Revised December 14, 2000

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

_______________

m 00-30746

Summary Calendar

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BRADLEY HANKS AND TRACY HANKS,

Plaintiffs,

VERSUS

SEAN BANNON ZENNER, ET AL.,

Defendants.

COLLECT AMERICA, LTD.,

DefendantCross ClaimantAppellant,

VERSUS

COLONY INSURANCE COMPANY,

DefendantCross DefendantAppellee.
2

_________________________

Appeal from the United States District Court

for the Western District of Louisiana

_________________________

December 8, 2000

Before SMITH, BENAVIDES, and

DENNIS, Circuit Judges.

JERRY E. SMITH, Circuit Judge:*

Collect America, Ltd. (“Collect America”),

appeals an adverse summaryjudgment holding

that Colony Insurance Company (“Colony”)

has no duty to defend it in a case of alleged

illegal debt collection practices, because the

claims are not covered by the insurance policy.

Concluding that some of the claims are covered, we reverse and remand. 

I.

Bradley Hanks received a collection letter

fromthe Zenner law firmregarding a defaulted

Visa card account for $2,660. When Hanks

called the firm, Billy Melton, a firm employee,

threatened that unlessHanksmade sixmonthly

payments, Melton would have the sheriff go to

the Hankses’ house and arrest Hanks. Over

the course of several more calls, Melton repeatedly threatened to have Hanks jailed and

to garnish his wages, freeze his checking

account, and have him charged with a felony.

The Hankses filed suit under state and federal law for extortion, blackmail, violations of

the Fair Debt Collection Practices Act, and

violations of the Louisiana Unfair Trade Practices and Consumer Protection Law. The

Hankses claim that “Defendants’ actions and

failures to act . . . were done knowingly, willingly, wantonly, with malice and intent to

harm, and with reckless disregard for the law

and the rights of others.” 

Collect America filed a cross-claim against

Colony, seeking coverage under the commercial general liability policy and to have Colony

defend the action. Colony refused to defend

and moved for summary judgment, claiming

that the asserted injuries were caused intentionallyor were the result of negligentsupervision and training. 

Colony pointed out that the policy does not

cover intentional injuries; it states that it covers only injuries arising from an “occurrence”

and defines an occurrence as “an accident.”1

Colony further noted that injuries arising from

“the negligent hiring,supervision or training of

anyemployee” also were excluded fromcoverage by a separate endorsement. The court

granted summary judgment.

II.

The parties disagree as to whether Louisiana or SouthCarolina law applies. In diversity

cases, a federal court must apply the substan-

* Pursuant to 5TH CIR. R. 47.5, the court has

determined that this opinion should not be published and is not precedent except under the limited

circumstances set forth in 5TH CIR. R. 47.5.4.

1 The full definition is “an accident, including

continuous or repeated exposure to substantially

the same general harmful conditions.”
3

tive law of the state in which it sits.2 Accordingly, “choice of substantive law is governed

by the forum state’s choice of law rules.”

Allison v. ITE Imperial Corp., 928 F.2d 137,

138 (5th Cir. 1991). 

Louisiana Civil Code articles 3515 and

3537 govern conflicts of laws questions in

contracts cases. Article 3515 states:

Except as otherwise provided inthis

Book, an issue in a case having contacts

with other states is governed by the law

of the state whose policies would be

most seriously impaired if its law were

not applied to that issue.

That state is determined by evaluating the strength and pertinence of the

relevant policies of all involved states in

the light of: (1) the relationship of each

state to the parties and the dispute; and

(2) the policies and needs of the interstate and international systems, including the policies of upholding the justified

expectations of parties and of minimizing the adverse consequencesthat might

follow fromsubjecting a partyto the law

of more than one state.

Article 3537 states:

Except as otherwise provided inthis

Title, an issue of conventional obligations is governed by the law of the state

whose policies would be most seriously

impaired if its law were not applied to

that issue. 

