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Insurance Law Blog Legal updates, news, and commentary from the attorneys of Baker Sterchi Cowden & Rice LLC

Missouri Court of Appeals Upholds Limitations on Stacking of Uninsured Motorist Coverage

September 23, 2020 | Richard Woolf

In Johnson v. State Farm Mutual Automobile Insurance Co., the Missouri Court of Appeals, Southern District, enforced insurance policy language to limit the extent of stacking of uninsured motorist coverage (“UM”) under multiple personal auto policies. The decision allows insurers with appropriate exclusionary language to limit “stacking” to the $25,000 limit of the Missouri Motor Vehicle Financial Responsibility Law (“MVFRL”) as to each additional vehicle insured that was not directly involved in the accident.

Plaintiff Tim Johnson appealed the trial court’s granting of summary judgment to State Farm, which limited UM stacking. The State Farm policies contained owned-vehicle exclusions with respect to the UM coverage that provided for no coverage in excess of the amount required by the MVFRL for an insured who sustains a bodily injury while “occupying a motor vehicle owned by you if it is not your car or a newly acquired car.” At issue on appeal was the definition of “your car” in the policy language and whether the owned-vehicle exclusion was applicable in this case.

Johnson owned three vehicles, all of which were insured by State Farm under separate policies that included UM coverage. Each of the policies stated a UM limit of $100,000 per person, and included the above-referenced owned-vehicle exclusion which allowed the insurer to reduce the amount of UM coverage with respect to insured vehicles that were not directly involved in the collision to the amount required under Missouri’s Financial Responsibility Law, or $25,000. Johnson was in one of his three insured vehicles when he was involved in a collision with an uninsured motorist. The insurer provided Johnson with the full limit of UM coverage pursuant to the policy on the vehicle he was driving, $100,000, and the minimum amount of UM coverage required by the MVFRLor  on the other two policies, $25,000 per policy, pursuant to the policies’ owned-vehicle exclusion.

Subsequently, Johnson sued State Farm claiming breach of contract and vexatious refusal to pay for failing to pay the maximum $100,000 UM policy limits stacked by each of  his two insured vehicles that were not involved in the accident. Johnson moved for partial summary judgment arguing that the owned-vehicle exclusion did not apply, was ambiguous, and conflicted with public policy and Missouri law. State Farm filed a motion for summary judgment arguing that the owned-vehicle exclusion did apply and that its $25,000 payment per policy was proper in accordance with the policy’s language and Missouri statutory requirements. The trial court granted State Farm’s motion for summary judgment.

On appeal, Johnson raised similar issues and the appellate court affirmed the lower court’s decision to uphold the owned-vehicle exclusion, limiting the Plaintiff’s recovery to $25,000 per policy for Johnson’s additional insured vehicles that were not involved in the collision.

In his first point on appeal, Johnson claimed that the owned-vehicle exclusion did not apply because the vehicle he was occupying was “your car” as listed on the Declarations Page in any of his three policies at the time of the collision. However, the policies’ Declarations Page listed only one vehicle under “your car” in each policy, and Johnson was only in one “your car” at the time of the crash. The Court, citing the Missouri Supreme Court’s Floyd-Tunnell v. Shelter Mutual Insurance Co. 493 S.W.3d 215 (Mo. banc 2014), upheld the unambiguous policy language as written, finding that Johnson was not in a “your car” as defined by the policy’s language for the two vehicles not involved in the accident and, therefore, the owned-vehicle exclusion applied on those two policies.

Points two and three asserted that the trial court erred in granting summary judgment in the insurer’s favor because of ambiguities in the policies that should be resolved in Johnson’s favor. The Court ruled that both of Johnson’s arguments were effectively foreclosed by Floyd-Tunnel, 493 S.W. 3d at 221, wherein the Missouri Supreme Court found similar policy language clear and unambiguous. 

In his final point on appeal, Johnson argued that the owned-vehicle exclusion reduced the amount of UM coverage available to the insured and was therefore void as against public policy and Missouri law. The court denied Johnson’s point. State Farm provided Johnson with the full amount of UM coverage for the insured vehicle he was occupying during the collision, as well as the MVFRL- required amount of coverage on the other two policies, in accordance with the plain owned-vehicle exclusion language of the policies’ UM coverage.

The Court of Appeals decision in Johnson reaffirms the Missouri judiciary’s commitment to upholding the plain meaning of insurance policy exclusions as written. Moving forward, insurers should consider checking the language of the owned-vehicle exclusions under their policies’ UM clauses and ensure that whatever language is used clearly indicates which vehicle the policy applies to and which vehicles qualify under the owned-vehicle exclusion.  

* Hannah Chanin, Law Clerk in the St. Louis office of Baker Sterchi, assisted in the research and drafting of this post. Chanin is a 3L student at the Washington University St. Louis School of Law.

Related Services: Insurance

Attorneys: Richard Woolf

Federal Court Denies Motion to Dismiss Action for COVID-19 Related Losses under an All-Risk Policy

September 14, 2020 | Richard Woolf and Kyra Short

On August 12, 2020, the United States District Court for the Western District of Missouri, Southern Division, in Studio 417, Inc., et al. v. The Cincinnati Insurance Company, denied defendant Cincinnati Insurance Company’s Motion to Dismiss Plaintiffs’ First Amended Complaint. Plaintiffs alleged losses due to COVID-19 and resulting from COVID-19 county Closure Orders in the Springfield and Kansas City metropolitan areas. Plaintiffs filed suit against Defendant after Defendant denied coverage for Plaintiffs’ COVID-19 related losses.

Plaintiff Studio 417, Inc. operates hair salons in the Springfield, Missouri metropolitan area. The remaining plaintiffs own and operate full-service restaurants in the Kansas City metropolitan area. Plaintiffs purchased “all-risk” property insurance policies from Defendant. The policies provided payment for direct loss unless the loss was excluded or limited. Under the policies, a “Covered Cause of Loss” was defined as an “accidental [direct] physical loss or accidental [direct] physical damage.” None of the policies included any exclusion for losses caused by viruses or communicable diseases.

Plaintiffs alleged that their businesses were rendered unusable by the presence of COVID-19 and the issuance of Closure Orders forcing them to either suspend or reduce their business, causing a direct physical loss or damage to their premises. Plaintiffs sought a declaratory judgment against Defendant and sued Defendant for breach of contract based on the following policy provisions: Business Income coverage; Extra Expense coverage; Dependent Property coverage; Civil Authority coverage; Extended Business Income coverage; Ingress and Egress coverage; and Sue and Labor coverage. Plaintiffs also sought class certification for 14 nationwide classes and a Missouri subclass for Defendant’s Missouri policyholders that were denied coverage due to COVID-19 losses.

Defendant filed its Motion to Dismiss primarily arguing that the policies only provide coverage for “income tied to physical damage to property[.]” Plaintiffs emphasized that the policy expressly covered for “loss” or “damage”, distinguishing the two terms for use of the disjunctive. Neither “physical loss” nor “physical damage” was defined by the policy.

The Court found, based on the record, that Plaintiffs adequately stated a claim for direct physical loss, relying on the plain and ordinary meaning of the phrase. In so finding, the Court relied on other court cases that recognized a physical loss may occur when the property has been determined to be uninhabitable or unusable. The Court did, however, acknowledge that case law exists to support Defendant’s proposition that physical damage is required to show a physical loss. However, the Court found that those cases were distinguishable from the present case in that the cases cited by Defendant were decided at the summary judgment stage and the Plaintiffs here adequately plead the existence of physical and active substances, whether on surfaces or in the air, to have plausibly met their burden. The Court denied Defendant’s Motion to Dismiss in its entirety, but the Court made clear that it was not holding that physical loss would be found whenever a business suffers any economic harm, rather under the circumstances this case.

Though Defendant’s Motion to Dismiss was denied, the Court’s ruling is not the final determination in this case on the issue of whether Plaintiffs’ COVID-19 losses will be covered by the policy. Here, the Court emphasized that to survive a Motion to Dismiss, Plaintiffs must have merely pled enough facts (which are accepted as true) to proceed to discovery. The Court found that they did. Defendant will likely take another bite at the apple and file a motion for summary judgment later in the case.

One [Insurance] Policy Does Not Fit All - JPML Limits Centralization of COVID-19 Insurance Coverage Cases...At This Time

September 2, 2020 | Joshua Davis

Hundreds of businesses seeking centralization of litigation for insurance coverage for losses from the COVID-19 pandemic have to file their cases elsewhere.

On August 12, 2020, in a much-anticipated ruling, The U.S. Judicial Panel on Multidistrict Litigation rejected two petitions to centralize hundreds of cases filed by the policyholders of businesses suffering losses from the Pandemic; however, the panel did indicate that centralization may certainly be appropriate for cases against single insurer policies.

Attempts to centralize the COVID-19 cases date back to April, when two groups of policyholders asserted that the insurance coverage cases pending in numerous Federal Courts across the country were more suited as an MDL. At the time, there were fewer than twenty cases pending in Federal Courts. As of August 12, 2020, there are more than 450 with countless others anticipated in the coming year. Insurance companies were uniformly opposed to creation of any type of MDL; whereas, policyholders’ positions varied.

Policyholders sought centralization in the Northern District of Illinois in Chicago, and in the Eastern District of Pennsylvania in Philadelphia, respectively. The policyholders argued the common fact issues included: whether government closure orders trigger coverage, what satisfies business interruption policies’ standard requirement of “direct physical loss or damage” to property, and whether any exclusions apply, (i.e., “contamination” and/or “virus” related losses.)

Reasoning that the cases involved hundreds of insurers and a wide variety of different policy forms, the JPML found that the movants actually presented very few common questions of fact, and such few facts were outweighed by the efficiency challenges of centralizing the litigation across an entire insurance industry. The panel found that even smaller regional or state-based MDLs would suffer from the same common fact issues, because no two policies are necessarily identical and each claim (while similar) will necessarily have different facts.

Ultimately, the JPML ruled that an industry wide multidistrict litigation would “not promote a quick resolution” of cases where “time is of the essence.”

Pivoting, the JPML did suggest that the creation of smaller “single-insurer” MDLs could be efficient to centralize those actions. They found that cases argued against one insurer or insurance group were “more likely to involve insurance policies utilizing the same language, endorsements, and exclusions” that would make sharing common discovery and pretrial motion proceedings more efficient.

Attorneys sought centralization hoping that some procedural mechanism would be found to prevent the chaos. Ultimately, maintaining separate and distinct claims and cases will allow carriers to better address individual cases and claims handling on a much smaller, more controlled scale.

Carriers should continue to thoroughly and cautiously approach all claims, including COVID-19 interruption claims. 

* Kelly M. “Koki” Sabatés assisted in the research and drafting of this post. Sabatés earned her J.D. from the University of Missouri-Columbia this Spring and is a current candidate for admission to the Missouri Bar.

Court Reaffirms Reach of Vexatious Refusal to Pay Statute

August 10, 2020 | Richard Woolf

On June 26, 2011, Farzad Qureshi was rear-ended by a hit and run driver while traveling westbound on Interstate 270 in Ferguson, Missouri. Mr. Qureshi filed a claim with his insurance company, American Family, the following day reporting back, neck and head injuries. He provided American Family the license plate number of the other driver, but they could not locate the driver or the owner. Thereafter, without advising him about his Uninsured Motorists (“UM”) benefits, American Family told Mr. Qureshi it would be closing his file.

Nevertheless, Mr. Qureshi repeatedly updated American Family regarding his treatment, instead of accepting the claim denial. And, after treating for years and receiving a surgery recommendation estimated at approximately $200,000, he made a UM policy limits demand through his attorney for $75,000. Ultimately, after being provided all his medical and employment records, American Family made a $20,000 counteroffer, which Mr. Qureshi rejected as insufficient. Thereafter, he filed suit against American Family for (1) breaching the UM provision of his insurance policy and (2) vexatious refusal to pay pursuant to §375.420, RSMo., asserting that American Family, without reasonable cause or excuse, refused to pay him the available UM limits.

