No. 173, Docket 92-7535.United States Court of Appeals, Second Circuit.Argued October 19, 1992.
Decided December 23, 1992.
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Gregoria Rosa, pro se.
Robyn G. Nir, Uniondale, NY (Evan H. Krinick, Rivkin, Radler
Kremer, on the brief), for defendant-appellee.
Appeal from the United States District Court for the Eastern District of New York.
Before KEARSE, MINER, Circuit Judges, and POLLAK[*] , District Judge.
LOUIS H. POLLAK, District Judge:
[1] Section 1332(c) of Title 28, which for the purposes of federal court diversity jurisdiction treats a corporation as a citizen “of any State by which it has been incorporated and of the State where it has its principal place of business,” contains the following proviso:[2] 28 U.S.C. § 1332(c)(1) (1988). This case tests the applicability of the § 1332(c) “direct action” proviso to a suit brought in a federal district court by an automobile passenger hurt in an accident who seeks to recover from the automobile owner’s insurance carrier certain benefits allegedly owed under the owner’s no-fault insurance policy. The principal question presented is whether such a suit is a “direct action” within the meaning of the proviso. An affirmative answer would bar subject matter jurisdiction in this case, since, notwithstanding that the named parties — the plaintiff injured passenger and the defendant insurance carrier — are of diverse citizenship, the passenger and the insured are not. We conclude that the suit is not a “direct action” and hence that the district court has subject matter jurisdiction of plaintiff’s suit.[I]n any direct action against the insurer of a policy or contract of liability insurance, whether incorporated or unincorporated, to which action the insured is not joined as a party-defendant, such insurer shall be deemed a citizen of the State of which the insured is a citizen, as well as of any State by which the insurer has been incorporated and of the State where it has its principal place of business . . .
I
[3] On March 20, 1991, plaintiff, a New York citizen, was injured in an automobile accident while a passenger in an automobile driven and owned by defendant Allstate Insurance Co.’s insured, also a New York citizen. Under New York’s no-fault insurance law, the insurer of a motor vehicle pays benefits to any person, other than occupants of another motor vehicle, for loss arising out of operation of the insured vehicle, regardless of who was at fault. N.Y.Ins.Law § 5103 (McKinney 1985). Six days after the accident, plaintiff applied for no-fault benefits from Allstate, and, soon thereafter, began to receive payments from Allstate for medical treatments. Pursuant to the terms of the no-fault insurance policy, Allstate arranged for plaintiff to be examined by three physicians;[1] those examinations took place on June 14, 1991. The three doctors provided reports indicating that plaintiff had been obstructive during the evaluations; therefore, Allstate discontinued plaintiff’s no-fault benefits as of June 14, 1991, claiming that plaintiff’s failure to cooperate breached the insurance policy.
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breach of contract, intentional infliction of emotional distress, fraud, and injurious falsehood. Plaintiff sought “real and punitive” damages in the amount of $7,500,000.
[5] On or about July 25, 1991, a summons and a complaint were sent by certified mail to Allstate in Illinois, its place of incorporation and principal place of business. Service of process was not acknowledged by Allstate. Plaintiff again attempted service on August 30, 1991, this time pursuant to § 253 of the New York State Vehicle and Traffic Law, which authorizes mail service of a complaint and summons upon nonresident motorists by or on behalf of a plaintiff who has first delivered such summons to the New York Secretary of State. Again, service of process was not acknowledged by Allstate. In light of Allstate’s failure to file an answer, plaintiff filed notice of a motion for default judgment on October 3, 1991. Thereafter, on October 22, 1991, plaintiff apparently made personal service on a New York representative of Allstate. Eight days later, on October 30, 1991, Allstate served an answer. [6] On November 13, 1991, the United States Marshal effected personal service of a supplemental summons and complaint on Allstate in Illinois. Approximately one week later, plaintiff filed a second motion for default judgment, and, on December 2, 1991, defendant served an answer to the supplemental complaint. On December 13, 1991, Allstate responded to the motions for default judgment, arguing that the initial attempts at mail service were legally insufficient to effectuate service on it. In Allstate’s view, Vehicle and Traffic Law § 253 applied only to tort actions against the owner and operator of a motor vehicle and not to contract actions against the insurer. [7] On February 5, 1992 Magistrate Judge Caden — to whom the case had been referred — issued a Report and Recommendation, agreeing that mail service was improper under both § 253 and the Federal Rules of Civil Procedure (since Rule 4(c)(2)(C)(ii) requires, after unacknowledged mail service, that the complaint and summons be re-served personally on defendant). Deciding that service of the complaint was not suitably effected until November 13, 1991,[2] and that Allstate’s