That state is determined by evaluating the strength and pertinence of the

relevant policies ofthe involved statesin

the light of: (1) the pertinent contacts of

each state to the parties and the transaction, including the place of negotiation,

formation, and performance of the contract, the location of the object of the

contract, and the place of domicile, habitual residence, or business of the parties; (2) the nature, type, and purpose of

the contract; and (3) the policies referred to in Article 3515, as well as the

policies of facilitating the orderly planning of transactions, of promoting commercial intercourse, and of protecting

one party from undue imposition by the

other.

In Sentilles Optical Servs. v. Phillips,

651 So. 2d 395 (La. App. 2d Cir. 1995), the

court explained:

Enforcement of a conventional obligation is governed by the law of the state

whose policies would be most seriously

impaired if its law were not applied to

that issue. La. C.C. Art. 3537. Article

3537 lists factors for determining the

state whose law should be applied, incorporating the factorslisted in the more

general La. C.C. Art. 3515. The two

articles are intended to be read together.

See La. C.C. Art. 3537, Comment (c).

The objective of the articles is to “identify the state whose policies would most

seriously be impaired ifitslaws were not

applied to [the] issue [to be resolved].”

La. C.C. Arts. 3515 and 3537. This

objective is acheived through an issuespecific analysis of the policies of each

of the two states, the first step in which

process is to identify the relevant policies of the laws in two states. 2 Erie R.R. v. Tompkins, 304 U.S. 64 (1938);

Guaranty Trust Co. v. York, 326 U.S. 99 (1945).
4

Id. at 398, cited in Shell Oil Co. v. Hollywood

Marine, Inc., 701 So. 2d 1038, 1040 (La.

App. 5th Cir. 1997).

In Levy v. Jackson, 612 So. 2d 894 (La.

App. 4th Cir. 1993), the court applied the

Louisiana conflicts of laws statutes to decide

whether Louisiana or Alabama law applied to

a case of insurance contract construction. A

guest passenger in an automobile sued the

driver (her father) for injuriesfroman accident

in Louisiana. The policy was issued in Alabama and covered the car, which was registered and garaged in Alabama. Both parties

were domiciled in Alabama. The Levy court

decided:

[T]his conflict of law problem is foremost and principally an issue of insurance coverage, and therefore one of

contract. When the basics are examined, Heather Levy is suing her father’s

insurance company and the issue is

whether that insurance covers her claim.

C.C. Art. 3537 saysthat an issue of conventional obligations is governed by the

law ofthe state whose policies would be

most seriously impaired if its law were

not applied, and section (1) indicates

that domicile of the parties is a paramount question. Another factor given

strong consideration is the expectations

of the parties. In this case that means

risks coverage and premiums paid.

They are directly related.

State Farm issued a policy in Alabama, accepting the risks of loss under

Alabama law, and charged premiums

accordingly. Patrick Levy could not expect coverage of risks not contemplated

by either him or his insurer. Determination of coverage vis a vis Patrick Levy

and State Farm should be governed by

Alabama law.

Id. at 897. See also Holcomb v. Universal

Ins. Co., 640 So. 2d 718, 722 (La. App. 3d

Cir.) (holding that Arkansas law governs the

insurance contract in question, because “the

application of Louisiana law in this case

would, in our opinion, impinge on the State of

Arkansas’ right to regulate the insurance

industry in that state.”), writ denied, 644 So.

2d 643 (La. 1994).

In Resure, Inc. v. Chemical Distributors,

Inc., 927 F. Supp. 190 (M.D. La. 1996), a

case analogous to the one before us, the court

addressed which state law should govern the

interpretation of a commercial general liability

policy entered into outside of Louisiana and

between two out-of-state parties where the

accident giving rise to suit occurred in

Louisiana. The court noted:

Resure points out that CDI is a New

Mexico corporation, and that the

insurance policy was negotiated and

delivered in New Mexico. Resure then

argues that “if the law of the place of

‘accident’ is applied to a multi-state

trucking company (like CDI), neither it

nor its insurer have any means of

negotiating required coverage for the

insured with any degree of certainty.”