After a three-day jury trial, the court entered judgment on the jury’s verdict in favor of Mr. Qureshi for $75,000 on his UM claim, $18,000 in penalties on his §375.420 vexatious refusal to pay the claim, in addition to awarding $96,828 in attorney’s fees. American Family appealed.

On appeal in the Missouri Court of Appeals, Eastern District, American Family claimed there was insufficient evidence to support the jury’s finding of vexatious refusal to pay under § 375.420. American Family made evidentiary challenges stating that: (1) the trial court erred in admitting its corporate representative’s testimony (2) the trial court erred in admitting evidence of its coverage limits of the policies and the settlement offers and demands exchanged between Mr. Qureshi and American Family while the suit was pending, and (3) the trial court erred in permitting Mr. Qureshi’s expert witness to opine that American Family vexatiously handled Qureshi’s UM claim.

The Court of Appeals affirmed the trial court judgment in Mr. Qureshi’s favor finding that when Mr. Qureshi made reasonable demands during settlement negotiations, his demands went unanswered by American Family, and ultimately resulted in a low-ball settlement offer. Unfortunately for American Family, its refusal to pay or offer a reasonable amount during settlement negotiations was presented to the jury and admitted into evidence.

The appellate court reiterated the breadth of §375.420 noting that the evidence that American Family sought to omit from trial was admissible to prove vexatious refusal to pay under §375.420. In other words, §375.420 allows a jury to consider all evidence, testimony, circumstances and facts that an insurer had up until trial for purposes of determining whether an insurer accepted reasonably in denying or failing to pay a claim. Under §375.420’s standards, the jury need only find (a) that Mr. Qureshi had an insurance policy with American Family, (b) that American Family refused to pay his losses, and (c) that American Family’s refusal was without reasonable cause or excuse.

In three other ancillary issues, the court held that the excerpts of deposition testimony of two claims adjusters of American Family who were assigned to Mr. Qureshi’s claim were properly admitted into evidence to show vexatious refusal to pay citing Missouri law, which allows depositions to be used “for any purpose.” Moreover, the court decided that American Family’s low settlement offer, and Mr. Qureshi’s settlement demands, were properly admitted into evidence to show vexatious refusal to pay, a clear exception to the general rule that evidence of settlement negotiations are not admissible at trial.

Finally, the court confirmed that both the policy limits of UM coverage in his American Family policy and Mr. Qureshi’s expert’s testimony regarding American Family’s actions were properly admitted into evidence to show vexatious refusal to pay.

Qureshi stands as a cautionary tale to insurers that their investigations into and evaluations of claims must be fair, thorough and reasonable. Otherwise, §375.420 not only allows for damages and penalties but also attorney’s fees, which will almost assuredly be approved where the insured is successful.

* Kameron Fleming, Summer Law Clerk in the St. Louis office of Baker Sterchi, assisted in the research and drafting of this post. Fleming is a rising 3L student at the Washington University St. Louis School of Law.

Related Services: Insurance

Attorneys: Richard Woolf

Insurance Claims in the time of COVID-19

April 20, 2020 | Joshua Davis and Rebecca Guntli

Business interruption insurance is a hot topic in insurance coverage law. Most policies afford coverage for lost income only if the business has sustained “property damage.” Property damage is typically defined to mean direct physical injury to tangible property. Policyholders seeking to obtain coverage for COVID-19 stay-home orders may seek to leverage a recent Pennsylvania Supreme Court decision in a case not related to insurance to advance the argument that COVID-19, and/or governmental stay-home orders, has caused “property damage.” In that case, the Pennsylvania Supreme Court found that any location, including an individual business, is within a disaster area. We expect policyholders to argue that their business have, thus, arguably sustained “property damage,” triggering their coverage. 

In Friends of DeVito, et al. v. Tom Wolf, Governor, et al. 2020 WL 1847100 (PA, April 13, 2020), the Pennsylvania Supreme Court shot down a lawsuit challenging Gov. Tom Wolf’s authority under state law to order “non-life-sustaining” businesses to shut down as a means of reducing the spread of COVID-19. The challengers in the case included Republican state legislative candidate, a public golf course, and a licensed realtor. They all argued that Gov. Wolf lacked authority to issue his Executive Order because the COVID-19 pandemic did not fall under the list of natural disasters outlined in the State’s emergency code.

The Pennsylvania Emergency Code defines “natural disaster” as:

Any hurricane, tornado, storm, flood, high water, wind-driven water, tidal wave, earthquake, landslide, mudslide, snowstorm, drought, fire, explosion or other catastrophe which results in substantial damage to property, hardship, suffering or possible loss of life.

While this code points to specific disasters (i.e., hurricane, tornado, storm etc.…), it also includes a catchall phrase for any “other catastrophe which results in substantial damage to property, hardship, suffering or possible loss of life.”

The challengers argued that pandemics could not be classified as a “natural disaster” under this code because they are too dissimilar to the natural disasters specifically listed. However, the Pennsylvania Supreme Court disagreed, noting that there was no commonality among the listed natural disaster in the code as some were weather-related and others, were not.

Most importantly, and the interesting language we are tracking, the Pennsylvania Supreme Court went on to hold that COVID-19 is a “natural disaster” because it “results in substantial damage to property, hardship, suffering or possible loss of life.” Because the virus is spread from person-to-person contact, has an incubation period of up to fourteen days and can live on surfaces for up to four days, any location, including an individual business, is within a disaster area and is thus damaged. Additionally, the Pennsylvania Supreme Court rejected the argument that the actual presence of the disease at a specific location was required before it could be shutdown, thus holding that all properties were damaged because of the manner in which the disease spreads. This could have implications in policy interpretation regarding physical damage.

In enforcing the governor’s authority, the court held that the “COVID-19 pandemic is, by all definitions, a natural disaster and a catastrophe of massive proportions.” We expect that policyholders may argue that the Pennsylvania Executive Order, like many other State’s orders, is a declaration that business property has been damaged and is unsafe due to the Coronavirus. Because policyholders have the burden of proving that a loss is within a policy’s insuring agreement, we expect to see a multitude of approaches to try to bring COVID-19 business disruptions within the ambit of “property damage,” and the Pennsylvania Supreme Court, while addressing right-to-assemble claims, may have provided one argument that we could see advanced in the skirmishes over coverage for business interruption losses.

It should be noted that Pennsylvania, New York, Massachusetts, Ohio, and New Jersey have proposed legislation prohibiting insurers from denying business interruption claims for losses caused by COVID-19 to small business in their respective states. However, Congress is also considering legislation that would cap the insurance industry’s exposure to COVID-19 pandemic claims. We will continue to monitor this ever changing, fluid situation.

Illinois Appellate Court Finds Insurer Owes Duty to Defend Biometric Lawsuit

March 30, 2020 | Gregory Odom

In what is likely to be one of many court rulings to come regarding the scope of an insurer’s duty to defend an insured in a biometric privacy lawsuit, the Illinois First District Court of Appeals recently weighed in on this issue. In West Bend Mut. Ins. Co. v. Krishna Schaumburg Tan, Inc., 2020 IL App (1st) 191834, the court determined that West Bend Mutual Insurance Company owed a duty to defend its insured in an underlying lawsuit filed under the Illinois Biometric Information Privacy Act (“BIPA”). The complete opinion can be found here

In that case, Krishna, a franchisee of L.A. Tan Enterprises, was sued for allegedly violating BIPA. According to the underlying complaint, Krishna’s customers were required to have their fingerprints scanned to verify their identification. The plaintiff further alleged that after having her fingerprints scanned by Krishna, the company failed to provide her with, or obtain, a written release allowing Krishna to disclose her biometric data to any third party. She claimed that Krishna disclosed her biometric information to a third-party vendor without her consent.

Krishna sought coverage from West Bend for the lawsuit under two insurance policies West Bend had issued to Krishna. West Bend defended Krishna in the underlying lawsuit pursuant to a reservation of rights. Subsequently, West Bend filed a declaratory judgment action seeking a declaration that it owed no duty to defend or indemnify Krishna in the underlying lawsuit. West Bend alleged that the underlying lawsuit did not trigger coverage because the plaintiff’s underlying allegations did not describe a “personal injury,” her allegations did not implicate a data compromise endorsement contained in one of the policies, and coverage was barred by the policies’ violation of statutes exclusion. In response, Krishna filed a counterclaim, arguing that it was entitled to coverage in the underlying lawsuit and damages under Section 155 of the Insurance Code for vexatious and unreasonable delay in providing coverage. Ultimately, the trial court granted Krishna’s motion for summary judgment in part, concluding that West Bend owed a duty to defend Krishna in the underlying lawsuit, but denying the section of the motion seeking damages under Section 155.

On appeal, the court first examined whether the underlying complaint allegations were encompassed by the policies’ definition of “personal injury.” The policies indicated that West Bend would pay “those sums that [Krishna] becomes legally obligated to pay as damages because of *** ‘personal injury’ ***” and that West Bend would have a duty to defend Krishna against “any ‘suit’ seeking those damages.” The policies defined “personal injury” to include any injury arising out of “[o]ral or written publication of material that violates a person’s right of privacy.” Krishna argued that the plaintiff in the underlying lawsuit alleged an injury arising from publication because she claimed that Krishna violated BIPA by providing her fingerprint data to a third-party vendor. West Bend argued that publication required communication of information to the public at large, not just to a single third-party. 

Because the policies did not define the term “publication,” the court gave the term its “plain, ordinary, and popular meaning.” Relying on guidance from the Illinois Second District Appellate Court’s holding in Valley Forge Ins. Co. v. Swiderski Elecs., Inc., 359 Ill. App. 3d 872 (2d Dist. 2005), the Oxford English Dictionary, and Black’s Law Dictionary, the court concluded that the term publication includes both the broad sharing of information to multiple recipients and a more limited sharing with a single third-party. According to the court, had West Bend intended for the term to apply only to communication of information to a large group of people, it could have explicitly defined it as such in its policies. 

West Bend further argued that the policies’ violation of statutes exclusion applied to prohibit coverage. That exclusion indicated that coverage did not apply to “*** ’personal injury’ *** arising directly or indirectly out of any act or omission that violates or is alleged to violate:

  1. The Telephone Consumer Protection Act (TCPA) ***
  2. The CAN-SPAM ACT of 2003 ***
  3. Any statute, ordinance or regulation *** that prohibits or limits the sending, transmitting, communicating or distribution of material or information.”  

According to West Bend, the underlying lawsuit alleged a violation of BIPA, a statute it characterized as prohibiting or limiting the sending of material or information, namely an individual’s biometric information or identifier. Section 14/15(d) of BIPA expressly provides that “[n]o private entity in possession of a biometric identifier or biometric information may disclose, redisclose, or otherwise disseminate a person’s or a customer’s biometric identifier or biometric information” unless at least one of four conditions is met. 

In rejecting this argument, the court cited the full title of the policies’ exclusion, “Violation of Statutes That Govern E-Mails, Fax, Phone Calls or Other Method of Sending Material or Information,” as evidence that the exclusion applied only to statutes that govern certain methods of communication, not to statutes that limit the sending or sharing of information. The text of the exclusion also expressly referred to certain statutes – TCPA and CAN-SPAM – that regulate certain methods of communication. Based upon the exclusion’s title and specific references to TCPA and CAN-SPAM, the court reasoned that the final, “catchall” provision of the exclusion was meant to encompass any state or local statutes, rules, or ordinances that, like the TCPA and CAN-SPAM, regulated methods of communication.  Based upon this interpretation of the exclusion, the court determined that it did not apply to bar coverage for the underlying lawsuit. According to the court, BIPA does not regulate methods of communication, but rather, regulates the collection, use, safeguarding, handling, storage, retention, and destruction of biometric identifiers and information. 740 ILCS 14/5(g).