amended answer was, therefore, filed within the time period required by the Federal Rules of Civil Procedure, Magistrate Judge Caden recommended that the motions for default judgment be denied. [8] Five days after the Report and Recommendation suggesting denial of the motions for default judgment, Magistrate Judge Caden, in response to a motion to dismiss filed by Allstate, issued a second Report and Recommendation advising that the complaint be dismissed for lack of subject matter jurisdiction. Magistrate Judge Caden reasoned that the lawsuit was, within the meaning of the “direct action” proviso of § 1332(c), a “direct action” against the insurer in which the insured had not been named as a party-defendant, and therefore 28 U.S.C. § 1332(c) required that Allstate be deemed a citizen not only of Illinois, its place of incorporation, but also of New York, the insured’s place of citizenship. Because plaintiff was also a New York citizen, there was no diversity of citizenship. [9] The district court adopted both Reports and Recommendations on April 14, 1992. Seven days later, plaintiff filed a notice of appeal to this Court. She raises two points: (1) the principal contention is that the district court erred in dismissing her complaint for lack of subject matter jurisdiction; (2) the second contention is that the district court erroneously denied her motions for default judgment.[3] II
[10] The diversity provisions of the First Judiciary Act did not address the issue of corporate
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citizenship. When the Supreme Court first addressed the issue it determined that a corporation was, as an entity, not a citizen for diversity purposes and hence could sue or be sued in diversity only if the citizenship of each of its stockholders was diverse from that of adverse parties. See Bank of the United States v. Deveaux, 9 U.S. (5 Cranch) 61, 3 L.Ed. 38 (1809). Later, the Court reexamined the corporate citizenship question, holding that each stockholder — and therefore the corporation — would be treated as a citizen of the state in which the corporation was incorporated. See Marshall v. Baltimore Ohio R.R., 57 U.S. (16 How.) 314, 14 L.Ed. 953 (1854); Louisville Cincinnati Charleston R.R. v. Letson, 43 U.S. (2 How.) 497, 11 L.Ed. 353 (1844). This determination created the opportunity to invoke diversity jurisdiction in a large number of actions involving corporations, including those brought by or against corporations that — although they had local headquarters — were incorporated out-of-state. Concerned about this development,[4] Congress, in 1958, added § 1332(c) to the diversity statute, providing that a corporation is a citizen both “of any State by which it has been incorporated and of the State where it has its principal place of business.”
[11] Shortly after the addition of § 1332(c), Congress addressed another asserted abuse of diversity jurisdiction. In the early 1950s, Louisiana had passed a so-called “direct action” statute permitting an injured party to bring a tort action directly against an insurer without having to join the alleged tortfeasor insured as a party-defendant.[5] See La.Rev.Stat.Ann. § 22:655(B)(1) (West 1992). The statute was designed to eliminate the necessity of two lawsuits: the first in which the victim sued the insured, and the second in which — if the victim prevailed on the merits — the insured would seek indemnity from his insurer Evanston Ins. Co. v. Jimco, Inc., 844 F.2d 1185, 1188 (5th Cir. 1988). [12] The Supreme Court was soon presented with the question whether diversity jurisdiction existed when a Louisiana citizen sued a foreign insurance company under the Louisiana Direct Action Statute without joining the insured, a fellow Louisiana citizen See Lumbermen’s Mut. Casualty Co. v. Elbert, 348 U.S. 48, 75 S.Ct. 151, 99 L.Ed. 59 (1954). The Court allowed that it did; however, in a concurring opinion, Justice Frankfurter described the preferential treatment that a “direct action” plaintiff would receive once brought under the umbrella of federal procedure on matters of local concern:[13] Id. at 56-57, 75 S.Ct. at 156-157 (Frank-furter, J., concurring). [14] In 1964, in direct response to a large number of “direct action” cases brought inHere we have a Louisiana citizen resorting to the federal court in Louisiana in order to avoid consequences of the Louisiana law by which every Louisiana citizen is bound when suing another Louisiana citizen. . . . [B]y the fortuitous circumstance that this Louisiana litigant could sue directly an out-of-state insurance company, she can avoid her amenability to Louisiana law. In concrete terms, she can cash in on the law governing jury trials in the federal courts, with its restrictive appellate review of jury verdicts, and escape the rooted jurisprudence of Louisiana law in reviewing jury verdicts. There is, to be sure, a kind of irony for corporate defendants to discover that two can play at the game of working, to use a colloquial term, the perverse potentialities of diversity jurisdiction. But it is not the less unreason and no greater fairness for a citizen of the forum to gain a discriminatory advantage over fellow citizens of his State, than it is for an out-of-state citizen to secure more than the same treatment given local citizens, by going to a federal court for the adjudication of state-created rights.
