        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.
                                      _________________________

                              Appeal from the United States District Court
                                 for the Western District of Louisiana
                                    _________________________

                                             December 8, 2000

Before SMITH, BENAVIDES, and                               violations of the Louisiana Unfair Trade Prac-
  DENNIS, Circuit Judges.                                  tices and Consumer Protection Law. The
                                                           Hankses claim that “Defendants’ actions and
JERRY E. SMITH, Circuit Judge:*                            failures to act . . . were done knowingly, wil-
                                                           lingly, wantonly, with malice and intent to
    Collect America, Ltd. (“Collect America”),             harm, and with reckless disregard for the law
appeals an adverse summary judgment holding                and the rights of others.”
that Colony Insurance Company (“Colony”)
has no duty to defend it in a case of alleged                 Collect America filed a cross-claim against
illegal debt collection practices, because the             Colony, seeking coverage under the commer-
claims are not covered by the insurance policy.            cial general liability policy and to have Colony
Concluding that some of the claims are cov-                defend the action. Colony refused to defend
ered, we reverse and remand.                               and moved for summary judgment, claiming
                                                           that the assert ed injuries were caused inten-
                        I.                                 tionally or were the result of negligent supervi-
   Bradley Hanks received a collection letter              sion and training.
from the Zenner law firm regarding a defaulted
Visa card account for $2,660. When Hanks                      Colony pointed out that the policy does not
called the firm, Billy Melton, a firm employee,            cover intentional injuries; it states that it cov-
threatened that unless Hanks made six monthly              ers only injuries arising from an “occurrence”
payments, Melton would have the sheriff go to              and defines an occurrence as “an accident.”1
the Hankses’ house and arrest Hanks. Over                  Colony further noted that injuries arising from
the course of several more calls, Melton re-               “the negligent hiring, supervision or training of
peatedly threatened to have Hanks jailed and               any employee” also were excluded from cover-
to garnish his wages, freeze his checking                  age by a separate endorsement. The court
account, and have him charged with a felony.               granted summary judgment.

   The Hankses filed suit under state and fed-                                    II.
eral law for extortion, blackmail, violations of              The parties disagree as to whether Louisi-
the Fair Debt Collection Practices Act, and                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
                                                              1
determined that this opinion should not be pub-                 The full definition is “an accident, including
lished and is not precedent except under the limited       continuous or repeated exposure to substantially
circumstances set forth in 5TH CIR. R. 47.5.4.             the same general harmful conditions.”

                                                       2
tive law of the state in which it sits.2 Accord-          ing the strength and pertinence of the
ingly, “choice of substantive law is governed             relevant policies of the involved states in
by the forum state’s choice of law rules.”                the light of: (1) the pertinent contacts of
Allison v. ITE Imperial Corp., 928 F.2d 137,              each state to the parties and the transac-
138 (5th Cir. 1991).                                      tion, including the place of negotiation,
                                                          formation, and performance of the con-
   Louisiana Civil Code articles 3515 and                 tract, the location of the object of the
3537 govern conflicts of laws questions in                contract, and the place of domicile, ha-
contracts cases. Article 3515 states:                     bitual residence, or business of the par-
                                                          ties; (2) the nature, type, and purpose of
        Except as otherwise provided in this              the contract; and (3) the policies re-
   Book, an issue in a case having contacts               ferred to in Article 3515, as well as the
   with other states is governed by the law               policies of facilitating the orderly plan-
   of the state whose policies would be                   ning of transactions, of promoting com-
   most seriously impaired if its law were                mercial intercourse, and of protecting
   not applied to that issue.                             one party from undue imposition by the
                                                          other.
        That state is determined by evaluat-
   ing the strength and pertinence of the                      In Sentilles Optical Servs. v. Phillips,
   relevant policies of all involved states in         651 So. 2d 395 (La. App. 2d Cir. 1995), the
   the light of: (1) the relationship of each          court explained:
   state to the parties and the dispute; and
   (2) the po licies and needs of the inter-              Enforcement of a conventional obliga-
   state and international systems, includ-               tion is governed by the law of the state
   ing the policies of upholding the justified            whose policies would be most seriously
   expectations of parties and of minimiz-                impaired if its law were not applied to
   ing the adverse consequences that might                that issue. La. C.C. Art. 3537. Article
   follow from subjecting a party to the law              3537 lists factors for determining the
   of more than one state.                                state whose law should be applied, in-
                                                          corporating the factors listed in the more
Article 3537 states:                                      general La. C.C. Art. 3515. The two
                                                          articles are intended to be read together.
        Except as otherwise provided in this              See La. C.C. Art. 3537, Comment (c).
   Title, an issue of conventional obliga-                The objective of the articles is to “iden-
   tions is governed by the law of the state              tify the state whose policies would most
   whose policies would be most seriously                 seriously be impaired if its laws were not
   impaired if its law were not applied to                applied to [the] issue [to be resolved].”
   that issue.                                            La. C.C. Arts. 3515 and 3537. This
                                                          objective is acheived through an issue-
       That state is determined by evaluat-               specific analysis of the policies of each
                                                          of the two states, the first step in which
                                                          process is to identify the relevant poli-
   2
   Erie R.R. v. Tompkins, 304 U.S. 64 (1938);             cies of the laws in two states.
Guaranty Trust Co. v. York, 326 U.S. 99 (1945).