Because the court found that the underlying complaint allegations triggered West Bend’s duty to defend Krishna, it did not examine whether West Bend owed coverage under an endorsement contained in one of the policies titled “Illinois Data Compromise Coverage.” Krishna, however, relied upon the endorsement to argue that it was entitled to damages under Section 155 of the Illinois Insurance Code. The endorsement provided “Additional Coverage” for “personal data compromise” under certain conditions. The policy defined “personal data compromise” to include disposal or abandonment of personally identifiable information or personally sensitive information without appropriate safeguards such as shredding or destruction, provided that the failure to use appropriate safeguards was accidental and not reckless or deliberate. 

Under Section 155, an insured may collect attorneys’ fees and costs where an insurer creates a vexatious and unreasonable delay in settling a claim. Where a bona fide coverage dispute exists, sanctions under Section 155 are inappropriate.  Krishna argued that the underlying complaint alleged a personal data compromise by disposal of the plaintiff’s personally identifying or personally sensitive information to a third-party without appropriate safeguards. Krishna claimed that appropriate safeguards would have entailed following the data protection requirements of BIPA and that negligent failure to take note of changes in the law was “accidental.” The court concluded that a bona fide coverage dispute existed and, therefore, Krishna was not entitled to Section 155 damages. The court reasoned that Krishna’s argument for coverage hinged on an interpretation of “disposal” as including Krishna’s deliberate sharing of the underlying plaintiff’s information, an interpretation that “safeguards such as shedding or destruction” included following new legal requirements contained in BIPA, and the term “accidental” meant failure to remain informed of changes in the law (i.e., the enactment of BIPA).

As lawsuits continued to be filed under BIPA, courts likely will see an increasing number of insurance coverage disputes concerning the duty to defend and indemnify in BIPA lawsuits. For example, American Family Mutual Insurance Company recently filed a declaratory judgment action in the District Court for the Northern District of Illinois, seeking a declaration that it does not owe a duty to defend certain companies named in an underlying BIPA lawsuit. That case involves some of the arguments raised in the West Bend case, including whether a violation of state statutes exclusion applies, but American Family also raises arguments not addressed in West Bend. The case is American Family Mut. Ins. Co. SI v. Amore Enterprises, Inc., No. 1:20-cv-01659. If courts continue to rule that insurers have a duty to defend companies named in BIPA lawsuits, as in West Bend, the already significant number of BIPA filings is likely to increase as well.  

Missouri Supreme Court Affirms Prospective Only Application of Amendments to Sect. 537.065 RSMo Providing for Notice to the Insurer and Intervention as a Right

August 28, 2019 | Lisa Larkin

The Missouri Supreme Court recently held that amendments to RSMo. § 537.065 requiring a valid § 537.065 contract and written notice to insurers for an opportunity to defend did not apply retroactively to a case where the plaintiff and tortfeasor executed the § 537.065 contract before the effective date of the amended statute. The dissent argued that the amended statute should apply retroactively despite the timing of § 537.065 contract in this case because the amended statute was not a new enactment, but rather a continuation of the existing law.

In Desai v. Seneca Specialty Insurance Co., 2019 WL 2588572, No. SC 97361 (June 25, 2019), Seneca sought to intervene in a lawsuit filed by Neil and Heta Desai against Seneca’s insured, Garcia Empire, LLC. In October 2014, Neil Desai suffered a personal injury while being escorted from a Garcia Empire establishment. The Desais filed suit in May 2016, and Garcia advised Seneca of the suit. Garcia rejected Seneca’s offer to defend Garcia subject to a full and complete reservation of rights regarding coverage. In November 2016, the Desais and Garcia entered into a contract under § 537.065 wherein the Desais agreed to limit recovery of any judgment against Garcia to Garcia’s insurance coverage. 

The parties tried the case on August 17, 2017, and the court entered judgment in favor of the Desais and against Garcia on October 2, 2017. Within 30 days of the entry of judgment, Seneca filed a motion to intervene as a matter of right, arguing it was entitled to receive notice of the § 537.065 contract between Garcia and the Desais and to intervene as a matter of right in the lawsuit based on the August 28, 2017, amendments to § 537.065. Seneca argued the rights afforded to insurers under the amended statute should apply to it and its efforts to intervene in the lawsuit.

The trial court denied Seneca’s motion to intervene, holding the legislature did not expressly provide for retroactive application of the August 2017 amendments to § 537.065 to cases where the parties executed the § 537.065 contract before the amendments. As discussed in our previous blog post found here, the Court of Appeals for the Western District of Missouri affirmed.

The Missouri Supreme Court began its analysis by looking to the language of the 2017 amendments. The amended statute permitted the same type of contract where the plaintiff agrees that, in the event of a judgment against the tortfeasor, the plaintiff will collect money solely from the tortfeasor’s insurer or other specified assets, rather than directly from the tortfeasor. The amended statute, however, included two notable additional requirements. First, it provided that before creation of such a contract between the plaintiff and a tortfeasor, the insurer must be given the opportunity to defend the tortfeasor without reservation and refuse to do so. Second, the amended statute provided that before a judgement may be entered against a tortfeasor after such tortfeasor “has entered into a contract under this section” (emphasis added), the insurer must be provided with written notice of the contract and be given the opportunity to intervene as a matter of right.

The key issue before the Supreme Court in terms of whether the amended statute applied in this case was to determine the meaning of “under this section.” First, the court looked to the relevant differences between the former and amended statutes. Then, it looked to whether the amended statute was merely a continuation of the former statute. This was because any change to the law that could be said to be a continuation of the prior law would not be a new enactment and could be applied retroactively to § 537.065 contract executed before the amendments.

The court found that the amended statute and the former statute both permitted the same type of contracts. Because the amended statute contained the two additional requirements noted above, i.e., that a valid § 537.065 contract exists, and that the insurer be given written notice of the execution of the contract and the opportunity to intervene before a judgment is entered, “under this section” cannot refer to the statute’s prior version. The Desais and Garcia could not have “entered into a contract” pursuant to a prerequisite and requirements that were not yet law. Thus, because the Desais and Garcia executed their contract under the provisions and requirements of the former statute, the amended statute was an inapplicable new enactment. It is important to note that the Supreme Court did not question the validity of the amended statute to any case where the § 537.065 contract was entered into after August 28, 2017 (the effective date of the amendments). 

The dissent argued that the 2017 amendments simply added a condition precedent to the entry of judgment after a tortfeasor has entered into a § 537.065 contract and did not affect the substantive terms of any contract entered into under that section. It argued that “under this section” referred to both the amended and prior versions of the statute because the revisions simply gave an insurer the right to written notice and an opportunity to intervene. The revisions did not purport to give an insurer an automatic right to set aside a judgment entered or any other rights beyond what any intervenor would have.

As was the case with the Western District’s prior opinion in this case, this Supreme Court opinion provides an excellent road map for the court’s likely approach to the issue of retroactive vs. prospective application of statutory amendments of not only this statute, but others under Missouri law.

* Kelly M. “Koki” Sabatés, Summer Law Clerk, assisted in the research and drafting of this post. Sabatés is a 3L student at the University of Missouri-Columbia.

Related Services: Insurance, Appellate and Commercial

Attorneys: Lisa Larkin

Restatement of the Law of Liability Insurance - Additional Insureds and Other Insurance

May 9, 2019 | Angela Higgins

The Restatement of the Law of Liability Insurance (“RLLI”) passed in May 2018 after a one-year delay in voting, following strong negative reactions from practitioners, insurers, and states. Indeed, following the release of the 2017 draft, several governors sent letters of protest – Iowa, Maine, Nebraska, South Carolina, Texas and Utah – stating that the ALI was usurping the state legislatures and the RLLI was at odds with their states’ common law.

Although changes were made to that draft, the version that was eventually passed remains extremely policyholder-oriented and not a “restatement” of existing legal principles in any real sense of the word. This is not surprising, as it began as a Principles of Law project – aspirational rather than reflecting settled legal holdings.  Following its passage, a number of state legislatures have passed laws or resolutions to prevent the adoption of the RLLI.  These include:

  • Arkansas (Ark. Code § 23-60-112);
  • Indiana (2019 House Concurrent Resolution No. 62);
  • Kentucky (2018 Kentucky House Resolution 222);
  • Michigan (Mich. Comp. Laws § 500.3032);
  • North Dakota (N.D. Cent. Code § 26.1-02 (2019));
  • Ohio (Ohio Rev. Code § 3901.82); and
  • Tennessee (Tenn. Code § 56-7-102).

Idaho and Texas are currently considering bills to preclude the adoption of the RLLI.

In this series of blog posts regarding provisions of the RLLI, we will examine how it is not a “restatement” of settled common law, but instead adopts minority or even entirely novel principles. The RLLI reflects a profound lack of insight into practical claims handling practices, and in many respects is internally inconsistent or unworkable. We will periodically update these posts as a type of “scorecard,” tracking how various jurisdictions have responded to the RLLI.

Our seventh post considers RLLI’s thoughts on additional insureds and other insurance.

THE RLLI LANGUAGE

§ 20. When Multiple Insurers Have a Duty to Defend

When more than one insurer has the duty to defend a legal action brought against an insured:

(1) The insured may select any of these insurers to provide a defense of the action;

(2) If that insurer refuses to defend or otherwise breaches the duty to defend, the insured may select any of the other insurers that has a duty to defend the action; and

(3) The selected insurer must provide a full defense until the duty to defend is terminated pursuant to § 18 or until another insurer assumes the defense pursuant to subsection (4)(a).

(4) If the policies establish an order of priority of defense obligations among them, or if there is a regular practice in the relevant insurance market that establishes such a priority, that priority will be given effect as follows:

(a) An insurer selected pursuant to subsection (1) or (2) may ask any insurer whose duty to defend is earlier in the order of priority to assume the defense; and

(b) An insurer that incurs defense costs has a right of contribution or indemnity for those costs against any other insurer whose duty to defend is in the same position or earlier in the order of priority.

(5) If neither the policies nor the insurance-market practice establish an order of priority:

(a) The duty to defend is independently and concurrently owed to the insured by each of the insurers;

(b) Any nonselected insurer has the obligation to pay its pro rata share of the reasonable costs of defense of the action and the noncollectible shares of other insurers; and

(c) A selected insurer may seek contribution from any of the other insurers for the costs of defense.

WHY IT IS PROBLEMATIC

It is admittedly not a restatement of the law – Comment a, acknowledges that courts have developed a body of case law regarding “other insurance” clauses and priority of coverage. This is presented as a reimagining of the approach under the common law. The RLLI also suggests that it is necessary to “protect” insureds from having to hire an insurance-coverage expert to determine which insurer to ask for a defense.” Comment a. This is frankly absurd – insureds with multiple potentially-applicable policies routinely tender to carriers for all potentially-triggered policies and leave the carriers to ascertain how the defense is provided. The notion that the insured has, or should be entitled to enforce, any preference as to which policy defends is not well-founded, and certainly not a “restatement” of the state of existing law.

Furthermore, in the additional insured context, the AI is given the option to choose which policy defends. This disregards that the loss risk for general contractors is priced into their policies based upon the expectation that they will, in the ordinary course of business, have additional insured status under subcontractors’ policies that would ordinarily defend. The RLLI approach proposes to usurp the terms of the subcontract agreements, which typically address whether AI coverage is available on a primary, co-primary, or secondary basis, and whether contribution is permitted. These contracts are separate and distinct from the insurance policies at issue, and the RLLI cites no well-established body of case law that would override the enforceable provisions of underlying indemnity agreements. 

HOW THE COURTS HAVE REACTED

As of the date of this writing, we have not seen reported decisions addressing § 21 of RLLI.

