1 The 1988 renewal application in the record, unlike the 1986 or 1987 applications, does not

inquire as to whether the attorney knows of any circumstance, act, error, or omission that could

result in a malpractice claim. United States Court of Appeals,

Fifth Circuit.

No. 92-3851.

The HOME INSURANCE COMPANY, Plaintiff-Appellant,

v.

Michael J. MATTHEWS, et al., Defendants-Appellees.

Aug. 20, 1993.

Appeal from the United States District Court for the Middle District of Louisiana.

Before WISDOM, DAVIS, and SMITH, Circuit Judges.

WISDOM, Circuit Judge.

The question in

t his case is whether an insurance company waived its right to void a legal

malpractice policy because the insured misrepresented his knowledge of malpractice claims against

him. In this diversity case, Louisiana authorities compel this Court to hold that the insurer has waived

its right. We AFFIRM the judgment of the district court.

I.

Michael J. Matthews, a Louisiana lawyer and a notary public, applied to The Home Insurance

Company (Home Insurance) for malpractice insurance. A policy was issued to him on August 28,

1986 for one year. A second application to renew the policy was signed July 3, 1987, and this policy

was also for one year. Both the original policy application and the second application contained the

following question:

Does any lawyer in question 5(A) [Matthews] know of any circumstance, act, error, or

omission that co uld result in a professional liability claim against him or his predecessor in

business?

On both occasions, Matthews answered this question "No".

On September 28, 1988, Matthews sought to renew his policy for one year. He attached to

his renewal application 1 sixteen supplemental claims forms relating to settlement disputes with clients.2 R.S. 22:636.4 D.(1).

Because of the many attached claims, Home Insurance declined to renew Matthews' policy. It did

not, however, terminate the policy. Notice of non-renewal was mailed to Matthews on November

8, 1988.

Under Louisiana law, if a commercial insurance policy is not renewed, "coverage shall remain

in effect under the same t erms and conditions until sixty days after notice is mailed or delivered". 2

Home Insurance continued the policy during this period, and Matthews paid a pro-rated premium on

or about January 25, 1989.

The insurance contract in pertinent part provides:

If the company shall cancel or refuse to renew the policy for reasons other than the named

insured's non-payment of premiums and/or deductibles or non-compliance with the terms and

conditions of this policy, then the named insured upon payment of an additional premium as set forth herein shall have the option to extend the insurance afforded by this policy subject

otherwise to its terms, limit of liabilit y, exclusions and conditions, to ap ply to claims first

made against the insured during (a) 12 months, (b) 24 months, or (c) 36 months, as elected

by the named insured, following immediately upon the effective date of such termination, but

only by reason of any act, error or omission i n pro fessional services rendered before such

effective termination date and otherwise covered by this insurance.

Matthews purchased this optional reporting period for the 36 month term on or about January 25,

1989.

On July 11, 1989, Home Insurance sought a declaratory judgment that the policies and the

extended reporting period coverage be declared void ab initio based upon Matthews' negative answer

to the ques t io n of whether he knew of any reason to suspect that a malpractice claim could be

brought against him. Matthews had acted dishonestly in the practice of law. We need not document

his mult iple transgressions; Matthews pleaded guilty on June 20, 1988 to five counts of forgery and

five counts of felony theft of clients' funds. Two of the guilty pleas involved conduct that occurred

before Matthews signed the 1986 application, and two more involved conduct that occurred before

the 1987 renewal application. On October 27, 1988, the Louisiana Supreme Court disbarred

Matthews.

Matthews asserted an affirmative defense to Home Insurance's claim of no coverage. At trial,

the company made a mo t io n in limine to strike Matthews' affirmative defense because, Home3 Comment, Waiver and Estoppel in Louisiana Insurance Law

, 22 La.L.Rev. 202, 204 (1961)

("It is well established in Louisiana and elsewhere that acceptance of premium payments by an

insurer after receiving knowledge of facts creating a power of avoidance or privilege of forfeiture

constitutes a waiver of such power or privileges"). Insurance argued, Federal Rule of Civil Procedure 8(c) had n o t been complied with. The district

co urt denied this motion. At the close of Home Insurance's case-in-chief, Matthews mo ved fo r

judgment as a matter of law. The district court granted this motion and ruled that as a matter of law,

Home Insurance had waived its right to assert a defense to liabilit y based on Matthews' responses on

his insurance applications. This appeal followed.

II.