                                                   3
Id. at 398, cited in Shell Oil Co. v. Hollywood            and State Farm should be governed by
Marine, Inc., 701 So. 2d 1038, 1040 (La.                   Alabama law.
App. 5th Cir. 1997).
                                                        Id. at 897. See also Holcomb v. Universal
    In Levy v. Jackson, 612 So. 2d 894 (La.             Ins. Co., 640 So. 2d 718, 722 (La. App. 3d
App. 4th Cir. 1993), the court applied the              Cir.) (holding that Arkansas law governs the
Louisiana conflicts of laws statutes to decide          insurance contract in question, because “the
whether Louisiana or Alabama law applied to             application of Louisiana law in this case
a case of insurance contract construction. A            would, in our opinion, impinge on the State of
guest passenger in an automobile sued the               Arkansas’ right to regulate the insurance
driver (her father) for injuries from an accident       industry in that state.”), writ denied, 644 So.
in Louisiana. The policy was issued in Ala-             2d 643 (La. 1994).
bama and covered the car, which was reg-
istered and garaged in Alabama. Both parties               In Resure, Inc. v. Chemical Distributors,
were do miciled in Alabama. The Levy court              Inc., 927 F. Supp. 190 (M.D. La. 1996), a
decided:                                                case analogous to the one before us, the court
                                                        addressed which state law should govern the
   [T]his conflict of law problem is fore-              interpretation of a commercial general liability
   most and principally an issue of insur-              policy entered into outside of Louisiana and
   ance coverage, and therefore one of                  between two out-of-state parties where the
   contract. When the basics are exam-                  accident giving rise to suit occurred in
   ined, Heather Levy is suing her father’s             Louisiana. The court noted:
   insurance company and the issue is
   whether that insurance covers her claim.                Resure points out that CDI is a New
   C.C. Art. 3537 says that an issue of con-               Mexico corporation, and that the
   ventional obligations is governed by the                insurance policy was negotiated and
   law of the state whose policies would be                delivered in New Mexico. Resure then
   most seriously impaired if its law were                 argues that “if the law of the place of
   not applied, and section (1) indicates                  ‘accident’ is applied to a multi-state
   that domicile of the parties is a para-                 trucking company (like CDI), neither it
   mount question. Another factor given                    nor its insurer have any means of
   strong consideration is the expectations                negotiating required coverage for the
   of the parties. In this case that means                 insured with any degree of certainty.”
   risks coverage and premiums paid.                       Resure also makes the related argument
   They are directly related.                              that application of the law of the place
                                                           of the accident could result in
        State Farm issued a policy in Ala-                 inconsistent results from state to state.
   bama, accepting the risks of loss under
   Alabama law, and charged premiums                    Id. at 192 (footnote omitted).
   accordingly. Patrick Levy could not ex-
   pect coverage of risks not contemplated                 These cases give us direction as to how
   by either him or his insurer. Determina-             Louisiana courts apply article 3537. We now
   tion of coverage vis a vis Patrick Levy              evaluate which state’s policies would be most


