party. In Duffy,

we examined the issue of whether an insurer waived its defense that the policy

was void ab initio. Id. at 150. Steadfast cites language from Duffy for the

proposition that waiting four years after the grounds for a defense arises to

assert a noncoverage defense does not place an insurer in danger of waiving its

reservation of rights. Duffy does not support this proposition. The insurer in

Duffy waited four years to raise its affirmative defense because the court

dismissed the suit sua sponte before the insurer had the opportunity to file

responsive pleadings. F.D.I.C. v. Duffy, 835 F. Supp. 307, 325 (E.D. La. 1993),

aff’d, 47 F.3d 146 (5th Cir. 1995). The insurer only had the opportunity to assert

its noncoverage defense four years later on remand, at which time the insurer

immediately filed responsive pleadings denying coverage. Id. Therefore Duffy

does not support Steadfast’s contention that voluntarily waiting years to assert

a noncoverage defense in a direct action suit could never waive an otherwise

valid reservation of rights. 

In Steptore, the Louisiana Supreme Court held that for an insurer to waive 

a provision of an insurance contract through its inconsistent conduct the insurer

must either have “an actual intention to relinquish the right” or the conduct

must be “so inconsistent with the intent to enforce the right so as to induce a

reasonable belief that the right has been relinquished.” Steptore, 643 So. 2d at

1216; Emery, 49 So. 3d at 21 (rejecting contention that insured could not waive

coverage defense through subsequent conduct after issuing reservation of rights

letter). An insurer may waive a reservation of rights unintentionally, even

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without explicitly withdrawing its reservation of rights. Steptore, 643 So. 2d at

1216. 

Sosebee’s claim of waiver revolves entirely around Steadfast’s conduct in

this suit, to which Harvest is not a party. Both parties are in agreement that

Steadfast’s delay in asserting the watercraft exclusion as a defense in this case

was the result of multiple Steadfast policy adjusters misreading the policy. 

Steadfast did not act with a knowing intention to relinquish its right to assert

the watercraft exclusion. 

Because Steadfast had no intention to relinquish its right to assert the

exclusion, we must examine whether Steadfast’s conduct was sufficiently

inconsistent with asserting the exclusion to induce a reasonable belief in Harvest

that Steadfast had relinquished its right to assert the exclusion. Louisiana law

implies a subjective and an objective component to this inquiry. See Arceneaux,

66 So. 3d at 450–51 (holding waiver requires “conduct so inconsistent with the

intent to enforce the right so as to induce a reasonable belief that the right has

been relinquished.”) (emphasis added). The requirement that the insured’s

belief be reasonable forms the objective component of the inquiry. The subjective

component of the inquiry requires the insurer’s conduct to actually induce or

cause the insured’s belief that the insurer relinquished its right. 

Regarding the objective component, Sosebee alleges Steadfast’s conduct in

this case was inconsistent with an intention to assert the watercraft exclusion

as a defense vis-à-vis Harvest. In Steadfast’s initial answer to Sosebee,

Steadfast pled no affirmative policy defenses. Only after its right to amend its

answer as a matter of course passed, see FED. R. CIV. P. 15(a)(1), did Steadfast

move to amend its answer to add policy defenses. When Sosebee asked Steadfast

to produce any insurance policies that would provide coverage for Sosebee’s

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injuries, Steadfast produced the applicable policies covering Harvest. Although

a judgment in this case would have no preclusive effect in the bankruptcy case,

Harvest might have viewed failure to timely assert the watercraft exclusion in

this case as inconsistent with an intention to assert the exclusion as a defense

in future litigation. Whether Steadfast’s actions in this case are sufficiently 3

inconsistent with asserting the watercraft exclusion as a defense to satisfy the

objective test is a close question. We need not resolve this question because the

subjective component of our inquiry clearly does not support a claim of waiver. 

Regarding the subjective component, the deposition testimony of Harvest’s

representative, Brian Daigle, never references Steadfast’s conduct in this case

as a reason for Harvest’s belief that Steadfast was not asserting policy defenses. 

Mr. Daigle suggests Harvest believed Steadfast was covering Sosebee’s claim

because (1) it read the February 23, 2009 reservation of rights letter as only

pertaining to Harvest’s policies with Zurich and (2) Steadfast never informed

Harvest that Steadfast would not be providing coverage for Sosebee’s claim. Mr.

