American Star Insurance v. Girdley

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
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.
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
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
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
3
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 out-
of-state reinsurer before the in-state insurer may receive credit
4
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.
5
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
6
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
7
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.
8