This concludes our series of blog posts regarding provisions of the RLLI, although we will periodically update the series to provide a “scorecard” of how various jurisdictions have responded to the RLLI. Our prior posts in the series can be found at:

RLLI – Exclusions

RLLI – Duty to Defend

RLLI – The Tripartite Relationship

RLLI – Independent Counsel

RLLI – The Insured’s Duty to Cooperate

RLLI – Bad Faith

Related Services: Insurance

Attorneys: Angela Higgins

Restatement of the Law of Liability Insurance - Bad Faith

May 7, 2019 | Angela Higgins

The Restatement of the Law of Liability Insurance (“RLLI”) passed in May 2018 after a one-year delay in voting, following strong negative reactions from practitioners, insurers, and states. Indeed, following the release of the 2017 draft, several governors sent letters of protest – Iowa, Maine, Nebraska, South Carolina, Texas and Utah – stating that the ALI was usurping the state legislatures and the RLLI was at odds with their states’ common law.

Although changes were made to that draft, the version that was eventually passed remains extremely policyholder-oriented and not a “restatement” of existing legal principles in any real sense of the word. This is not surprising, as it began as a Principles of Law project – aspirational rather than reflecting settled legal holdings.  Following its passage, a number of state legislatures have passed laws or resolutions to prevent the adoption of the RLLI.  These include:

  • Arkansas (Ark. Code § 23-60-112);
  • Indiana (2019 House Concurrent Resolution No. 62);
  • Kentucky (2018 Kentucky House Resolution 222);
  • Michigan (Mich. Comp. Laws § 500.3032);
  • North Dakota (N.D. Cent. Code § 26.1-02 (2019));
  • Ohio (Ohio Rev. Code § 3901.82); and
  • Tennessee (Tenn. Code § 56-7-102).

Idaho and Texas are currently considering bills to preclude the adoption of the RLLI.

In this series of blog posts regarding provisions of the RLLI, we will examine how it is not a “restatement” of settled common law, but instead adopts minority or even entirely novel principles. The RLLI reflects a profound lack of insight into practical claims handling practices, and in many respects is internally inconsistent or unworkable. We will periodically update these posts as a type of “scorecard,” tracking how various jurisdictions have responded to the RLLI.

Our sixth post considers RLLI’s thoughts on an insurer’s bad faith failure or refusal to settle. Bad faith is very much a creation of state law, and the RLLI’s proposals here are not a “restatement” so much as an entirely novel approach to bad faith law. 

THE RLLI LANGUAGE

§ 24. The Insurer’s Duty to Make Reasonable Settlement Decisions

(1) When an insurer has the authority to settle a legal action brought against the insured, or the insurer’s prior consent is required for any settlement by the insured to be payable by the insurer, and there is a potential for a judgment in excess of the applicable policy limit, the insurer has a duty to the insured to make reasonable settlement decisions.

(2) A reasonable settlement decision is one that would be made by a reasonable insurer that bears the sole financial responsibility for the full amount of the potential judgment.

(3) An insurer’s duty to make reasonable settlement decisions includes the duty to make its policy limits available to the insured for the settlement of a covered legal action that exceeds those policy limits if a reasonable insurer would do so in the circumstances.

§ 27. Damages for Breach of the Duty to Make Reasonable Settlement Decisions

An insurer that breaches the duty to make reasonable settlement decisions is subject to liability for any foreseeable harm caused by the breach, including the full amount of damages assessed against the insured in the underlying legal action, without regard to the policy limits.

§ 36. Assignment of Rights Under a Liability Insurance Policy

(1) Except as otherwise stated in this Section, rights under a liability insurance policy are subject to the ordinary rules regarding the assignment of contract rights.

(2) Rights of an insured under an insurance policy relating to a specific claim that has been made against the insured may be assigned without regard to an anti-assignment condition or other term in the policy restricting such assignments.

(3) Rights of an insured under an insurance policy relating to a class of claims or potential claims may be assigned without regard to an anti-assignment condition or other term in the policy restricting such assignments, if the following requirements are met:

(a) The assignment accompanies the transfer of financial responsibility for the underlying liabilities insured under the policy as part of a sale of corporate assets or similar transaction;

(b) The assignment takes place after the end of the policy period; and

(c) The assignment of the rights does not materially increase the risk borne by the insurer.

§ 49. Liability for Insurance Bad Faith

An insurer is subject to liability to the insured for insurance bad faith when it fails to perform under a liability insurance policy:

(a) Without a reasonable basis for its conduct; and

(b) With knowledge of its obligation to perform or in reckless disregard of whether it had an obligation to perform.

§ 50. Remedies for Liability Insurance Bad Faith

The remedies for liability insurance bad faith include:

(1) Compensatory damages, including the reasonable attorneys’ fees and other costs incurred by the insured in the legal action establishing the insurer’s breach of the liability insurance policy and any other loss to the insured proximately caused by the insurer’s bad-faith conduct;

(2) Other remedies as justice requires; and

(3) Punitive damages when the insurer’s conduct meets the applicable state-law standard.

WHY IT IS PROBLEMATIC

Bad faith is a highly state-specific cause of action

Bad faith, as a cause of action, is one of the most distinct and individualized expressions of each jurisdiction’s public policy. There is no uniform agreement as to whether “bad faith” is a contractual or tort cause of action, and state-specific expressions of what conduct rises to the level of “bad faith.” It is, therefore, a difficult subject for a “restatement” of the law.

Failure to settle

Initially, RLLI reformulates an existing cause of action commonly known as “bad faith failure to settle” or “bad faith refusal to settle” as simply a “breach of the duty to make reasonable settlement decisions.” Comment a to § 24 makes it clear that liability is imposed for less than a bad faith state of mind on the part of the insurer, but for simple negligence. RLLI construes the standard of care in terms of “commercial reasonableness.” As is clear from Comment c, it is a “disregard the limits” remedy, which blows up the limits even in the absence of wrongful intent by the insurer. Amazingly, the RLLI argues that this is a more lenient approach than “strict liability,” with Comment b being the only nod in the entire RLLI to any interest in preventing the bad faith setup, while citing no authority for the proposition that any jurisdictions presently impose a strict liability standard for failure to settle.

This is not a “restatement.” The Reporter’s Note to § 24 cites treatises rather than case law in support of the contention that this is a “majority rule,” and admits, without clearly addressing the issue, that liability for failure to settle is determined by different standards of “bad faith” or negligence by the various jurisdictions. Remarkably, the Reporter’s Note to § 27, in claiming that the majority of jurisdictions have adopted the principle, cite to cases establishing the measure of damages for “bad faith failure to settle,” without noting that this section is the measure of damages for a breach of duty to settle that is not predicated in “bad faith.”

The RLLI approach would eliminate the minimal protections afforded to insurers in some notorious “set up” states like Missouri. Every reported Missouri case involving insurer bad faith, beginning with Zumwalt v. Utilities Ins. Co., 228 S.W.2d 750 (Mo. 1950), limits liability to a bad faith refusal of an offer to settle within or for the liability policy’s limitsSee Id. at 754 (bad faith for insurer to refuse reasonable settlement offer within liability limits and instead gamble on escaping liability by favorable verdict); Landie v. Century Indem. Co., 390 S.W.2d 558, 564-66 (Mo. App. K.C. 1965) (the insurer’s duty is to give good faith consideration to settlement offers within the liability limits; insurer’s refusal to accept such offer, if in bad faith, entitles insured to recover); Levin v. State Farm Mut. Ins., 510 S.W.2d 455, 458 (Mo. banc 1974) (offer to settle within liability limits is a “necessary predicate” to bad faith claim); Bonner v. Auto. Club Inter-Ins. Exch., 899 S.W.2d 925, 928 (Mo. App. E.D. 1995) (not only must there be an offer to settle within the liability limits, but also the offer must be definite in amount); Ganaway v. Shelter Mut. Inc. Co., 795 S.W.2d 554, 556 (Mo. App. S.D. 1990) (insurer liability results from failure to exercise good faith in considering offers to compromise within liability limits). An offer to “settle” within policy limits is a “necessary prerequisite” for a claim for bad faith in Missouri. Levin, 510 S.W.2d at 458. The “good faith” contemplated by the law is a duty to give consideration to settlement offers within the liability limits. Landie, 390 S.W.2d at 564-66. The RLLI would eliminate the need for the policy-limits demand to trigger potential bad faith liability in Missouri, and other similar jurisdictions.

Moreover, the RLLI would propose to blow up the policy limits without addressing circumstances in which the insurer’s position on settlement was based upon its coverage analysis. Again, even in insurer-hostile jurisdictions, this kind of liability generally requires more than an erroneous denial of coverage. See, e.g., Shobe v. Kelly, 279 S.W.3d 203, 211-12 (Mo. App. W.D. 2009).

Bad faith

Punitive damages are the only additional remedy brought to the table by the bad faith cause of action, with RLLI’s proposed standard for failure to settle already accomplishing the elimination of the policy’s liability limits and recovery of the insured’s attorneys’ fees and consequential damages. Again, the RLLI is lacking in case law support for this approach. 

Many courts will define “bad faith” as a “state of mind” consisting of the insurer’s “‘intentional disregard of the financial interest of [the] insured in the hope of escaping the responsibility imposed upon [the insurer] by its policy.’”  Scottsdale Ins. Co. v. Addison Ins. Co., 448 S.W.3d 818, 828 (Mo. banc 2014). Often, evidence must establish that the insurer “intentionally disregarded” the insured’s financial interests in the hope of escaping its responsibility under the policy. Rinehart v. Shelter Gen. Ins. Co., 261 S.W.3d 583, 595 (Mo. App. W.D. 2008). The principle is that the insure

The measure of damages

The RLLI fails to address a critical topic – how to measure the insured’s damages for bad faith failure to settle. There is a significant question as to whether courts should presume that the amount of the underlying judgment equals the amount of the judgment or settlement entered into by the insured. 

This includes circumstances in which the insured has protected itself from the impact of a judgment in excess of its policy limits by virtue of a covenant not to execute against the insured’s assets, a/k/a a “Mary Carter” agreement, an agreement pursuant to Mo. Rev. Stat. § 537.065, etc. The essence of a bad faith cause of action is that the insured suffered tangible economic loss as a result of its insurer’s tortious refusal to settle claims against it. However, where the insured has not suffered these tangible economic losses, including by virtue of a covenant not to execute, there is case law in many jurisdictions holding that the insured has sustained no actual damages. Allowing a party in such circumstances to collect all or part of the judgment amount:

perpetrates a fraud on the court, because it bases the recovery on an untruth, i.e., that the judgment debtor may have to pay the judgment. Such a result should be against public policy, because it allows, as here, parties to take a sham judgment by agreement, without any trial or evidence concerning the merits, and then collect all or a part of that judgment from a third party. Allowing recovery in such a case encourages fraud and collusion and corrupts the judicial process by basing the recovery on a fiction.... [T]he courts are being used to perpetrate and fund an untruth.

H.S.M. Acquisitions, Inc. v. West, 917 S.W.2d 872, 882 (Tex. App. Corpus Christi 1996) (citations omitted). The Texas court found that the consent judgment entered by the parties pursuant to the covenant not to execute could not be enforced against the insurer in a bad faith action. Id.

Moreover, Courts have found that a judgment entered into by the insured with the injured party need not even have been collusive for a court to refuse to give it any weight in determining the amount of insured’s damages in a bad faith action against his insurer. See Hamilton v. Maryland Casualty Co., 117 Cal. Rptr. 2d 318, 327 (Cal. 2002). “A defending insurer cannot be bound by a settlement made without its participation and without any actual commitment on its insured’s part to pay the judgment.” Id. RLLI is astonishingly silent on these issues.

HOW THE COURTS HAVE REACTED

As of the date of this writing, we have not seen reported decisions addressing these RLLI provisions.

