1 At the time of the contract, the insurance company's name

was Classified Insurance Company. The company later changed its

name to American Star Insurance Company.

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

 

No. 92-5084

 

AMERICAN STAR INSURANCE CO.,

f/k/a Classified Insurance 

Corporation,

Plaintiff-Appellee,

versus

ROBERT F. GIRDLEY and

VIRGINIA L. GIRDLEY,

Defendants-Appellants.

 

Appeal from the United States District Court

for the Eastern District of Texas

 

(January 10, 1994)

Before HIGGINBOTHAM, DAVIS, and SMITH, Circuit Judges.

HIGGINBOTHAM, Circuit Judge:

We hold that an agreement requiring the agent of a bail bond

company to indemnify the company is not an illegal reinsurance

contract under Texas law.

I

Robert F. Girdley and Virginia L. Girdley agreed to act as

agents of American Star Insurance Company1 in the bail bond

business. The contract required the Girdleys to indemnify American

Star for any loss incurred on a bail bond issued by the Girdleys on
 

2 After the district court entered final judgment, the

Girdleys asked that the court amend its findings pursuant to

Fed.R.Civ.P. 52(b) to reflect the fact that the bail bond

business was not the Girdleys' but, rather, was American Star's. 

The district court made this alteration but nevertheless held

that American Star was entitled to summary judgment. 

2

American Star's behalf. American Star here sued the Girdleys under

the indemnification provision.

Both American Star and the Girdleys moved for summary

judgment, the motions turning on whether the indemnification

provision is an insurance contract. If it is, the Girdleys argued,

then the agreement was void because the Girdleys were not licensed

as insurers. This is their only defense on appeal.

The district court applied Texas law in granting summary

judgment for American Star, despite a provision in the agreement

specifying California law as controlling. The court concluded that

the indemnity provision was incidental to the agency agreement and

therefore that it did not require the Girdleys to provide

insurance. As a result, the agreement was enforceable.2 From this

judgment, plaintiffs timely appeal. 

II

We must first answer the choice of law question. We hold that

district court did not err in applying Texas law.

As Texas provided the legal forum for this federal diversity

case, the choice of law rules of Texas govern. Caton v. Leach

Corp., 896 F.2d 939, 942 (5th Cir. 1990). The Texas Supreme Court

has adopted section 187 of the Restatement (Second) of Conflict of

Laws (1971) to determine the validity of contractual choice of law
3

provisions. DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 677 (Tex.

1990), cert. denied, 498 U.S. 1048 (1991). According to Section

187 of the Restatement, a choice of law provision applies if the

parties could have "resolved by an explicit provision in their

agreement" the issue in dispute. Id. at 677 (citation omitted).

As the issue before the court is whether the indemnification

agreement is unenforceable as a matter of law, the parties could

not have resolved the claim by agreement.

Nevertheless, the choice of law provision will generally

govern, with two exceptions. First, California, as the "chosen

state," must have some substantial relationship to the parties or

the transaction, or there must be some other reasonable basis for

the parties' choice. Id. at 678 (citing Restatement (Second) of

Conflict of Laws § 187(a) (1971)). American Star claims that its

principal place of business is in California and therefore that it

has a substantial relationship to the state. Judging this

contention is not necessary to our decision. But see Admiral Ins.

Co. v. Brinkcraft Development, Ltd., 921 F.2d 591, 593-94 (5th Cir.

1991) (interpreting UCC, not Texas common law, as requiring

application of New York law where party's principal place of

business in New York and receipt of payments in New York

established "a reasonable relation" to the state).

Second, if the dispute involves the fundamental policy of

Texas, if Texas has the most significant relationship to the

transaction and the parties, and if Texas has a materially greater

interest in the dispute than California, then the laws of Texas
4

will apply. DeSantis, 793 S.W.2d at 678-79 (citing Restatement

(Second) of Conflict of Laws § 187(b)). This second exception

governs the case before us. As we noted, the only relationship

between the circumstances of this dispute and the chosen forum is

that American Star's principal place of business is in California.

In contrast, the Girdleys served as agents in Texas, they issued

bonds in Texas, and the criminal proceeding behind the Girdleys'

potential liability was in Texas. Texas has the most significant

relationship to this case and has a materially greater interest in

it than California. 

As resolution of this dispute implicates laws pertaining to

insurance, it also affects a fundamental policy of Texas. The

Texas Supreme Court recently held, "The State of Texas has special

interest in regulating... insurance." Guardian Royal Exch. Assur.

Co. v. English China Clays, P.L.C., 815 S.W.2d 223, 229 (Tex.