Daigle did not claim Steadfast employees informed HarvestthatSteadfast would

be covering Sosebee’s claim, only that Steadfast employees never informed

Harvest that Steadfast would not be covering Sosebee’s claim. As discussed in

our analysis of the February 23, 2009 reservation of rights letter, that letter

Taking such an inconsistent position could give rise to a claim of judicial estoppel. See, 3

Rissetto v. Plumbers & Steamfitters Local 343, 94 F.3d 597, 600 (9th Cir. 1996) (“Judicial

estoppel . . . precludes a party from gaining an advantage by taking one position, and then

seeking a second advantage by taking an incompatible position.”). We have no occasion here

to guess what advantage Steadfast might have gained by intentionally failing to assert the

watercraft exclusion in this case, losing, and then raising the exclusion in the bankruptcy case. 

We make this point only to acknowledge that Steadfast failing to timely assert the watercraft

exclusion in this case could induce a belief that it did not intend to raise the exclusion as a

defense in future litigation. 

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references Harvest’s policy with Steadfast by number and reproduces verbatim

the text of the watercraft exclusion. In this letter Steadfast properly reserved

its rights to assert the watercraft exclusion as a defense. Once Steadfast

reserved its rights under the watercraft exclusion, it did not need to again

inform Harvest that it might not be covering Sosebee’s claim. Mr. Daigle’s

deposition strongly suggests that it was a careless reading of the reservation of

rights letter, rather than Steadfast’s conduct in this case that misled Harvest as

to coverage. To establish waiver Louisiana requires that the insured be misled

about coverage because of the insurer’s inconsistent conduct. See Arceneaux, 969

So. 2d at 767 (citing Steptore, 643 So. 2d at 1216). Mr. Daigle’s deposition

testimony was sufficiently clear on this point as to leave no issue of material fact

in dispute: Harvest’s understanding that Steadfast would cover Sosebee’s claim

was not related to Steadfast’s conduct in this case. Thus, the district court erred

in granting summary judgment to Sosebee and in denying to summary judgment

to Steadfast. 

ii

Even if Sosebee had produced sufficient evidence of inconsistent conduct

to survive summary judgment, Sosebee produced no evidence that Steadfast’s

conduct in this case prejudiced Harvest. 

Steadfast contends the district court erred in holding Steadfast’s conduct

prejudiced Harvest. In support of this contention Steadfast states that Harvest

was never a defendant in this case and Sosebee’s case against Harvest is stayed

pending the resolution of Harvest’s bankruptcy case. Steadfast maintains its

conduct could not have prejudiced Harvest when Sosebee has no active lawsuits

pending against Harvest. Steadfast stresses Harvest provided the information

with respect to the vessel involved in the accident prior to the time Steadfast

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assumed Harvest’s defense. Thus, Steadfast asserts the documents and fact

witnesses Harvest provided to Steadfast after Steadfast assumed its defense did

not give Steadfast any information Steadfast could use against Harvest. 

The party asserting waiver must prove the insurer’s inconsistent conduct

prejudiced the insured. Scottsdale, 1999 WL 130633, at *5. If the injured party

raises the issue of waiver pursuant to a claim under the Louisiana Direct Action

statute, the relevant question remains whether the insurer’s conduct prejudiced

the insured. See Todd v. Steamship Mut. Underwriting Ass’n, No. 08-1195, 2011

WL 1226464, at *6 (E.D. La. Mar. 28, 2011) (citing LA.REV.STAT. § 22:1269(B)(1)

(2009))(holding direct action plaintiff has no independent cause of action against

insurer but merely stands in shoes of insured). The question of whether an

insurer’s conduct prejudiced the injured party is irrelevant to the question of

whether the insurer waived its reservation of rights vis-à-vis the insured. 

This appeal raises the question of whether the party asserting waiver may,

under Louisiana law, prove prejudice to the insured without showing actual

harm. Louisiana case law addressing the prejudice prong of waiver does not

clarify whether the insured must have detrimentally relied on the insurer’s

misleading conduct to prove prejudice. Cf. Tudor Ins. Co. v. First Advantage

Litig. Consulting, LLC, No. 11 CIV. 3567 KBF, 2012 WL 3834721, at *11

(S.D.N.Y. Aug. 21, 2012) (citing Federated Dep’t. Stores, Inc. v. Twin City Fire

Ins. Co., 28 A.D. 3d 32, 37 ( N.Y. App. Div. 2006))(“Moreover, ‘a key element of

common-law estoppel’ is a showing by the insured of prejudice, or detrimental

reliance, from the belated disclaimer.”); Pennsylvania Nat. Mut. Cas. Ins. Co. v.

