Amplifying Louisiana’s Anti-Annulment Statute

Louisiana is among a small number of states that have enacted anti-annulment statutes applying to all liability insurance policies, and not just automobile liability insurance policies. LA. R.S. § 22:262 provides:

“No insurance contract insuring against loss or damage through legal liability for the bodily injury or death by accident by any individual, or for damage to the property of any person, shall be retroactively annulled by any agreement between the insurer and insured after the occurrence of any such injury, death, or damage for which the insured may be liable, and any such annulment attempted shall be null and void”.

The Louisiana statute prevents so-called “policy buy-backs” in which the insurance company and the insured agreed to annul an existing insurance policy for the payment of an agreed upon sum by the insurance company. Policy buy-backs typically arise in situations where there is a coverage dispute between the insurer and insured. By annulling the insurance policy, and thereby receiving payment for the annulment, the insured cashes out the policy to the detriment of the injured victim who may have no recovery source without the insurance policy.

In 1994, the Louisiana Supreme Court in Washington v. Savoie, 634 So.2d 1176 (La. 1994) interpreted Louisiana’s anti-annulment statute and concluded that Louisiana law and public policy did not allow the post-accident reformation of insurance policies.

Recently, the Louisiana Court of Appeals in Long v. Eagle, Inc., 2014-CA-0889, 158 So.3d 968 (2015), held that the anti-annulment statute’s prohibition against insurers and insureds retroactively rescinding or annulling a liability insurance policy by agreement post-occurrence did not extend to prohibit one insurer from entering into a post-occurrence settlement agreement with its insured that limited the amount that the insurer was obligated to pay for costs and expenses for the insured’s defense in the underlying lawsuit.

The Court in Long acknowledged that the language of Louisiana’s anti-annulment statute indicated that its purpose was to prevent insurers and insureds from entering agreements to annul or rescind insurance contracts to the detriment of an injured third-party. That was the concern of the Louisiana Supreme Court in Savoie. In Savoie, the Court found that the focus of the anti-annulment statute was to protect third-party tort victims. However, the Court in Long found that the focus of the anti-annulment statute was not to protect insurance companies that contracted to cover a particular risk.

Under the facts of Long, two insurance companies issued policies to the insured in a progressive loss asbestos case. One insurer entered into a settlement agreement with the insured. A condition of the settlement agreement was that once the designated sum of funds allocated to paying asbestos claims was exhausted, the insurer would no longer be responsible for defense costs. Essentially, the condition of the settlement agreement left the insurer without insurance for defense costs related to the years that the insurer’s policies provided coverage.

Once USF&G had exhausted the funds identified in the settlement agreement, it withdrew from the defense of the insured. A second insurer, who was co-defending the insured, made a third-party demand seeking to have the trial court declare that USF&G was obligated to pay its share of the defense costs, and for reimbursement of expenses expended on that insurer’s behalf by USF&G. The Court refused to find the settlement agreement null and void under Louisiana’s Anti-annulment Statute.

The Court in Long found that the protections set forth in the Savoie decision, and Louisiana’s Anti-annulment Statute did not apply to another insurer. The Court did express, in dicta, that if the injured claimant was challenging the settlement agreement, pursuant to the Louisiana’s anti-annulment statute, the Court’s opinion might differ.