Federal Rule of Civil Procedure 8(c) requires that

In pleading to a preceding pleading, a party shall set forth affirmat ively accord and

satisfaction, arbitration and award, assumption of risk, contributory negligence, discharge in

bankruptcy, duress, estoppel, failure o f consideration, fraud, illegality, injury by fellow

servant, laches, license, payment, release, res judicata, statute of frauds, statute of limitations,

waiver, and any other matter constituting an avoidance or affirmative defense. When a party

has mistakenly designated a defense as a coun t erclaim or a counterclaim as a defense, the

co urt on terms, if justice so requires, shall treat the pleading as if there had been a proper

designation.

Matthews raised an affirmative defense in the pre-trial stipulations of April 13, 1992:

1. The Home is equitably estopped by its acts and/or the acts of its agent, Gilsbar, Inc., from

declaring the policy it issued to Matthews null and void ab initio, since The Home extended

Matthews' reporting period and his policy period for minimal premiums after The Home and

Gilsbar had been notified of sixteen claims pending against Matthews for his alleged failure

to disburse settlement proceeds to t his[sic] clients and/or for his alleged unauthorized

settlement of his clients' cases.

Matthews' defense, however, is not one of estoppel but waiver. Indeed, he perhaps realized

this when preparing the special jury instructions. There, under the general heading "Estoppel", part

a. is titled "Waiver". In the most frequently cited commentary on waiver and estoppel in Louisiana

insurance law, Matthews' defense that Home Insurance accepted premiums is discussed as waiver. 3

This commentary, however, acknowledges that, "Much confusion surrounds the principles of waiver

and estoppel in insurance law. Many courts have used the two terms interchangeably, while others

have considered waiver and estoppel as being complementary, that is, that waiver must be supported4 Comment at 211.

5 See e.g. Monroe Air Park No. 1 v. American Aviation & Gen. Ins. Co., 41 So.2d 795, 798-99

(La.App. 2 Cir.1949) (Even in this case, although the court's analysis is in terms of waiver, it uses

the word "estoppel" on one occasion).

6 Bonadona v. Guccione, 362 So.2d 740, 742 (La.1978).

7 Union National Bank v. Manhattan Life Insurance Co., 26 So. 800 (La.1899).

8 Dairy Engineering Corp. v. De-Raef Corp., 2 F.R.D. 378, 379 (W.D.Mo.1942).

9 American Motorists Ins. Co. v. Napoli, 166 F.2d 24, 26 (5th Cir.1948). by estoppel, or estoppel is the result of waiver ." 4 On t his very point of acceptance of premiums,

although many Louisiana courts analyze the problem in terms of w aiver, 5 Justice Tate (as he then

was) wrote for the Louisiana Supreme Court that, "under the circumstances here shown, the insurer

is estopped from denying liabilit y

... when it has accepted premiums with knowledge...." 6 Moreover,

in a case invo lving a misrepresentation by the insured which was later discovered by the insurer who

nevertheless chose to continue to receive premium payments, the Louisiana Supreme Court discussed

the issue in t erms of both waiver and estoppel. 7 Even Home Insurance which argues that it was

prejudiced by the failure of Matthews to designate the defence as waiver rather than estoppel, on one

occasion in its brief blurs the dist inct ion bet ween the two: "the doctrine of estoppel or waiver is

recognized as being founded upon equity...." (Brief at 13).

If we were concerned only with notice pleading under rule 8(b), this Court would excuse the

mislabelling on the principle that the rules "contemplate the greatest liberality in pleading". 8 The

words "set forth affirmat ively" in rule 8(c), however, would seem to demand more than mere notice.

This Court, in the early years under the regime of the new federal rules, held that the liberal spirit also

applied to rule 8(c): "Under our very liberal rules of pleading, although a plea of contributory

negligence must be a ffirmatively set forth, it need not be predicated upon extensive factual

allegations. A plea that simply states that complainant was guilty of contributory negligence, as in

the case at b ar, is sufficient." 9 In that case, the defendant had at least set forth the name of the

affirmative defense he was pleading. In this case Matthews pleaded estoppel when waiver was the

proper term. The Court of Appeals for the Second Circuit once noted in the context of an affirmative10 Doubleday & Co., Inc. v. Curtis, 763 F.2d 495, 502 (2nd Cir.1985) cert. dismissed 474 U.S.

912, 106 S.Ct. 282, 88 L.Ed.2d 247 (1985).