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the federal district courts in Louisiana[6] that “[did] not come within the spirit or the intent . . . of the diversity jurisdiction of the Federal judicial system,” S.Rep. No. 1308, 88th Cong., 2d Sess. 7 (1964), reprinted in 1964 U.S.C.C.A.N. 2778, 2784, Congress amended § 1332(c) to provide that in a “direct action against the insurer of a policy or contract of liability insurance,” where the “insured is not joined as a party-defendant,” the citizenship of the insured would be attributed to the insurer. In the case at bar, the parties apparently agree that an action has been brought against an insurer on “a policy or contract of liability insurance”[7]
to which the insured “is not joined as a party-defendant”; the intriguing question that remains is whether this case involves a “direct action” within the intendment of the 1964 amendment.
A.
[15] The question whether the § 1332(c) proviso applies to a claim brought by an injured third-party under a no-fault insurance contract has received limited attention, with divided results Compare Ford Motor Co. v. Insurance Co. of N. Am., 669 F.2d 421
(6th Cir. 1982) (§ 1332(c)’s proviso applies to a no-fault insurance action brought by an injured third party) and Fox v. Liberty Mut. Ins. Co., 553 F.Supp. 393 (S.D.N.Y. 1983) (same)and McMurry v. Prudential Property Casualty Ins. Co., 458 F.Supp. 209 (E.D.Mich. 1978) (approved in Ford) with Fleming v. Allstate Ins. Co., 709 F.Supp. 216 (D.Colo. 1989) (proviso does not apply to a no-fault insurance action brought in state court by injured pedestrian and removed to federal court by insurer).[8] This Court’s published opinions have never had occasion to address the § 1332(c) proviso, much less to consider its applicability to suits brought against an insurer under a no-fault insurance contract. One district court decision within this Circuit — Fox, supra — squarely holds that the § 1332(c) proviso defeats diversity jurisdiction
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in no-fault actions brought against an out-of-state insurer. I Fox, the court found
[16] 553 F.Supp. at 393; see also Ford, 669 F.2d at 425 (emphasis in original) (“The language of the amendment is inclusive rather than exclusive: `in any direct action. . . .'”). However, we decline to adopt this expansive reading of the phrase “direct action.” [17] The Senate Report accompanying the 1964 amendment to § 1332(c) that added the proviso sets forth the legislative purpose:no reason why [the proviso] should not be applicable to subsequently adopted state no-fault laws. They create the same problem of increasing federal diversity jurisdiction. The language is broad enough to encompass any direct action against the insurance company on a liability policy.
[18] S.Rep. No. 1308, 88th Cong., 2d Sess. 1 (1964), reprinted in 1964 U.S.C.C.A.N. 2778, 2778-79. Sensitive to congressional design,[9] a number of courts have recognized that “direct action” is a form of words taken from the Louisiana statute and that simply because an insurer is a direct party does not make the litigation a “direct action.” Evanston Ins., 844 F.2d at 1188; see also White v. United States Fidelity Guar. Co., 356 F.2d 746, 747 (1st Cir. 1966), Bodine’s Inc. v. Federal Ins. Co., 601 F.Supp. 47, 50 (N.D.Ill. 1984). These courts have tended to limit the § 1332(c) proviso to situations where the insurer’s status is that of a “`payor of a judgment based on the negligence of one of its insureds.'”[10]The purpose of the proposed legislation is to amend section 1332(c) of title 28, United States Code, so as to eliminate under the diversity jurisdiction of the U.S. district courts, suits on certain tort claims in which both parties are local residents, but which, under a State “direct action” statute, may be brought directly against a foreign insurance carrier without joining the local tort-feasor as a defendant.