                                                    4
seriously impaired if its law were not applied          most identical to those here. In Shell, there
here.      Just as Louisiana courts have                was a comprehensive commercial liability pol-
determined in the above cases, we conclude              icy much like the one here. The accident oc-
that the state in which the insurance policy was        curred in Louisiana, where an employee of
negotiated, written, and agreed toSSSouth               Hollywood Marine was injured and sued Shell,
CarolinaSShas the most substantial interest in          which cross-claimed against Hollywood and its
regulation of such policies. Further, none of           insurance company, claiming that Shell was an
the parties is domiciled in Louisiana. Colony           additional insured under Hollywood’s policy.
is a South Carolina company, and it issued this         Shell argued that Louisiana law applied to the
policy to another South Caro lina                       question whether the policy covered the claims
companySSU.S. Collections, Inc. Collect                 made against it. The Louisiana court of appeal
America later was added as an additional                disagreed and concluded that Texas law
insured. Collect America is a Colorado                  governed:
company. Only the HanksesSSwho are not
appealing the dismissal of ColonySSare                     Texas has a compelling interest is [sic]
residents of Louisiana.                                    regulating insurance policies contracted
                                                           for in Texas and issued to companies
   Contrarily, Louisiana’s policies would not              doing business in Texas . . . .
be significantly impaired by having South Car-             Louisiana’s interest arises only because
olina law applied. Louisiana does have a                   a Delaware corporation, with its
strong policy that protects its citizens from ex-          principal place of business in Texas,
tortion and blackmail such as that alleged by              seeks indemnity under a policy of
the Hanks against Collect America; this policy,            insurance issued in Texas to recover
however, is affected little by the determination           payment it made to recompense for
of whether Collect America is insured against              damages it caused a Louisiana citizen.
such a claim.                                              We do not believe that this interest is
                                                           sufficient to override the compelling
   Additionally, the expectations of the parties           interest Texas has in regulating
would be upheld by applying South Carolina                 insurance contracts written in Texas and
law. Just as the parties in Levy contracted un-            issued to Texas companies.
der Alabama law, gauged the risks of loss un-              Accordingly, we hold that Texas law
der Alabama law, and charged premiums ac-                  should be applied in this instance.
cordingly, the parties here contracted under
South Carolina law, assessing risks and                 Shell, 701 So. 2d at 1041. We conclude that,
premiums accordingly.         To subject this           just as Texas had an interest in the insurance
insurance contract to the law of Louisiana              policy at issue in Shell, South Carolina has a
would undermine the policy of allowing the              compelling interest in regulating insurance
parties to negotiate insurance contracts with           policies contracted for in South Carolina and
certainty and would allow the coverage to vary          issued to companies doing business there.
depending on the state in which a claim is
brought. See id.                                           Here as well, Louisiana’s interest arises
                                                        only because a Colorado corporation seeks in-
   Shell involved facts and legal questions al-         demnity under a policy of insurance issued in


                                                    5
South Carolina for damages it caused two                      The Hankses make a number of claims un-
Louisiana citizens. 3 Just as the court did in            der state and federal law for damages arising
Shell, we conclude that this interest is                  from Collect America’s allegedly unlawful
insufficient to override the compelling interest          debt collection practices, which, according to
of South Carolina in regulating insurance                 the Hankses, caused them to suffer “extreme
contracts written in that state. Accordingly,             emotional distress, fear, anxiety, humiliation,
South Carolina law should be applied.                     and outrage.” Before we address whether the
                                                          Hankses’ various claims are covered under the
                        III.                              policy, we first examine the types of injuries
    Under South Carolina law, the                         covered: “bodily injury and property damage
determination of whether an insurance                     liability.”   Because South Carolina law
company is obligated to defend an action                  recognizes infliction of emotional distress as a
under its policy provisions is based on the               “bodily injury” under a standard insurance pol-
complaint. R.A. Earnhardt Textile Mach.                   icy, see State Farm Mut. Auto. Ins. Co. v.
Div., Inc. v. South Carolina Ins. Co., 282                Ramsey, 374 S.E.2d 896 (S.C. 1988), the
S.E.2d 856, 857 (S.C. 1981). If the facts                 Hankses’ emotional distress is covered under
alleged fail to bring the case within the policy’s        the policy.
coverage, the insurer has no obligation to
defend. Id.; see also Manufacturers &                         The policy covers “bodily injury” only if it
Merchants Mut. Ins. Co. v. Harvey, 498                    is caused by an “occurrence,” which it defines
S.E.2d 222 (S.C. App. 1998) (citing cases).               as “an accident, including continuous or re-
                                                          peated exposure to substantially the same gen-
    Our inquiry therefore must be whether any             eral harmful conditions.” The policy does not
of the claims made in the complaint allege                define “accident.” We therefore look to the
facts that bring the action within the policy’s           ordinary meaning of the term.
coverage. If so, Colony owes Collect America
a duty to defend and may be required to in-                  The South Carolina Supreme Court has in-
demnify Collect America if an adverse decision            terpreted the ordinary meaning of “accident”
is returned on a covered claim. If not, Colony            to be “an effect which the actor did not intend
owes no such duty.                                        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
   3
      We acknowledge one small distinction                Manufacturers & Merchants, 498 S.E.2d at
between the two cases. In Shell, payment already          225. Thus, only claims for bodily injuries
had been made to the injured Louisiana resident. It       caused by accidents are covered under Collect
could be argued that Louisiana’s interest in this         America’s policy. All of the Hankses’ claims
case is therefore somewhat greater, because the
                                                          based on intentional acts are therefore outside
Louisiana plaintiff has not yet been compensated,
and therefore a finding of coverage for Collect
                                                          the coverage, and Colony owes no duty to
America might affect the amount of compensation           defend them.
available to the Hanks. We do not believe,
however, that Louisiana’s policy that plaintiffs be           The Hankses also claim that the allegedly
compensated for injury would be seriously                 illegal debt collection tactics employed by Mel-
impaired by applying South Carolina law to                ton resulted from Collect America’s failure
construe this insurance contract.