11 Allied Chemical Corp. v. Mackay, 695 F.2d 854, 855-6 (5th Cir.1983).

12 Bull's Corner Rest. v. Dir., Fed. Emer. Mgmt. Agcy., 759 F.2d 500, 502 (5th Cir.1985).

13 Tate v. Charles Aguillard Ins. & Real Est., 508 So.2d 1371, 1373 (La.1987).

14 Estoppel occurs when "a party has been induced to rely upon asserted facts or

representations and thereby moved or acted to his detriment, or in a manner he would not have

done but for his reliance upon such asserted facts or representations". Goodw in v. Federal Mut.

Ins. Co., 180 So. 662, 666 (La.App. 2 Cir.1938). Robbins Tire & Rubber v. Winnfield Retread,

577 So.2d 1189, 1991 (La.App. 2 Cir.1991) sets forth the three elements of equitable estoppel:

"(1) a representation by conduct or words; (2) justifiable reliance; and (3) a change of position to

one's detriment because of the reliance." defense that the pleading seemed "to state the defense of estoppel rather than waiver". 10 In that case,

however, the defendant merely pleaded bad faith; it was the district court which sua sponte raised

the affirmative defense, and the Court held that the lack of notice prejudiced the plaintiff.

In reading rule 8(c), this Court attem pts "to do substantial justice" and will forgive "technical

failure to comply precisely with Rule 8(c)" if the matter is raised in such a manner so as not to "result

in unfair surprise". 11 In B ull's Corner Restaurant, this Court held that when the defendant sufficiently

articulated the defense so that the plaint iff was not a victim of unfair surprise, the requirements of rule

8(c) were satisfied. 12

Home Insurance argues that it is prejudiced by subst ituting waiver for estoppel. Home

Insurance is entirely correct that the proper defense was waiver, and that the elements of waiver and

esto ppel are different. Justice Dennis, for the Louisiana Supreme Court, defined waiver as "the

intentional relinquishment of a known power or privilege". 1 3 Equitable estoppel is founded on

detrimental reliance on the representations of the other party. 14 Two factors here, however, mitigate

any prejudice. Matthews, while labelling the defense as estoppel, set forth the facts which constituted

Home Insurance's waiver. Moreover, as point ed out , the Louisiana courts have not been clear or

consistent in their use o f t he t wo terms in insurance law. We can hardly expect Matthews to

disregard the language of th e Lo uisiana Supreme Court. If the two defenses had been clearly

distinguished by the Louisiana courts, we would perhaps be more receptive to Home Insurance's15 Comment at 204.

16 537 So.2d 1297, 1300 (La.App. 2 Cir.1989) cert. denied 541 So.2d 895 (La.1989).

17 120 U.S. 183, 7 S.Ct. 500, 30 L.Ed. 644 (1887). claims of prejudice. Here, where Matthews stated the pertinent facts and applied a label which the

Louisiana courts have applied, we hold that Matthews satisfied rule 8(c).

III.

We turn to the merits of Matthews' defense. It is clear that under Louisiana law, the

"acceptance of premium payments by an insurer after receiving knowledge of facts creating a power

of avoidance or privilege of forfeiture constitutes a waiver of such power or privilege". 15 This was

the Louisiana law when it was written in 1961; it was t he law when Justice Tate wrote that

acceptance of premiums with knowledge will estop t he insurer from denying coverage; and the

Louisiana courts have recently reaffirmed this principle in Swain v. Life Insurance Co. of Louisiana

repeating language quoted above. 16

Swain purchased life insurance and represented on the policy that he was in "sound health".

In fact, five years earlier Swain had triple by-pass surgery, three years earlier he was diagnosed as

having Laennec's cirrhosis, and, three weeks before signing the policy, he had hip surgery. Although

Swain was on crutches when he signed the policy, the agent never questioned Swain about his health.

The acceptance of premiums when the agent had reason to suspect that Swain may not have been in

sound health, y et did not initiate further inquiry, led the district court to hold that the insurance

co mpany waived any power or privilege it might have to avoid coverage based on Swain's

representation.

A century earlier, Mr. Justice Gray writing for the United States Supreme Court stated that

the question before the Court in Phoenix Mutual Life Insurance Co. v. Raddin 1 7 was "whether, if

insurers accept payment of a premium after they know that there has been a breach of a condition of

the policy, their ac c eptance of the premium is a waiver of the right to avoid the policy for that18 Raddin at 196, 7 S.Ct. at 506.

19 Id.

20 26 So. 800 (La.1899).