Kitty Hawk Airways, Inc., 964 F.2d 478, 480 (5th Cir. 1992) (requiring insured

show actual harm to prove prejudice under Texas law). In Arceneaux, the court

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discusses but does not decide whether actual harm is required to prove the

insured was prejudiced. 969 So. 2d at 767 (citing 14 Couch on Ins.3d §§

202:67-69) (some jurisdictions hold “the loss of the right of the insured to control

and manage the defense is, in itself, prejudice without any further proof.”)

(internal quotation marks omitted). Keeping in mind this ambiguity, the central

point of our prejudice inquiry is whether insurer’s conduct interfered with the

insured’s rights. Lee R. Russ, et. al, 14 Couch on Ins. § 202:70 (3d ed. 2008).

(“Whether specific detriments, or combinations thereof, constitute prejudice is

extremely fact specific, rendering it difficult or impossible to provide any black

letter rules of law. Practitioners must review each factual pattern to determine

whether the insurer’s actions or inactions interfered with the insured’s rights.”). 

Louisiana case law suggests there are two ways to prove an insurer’s

misleading conduct prejudiced the insured. First, an insurer may prejudice an

insured by depriving the insured of the opportunity to assume and manage its

own defense. Arceneaux, 66 So. 3d at 452. Louisiana case law does not clearly

define the contexts in which this form of prejudice may occur. 

4

[A]n insurers actions in continuing to defend an insured after it

acquired information relevant to a potential defense against

coverage, may be thought to imply an acknowledgment of

coverage despite that defense. The jurisprudence has found an

insurers belated disclaimer prejudicial because the insured lost

its opportunity to assume and/or manage its own defense as a

direct result of its reliance on the insurers assumption of the

defense. However, there are no universally accepted rules. 

Arceneaux v. Amstar Corp., 969 So. 2d at 768 (internal citations omitted). 

The two instances in which Louisiana case law mentions this form of prejudice are in 4

contexts where the insurer never issued a reservation of rights. Arceneaux, 66 So. 3d at 452;

Arceneaux, 969 So. 2d at 768. 

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Second, an insurer prejudices an insured if the insured was actually harmed by

the insurer’s inconsistent conduct. See Scottsdale, 1999 WL 130633, at *5. In

Scottsdale the insured’s claim of waiver was not based on delay in asserting a

policy defense, but based on a claimed conflict of interest. Id. at *4. The court

held the insurer indeed created a conflict of interest by retaining the same

attorney to represent itself and the insured even though the insurer raised policy

defenses. Id. at *5. Nevertheless the court held the insured was not prejudiced

by this conflict of interest because the insurer also defended the claim on the

merits and there was no evidence that the settlement was unfair to the insured. 

Id. 

Sosebee failed to show evidence either of Arceneaux or “real harm”

prejudice. Steadfast did not deprive Harvest of the opportunity to assume and

manage its own defense. Stephens & Grace did not begin representing Harvest

until after the district court stayed Sosebee’s claim against Harvest pursuant to

11 U.S.C. § 362. This case remained stayed the entire time Stephens & Grace

was representing Harvest. While it is true that Sosebee has filed a claim against

Harvest in the bankruptcy case that may evolve into an adversary proceeding,

Harvest’s own counsel represents Harvest in the bankruptcy case. Further,

neither claim preclusion nor issue preclusion will apply to prevent relitigation

in the impending adversary proceeding of the coverage issue or the merits of

Sosebee’s claim against Harvest. Therefore, Harvest will have an opportunity

to defend itself both from Sosebee’s personal injury claim and Steadfast’s claim

of waiver. The only evidence Sosebee provided of prejudice to Harvest was that

Harvest cooperated with Steadfast to aid Steadfast in defending Sosebee’s claim

against Steadfast by making its personnel available to Steadfast for questions,

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allowing Stephens & Grace to represent a Harvest employee in a deposition

taken by the owner and operator of the fishing boat, and providing discovery

material to Steadfast as an aligned party rather than as an adversarial party. 

Sosebee provided no evidence that any of these actions actually harmed Harvest

or will somehow detrimentally effect Harvest in its attempt to reorganize or in

its future negotiations with Sosebee as unsecured creditor in the bankruptcy

case. In short, Sosebee did not provide evidence that any of the aid Harvest

provided to Steadfast in this case actually harmed Harvest’s interests. We do

not have occasion to hold that if an insured is in Chapter 11 bankruptcy it may

never be prejudiced by an insurer’s conduct in a direct action suit. We do,

however, hold Sosebee did not provide evidence that Harvest was actually

prejudiced by Steadfast’s inconsistent conduct in this case. Thus, the district

court erred in denying summary judgment to Steadfast and granting summary

judgment to Sosebee. 

V

For these reasons, we REVERSE and render summary judgment for

Steadfast. 

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