Resure also makes the related argument

that application of the law of the place

of the accident could result in

inconsistent results from state to state.

Id. at 192 (footnote omitted).

These cases give us direction as to how

Louisiana courts apply article 3537. We now

evaluate which state’s policies would be most
5

seriously impaired if its law were not applied

here. Just as Louisiana courts have

determined in the above cases, we conclude

that the state in which the insurance policywas

negotiated, written, and agreed toSSSouth

CarolinaSShas the most substantial interest in

regulation of such policies. Further, none of

the parties is domiciled in Louisiana. Colony

is a South Carolina company, and it issued this

policy to another South Caro lina

companySSU.S. Collections, Inc. Collect

America later was added as an additional

insured. Collect America is a Colorado

company. Only the HanksesSSwho are not

appealing the dismissal of ColonySSare

residents of Louisiana. 

Contrarily, Louisiana’s policies would not

be significantly impaired by having South Carolina law applied. Louisiana does have a

strong policy that protectsits citizensfrom extortion and blackmail such as that alleged by

the Hanks against Collect America; this policy,

however, is affected little by the determination

of whether Collect America is insured against

such a claim. 

Additionally, the expectations ofthe parties

would be upheld by applying South Carolina

law. Just as the parties in Levy contracted under Alabama law, gauged the risks of loss under Alabama law, and charged premiums accordingly, the parties here contracted under

South Carolina law, assessing risks and

premiums accordingly. To subject this

insurance contract to the law of Louisiana

would undermine the policy of allowing the

parties to negotiate insurance contracts with

certaintyand would allow the coverage to vary

depending on the state in which a claim is

brought. See id.

Shell involved facts and legal questions almost identical to those here. In Shell, there

was a comprehensive commercial liability policy much like the one here. The accident occurred in Louisiana, where an employee of

Hollywood Marine wasinjured and sued Shell,

whichcross-claimed against Hollywood and its

insurance company, claiming that Shell was an

additional insured under Hollywood’s policy.

Shell argued that Louisiana law applied to the

questionwhether the policycovered the claims

made against it. The Louisiana court of appeal

disagreed and concluded that Texas law

governed:

Texas has a compelling interest is [sic]

regulating insurance policies contracted

for in Texas and issued to companies

doing business in Texas . . . .

Louisiana’s interest arises only because

a Delaware corporation, with its

principal place of business in Texas,

seeks indemnity under a policy of

insurance issued in Texas to recover

payment it made to recompense for

damages it caused a Louisiana citizen.

We do not believe that this interest is

sufficient to override the compelling

interest Texas has in regulating

insurance contracts written in Texas and

issued to Texas companies.

Accordingly, we hold that Texas law

should be applied in this instance. 

Shell, 701 So. 2d at 1041. We conclude that,

just as Texas had an interest in the insurance

policy at issue in Shell, South Carolina has a

compelling interest in regulating insurance

policies contracted for in South Carolina and

issued to companies doing business there.

Here as well, Louisiana’s interest arises

only because a Colorado corporation seeksindemnity under a policy of insurance issued in
6

South Carolina for damages it caused two

Louisiana citizens.3 Just as the court did in

Shell, we conclude that this interest is

insufficient to override the compelling interest

of South Carolina in regulating insurance

contracts written in that state. Accordingly,

South Carolina law should be applied. 

III.

Under South Carolina law, the

determination of whether an insurance

company is obligated to defend an action

under its policy provisions is based on the

complaint. R.A. Earnhardt Textile Mach.

Div., Inc. v. South Carolina Ins. Co., 282

S.E.2d 856, 857 (S.C. 1981). If the facts

alleged fail to bring the case within the policy’s

coverage, the insurer has no obligation to

defend. Id.; see also Manufacturers &

Merchants Mut. Ins. Co. v. Harvey, 498

S.E.2d 222 (S.C. App. 1998) (citing cases). 