21 Union at 811.

22 See e.g. German-American Mut. Life Ass'n v. Farley, 102 Ga. 720, 29 S.E. 615, 628-29

(1897); Sovereign Camp, W.O.W. v. Bow man, 40 Ga.App. 536, 150 S.E. 436, 437-38 (1929);

Peninsular Casualty Co. v. McCloud, 47 Ga.App. 316, 170 S.E. 396, 397 (1933); Johnson v.

Massachusetts Benefit Ass'n, 9 Kan.App. 238, 59 P. 669, 671 (1900); Foremost Guar. Corp. v.

Meritor Sav. Bank, 910 F.2d 118, 129 (4th Cir.1990).

23 Transcript at 158.

24 Id.

25 Id.

26 La.Rev.Stat.Ann. § 22:619 in pertinent part provides:

A. Except as provided in Subsection B of this Section and R.S. 22:692, no oral or

written misrepresentation or warranty made in the negotiation of an insurance contract, by

the insured or in his behalf, shall be deemed material or defeat or avoid the contract or

prevent it attaching, unless the misrepresentation or warranty is made with the intent to

deceive. breach." 18 His answer was, "Upon principle and authority, there can be no doubt that it is." 19 The

Louisian a Supreme Court subsequently spoke with equal certainty. In U nion National Bank v.

Manhattan Life Insurance Co., 20 the court held that:

If at the time it issued the policy the company did not have knowledge of the untruthfulness

of the answer of the insured, but subsequently acquired t his knowledge, and yet thereafter

accepted payment of a premium due on the policy, this act could not be considered otherwise

than as an election on its part to continue the policy in force, and it would not be heard to set up its avoidance because of this breach of warranty. 21

Other courts have also reached the same conclusion Justice Gray reached. 22

Home Insurance had the power of termination on Matthews' failure to comply with the terms

of the policy; 23 dishonest answers in his application constitute a failure to comply with the terms and

conditions of the policy. 24 Termination for this reason would have eliminated Home Insurance's

burden of offering the optional reporting period. 25 Although Louisiana has provided some protections

for those applicants who make minor errors or omissions in filling out their policies or who lack the

intent to deceive, 26 these prot ections would not have prevented the company from cancelling the27 Brief at 16-17.

policy in this case. Matthews, shortly after representing in his application that he did not know of any

circumstance, act, error, or omission that could lead to a claim against him, pleaded guilty to felony

theft of client funds. Although the policy does not cover deliberately fraudulent or criminal acts or

o missio ns, his failure to acknowledge that malpractice claims could result in the light of his

professional conduct is sufficient to permit Home Insurance to have cancelled the policy.

Therefore, we must now inquire whether Home Insurance had knowledge when it accepted

the premiums. The parties discuss at length whether Home Insurance had sufficient knowledge in

January 1989 so as not to issue the additional reporting period coverage. Adequate information was

sent to the insurance agen t , but it is unclear when Home Insurance was made aware of Matthews'

transgressions. We, however, need not reach the tricky agency issues raised by this, for as the district

court noted, the company had sufficient information to prompt a thorough investigation back in late

October or early November 1988. When Matthews attached the sixteen supplemental claims to his

renewal application, Home Insurance should have investigated promptly. Further, one of these claims

noted that it "i s no t being made by claimant but by district attorney's office of 23rd J.D.C. in

Ascension Parish". In June 1988, Matthews had pleaded guilty to felony theft and forgery, and in

October 1988, he was disbarred. This informatio n wo uld no t have been difficult to learn. That

Matthews had so many claims against him and that th e district attorney was pursuing one of them

should have placed Home Insurance on notice that Matthews misrepresented his record when he had

twice previously denied knowledge of any "circumstance, act, error, or omission that could result in

a professional liability claim".

Home Insurance argues that, "It is an unfair burden to place upon an insurer that it must

immediately, without consultation and without looking into all of the facts and circumstances of an

insured' s activity, assert its right of forfeiture ... would be tantamount to bad faith and, perhaps,

defamation if any of said facts turned out to be untrue." 27 That is not this case. Home Insurance had

ample time to investigate Matthews between the beginning of November 1988 and late January 1989

when the reporting period was extended for three years. Its failure to do so when it had reason tosuspect that Matthews had misrepresented his knowledge of possible claims and its subsequent

acceptance of premium payments amount to a waiver of its right to avoid coverage.

IV.

We AFFIRM the judgment of the district court.