                                                      6
properly to hire, train, and supervise. This             the part of Collect America.
claim also is excluded by an endorsement that
excludes bodily injury arising from “[t]he neg-              If Collect America faithfully supervised
ligent hiring, supervision or training of any em-        Melton and directed him to do the acts com-
ployee of the insured.”                                  plained of, not knowing that they were illegal,
                                                         then Collect America may have negligently
   Collect America argues, however, that the             violated debt collection laws or negligently in-
complaint can be read as alleging negligence,            flicted emotional distress, and this would be
separate from and above any claims for                   covered by the policy. This possibility of cov-
negligent supervision. Injuries caused by                erage is enough to trigger Colony’s duty to
negligence are “occurrences” and thus are                defend this suit.
covered by the policy.
                                                            Further, even the defendants’ intentional
   Collect America claims that paragraph 24              actions may be held to be “not intentional” and
of the complaint may be read as a claim for              thus “occurrences” under South Carolina law.
injury from negligence, apart from negligent             Though we have noted that claims for
supervision. That paragraph states, “Collect             damages from intentional torts are not
America and/or Sean Bannon Zenner                        covered, under South Carolina law the alleged
negligently or willfully allowed [Melton] to             “intentional” acts of Collect America and its
engage in abusive and criminal methods of                employee may fall short of the requirements
debt collection.” Colony claims that this                needed to make an act intentional for purposes
paragraph can be interpreted only as a claim             of an exception to coverage.
for injuries arising from negligent supervision
of an employee, and it vigorously denies that               “The South Carolina Supreme Court has
there are any negligence claims set forth in the         held that, for an act to be an intentional act
complaint.                                               excluded by the intentional act exclusion of a
                                                         policy, (1) the act which produces the loss
   We conclude that this paragraph can be                must be intentional, and (2) the results of the
read two waysSSas a claim of negligent                   act must be intended.” Manufacturers &
supervision or as one for simple negligence.             Merchants, 498 S.E.2d at 229 (citing Miller v.
An insurer has a duty to defend if “the                  Fidelity-Phoenix Ins. Co., 231 S.E.2d 701
underlying complaint creates a possibility of            (S.C. 1977)). Thus, if the Hanks do not prove
coverage under an insurance policy.” Isle of             that the acts complained of were done (1) in-
Palms Pest Control Co. v. Monticello Ins.                tentionally and (2) with intent to cause the
Co., 459 S.E.2d 318, 319 (S.C. Ct. App.                  complained-of harm, they will not have proven
1995), aff’d, 468 S.E.2d 304 (S.C. 1996). If             an intentional act of the type that is excepted
paragraph 24 is viewed only as a claim for               from the policy.4 Therefore, until it is proven
negligent failure to supervise, then it is plainly
excluded from coverage by the negligent
supervision exception endorsement discussed                 4
                                                              For example, the claim for infliction of emo-
above. We agree with Collect America,                    tional distress will not be considered intentional for
however, that this paragraph also may be                 purposes of the insurance exception until the
interpreted as a claim of simple negligence on           Hankses prove (1) that Melton purposefully
                                                                                                 (continued...)

                                                     7
that a defendant intended to cause the                             Therefore, we conclude that claims have
complained-of harm, a duty to defend is pres-                  been alleged that are within the coverage of
ent if the complained-of injury also could have                the policy. Colony’s duty to defend is thus
been the result of negligence.5                                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
                                                                  5
on fire in two separate rooms, he acted without a                   (...continued)
conscious intent to cause major property damage,               damage the plaintiff’s eye could not be found, and
and thus he did not have the necessary intent to               the intentional act exclusion thus did not apply.
trigger the intentional act exclusion. The South
Carolina Supreme Court reaffirmed Miller in                        Unlike the case sub judice, in which Collect
Vermont Mut. Ins. Co. v. Singleton, 446 S.E.2d                 America is seeking inclusion under the definition of
417 (S.C. 1994), holding that the intentional act              occurrences, both Miller and Vermont Mutual
exclusion of a home owner’s policy did not apply               involved insureds who sought to avoid exclusion
to exclude coverage for damage to plaintiff’s eye              under an exception for intentional acts. South
resulting from a fight with the defendant. The                 Carolina courts do not seem to consider this dif-
court acknowledged that the defendant purposefully             ference important, however. See Manufacturers &
had hit the plaintiff but held that because the record         Merchants, 498 S.E.2d at 229 (using the Miller
contained evidence that the defendant was                      two-part test for intentional acts to determine
defending himself, the requisite subjective intent to          whether an act was outside the definition of
                                         (continued...)        “occurrence”).

                                                           8