Our inquiry therefore must be whether any

of the claims made in the complaint allege

facts that bring the action within the policy’s

coverage. If so, Colony owes Collect America

a duty to defend and may be required to indemnifyCollect America if an adverse decision

is returned on a covered claim. If not, Colony

owes no such duty. 

The Hankses make a number of claims under state and federal law for damages arising

from Collect America’s allegedly unlawful

debt collection practices, which, according to

the Hankses, caused them to suffer “extreme

emotional distress, fear, anxiety, humiliation,

and outrage.” Before we address whether the

Hankses’ various claims are covered under the

policy, we first examine the types of injuries

covered: “bodily injury and property damage

liability.” Because South Carolina law

recognizes infliction of emotional distress as a

“bodilyinjury” under a standard insurance policy, see State Farm Mut. Auto. Ins. Co. v.

Ramsey, 374 S.E.2d 896 (S.C. 1988), the

Hankses’ emotional distress is covered under

the policy.

The policy covers “bodily injury” only if it

is caused by an “occurrence,” which it defines

as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The policy does not

define “accident.” We therefore look to the

ordinary meaning of the term. 

The South Carolina Supreme Court has interpreted the ordinary meaning of “accident”

to be “an effect which the actor did not intend

to produce and cannot be charged with the design of producing.” Goethe v. New York Life

Ins. Co., 190 S.E. 451 (S.C. 1937), quoted in

Manufacturers & Merchants, 498 S.E.2d at

225. Thus, only claims for bodily injuries

caused by accidents are covered under Collect

America’s policy. All of the Hankses’ claims

based on intentional acts are therefore outside

the coverage, and Colony owes no duty to

defend them.

The Hankses also claim that the allegedly

illegaldebt collectiontactics employed byMelton resulted from Collect America’s failure

3 We acknowledge one small distinction

between the two cases. In Shell, payment already

had been made to the injured Louisiana resident. It

could be argued that Louisiana’s interest in this

case is therefore somewhat greater, because the

Louisiana plaintiff has not yet been compensated,

and therefore a finding of coverage for Collect

America might affect the amount of compensation

available to the Hanks. We do not believe,

however, that Louisiana’s policy that plaintiffs be

compensated for injury would be seriously

impaired by applying South Carolina law to

construe this insurance contract. 
7

properly to hire, train, and supervise. This

claim also is excluded by an endorsement that

excludes bodily injury arising from “[t]he negligent hiring,supervision or training of anyemployee of the insured.”

Collect America argues, however, that the

complaint can be read as alleging negligence,

separate from and above any claims for

negligent supervision. Injuries caused by

negligence are “occurrences” and thus are

covered by the policy. 

Collect America claims that paragraph 24

of the complaint may be read as a claim for

injury from negligence, apart from negligent

supervision. That paragraph states, “Collect

America and/or Sean Bannon Zenner

negligently or willfully allowed [Melton] to

engage in abusive and criminal methods of

debt collection.” Colony claims that this

paragraph can be interpreted only as a claim

for injuries arising from negligent supervision

of an employee, and it vigorously denies that

there are any negligence claims set forth in the

complaint. 

We conclude that this paragraph can be

read two waysSSas a claim of negligent

supervision or as one for simple negligence.

An insurer has a duty to defend if “the

underlying complaint creates a possibility of

coverage under an insurance policy.” Isle of

Palms Pest Control Co. v. Monticello Ins.

Co., 459 S.E.2d 318, 319 (S.C. Ct. App.

1995), aff’d, 468 S.E.2d 304 (S.C. 1996). If

paragraph 24 is viewed only as a claim for

negligent failure to supervise, then it is plainly

excluded from coverage by the negligent

supervision exception endorsement discussed

above. We agree with Collect America,

however, that this paragraph also may be

interpreted as a claim of simple negligence on

the part of Collect America. 

