BEFORE DAN M. LEE, P.J.; PRATHER AND ROBERTSON, JJ.
ROBERTSON, JUSTICE, FOR THE COURT:
This case presents an appeal and a cross-appeal arising out of a hotly disputed action regarding the rights and responsibilities of the parties to an automobile insurance contract. In the end, the Circuit Court dismissed the insurer's declaratory judgment complaint and the insured's bad faith counterclaim without prejudice and then assessed against each substantial sanctions under Rule 11(b), Miss. R. Civ. P., payable to the other.
We hold that the Circuit Court employed incorrect legal standards in considering the Rule 11 issues. Moreover, when the correct standards are applied, neither sanction order may stand. We reverse and render on both direct and cross-appeal.
All else was inchoate until April 30, 1985, when Ida Rose Yocum slipped and fell in the bumper area of a 1970 Ford truck, actually a mail van, and broke her leg. Yocum was operating the truck as a driver for John L. Evans who held a contract with the U.S. Postal Service to deliver mail and also owned the truck. At the time, Evans held a liability insurance policy with Nationwide Mutual Insurance Company covering the truck.
On January 10, 1986, Yocum filed suit against Evans charging negligence and her personal injuries. Evans notified Nationwide of the suit and Nationwide in turn employed counsel to defend.
In point of fact, the Nationwide policy contained an employee exclusion, that is, the policy provided that the insured, Evans, would have no liability coverage in the event of personal injury claims which may be asserted by someone who was Evan's employee which arose out of an incident occurring in the
course and scope of such employment.
In her complaint Yocum had alleged that "she was employed by the defendant, John L. Evans, for the purpose of delivering mail," that "she was going about her ordinary and customary job duties . . . and was operating as his [Evans'] servant, agent and employee in carrying out the duties of her employment at the time of the accident . . . ." The complaint further charged that Evans "had not secured Workmen's Compensation insurance for and on her behalf."
At that time, Nationwide's file reflected facts which would suggest that Yocum was not an employee. When Evans originally reported the claim, he had talked with Nationwide claims representative Debbi George and had stated Yocum was not his employee. George had made a note to the file to this effect. Evans apparently regarded Yocum as a substitute mail carrier. He paid Yocum $25.00 a day each day she delivered the mail for him.
In this state of the matter, Nationwide sent Evans a "Reservation of Rights" letter and retained counsel to institute the present action, a declaratory judgment action, against Evans on the question of coverage. In fact, on February 19, 1986, Nationwide Mutual Insurance Company commenced the present action by filing in the Circuit Court of Jackson County its Complaint for Declaratory Judgment asking that the Court construe "the provisions of the policy of insurance." Rule 57, Miss. R. Civ. P. Nationwide put at issue the effect of the employee exclusion.
On September 19, 1986, following Evans' deposition, Nationwide amended its complaint and thereupon alleged that Evans had failed to disclose material facts in procuring the policy and that, if Evans had disclosed the correct facts, Nationwide would either not have issued the policy in question or would have issued a different kind of coverage.
Evans answered the complaint and asserted a counterclaim, originally on March 21, 1986, charging Nationwide with bad faith and demanding $50,000.00 in actual damages and $7,000,000.00 in punitive damages.
At trial the Circuit Court ultimately bifurcated the proceedings on Nationwide's claim for declaratory judgment and Evans' bad faith counterclaim. The Court then directed a verdict for Evans on Nationwide's declaratory judgment action and, most important for the present appeal, imposed sanctions on Nationwide under Rule 11, Miss. R. ...