Watch for our final post in this series, which considers RLLI’s thoughts on additional insureds and other insurance.  Our prior posts in the series can be found at:

RLLI – Exclusions

RLLI – Duty to Defend

RLLI – The Tripartite Relationship

RLLI – Independent Counsel

RLLI – The Insured’s Duty to Cooperate

Related Services: Insurance

Attorneys: Angela Higgins

Restatement of the Law of Liability Insurance - The Insured's Duty to Cooperate

May 2, 2019 | Angela Higgins

The Restatement of the Law of Liability Insurance (“RLLI”) passed in May 2018 after a one-year delay in voting, following strong negative reactions from practitioners, insurers, and states. Indeed, following the release of the 2017 draft, several governors sent letters of protest – Iowa, Maine, Nebraska, South Carolina, Texas and Utah – stating that the ALI was usurping the state legislatures and the RLLI was at odds with their states’ common law.

Although changes were made to that draft, the version that was eventually passed remains extremely policyholder-oriented and not a “restatement” of existing legal principles in any real sense of the word. This is not surprising, as it began as a Principles of Law project – aspirational rather than reflecting settled legal holdings.  Following its passage, a number of state legislatures have passed laws or resolutions to prevent the adoption of the RLLI.  These include:

  • Arkansas (Ark. Code § 23-60-112);
  • Indiana (2019 House Concurrent Resolution No. 62);
  • Kentucky (2018 Kentucky House Resolution 222);
  • Michigan (Mich. Comp. Laws § 500.3032);
  • North Dakota (N.D. Cent. Code § 26.1-02 (2019));
  • Ohio (Ohio Rev. Code § 3901.82); and
  • Tennessee (Tenn. Code § 56-7-102).

Idaho and Texas are currently considering bills to preclude the adoption of the RLLI.

In this series of blog posts regarding provisions of the RLLI, we will examine how it is not a “restatement” of settled common law, but instead adopts minority or even entirely novel principles. The RLLI reflects a profound lack of insight into practical claims handling practices, and in many respects is internally inconsistent or unworkable. We will periodically update these posts as a type of “scorecard,” tracking how various jurisdictions have responded to the RLLI.

Our fifth post considers RLLI’s thoughts on the insured’s duty to cooperate.

§ 29. The Insured’s Duty to Cooperate

When an insured seeks liability insurance coverage from an insurer, the insured has a duty to cooperate with the insurer. The duty to cooperate includes the obligation to provide reasonable assistance to the insurer:

(1) In the investigation and settlement of the legal action for which the insured seeks coverage;

(2) If the insurer is providing a defense, in the insurer’s defense of the action; and

(3) If the insurer has the right to associate in the defense of the action, in the insurer’s exercise of the right to associate.

§ 30. Consequences of the Breach of the Duty to Cooperate

(1) An insured’s breach of the duty to cooperate relieves an insurer of its obligations under an insurance policy only if the insurer demonstrates that the failure caused or will cause prejudice to the insurer.

(2) If an insured’s collusion with a claimant is discovered before prejudice has occurred, the prejudice requirement is satisfied if the insurer demonstrates that the collusion would have caused prejudice to the insurer had it not been discovered.

§ 25. The Effect of a Reservation of Rights on Settlement Rights and Duties

(1) A reservation of the right to contest coverage does not relieve an insurer of the duty to make reasonable settlement decisions stated in § 24, but the insurer is not required to cover a judgment on a non-covered claim.

(2) Unless otherwise stated in an insurance policy or agreed to by the insured, an insurer may not settle a legal action and thereafter demand recoupment of the settlement amount from the insured on the ground that the action was not covered.

(3) When an insurer has reserved the right to contest coverage for a legal action, the insured may settle the action without the insurer’s consent and without violating the duty to cooperate or other restrictions on the insured’s settlement rights contained in the policy if:

(a) The insurer is given a reasonable opportunity to participate and is kept reasonably informed of developments in the settlement process;

(b) The insured makes a reasonable effort to obtain the insurer’s consent or approval of the settlement;

(c) The insurer declines to withdraw its reservation of rights after receiving prior notice of the proposed settlement; and

(d) The settlement agreed to by the insured is one that a reasonable person who bears the sole financial responsibility for the full amount of the potential covered judgment would make.

WHY IT IS PROBLEMATIC

Initially, the recognition that collusion with a claimant would constitute a breach of the duty to cooperate is useful, though why the insurer must still demonstrate that such “collusion” would be prejudicial (rather than such prejudice being implied) is questionable. Notable is how the duty to cooperate is conceived of as very much bare-minimum conduct by the insured – even collusion is not a breach unless it is or, if completed would have been, prejudicial to the insurer. The RLLI thus conceives of the obligations under an insurance policy as almost entirely running in one direction, from the insurer to the insured.

Allowing the insured to settle a claim without the insurer’s consent merely because it has issued a reservation of rights letter is not a “restatement” of the law. This is the bad faith set up, in many ways worse than the Missouri problem. Missouri allows this because it treats a reservation of rights as an inherent, unwaivable conflict of interest between the insurer and insured. But Missouri does not provide for independent counsel. RLLI requires provision of independent counsel, not controlled by the insurer, if there is a reservation of rights, to address the perceived conflict, then still allows the insured to settle/submit to judgment. The insurer has no meaningful right to control the defense/settlement if it issues a reservation of rights. RLLI proposes that an insurer can only exercise its contractual right to control the defense and settlement of claims if it waives its contractual rights to limit or deny coverage based on its policy language.

HOW THE COURTS HAVE REACTED

§ 29

Adopted or cited with approval:

Mid-Continent Cas. Co. v. Petroleum Solutions, Inc., No. 4:09-0422, 2016 U.S. Dist. LEXIS 182174, at *11 n.28 (S.D. Tex. Dec. 16, 2016) (citing the 2016 discussion draft, along with case law, for the proposition that “the substantive test for breach of the duty to cooperate is whether the conduct was ‘reasonable and justified under the circumstances.’”).

Watch for our next post in this series, which considers RLLI’s thoughts on an insurer’s bad faith failure or refusal to settle. Our prior posts in the series can be found at:

RLLI – Exclusions

RLLI – Duty to Defend

RLLI – The Tripartite Relationship

RLLI – Independent Counsel

Related Services: Insurance

Attorneys: Angela Higgins

Restatement of the Law of Liability Insurance - Independent Counsel

April 30, 2019 | Angela Higgins

The Restatement of the Law of Liability Insurance (“RLLI”) passed in May 2018 after a one-year delay in voting, following strong negative reactions from practitioners, insurers, and states. Indeed, following the release of the 2017 draft, several governors sent letters of protest – Iowa, Maine, Nebraska, South Carolina, Texas and Utah – stating that the ALI was usurping the state legislatures and the RLLI was at odds with their states’ common law.

Although changes were made to that draft, the version that was eventually passed remains extremely policyholder-oriented and not a “restatement” of existing legal principles in any real sense of the word.  This is not surprising, as it began as a Principles of Law project – aspirational rather than reflecting settled legal holdings.  Following its passage, a number of state legislatures have passed laws or resolutions to prevent the adoption of the RLLI.  These include:

  • Arkansas (Ark. Code § 23-60-112);
  • Indiana (2019 House Concurrent Resolution No. 62);
  • Kentucky (2018 Kentucky House Resolution 222);
  • Michigan (Mich. Comp. Laws § 500.3032);
  • North Dakota (N.D. Cent. Code § 26.1-02 (2019));
  • Ohio (Ohio Rev. Code § 3901.82); and
  • Tennessee (Tenn. Code § 56-7-102).

Idaho and Texas are currently considering bills to preclude the adoption of the RLLI.

In this series of blog posts regarding provisions of the RLLI, we will examine how it is not a “restatement” of settled common law, but instead adopts minority or even entirely novel principles. The RLLI reflects a profound lack of insight into practical claims handling practices, and in many respects is internally inconsistent or unworkable. We will periodically update these posts as a type of “scorecard,” tracking how various jurisdictions have responded to the RLLI.

Our fourth post considers RLLI’s thoughts on an insurer’s obligation to provide independent counsel to defend the insured.

THE RLLI LANGUAGE

§ 16. The Obligation to Provide an Independent Defense

When an insurer with the duty to defend provides the insured notice of a ground for contesting coverage under § 15 and there are facts at issue that are common to the legal action for which the defense is due and to the coverage dispute, such that the action could be defended in a manner that would benefit the insurer at the expense of the insured, the insurer must provide an independent defense of the action.

§ 17. The Conduct of an Independent Defense

When an independent defense is required under § 16:

(1) The insurer does not have the right to defend the legal action;

(2) The insured may select defense counsel and related service providers;

(3) The insurer is obligated to pay the reasonable fees of the defense counsel and related service providers on an ongoing basis in a timely manner;

(4) The insurer has the right to associate in the defense of the legal action under the rules stated in § 23; and

(5) The rules stated in § 11 govern the insured’s provision of information to the insurer.

WHY IT IS PROBLEMATIC

Right to independent counsel upon issuance of reservation of rights

The majority rule is that an insurer has a duty to defend a liability claim if there is even an arguable basis for coverage. The accepted approach, where the insurer must defend but reasonably questions coverage, is to issue a reservation of rights letter. The insurer is at a clear disadvantage, as compared to the parties embroiled in the dispute, regarding the underlying facts of the claim. RLLI suggests that there is something nefarious about an insurer’s reservation of rights, but insurers are routinely obligated to undertake a defense on short notice with minimal knowledge of the facts. 

Even in jurisdictions that provide for Cumis counsel, there is rarely any absolute requirement to provide independent counsel at the insurer’s expense merely upon the issuance of a reservation of rights letter. California does not require provision of Cumis counsel upon issuance of a reservation of rights. See, e.g., Dynamic Concepts v. Truck Ins. Exch., 61 Cal. App. 4th 999, 1006-07, 71 Cal. Rptr. 2d 882 (1998); Gafcon, Inc. v. Ponsor & Associates, 98 Cal. App. 4th 1388, 1421, 120 Cal. Rptr. 2d 392 (2002) (“a conflict of interest does not arise every time the insurer proposes to provide a defense under a reservation of rights”). If the insurer must provide independent counsel, and surrender control of the defense as suggested by RLLI, the insurer is precluded from exercising its contractual right to control the defense if it asserts its contractual rights to disclaim coverage. This is an outlier position, not a “restatement.”

Communications with the insurer are not shielded by attorney-client privilege

Where counsel is independent, he/she does not have an attorney-client relationship with the insurer. Accordingly, communications with the insurer are not protected by the attorney-client privilege. Instead, the RLLI assures us that these communications would be protected by a “common interest” doctrine. However, many jurisdictions do not have a well-developed body of law on the common interest doctrine. Where such law exists, often the interests must be identical for the common interest to apply. See, e.g., Ayers Oil Co. v. Am. Bus. Brokers, Inc., 2009 U.S. Dist. LEXIS 111928, *5 (E.D. Mo. Dec. 2, 2009). The RLLI establishes, by virtue of the provisions on reservations of rights and the supposed resulting need for independent counsel, as well as by the tripartite provisions discussed above, that the interests of the insured and insurer are not identical. 

The insurer must provide independent counsel, but the insured “may” select that counsel.

Under § 16, if the insurer issues a reservation of rights, it “must” provide independent counsel. However, under § 17, the insured “may” select that counsel. The gap here anticipates that there will be circumstances in which the insurer is obligated to supply independent counsel, but the insured leaves that selection up to the insurer. Under other provisions of the RLLI discussed above, the insurer would, presumably, then face potential liability for the conduct of the defense by the counsel that it selected, all the while being precluded from controlling the defense and existing in a tenuous environment with respect to attorney-client privilege for its communications. Liable for failing to supervise defense counsel, but unable to do so.