If Collect America faithfully supervised

Melton and directed him to do the acts complained of, not knowing that they were illegal,

then Collect America may have negligently

violated debt collection laws or negligently inflicted emotional distress, and this would be

covered by the policy. This possibility of coverage is enough to trigger Colony’s duty to

defend this suit. 

Further, even the defendants’ intentional

actions may be held to be “not intentional” and

thus “occurrences” under South Carolina law.

Though we have noted that claims for

damages from intentional torts are not

covered, under South Carolina law the alleged

“intentional” acts of Collect America and its

employee may fall short of the requirements

needed to make an act intentionalfor purposes

of an exception to coverage. 

“The South Carolina Supreme Court has

held that, for an act to be an intentional act

excluded by the intentional act exclusion of a

policy, (1) the act which produces the loss

must be intentional, and (2) the results of the

act must be intended.” Manufacturers &

Merchants, 498 S.E.2d at 229 (citing Miller v.

Fidelity-Phoenix Ins. Co., 231 S.E.2d 701

(S.C. 1977)). Thus, if the Hanks do not prove

that the acts complained of were done (1) intentionally and (2) with intent to cause the

complained-of harm, theywillnot have proven

an intentional act of the type that is excepted

from the policy.4 Therefore, until it is proven

4 For example, the claim for infliction of emotional distress will not be considered intentional for

purposes of the insurance exception until the

Hankses prove (1) that Melton purposefully

(continued...)
8

that a defendant intended to cause the

complained-of harm, a duty to defend is present if the complained-ofinjury also could have

been the result of negligence.5

Therefore, we conclude that claims have

been alleged that are within the coverage of

the policy. Colony’s duty to defend is thus

triggered. The judgment is REVERSED and

REMANDED for further proceedings.

4

(...continued)

threatened them and (2) that he intended to cause

emotional distress rising to the level of a tort.

5 We note, without commenting on, the fact that

this two-part intent requirement may give insurers

perverse incentives when defending insureds

against claimsfor intentionalinjuries. Typically an

insurer’s and insured’s interests are alignedSSboth

want to avoid a finding of liability. Under South

Carolina law, however, the insurer can escape

liability if the defendant is found to have

intentionally injured the plaintiff. The insurance

company, therefore, has an incentive to let

intentional injury be proven. This incentive is

directly opposed to the insured’s incentive to show

that the injury was not intentional, because once

intent is found the insured is no longer covered, and

higher damages generally result.

Nevertheless, the South Carolina Supreme

Court has plainly stated that its two-part test for

intentionality appliesin insurance cases. The court

first adopted this test for intentionality in Miller, in

which the court held that where a minor

purposefully set fire to a house by lighting papers

on fire in two separate rooms, he acted without a

conscious intent to cause major property damage,

and thus he did not have the necessary intent to

trigger the intentional act exclusion. The South

Carolina Supreme Court reaffirmed Miller in

Vermont Mut. Ins. Co. v. Singleton, 446 S.E.2d

417 (S.C. 1994), holding that the intentional act

exclusion of a home owner’s policy did not apply

to exclude coverage for damage to plaintiff’s eye

resulting from a fight with the defendant. The

court acknowledged that the defendant purposefully

had hit the plaintiff but held that because the record

contained evidence that the defendant was

defending himself, the requisite subjective intent to

(continued...)

5

(...continued)

damage the plaintiff’s eye could not be found, and

the intentional act exclusion thus did not apply. 

Unlike the case sub judice, in which Collect

America isseeking inclusion under the definition of

occurrences, both Miller and Vermont Mutual

involved insureds who sought to avoid exclusion

under an exception for intentional acts. South

Carolina courts do not seem to consider this difference important, however. See Manufacturers &

Merchants, 498 S.E.2d at 229 (using the Miller

two-part test for intentional acts to determine

whether an act was outside the definition of

“occurrence”).