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Myers v. State Farm Ins. Co., 842 F.2d 705, 707 (3d Cir. 1988) (proviso does not apply to suit for underinsurance benefits by injured third party brought against the insurance carrier of the vehicle’s owner and operator); Velez v. Crown Life Insurance Co., 599 F.2d 471, 473 (1st Cir. 1979) (§ 1332(c) proviso does not apply to suit by son of deceased against insurer for failure to meet its obligations under the deceased’s life insurance policy); see also District of Columbia, ex rel. Am. Combustion, Inc. v. Transamerica Ins. Co., 797 F.2d 1041, 1048-49 (D.C.Cir. 1986) (refusing to extend the proviso to a contract claim against an insurer on a performance bond in view of Congress’ limited intent to bar jurisdiction over local tort claims); Holland Am. Ins. Co. v. Succession of Roy, 777 F.2d 992, 995 (5th Cir. 1985) (noting that Louisiana’s “direct action” statute only applies to tort disputes and therefore the § 1332(c) proviso should not defeat diversity in a case involving claims on a fire insurance policy). Because the § 1332(c) proviso is applicable when the insurer stands in the shoes of its legally responsible insured, who would traditionally be a defendant, the general rule is that the proviso does not affect suits against the insurer based on its independent wrongs: such as actions brought against the insurer either by the insured for failure to pay policy benefits[11] or by an injured third party for the insurer’s failure to settle within policy limits or in good faith.[12] The Ninth Circuit has succinctly captured the prevailing rule:
Courts have uniformly defined the term “direct action” as used in this section as those cases in which a party suffering injuries or damage for which another is legally responsible is entitled to bring suit against the other’s liability insurer without joining the insured or first obtaining a judgment against him. . . . Thus, “unless the cause of action urged against the insurance company is of such a nature that the liability sought to be imposed could be imposed against the insured, the action is not a direct action.”
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[19] Beckham v. Safeco Ins. Co. of Am., 691 F.2d 898, 901-02 (9th Cir. 1982) (citations omitted);[13] accord McGlinchey v. Hartford Accident Indem. Co., 866 F.2d 651, 653 (3d Cir. 1989) Fortson v. St. Paul Fire Marine Ins. Co., 751 F.2d 1157, 1159 (11th Cir. 1985). B.
[20] New York’s Comprehensive Motor Vehicle Insurance Reparations Act (“no-fault law”), N.Y.Ins.Law § 5101 et seq. (McKinney 1985), adopted in 1973, requires the insurer of any vehicle owner to pay benefits to “[p]ersons, other than occupants of another motor vehicle or a motorcycle, for loss arising out of the use or operation in this state of such motor vehicle.” Id. § 5103(a)(1). Courts extending the § 1332(c) proviso to no-fault claims have been impressed by what, on the surface, appears to be a strong, formal kinship between the operation of no-fault laws and “direct action” statutes: each enables an injured party to proceed against the insurer rather than the insured. See Ford,
669 F.2d at 425; McMurry, 458 F.Supp. at 211-12. However, beneath this surface procedural similarity lurk crucial substantive differences.