HOW THE COURTS HAVE REACTED

§ 16

Rejected:

Outdoor Venture Corp. v. Phila. Indem. Ins. Co., No. 6:16-cv-182-KKC, 2018 U.S. Dist. LEXIS 167986, at *55 (E.D. Ky. Sep. 27, 2018). The insured cited a 2016 draft of the RLLI, instead applying Kentucky law.

Watch for our next post in this series, which considers RLLI’s thoughts on the insured’s duty to cooperate. Our prior posts in the series can be found at:

RLLI – Exclusions

RLLI – Duty to Defend

RLLI – The Tripartite Relationship

Related Services: Insurance

Attorneys: Angela Higgins

Restatement of the Law of Liability Insurance - The Tripartite Relationship

April 26, 2019 | Angela Higgins

The Restatement of the Law of Liability Insurance (“RLLI”) passed in May 2018 after a one-year delay in voting, following strong negative reactions from practitioners, insurers, and states. Indeed, following the release of the 2017 draft, several governors sent letters of protest – Iowa, Maine, Nebraska, South Carolina, Texas and Utah – stating that the ALI was usurping the state legislatures and the RLLI was at odds with their states’ common law.

Although changes were made to that draft, the version that was eventually passed remains extremely policyholder-oriented and not a “restatement” of existing legal principles in any real sense of the word. This is not surprising, as it began as a Principles of Law project – aspirational rather than reflecting settled legal holdings.  Following its passage, a number of state legislatures have passed laws or resolutions to prevent the adoption of the RLLI.  These include:

  • Arkansas (Ark. Code § 23-60-112);
  • Indiana (2019 House Concurrent Resolution No. 62);
  • Kentucky (2018 Kentucky House Resolution 222);
  • Michigan (Mich. Comp. Laws § 500.3032);
  • North Dakota (N.D. Cent. Code § 26.1-02 (2019));
  • Ohio (Ohio Rev. Code § 3901.82); and
  • Tennessee (Tenn. Code § 56-7-102).

Idaho and Texas are currently considering bills to preclude the adoption of the RLLI.

In this series of blog posts regarding provisions of the RLLI, we will examine how it is not a “restatement” of settled common law, but instead adopts minority or even entirely novel principles. The RLLI reflects a profound lack of insight into practical claims handling practices, and in many respects is internally inconsistent or unworkable. We will periodically update these posts as a type of “scorecard,” tracking how various jurisdictions have responded to the RLLI.

Our third post considers RLLI’s thoughts on the tripartite relationship amongst insurer, defense counsel, and insured. The reimagining of the tripartite relationship is perhaps the part of the RLLI that ventures farthest afield from any “restatement” of existing legal principles.

THE RLLI LANGUAGE

§ 11. Confidentiality

(1) An insurer or insured does not waive rights of confidentiality with respect to third parties by providing to the insured or the insurer, within the context of the investigation and defense of a legal action, information protected by attorney–client privilege, work-product immunity, or other confidentiality protections.

(2) An insurer does not have the right to receive any information of the insured that is protected by attorney–client privilege, work-product immunity, or a defense lawyer’s duty of confidentiality under rules of professional conduct, if that information could be used to benefit the insurer at the expense of the insured.

§ 12. Liability of Insurer for Conduct of Defense

(1) If an insurer undertakes to select counsel to defend a legal action against the insured and fails to take reasonable care in so doing, the insurer is subject to liability for the harm caused by any subsequent negligent act or omission of the selected counsel that is within the scope of the risk that made the selection of counsel unreasonable.

(2) An insurer is subject to liability for the harm caused by the negligent act or omission of counsel provided by the insurer to defend a legal action when the insurer directs the conduct of the counsel with respect to the negligent act or omission in a manner that overrides the duty of the counsel to exercise independent professional judgment.

WHY IT IS PROBLEMATIC

It is not a “restatement”

A restatement should express the majority view of the law, except in rare instances where that majority view has become outdated and there is a clear trend away from it. These changes are not a “restatement” of existing law, but rather a wholesale creation of new law. As noted by DRI in its opposition to the 2017 draft, Section 12 “would create new direct liability on the part of the insurer to the insured for the acts of defense counsel” with no support from the case law.

This is not an entirely insurer-oriented problem. Policyholders, too, should be concerned about greater intrusion into the attorney-client relationship between insured and defense counsel. Facing potential liability for negligent selection or “supervision” of counsel, we would expect insurers to exert greater influence over defense counsel. Moreover, this is in tension with provisions that defense counsel is not permitted to share certain information or communications with the insurer. If these provisions of RLLI are adopted, there would be a new and real conflict of interest between the insurer and the insured, placing defense counsel in an untenable and practically unworkable position.

The insurer faces potential liability but is foreclosed from managing the defense in such a way as to limit its exposure.

These sections of the RLLI propose to render insurers liable to insureds for mistakes by defense counsel, while at the same time preventing the insurer from receiving a full account from defense counsel of any information that defense counsel deems he/she should not share with the insurer. Indeed, as discussed in the above section, if the insurer is defending under a reservation of rights, the insurer is required to pay for independent counsel, and the insured is free to act without the insurer’s consent. It appears that the actions of independent counsel, who are not controlled by the insurer but who might be “selected” by the carrier, could subject the insurer to liability even though the insurer has no meaningful opportunity to supervise or control defense counsel.

Some jurisdictions have case law addressing insurer liability for the professional negligence of insurer-retained defense counsel. However, there is by no means a consensus on this issue such that the RLLI’s approach could be said represent a “restatement” of the law. “The question of whether an attorney appointed to represent an insured to defend a claim is an agent for the insurer is one that has divided courts, and often turns on specific facts.” Remodeling Dimensions, Inc. v. Integrity Mut. Ins. Co., 819 N.W.2d 602, 615 (Minn. 2012). Some jurisdictions hold that the insurer does not have the necessary opportunity to control defense counsel’s conduct that would justify rendering the insurer vicariously liable for acts or omissions of the attorney. See, e.g., Ingersoll-Rand Equip. Corp. v. Transp. Ins. Co., 963 F. Supp. 452, 454 (M.D. Pa. 1997) (stating that an attorney's ethical obligations to the insured "prevent the insurer from exercising the degree of control necessary to justify the imposition of vicarious liability"); Lifestar Response of Ala., Inc. v. Admiral Ins. Co., 17 So. 3d 200, 214-18 (Ala. 2009) (imposing no vicarious liability for defense attorney's alleged negligence because insurer could not control attorney's professional judgment). 

Others take a compromise approach:

In the typical situation in which an insurer hires an attorney to defend an insured, the relationship of the insurer and its attorney is precisely that of principal to independent contractor. For example, the attorney is engaged in the distinct occupation of practicing law, and this occupation is one in which the attorney possesses special skill and expertise. . . . Finally, and obviously, the practice of law is not, nor could it be, part of the regular business of an insurer.

Givens v. Mullikin, 75 S.W.3d 383, 393-94 (Tenn. 2002). However, “an insurer can be held vicariously liable for the acts or omissions of an attorney hired to represent an insured when those acts or omissions were directed, commanded, or knowingly authorized by the insurer.” Id. at 395. 

Even under this approach, however, the insurer can face liability only if it expressly directed the conduct of defense counsel at issue. The RLLI approach would render the insurer liable for “negligent selection of defense counsel,” not for specific actions or omissions that the insurer directed the defense attorney to undertake. 

Defense counsel is required to “hide the ball” from the insurer

Defense counsel hired by the insurer is required to keep from the insurer any privileged information if the information could be used to benefit the insurer at the expense of the insured. While there is existing case law in many jurisdictions that prevents an insurer from directing defense counsel to develop a coverage case against the insured, what is new is this notion that defense counsel, who typically does represent the insurer in the tripartite relationship, is obligated to hide from the insurer information that is pertinent to the insurer’s interests. 

Unfettered communication with both clients on the subject of the joint representation is therefore a practical necessity. Both are directly interested in the case, its progress and any material developments, counsel's litigation and trial strategy, his assessments of the merits and likelihood of success, his views on whether the case ought to be tried or settled, and myriad other issues, many of which require expression of counsel's strategic judgments and mental impressions. In communicating with the insurer on these matters, the attorney is rendering advice and counsel to a client as a necessary aspect of his representation, both of the insurer and of the insured.

RFF Family P'ship, LP v. Burns & Levinson, LLP, 32 Mass. L. Rep. 88 (2013).

Some jurisdictions expressly hold that both defense counsel and the insured have a duty to disclose to the insurer relevant information regarding the claim and defense. See, e.g., Cont'l Cas. Co. v. St. Paul Surplus Lines Ins. Co., 265 F.R.D. 510, 518 (E.D. Cal. 2010). This is a contractual duty on the part of the insured, and an ethical obligation by the defense counsel. Furthermore, some courts have held that the insured does not have a reasonable expectation that information it communicates to defense counsel will be privileged and withheld from the insurer that has hired defense counsel for the action. Northwood Nursing & Convalescent Home, Inc. v. Continental Ins. Co., 161 F.R.D. 293, 297 (E.D. Pa. 1995). 

Notably, there is a significant absence of established case law regarding what information an attorney may ethically withhold from its insurer client in a tripartite relationship, so the RLLI’s position is in no respect a “restatement” of the existing law on this question. A number of courts to have considered the issue have held that the insurer is entitled to be completely informed of information related to the defense of the claim. Obviously, information that is relevant to a coverage issue (such as intent) is likely to be highly relevant to the defense as well. RLLI proposes no practical approach to defending claims here, and fails to recognize that in the ordinary course of the defense facts discovered will bear on both the defense to liability and the insurer’s coverage position. 

Moreover, RLLI seeks to intrude upon the individualized ethical obligations imposed upon attorneys by weighing in upon what defense counsel may or may be required to withhold from insurers in a tripartite relationship in which defense counsel is also deemed to represent the insurer. This is not the place of RLLI, and is not a “restatement” of insurance law, but a statement on professional ethics. It would also seem to open the door for plaintiffs’ counsel to seek to discover information communicated to the insurer by defense counsel on the argument that, where the insurer is not permitted to receive the information under § 11, there is no attorney-client relationship between the insurer and defense counsel.

HOW THE COURTS HAVE REACTED

§ 12

The insured’s reliance upon § 12 of the RLLI was found to be “premature.” Progressive Northwestern Ins. Co. v. Gant, No. 15-9267-JAR-KGG, 2018 U.S. Dist. LEXIS 163624, at *16 (D. Kan. Sep. 24, 2018). “[T]he notes to the Restatement acknowledge that ‘there is a dearth of reported cases holding liability insurers directly liable for negligent selection [of defense counsel].’ Accordingly, this Court is not inclined to use a nonbinding Restatement as a means to overturn or expand Kansas law.” Id. at *16-17.

Watch for our next post in this series, which considers RLLI’s thoughts on an insurer’s obligation to provide independent counsel to defend the insured. Our prior posts in the series can be found at:

RLLI – Exclusions

RLLI – Duty to Defend

Related Services: Insurance

Attorneys: Angela Higgins

Restatement of the Law of Liability Insurance - Duty to Defend

April 23, 2019 | Angela Higgins

The Restatement of the Law of Liability Insurance (“RLLI”) passed in May 2018 after a one-year delay in voting, following strong negative reactions from practitioners, insurers, and states. Indeed, following the release of the 2017 draft, several governors sent letters of protest – Iowa, Maine, Nebraska, South Carolina, Texas and Utah – stating that the ALI was usurping the state legislatures and the RLLI was at odds with their states’ common law.

Although changes were made to that draft, the version that was eventually passed remains extremely policyholder-oriented and not a “restatement” of existing legal principles in any real sense of the word. This is not surprising, as it began as a Principles of Law project – aspirational rather than reflecting settled legal holdings.  Following its passage, a number of state legislatures have passed laws or resolutions to prevent the adoption of the RLLI.  These include:

  • Arkansas (Ark. Code § 23-60-112);
  • Indiana (2019 House Concurrent Resolution No. 62);
  • Kentucky (2018 Kentucky House Resolution 222);
  • Michigan (Mich. Comp. Laws § 500.3032);
  • North Dakota (N.D. Cent. Code § 26.1-02 (2019));
  • Ohio (Ohio Rev. Code § 3901.82); and
  • Tennessee (Tenn. Code § 56-7-102).

