Lincoln General Insurance v. U.S. Auto Insurance Services, Inc.
2015 U.S. App. LEXIS 8172
| 5th Cir. | 2015Background
- Lincoln General reinsured 100% of policies fronted by State & County (S&C); U.S. Auto (managed by Doug Maxwell) acted as managing general agent, collecting premiums, handling claims, and was contractually required to maintain premium trust accounts.
- U.S. Auto transferred roughly $50 million to affiliated entities CSi and Alpha (owned by Doug and Jim Maxwell) as inflated management fees; those entities distributed about $30M to Jim and $20M to Doug.
- Premium trust accounts were depleted by 2006; U.S. Auto began misallocating commissions (removing IBNR adjustments) and used a zero-balance account to pay claims, causing Lincoln to cover deficits.
- Lincoln sued in 2007; an earlier 2009 settlement fell apart and S&C assigned its claims to Lincoln; litigation proceeded with many claims dismissed on summary judgment, leaving tortious interference (trial) and a stipulated $16.5M breach figure.
- After a bench trial the district court found CSi and Alpha tortiously interfered and entered $16.5M against them; Lincoln appeals multiple adverse rulings (fiduciary, conversion, alter ego, aiding/abetting, judgment amendments); CSi/Alpha appeal statute of limitations on tortious interference.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Accrual / statute of limitations for tortious interference | Lincoln: claims accrued when Lincoln suffered financial injury (when premiums depleted and Lincoln paid claims), within limitations. | CSi/Alpha: accrual started when transfers occurred (2002–2005), so claims time-barred. | Court applied discovery rule (finding Lincoln could not have known earlier) and affirmed judgment against CSi/Alpha as timely. |
| Whether U.S. Auto and Maxwells owed fiduciary duties for premium handling | Lincoln: contractual language and Texas Insurance Code create fiduciary duties from receipt of premiums (not only after deposit into trust account) and duties extend to Lincoln. | Defendants: no fiduciary duty until funds deposited into premium trust; duty limited to escrow context. | Reversed summary judgment: contract and Code impose fiduciary duties from acceptance/maintenance of premiums; claims against U.S. Auto and Maxwells remanded. |
| Application of economic loss rule to conversion claims | Lincoln: conversion independent of contract; seeks constructive trust and tort remedies. | Defendants: misappropriation arose from breach of contract terms governing funds/commissions, so economic loss rule bars tort. | Affirmed summary judgment for defendants on conversion: claims governed by contract and barred by economic loss rule. |
| Entry of judgment / amendment post-trial (U.S. Auto and nonparty ZVN) | Lincoln: court should enter $16.5M breach judgment against U.S. Auto per stipulation; also include ZVN (stipulated successor) in judgment. | Defendants/district court: believed breach resolved by out-of-court settlement; cannot enter judgment against nonparty ZVN. | Court ordered district court to enter judgment against U.S. Auto for $16.5M (abuse of discretion to refuse); affirmed denial of judgment against nonparty ZVN (nonparty cannot be bound). |
Key Cases Cited
- State Farm Life Ins. Co. v. Swift (In re Swift), 129 F.3d 792 (5th Cir.) (discussing accrual/discovery rule issues)
- TIG Ins. Co. v. Aon Re, Inc., 521 F.3d 351 (5th Cir. 2008) (discovery rule may be applied even if not pleaded when raised in pretrial order)
- Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617 (Tex.) (economic loss rule—broad application)
- National Plan Administrators, Inc. v. National Health Ins. Co., 235 S.W.3d 695 (Tex. 2007) (contracts can impose specific fiduciary duties)
- Meadows v. Bierschwale, 516 S.W.2d 125 (Tex.) (constructive trust/remedies for breach of fiduciary duty)
- Kinzbach Tool Co. v. Corbett-Wallace Corp., 160 S.W.2d 509 (Tex.) (forfeiture of secret gains for fiduciary breach)
- Pegram v. Herdich, 530 U.S. 211 (U.S. Supreme Court) (fiduciary duties commonly attach to asset management/control)
- Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100 (U.S. Supreme Court) (a person not a party is not bound by in personam judgment)