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[23] Therefore, the configuration of the parties in a no-fault action, realistically viewed, differs substantially from the “direct action” scenario. Whereas a “direct action” is a tort claim in which the insurer essentially stands in the shoes of its legally responsible insured, no-fault coverage is contractual in nature,[17] 12A George J. Couch, Cyclopedia of Insurance Law§ 45:664, at 263 (2d ed. 1981); 8D John A. Appleman Gene Appleman, Insurance Law and Practice § 5163, at 442 (1981), and even a no-fault claimant who is not the named insured assumes the position of an insured with a right to enforce the insurance contract.[18] In a no-fault action, the insured driver is no longer an absentee party-defendant[19] — whose citizenship may properly be attributed to the insurer — because, unlike the derivative liability that arises in a “direct action,” no-fault liability could not have been imposed against the insured driver. First, because the insured driver may be entirely blameless,[20] it cannot be said, as a general matter, that a no-fault action involves a situation in which the insured would ordinarily be expected to be a party-defendant.[21] More importantly, even in cases where the insured may have been negligent, the no-fault claim, by definition, is not based on that negligence. Rather, the claimant — like plaintiff in this case — seeks to hold the insurer responsible for breaching the terms of its insurance policy or for its independent tortious acts.[22]
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Thus, in the present case, since the named insured presumably had nothing whatsoever to do with Allstate’s decision to disallow benefits on the policy, and likewise presumably had no connection with the insurer’s alleged scheme of malicious deception and fraud, it would appear that the named insured could not properly be sued on the claims at issue.
[24] In similar situations involving suits by an injured third party against the insurer for failure to settle within the policy limits, courts have held that the § 1332(c) proviso does not control. In Beckham, supra, Beckham (the plaintiff) was seriously injured in an automobile accident and sued the other driver, Mankin, in state court. Mankin’s defense was assumed by her primary insurer, and then her excess liability insurer, Safeco. Beckham and Safeco engaged in settlement negotiations, which were ultimately unsuccessful, and then proceeded to trial. After the jury awarded her $1,500,000 in the suit against Mankin, Beckham commenced another state court suit, this time against Safeco itself, alleging unfair settlement practices and intentional infliction of emotional distress. Safeco, a Washington corporation, removed the action to federal court, and Beckham, a California citizen, moved to remand, relying on the § 1332(c) proviso and Mankin’s California citizenship. The Ninth Circuit decided that there was diversity jurisdiction, notwithstanding the direct action proviso. The court reasoned:[25] 691 F.2d at 902 (citation omitted); see also Cunningham v. State Farm Mut. Auto Ins. Co., 297 F.Supp. 1138 (E.D.Tenn. 1969) (§ 1332(c) proviso inapplicable where plaintiff, having sued tortfeasor, institutes subsequent action against tortfeasor’s insurer). [26] Similarly, in Myers, supra, Myers had sustained injuries as a passenger in an automobile owned and operated by the insured. The driver’s policy provided for liability and underinsurance coverage each in the amount of $15,000, and, as a passenger, Myers was covered under the policy. The driver’s insurer, State Farm, agreed to pay the full $15,000 in liability coverage to Myers, but denied him underinsurance benefits. Myers filed suit in state court seeking the additional $15,000 in underinsurance benefits from State Farm; State Farm removed the action to federal court; and Myers filed a motion for remand, which the district court denied. The Third Circuit concluded that “Myers, as an injured third party, brings this suit based on State Farm’s failure to settle within the policy limits and not, as contemplated by section 1332(c), as a result of State Farm’s status as `payor of a judgment based on the negligence of one of its insureds.'” 842 F.2d at 707. [27] Because a party suing a diverse insurer for failure to make payments under an insurance contract or for bad faith refusal to settle is entitled to invoke diversity jurisdiction, it would be anomalous to deny access to a federal court to a no-fault claimantThe present suit is clearly not a direct action since Beckham is not seeking to impose liability on Safeco for the negligence of Safeco’s insured, Mankin. Rather, she is seeking to impose liability on Safeco for its own tortious conduct, i.e., Safeco’s bad faith refusal to settle her claim against Mankin. Such liability could not be imposed against Mankin, nor could Mankin even be joined as a defendant in this suit. . . . The district court thus did not err in concluding that diversity jurisdiction existed in this case.
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seeking a declaration of her rights under the insurer’s policy. Accordingly, we will reverse the district court’s ruling that the § 1332(c) proviso worked to deprive it of subject matter jurisdiction over the instant no-fault action.