Idaho and Texas are currently considering bills to preclude the adoption of the RLLI.

In this series of blog posts regarding provisions of the RLLI, we will examine how it is not a “restatement” of settled common law, but instead adopts minority or even entirely novel principles. The RLLI reflects a profound lack of insight into practical claims handling practices, and in many respects is internally inconsistent or unworkable. We will periodically update these posts as a type of “scorecard,” tracking how various jurisdictions have responded to the RLLI.

Our second post considers RLLI’s thoughts on the duty to defend.

THE RLLI LANGUAGE

§ 13. Conditions Under Which the Insurer Must Defend

(1) An insurer that has issued an insurance policy that includes a duty to defend must defend any legal action brought against an insured that is based in whole or in part on any allegations that, if proved, would be covered by the policy, without regard to the merits of those allegations.

(2) For the purpose of determining whether an insurer must defend, the legal action is deemed to be based on:

(a) Any allegation contained in the complaint or comparable document stating the legal action; and

(b) Any additional allegation known to the insurer, not contained in the complaint or comparable document, stating the legal action that a reasonable insurer would regard as an actual or potential basis for all or part of the action.

(3) An insurer that has the duty to defend under subsections (1) and (2) must defend until its duty to defend is terminated under § 18 by declaratory judgment or otherwise, unless facts not at issue in the legal action for which coverage is sought and as to which there is no genuine dispute establish that:

(a) The defendant in the action is not an insured under the insurance policy pursuant to which the duty to defend is asserted;

(b) The vehicle or other property involved in the accident is not covered property under a liability insurance policy pursuant to which the duty to defend is asserted and the defendant is not otherwise entitled to a defense;

(c) The claim was reported late under a claims-made-and-reported policy such that the insurer’s performance is excused under the rule stated in § 35(2);

(d) The action is subject to a prior and pending litigation exclusion or a related claim exclusion in a claims-made policy;

(e) There is no duty to defend because the insurance policy has been properly cancelled; or

(f) There is no duty to defend under a similar, narrowly defined exception to the complaint-allegation rule recognized by the courts in the applicable jurisdiction.

§ 14. Duty to Defend: Basic Obligations

When an insurance policy obligates an insurer to defend a legal action:

(1) Subject to the insurer’s right to terminate the defense under § 18, the insurer has a duty to provide a defense of the action that:

(a) Makes reasonable efforts to defend the insured from all of the causes of action and remedies sought in the action, including those not covered by the liability insurance policy; and

(b) Requires defense counsel to protect from disclosure to the insurer any information of the insured that is protected by attorney–client privilege, work-product immunity, or a defense lawyer’s duty of confidentiality under rules of professional conduct, if that information could be used to benefit the insurer at the expense of the insured;

(2) The insurer may fulfill the duty to defend using its own employees, except when an independent defense is required; and

(3) Unless otherwise stated in the policy, the costs of the defense of the action are borne by the insurer in addition to the policy limits.

§ 18. Terminating the Duty to Defend a Legal Action

An insurer’s duty to defend a legal action terminates only upon the occurrence of one or more of the following events:

(1) An explicit waiver by the insured of its right to a defense of the action;

(2) Final adjudication of the action;

(3) Final adjudication or dismissal of parts of the action that eliminates any basis for coverage of any remaining parts of the action;

(4) Settlement of the action that fully and finally resolves the entire action;

(5) Partial settlement of the action, entered into with the consent of the insured, that eliminates any basis for coverage of any remaining parts of the action;

(6) If so stated in the insurance policy, exhaustion of the applicable policy limits;

(7) A correct determination by the insurer that it does not have a duty to defend the legal action under the rules stated in § 13; or

(8) Final adjudication that the insurer does not have a duty to defend the action.

§ 19. Consequences of Breach of the Duty to Defend

An insurer that breaches the duty to defend a legal action forfeits the right to assert any control over the defense or settlement of the action.

§ 21. Insurer Recoupment of the Costs of Defense

Unless otherwise stated in the insurance policy or otherwise agreed to by the insured, an insurer may not seek recoupment of defense costs from the insured, even when it is subsequently determined that the insurer did not have a duty to defend or pay defense costs.

§ 33. Timing of Events That Trigger Coverage

(1) When a liability insurance policy provides coverage based on the timing of a harm, event, wrong, loss, activity, occurrence, claim, or other happening, the determination of the timing is a question of fact.

(2) A liability insurance policy may define a harm, event, wrong, loss, activity, occurrence, claim, or other happening that triggers coverage under a liability insurance policy to have taken place at a specially defined time, the timing of which is also a question of fact, even if it would be determined for other purposes to have taken place at a different time.

§ 45. Insurance of Liabilities Involving Aggravated Fault

(1) Except as barred by legislation or judicially declared public policy, a term in a liability insurance policy providing coverage for defense costs incurred in connection with any legal action is enforceable, including but not limited to defense costs incurred in connection with: a criminal prosecution; an action seeking fines, penalties, or punitive damages; and an action alleging criminal acts, expected or intentionally caused harm, fraud, or other conduct involving aggravated fault.

(2) Except as barred by legislation or judicially declared public policy, a term in a liability insurance policy providing coverage for civil liability arising out of aggravated fault is enforceable, including civil liability for: criminal acts, expected or intentionally caused harm, fraud, or other conduct involving aggravated fault.

(3) Whether a term in a liability insurance policy provides coverage for the defense costs and civil liability addressed in subsections (1) and (2) is a question of interpretation governed by the ordinary rules of insurance policy interpretation.

WHY IT IS PROBLEMATIC

Duty to defend continues until the insurer has made a “correct determination” that it has no duty to defend under § 13, or “final” adjudication that it has no duty to defend.

Initially, the insurer cannot make its own “correct determination” that it has no duty to defend where there is no “occurrence,” offense, “wrongful act,” etc., even though it is the insured’s burden to prove that the claim is within the scope of the insuring agreement under the default rule of the common law. Similarly, § 13 does not identify the insured’s failure to satisfy the policy’s conditions for coverage, including, significantly, the duty to give notice and to cooperate, as bases upon which the insurer may deny or terminate a defense. Many jurisdictions hold that it is the insured’s burden to prove compliance with the policy’s conditions, including the duty to cooperate. See, e.g., Steadfast Ins. Co. v. Purdue Frederick Co., No. X08CV020191697S, 2005 Conn. Super. LEXIS 3286, at *8 (Super. Ct. Nov. 29, 2005). There is ample case law supporting the proposition that not only does pre-suit conduct by the insured in breach of its obligations under the policy obviate a duty to defend, the duty to defend may be terminated by the insured’s breach during the course of the claim. See, e.g., Arton v. Liberty Mutual Ins. Co., 163 Conn. 127, 302 A.2d 284 (1972). RLLI simply abrogates the insurer’s contractual rights under the policy, with no firm support in well-established case law.

The RLLI proposes that the insurer must also litigate the applicability of any exclusions other than the prior/pending litigation exclusion. This would include exclusions such as the sexual molestation, criminal acts, “your work,” professional liability, and many similar commonly-applicable exclusions. One of the most common coverage questions presented is the contractor seeking coverage under a CGL policy for faulty work, and under the RLLI the insurer would apparently have a duty to defend these claims to the bitter end despite clear case law in most jurisdictions that CGL policies do not afford coverage for professional errors and omissions by contractors in the performance of their contracts. See, e.g., Owings v. Gifford, 237 Kan. 89, 94, 697 P.2d 865 (1985) (“the [CGL] insurance policy is not a performance bond or a guarantee of contract performance. A house built or being constructed by an insured builder is the work product of the builder and under the exclusion clause of the policy no coverage is provided the insured for damages due to faulty construction.”).

“Final adjudication” means the exhaustion of all appeals. Because the appellate process can reasonably be expected to take longer than the course of litigation of the underlying civil claim, this proposition effectively negates the insurer’s contractual right to deny a defense for uncovered claims. RLLI also proposes that the insurer has no right to recoupment of defense costs. Moreover, the RLLI’s position is inconsistent with the position of a significant number of jurisdictions (including what are regarded as policyholder-friendly jurisdictions) that an insurer may terminate its defense upon its discovery of facts placing the claim outside of coverage. See, e.g., Scottsdale Ins. Co. v. MV Transportation, 36 Cal. 4th 643, 661, 31 Cal. Rptr. 3d 147, 115 P.3d 460 (2005); Certain Underwriters at Lloyd's London v. Mestmaker, No. F066016, 2014 Cal. App. Unpub. LEXIS 3021, at *27 (Apr. 29, 2014).

Requires the insured’s consent to settlement of covered claims

Where the insurer is defending without a reservation of rights, it has the contractual right to control the investigation, defense, and settlement of claims under the policy. The RLLI cites no legal authority for the proposition that a majority of courts have held, as the ALI suggests in § 18(5), that the insured’s consent is required to settle covered claims under the policy, leaving uncovered claims unresolved. Why would the presence of uninsured claims in the action give the insured veto power over the insurer’s contractual right to control settlement of covered claims?

Whether there was an occurrence within the policy period becomes a fact question that precludes summary disposition.

One of the most remarkable positions taken by the RLLI is in § 33, which suggests that it is a fact question whether there is a trigger of coverage. In describing this language, Comment a, expressly discusses this “trigger” in terms of whether there is an occurrence within the policy period. In Comment b, “Because all liability insurance policies are issued for a defined policy period, all liability insurance policies have some trigger of coverage.” Comment d expressly suggests that, “Determining whether the required event took place during the required period involves the application of the policy, as interpreted by the court, to the facts,” and suggests that unless the facts are undisputed the matter cannot be resolved with a trial. 

HOW THE COURTS HAVE REACTED

§ 19

Rejected:

  • Catlin Specialty Ins. Co. v. J.J. White, Inc., 309 F. Supp. 3d 345, 363 (E.D. Pa. 2018) discusses the insured’s argument that the 2017 draft of § 19, which then provided that “an insurer that breaches the duty to defend without a reasonable basis for its conduct must provide coverage for the legal action for which the defense was sought, notwithstanding any grounds for contesting coverage.” The court declined to adopt such a position, and the language changed substantially from the 2017 draft to the 2018 final.

Adopted or cited with approval:

  • Nationwide Mut. Fire Ins. Co. v. D.R. Horton, Inc., Civil Action No. 15-351-CG-N, 2016 U.S. Dist. LEXIS 160148, at *20 n.6 (S.D. Ala. Nov. 18, 2016) cited a 2015 draft of § 19 RLLI and a Florida federal opinion for “the longstanding principal of law that an insurer which ‘breaches its duty to defend or unjustifiably refuses to defend its insured . . . forfeits control of the suit to the insured and may be held liable to its insured for costs incurred in providing its own defense.’”

§ 21

Rejected:

  • Catlin Specialty Ins. Co. v. CBL & Assocs. Props., No. N16C-07-166 PRW CCLD, 2018 Del. Super. LEXIS 342, at *8 (Super. Ct. Aug. 9, 2018) (applying Tennessee law) declined to adopt § 21. “Restatements are mere persuasive authority until adopted by a court; they never, by mere issuance, override controlling case law. And this Restatement itself acknowledges that ‘[s]ome courts follow the contrary rule[.]’”

Adopted or cited with approval:

  • Selective Ins. Co. of Am. v. Smiley Body Shop, Inc., No. 1:16-cv-00062-JMS-MJD, 2017 U.S. Dist. LEXIS 215904, at *15-16 (S.D. Ind. July 28, 2017) cites the 2017 discussion draft of the RLLI, specifically § 21, in support of its holding that an insurer may not seek recoupment of defense costs for uncovered claims unless the policy provides for recoupment.

