Hanks v. Zenner, et al

Revised December 14, 2000
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_______________
m 00-30746
Summary Calendar
_______________
BRADLEY HANKS AND TRACY HANKS,
Plaintiffs,
VERSUS
SEAN BANNON ZENNER, ET AL.,
Defendants.
COLLECT AMERICA, LTD.,
Defendant-
Cross Claimant-
Appellant,
VERSUS
COLONY INSURANCE COMPANY,
Defendant-
Cross Defendant-
Appellee.

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_________________________
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 summary judgment 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 cov-
ered, we reverse and remand.
I.
Bradley Hanks received a collection letter
from the Zenner law firm regarding a defaulted
Visa card account for $2,660. When Hanks
called the firm, Billy Melton, a firm employee,
threatened that unless Hanks made six monthly
payments, Melton would have the sheriff go to
the Hankses’ house and arrest Hanks. Over
the course of several more calls, Melton re-
peatedly 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 fed-
eral law for extortion, blackmail, violations of
the Fair Debt Collection Practices Act, and
violations of the Louisiana Unfair Trade Prac-
tices and Consumer Protection Law. The
Hankses claim that “Defendants’ actions and
failures to act . . . were done knowingly, wil-
lingly, 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 commer-
cial general liability policy and to have Colony
defend the action. Colony refused to defend
and moved for summary judgment, claiming
that the assert ed injuries were caused inten-
tionally or were the result of negligent supervi-
sion and training.
Colony pointed out that the policy does not
cover intentional injuries; it states that it cov-
ers 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
any employee” also were excluded from cover-
age by a separate endorsement. The court
granted summary judgment.
II.
The parties disagree as to whether Louisi-
ana or South Carolina 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 pub-
lished 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.”

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tive law of the state in which it sits.2 Accord-
ingly, “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 in this
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 evaluat-
ing 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 po licies and needs of the inter-
state and international systems, includ-
ing the policies of upholding the justified
expectations of parties and of minimiz-
ing the adverse consequences that might
follow from subjecting a party to the law
of more than one state.
Article 3537 states:
Except as otherwise provided in this
Title, an issue of conventional obliga-
tions 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 evaluat-
ing the strength and pertinence of the
relevant policies of the involved states in
the light of: (1) the pertinent contacts of
each state to the parties and the transac-
tion, including the place of negotiation,
formation, and performance of the con-
tract, the location of the object of the
contract, and the place of domicile, ha-
bitual residence, or business of the par-
ties; (2) the nature, type, and purpose of
the contract; and (3) the policies re-
ferred to in Article 3515, as well as the
policies of facilitating the orderly plan-
ning of transactions, of promoting com-
mercial 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 obliga-
tion 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, in-
corporating the factors listed 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 “iden-
tify the state whose policies would most
seriously be impaired if its laws were not
applied to [the] issue [to be resolved].”
La. C.C. Arts. 3515 and 3537. This
objective is acheived through an issue-
specific analysis of the policies of each
of the two states, the first step in which
process is to identify the relevant poli-
cies 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).

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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 injuries from an accident
in Louisiana. The policy was issued in Ala-
bama and covered the car, which was reg-
istered and garaged in Alabama. Both parties
were do miciled in Alabama. The Levy court
decided:
[T]his conflict of law problem is fore-
most and principally an issue of insur-
ance coverage, and therefore one of
contract. When the basics are exam-
ined, Heather Levy is suing her father’s
insurance company and the issue is
whether that insurance covers her claim.
C.C. Art. 3537 says that an issue of con-
ventional obligations is governed by the
law of the 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 para-
mount 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 Ala-
bama, accepting the risks of loss under
Alabama law, and charged premiums
accordingly. Patrick Levy could not ex-
pect coverage of risks not contemplated
by either him or his insurer. Determina-
tion 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

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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 policy was
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 Car-
olina law applied. Louisiana does have a
strong policy that protects its citizens from ex-
tortion 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 of the parties
would be upheld by applying South Carolina
law. Just as the parties in Levy contracted un-
der Alabama law, gauged the risks of loss un-
der Alabama law, and charged premiums ac-
cordingly, 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
certainty and would allow the coverage to vary
depending on the state in which a claim is
brought. See id.
Shell involved facts and legal questions al-
most identical to those here. In Shell, there
was a comprehensive commercial liability pol-
icy much like the one here. The accident oc-
curred in Louisiana, where an employee of
Hollywood Marine was injured and sued Shell,
which cross-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
question whether the policy covered 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 seeks in-
demnity under a policy of insurance issued in

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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 in-
demnify Collect 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 un-
der 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
“bodily injury” under a standard insurance pol-
icy, 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 re-
peated exposure to substantially the same gen-
eral harmful conditions.” The policy does not
define “accident.” We therefore look to the
ordinary meaning of the term.
The South Carolina Supreme Court has in-
terpreted the ordinary meaning of “accident”
to be “an effect which the actor did not intend
to produce and cannot be charged with the de-
sign 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
illegal debt collection tactics employed by Mel-
ton 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.

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properly to hire, train, and supervise. This
claim also is excluded by an endorsement that
excludes bodily injury arising from “[t]he neg-
ligent hiring, supervision or training of any em-
ployee 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 com-
plained of, not knowing that they were illegal,
then Collect America may have negligently
violated debt collection laws or negligently in-
flicted emotional distress, and this would be
covered by the policy. This possibility of cov-
erage 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 intentional for 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) in-
tentionally and (2) with intent to cause the
complained-of harm, they will not 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 emo-
tional distress will not be considered intentional for
purposes of the insurance exception until the
Hankses prove (1) that Melton purposefully
(continued...)

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that a defendant intended to cause the
complained-of harm, a duty to defend is pres-
ent if the complained-of injury 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 claims for intentional injuries. 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. T his 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 applies in 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 is seeking 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 dif-
ference 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”).

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