III
[28] Plaintiff’s motions for default judgment were correctly denied. In arguing that mail service upon Allstate was proper, plaintiff relies on § 253 of the Vehicle and Traffic Law. However, § 253 provides for mail service of process upon a non-resident owner or operator of an automobile for claims growing out of a New York accident and does not pertain to service upon the insurer in an insurance contract matter. See Merchants Mut. Ins. Co. v. Jackson Trucking Co., 21 Misc.2d 1005, 193 N.Y.S.2d 135, 137 (Sup.Ct. 1959); Secured Casualty Ins. Co. v. Sinelnikoff, 1 A.D.2d 1036, 152 N.Y.S.2d 15, 17 (App. Div. 2d Dep’t 1956).
IV
[30] The district court order dismissing the action for lack of subject matter jurisdiction is reversed, the order denying plaintiff’s motions for default judgment is affirmed, and this case is remanded for further proceedings consistent with this opinion.
note 23.
1964 U.S.C.C.A.N. 2778, 2779.
a third party, fault based insurance — that is, the insurance company agrees to provide indemnification for an insured in the event that the insured is legally obligated to a third party who is injured as a consequence of the insured’s negligence.
Robert E. Keeton Allen I. Widiss, Insurance Law § 4.10, at 411 (1988). By contrast, “first-party” motor vehicle insurance coverages were traditionally designed to indemnify the named insured and parties closely associated with him against any injuries they might suffer from operation of the vehicle, regardless of fault. Id. Contemporary no-fault statutes expand “first-party” insurance protection to cover a broader class of accident victims — including “third parties” who, under a fault system, might have brought a tort liability suit against the insured driver. Still, because no-fault insurance benefits are paid automatically to any covered person regardless of tort liability, see infra pp. 677-79, it is arguable that no-fault coverage should be regarded as “first-party” indemnity insurance rather than third-party “liability insurance.” See Liberty Mut. Ins. Co. v. State of N.Y., 94 Misc.2d 676, 405 N.Y.S.2d 945, 947 (Ct.Cl. 1978) (noting that an insurer’s obligations under a no-fault policy do not arise “because of any `liability of the insured'” but “directly by reason of the law’s provisions and their legislatively mandated incorporation into its policy with the insured”). However, this view is in some tension with several decisions interpreting the term “liability insurance” broadly to mean “`an indemnity agreement which protects the insured against his liability to others.'” E.g. Aetna Casualty Sur. Ins. Co. v. Greene, 606 F.2d 123, 126 (6th Cir. 1979) (quoting Twin City Fire Ins. Co. v. Wilkerson, 247 F.Supp. 766, 767 (E.D.Tenn. 1965)) (worker’s compensation insurance policy is a “policy or contract of liability insurance”). Insofar as no-fault insurance coverage shields the insured from basic tort liability, see infra note 15 and accompanying text, it might be said to fit within this expansive definition.
503 F.Supp. 848 (E.D.Mich. 1980) — which the Sixth Circuit i Ford declined to follow.
part of plaintiff’s employment package, and thus constituted one aspect of [the employer’s] obligation to plaintiff as its employee. . . . [The employer’s] obligation to plaintiff was met in part by its contract of insurance with defendant. . . . The insurer’s alleged obligation to plaintiff would not exist but for the primary obligation owed by [the employer] to plaintiff as a result of their employment relationship. Plaintiff is, in essence, seeking recovery from an insurer pursuant to an obligation undertaken by her employer. Thus this is a “direct action against the insurer” under the proviso in § 1332(c).
495 F.Supp. at 243 (citations omitted). Similarly, in Aetna,
under the workers’ compensation laws in question, an employer and his compensation carrier were jointly and severally liable for all injuries sustained by the employee in the course of his employment; therefore, the employer was a proper, although not an indispensable, party. See 606 F.2d at 125, 126 n. 3. Finally, in Hernandez a unique Texas workers’ compensation statute allowed an employee only to sue his employer’s insurer, not his employer. Even though the employer could not have been joined in the suit, it owed some primary obligation to the plaintiff as a result of the employment relationship, and the court concluded that the plaintiff had suffered injuries or damages for which his employer was “legally responsible.” 489 F.2d at 724. Indeed Hernandez specifically distinguished its holding from cases where the injured party brings suit not on the primary liability of the insurance contract but for failure to settle within policy limits. See id. at 724-25.
§ 4.10(b)(1), at 413 (1988).