1991). It made this observation in assessing the requirements for

exercising jurisdiction over a nonresident defendant. Given the

importance of Texas' regulatory interest in insurance, the court

allowed "a lesser showing of minimum contacts than would otherwise

be required." Id. The Texas legislature has indicated its

interest in insurance not only by heavy regulation of the industry

but also, in particular, by placing special requirements on

reinsurance transactions involving insurers not licensed to do

business in Texas. See, e.g., Tex. Rev. Civ. Stat. Ann. art. 3.10A

(Supp. 1994) (requiring special contractual commitments by an outof-state reinsurer before the in-state insurer may receive credit
5

in its accounting and financial statements). By protecting

policyholders in Texas in a way that places burdens on insurance

companies in other states, the legislature has made manifest its

fundamental policy interest in the insurance and reinsurance

businesses. Texas law therefore controls. 

III

We hold that the indemnification provision was incidental to

the lawful agreement that the Girdleys would serve as American

Star's agents. It therefore did not constitute, or transform the

agreement into, an illegal insurance contract. As a result, we

need not decide whether providers of bail bonds are in the

insurance business or, alternatively, whether a party may shirk its

commitments by claiming that it has acted illegally.

All parties agree that the Girdleys could lawfully serve as

agents of American Star in the bail bond business. The question is

whether the Girdleys' indemnification of American Star qualifies as

reinsurance. We note at the outset that "when a contract is

susceptible of two constructions the construction which makes it

legal and valid will be adopted." Board of Ins. Com'rs v. Kansas

City Title Ins. Co., 217 S.W.2d 695, 697-98 (Tex. Civ. App. Austin

1949, writ ref'd n.r.e.).

We recently interpreted Texas law as establishing that "one

party to a contract for services is not an 'insurer' of the other

party to the contract solely because the first party indemnifies

the second party pursuant to an indemnity clause." Vesta Insurance

Co. v. Amoco Production Co., 986 F.2d 981, 985 (5th Cir.), cert.
6

denied, 114 S.Ct. 80 (1993). This court relied in Vesta on Board

of Ins. Com'rs. Vesta, 986 F.2d at 986 n.12 (citing Board of Ins.

Com'rs v. Kansas City Title Ins. Co., 217 S.W.2d 695 (Tex. Civ.

App. Austin 1949, writ ref'd n.r.e.)). In Board of Ins. Com'rs.,

the court addressed an indemnification provision in a contract

between a vendor of title abstracts and a provider of title

insurance. The vendor agreed to serve as the title insurance

company's agent. The indemnification provision held the vendor

liable to the title insurance company for obligations arising from

the policies the vendor sold on the insurance company's behalf. If

the indemnity provision was a reinsurance contract, it violated

Texas law by enabling the vendor to act as an unlicensed insurer.

The court held that the provision was not a reinsurance contract

but rather was incidental to the agency relationship. Id. at 697-

98.

In reaching this conclusion, the court looked to the likely

effect on the "public interest" of invalidating the indemnification

agreement. Id. at 698. By tracing the court's reasoning, we heed

the stated purpose for enacting the statute requiring the licensing

and regulation of bail bondsmen, that is, regulation of "a business

affecting the public interest." Tex. Rev. Civ. Stat. Ann. art.

2372p-3 §1 (Supp. 1994). See also Board of Ins. Com'rs, 217 S.W.2d

at 698 ("Title insurance is a business affected by public interest

and subject to legislative control"). 

The court in Board of Insurance Commissioners noted that the

indemnification provision neither allowed the vendor to "hold
7

itself out as engaging in the insurance business" nor caused people

to "rely upon the responsibility" of the vendor. 217 S.W.2d at

698. A Texas court addressing a similar issue noted that in Board

of Ins. Com'rs the title company "had not by [the] contract

relieved itself of liability to the policyholder, and that the

public was buying insurance from the [insurer] and not [the

vendor]." Manning v. State, 423 S.W.2d 406, 412 (Tex. Civ. App.

Austin 1967, writ ref'd n.r.e.) (citing Board of Ins. Com'rs, 217

S.W.2d 695, 698 (Tex. Civ. App. Austin, writ ref'd 1949 writ ref'd

n.r.e.)). The court in Manning seized on the fact that the agent

before it had "assumed all liability to the policyholder" whereas

the agent in Board of Ins. Com'rs had not. For this reason, the

Manning court found that the agent had provided insurance and had

not merely formed "a contract of indemnity." Id.

The same distinction applies to the present case. The

Girdleys could, and did, present themselves only as American Star's

agents. By the terms of the agreement, American Star acted "as

surety for bail bonds solicited in its name." The Girdleys do not

claim that American Star could have avoided its obligations as a

result of the indemnification provision. That provision was a

purely private agreement between American Star and the Girdleys.

It would be ironic if in an effort to protect an unwary government

institution or member of the public, neither of which had reason to

rely on the Girdleys as bail bondsmen, we were to keep American

Star from enforcing the Girdleys' obligations. The court in Board

of Ins. Com'rs rejected this approach to distinguishing between
8

indemnification and reinsurance. Board of Ins. Com'rs, 217 S.W.2d

at 698 (treating an indemnity provision as an illegal insurance

contract would be error where it would expose to risk parties that

the law was designed to protect). No interest that Texas might

wish to protect would be served by allowing the Girdleys to escape

liability. 

AFFIRMED.