Watch for our next post in this series, which considers RLLI’s thoughts on the tripartite relationship amongst insurer, defense counsel, and insured. Our prior post in the series can be found at:

RLLI – Exclusions

Related Services: Insurance

Attorneys: Angela Higgins

Restatement of the Law of Liability Insurance - Exclusions

April 18, 2019 | Angela Higgins

The Restatement of the Law of Liability Insurance (“RLLI”) passed in May 2018 after a one-year delay in voting, following strong negative reactions from practitioners, insurers, and states. Indeed, following the release of the 2017 draft, several governors sent letters of protest – Iowa, Maine, Nebraska, South Carolina, Texas and Utah – stating that the ALI was usurping the state legislatures and the RLLI was at odds with their states’ common law.

Although changes were made to that draft, the version that was eventually passed remains extremely policyholder-oriented and not a “restatement” of existing legal principles in any real sense of the word. This is not surprising, as it began as a Principles of Law project – aspirational rather than reflecting settled legal holdings.  Following its passage, a number of state legislatures have passed laws or resolutions to prevent the adoption of the RLLI.  These include:

  • Arkansas (Ark. Code § 23-60-112);
  • Indiana (2019 House Concurrent Resolution No. 62);
  • Kentucky (2018 Kentucky House Resolution 222);
  • Michigan (Mich. Comp. Laws § 500.3032);
  • North Dakota (N.D. Cent. Code § 26.1-02 (2019));
  • Ohio (Ohio Rev. Code § 3901.82); and
  • Tennessee (Tenn. Code § 56-7-102).

Idaho and Texas are currently considering bills to preclude the adoption of the RLLI.

In this series of blog posts regarding provisions of the RLLI, we will examine how it is not a “restatement” of settled common law, but instead adopts minority or even entirely novel principles. The RLLI reflects a profound lack of insight into practical claims handling practices, and in many respects is internally inconsistent or unworkable. We will periodically update these posts as a type of “scorecard,” tracking how various jurisdictions have responded to the RLLI.

Our first post considers RLLI’s suggestions on the interpretation of policy language, and specifically exclusions:

§ 32 Exclusions

(1) An “exclusion” is a term in an insurance policy that identifies a category of claims that are not covered by the policy.

(2) Whether a term in an insurance policy is an exclusion does not depend on where the term is in the policy or the label associated with the term in the policy.

(3) Exclusions are interpreted narrowly.

(4) Unless otherwise stated in the insurance policy, words in an exclusion regarding the expectation or intent of the insured refer to the subjective state of mind of the insured.

(5) An exception to an exclusion narrows the application of the exclusion; the exception does not grant coverage beyond that provided in the insuring clauses.

WHY IT IS PROBLEMATIC

The RLLI proposes that any exclusion related to the expectation or intent of the insured should be determined by the subjective state of mind of the insured. RLLI proposes that even the insured’s statement of his/her state of mind can be disregarded – “even an insured’s admission of intent to harm is subject to cross-examination and the jury’s assessment of credibility.” Comment d. 

Furthermore, RLLI suggests that as to exclusions such as sexual abuse, physical and mental abuse, etc., “The default rule is that such exclusions are severable, meaning that they apply only to insureds whose conduct meets the requirements of the exclusion.” Comment c. That is not an accurate statement of the law, which depends upon the precise language of the exclusion, including whether the exclusion applies to “the insured” or to “any insured.” In policies with severability or “separation of insureds” language, claims against each insured are evaluated separately for coverage, but there is considerable case law distinguishing between “the insured” and “any insured” language, where “any insured” language will exclude coverage for all insureds if any of them has engaged in the excludable conduct. See, e.g., Am. Family Mut. Ins. Co. v. Copeland-Williams, 941 S.W.2d 625, 629-30 (Mo. App. E.D. 1997) (“The use of the phrase ‘any insured’ makes the exclusionary clause unambiguous even in light of the severability clause. . . . [it] unambiguously precludes coverage to all persons covered by the policy if any one of them engages in excludable conduct.”).

Moreover, many modern exclusions are written to exclude coverage for particular claims and losses, without regard to the insured’s intent, including the sexual, physical, and mental abuse exclusions. Courts interpreting this kind of policy language have found that it “serves to exclude an entire category of injury based on the cause, not just the person who committed the harmful act.” Safeco Ins. Co. v. Thomas, No. 13-CV-0170-AJB (MDD), 2013 WL 12123852, at *5 (S.D. Cal. Nov. 26, 2013) (emphasis added); see also, accord, Universal N. Am. Ins. Co. v. Colosi, No. 217CV00113JADGWF, 2018 WL 3520118, at *4 (D. Nev. July 20, 2018); Liberty Mut. Fire Ins. Co. v. Shaibaz S., 2017 WL 2118312 (N.D. Cal. May 16, 2017); Travelers Indem. Co. of Am. v. Isom, 2014 WL 1092542 (D. Ariz. Mar. 20, 2014). RLLI does not address the modern language of sex abuse exclusions in suggesting that there is a “default” rule that applies the exclusion only to the abuser.

RLLI mentions, in passing, that some states have adopted an inferred-intent approach to the insured’s subjective intent with sexual molestation claims, but otherwise takes no position that intent may (and should) be inferred or determined on an objective basis in many circumstances. Not only does this raise significant questions of how the insurer could prove the insured’s subjective state of mind, it is inconsistent with well-established law in all jurisdictions that will infer intent as to certain conduct as a matter of public policy, including sex abuse and other criminal conduct.

As discussed below, it is clearly distasteful and inappropriate to allow insureds who have engaged in certain conduct to advance an argument regarding whether they subjectively believed that their victims would welcome, rather than be harmed by, offensive behavior. Moreover, the principle that the insured is deemed to intend the reasonable and probable consequences of his/her voluntary acts, an objective standard for intent, is a widely-accepted standard that serves public policy and preserves the resources of the courts and parties.

Sexual abuse and expected/intended exclusions

Many modern policies will have a specific sexual abuse/molestation exclusion. However, practitioners can face a lack of case law interpreting their specific exclusion(s) or a policy that lacks a sex abuse-specific exclusion, including in older policies. Historically, sex abuse has been addressed, in whole or in part, through expected/intended exclusions.

A person who sexually molests a minor is deemed as a matter of law to have expected and intended to cause harm or injury. See, e.g., B.B. v. Cont’l Ins. Co., 8 F.3d 1288, 1296 (8th Cir. 1993) (applying Missouri law). 

Forcing the insurer to indemnify the insured “subsidizes the episodes of sexual abuse of which its victims complain, at the ultimate expense of other insureds to whom the added costs of indemnifying child molesters will be passed.” . . . “The average person purchasing homeowner’s insurance would cringe at the very suggestion that he was paying for [coverage for liability arising out of his sexual abuse of a child]. And certainly he would not want to share that type of risk with other homeowner’s policy holders.”

B.B., 8 F.3d at 1295 (citations omitted). 

“The inference or inferred-intent standard in cases of sexual molestation is now the unanimous rule among jurisdictions that have considered the issue.” B.B., 8 F.3d at 1293. 

The rationale behind the inferred-intent standard is based on the inherently harmful nature of child molestation. . . . Courts have stated that “‘acts of sexual molestation against a minor are so certain to result in injury to that minor that the law will infer an intent to injure on behalf of the actor without regard to his . . . claimed intent.’” . . . . “in the exceptional case of an act of child molestation, cause and effect cannot be separated; that to do the act is necessarily to do the harm which is its consequence; and that since unquestionably the act is intended, so also is the harm.” . . . “the very essence of child molestation is the gratification of sexual desire. The act is the harm. There cannot be one without the other. Thus the intent to molest is, by itself, the same thing as intent to harm.”

B.B., 8 F.3d at 1293.

When an adult subjects a minor to “unwanted and unconsented to sexual contact,” the perpetrator is deemed as a matter of law to have intended and expected the resulting physical and psychological damages, even if the perpetrator “believed in some perverse way” that his conduct would be welcomed by the minor. State Farm Fire & Cas. Co. v. Caley, 936 S.W.2d 250, 252 (Mo. App. W.D. 1997). “Missouri case law specifically holds that a person engaging in sexual misconduct against a minor intends to cause any resulting injuries.” California Cas. Gen. Ins. Co. v. Nelson, 2014 U.S. Dist. LEXIS 191438, *15-16 (W.D. Mo. Dec. 22, 2014).

With a “unanimous rule” for legally inferred intent as to acts of sexual abuse, is there a place for the RLLI’s subjective intent standard? In the modern climate of “me too” and a growing awareness and litigation of sex abuse, who has the appetite to argue for a subjective standard of intent as to such conduct? Although we might expect any jurisdictions tempted to adopt the subjective intent standard to try to carve out sex abuse against minors, for the same reasons that intent is inferred for this type of behavior, intent is properly inferred or judged on an objective basis for many types of conduct.

Criminal acts and expected/intended exclusions

Although many policies will include a criminal acts exclusion, the expected/intended exclusion is often used to address conduct that constitutes a crime, particularly under commercial policies. Many jurisdictions apply an inferred-intent standard to this exclusion as a matter of public policy.

In James v. Paul, 49 S.W.3d 678 (Mo. 2001), the Missouri Supreme Court agreed with an insurer that it was entitled to summary judgment on the question of the applicability of its intended/expected acts exclusion based upon the insured’s plea of guilty in a criminal case arising out of the same underlying conduct that gave rise to the civil case. 49 S.W.3d at 682.

If issue preclusion is not permitted, Paul will, in effect, be insulated by an insurer from the full brunt of economic responsibility resulting from his admittedly intentional criminal act. This runs contrary to the public policy of Missouri. . . . Both James and Paul stood to profit from Paul’s duplicity in admitting intentional wrongdoing in the criminal proceeding while, in effect, denying it in the present case. Applying collateral estoppel in this situation serves to prevent the potential of collusive litigation as well as promoting the other policies of finality, consistency and judicial economy discussed above.

James, 49 S.W.3d at 687-88 (citation omitted).

“[W]here the insured made a judicial admission as part of a prior judicial determination in a criminal case that the insured's conduct was intentional,” a court considering the application of an intended/expected exclusion is also required to presume that the insured’s conduct was intentional. James, 49 S.W.3d at 689. “The criminal conviction foreclosed [the insured] and any party claiming through him from asserting that his conduct was not intentional.” Id. (emphasis added).

Again, there are significant public policy considerations underlying an inferred-intent approach to the expected/intended acts exclusions commonly found in liability policies. RLLI’s suggestion that a subjective intent standard is preferred, which would place the burden on the insurer to establish the insured’s state of mind, is inconsistent with well-developed precedent in most jurisdictions.

HOW THE COURTS HAVE REACTED

To date, the only available decision to address RLLI § 32 cited it, along with preexisting case authority, for the proposition that an insurer bears the burden of proving the applicability of exclusions. Akorn, Inc. v. Fresenius Kabi AG, No. 2018-0300-JTL, 2018 Del. Ch. LEXIS 325, at *137 n.619 (Ch. Oct. 1, 2018) (citing Restatement of the Law of Liability Insurance § 32 cmt. e (Am. Law. Inst. 2018); “It is the insurer that has identified the excluded classes of claims and will benefit from being able to place a specific claim into an excluded class. Thus, assigning the insurer the burden of proving that the claim fits into the exclusion is appropriate.”)

Watch for our next post in this series, which considers RLLI’s thoughts on the duty to defend.

Related Services: Insurance

Attorneys: Angela Higgins

Amended Missouri Interpleader Statute Tackles the Multiple Claimants, Insufficient Limits Problem

August 13, 2018 | Angela Higgins

The Missouri legislature has enacted amendments to our state’s interpleader statute, Mo. Rev. Stat. § 507.060, which address one of the most vexatious problems in claims handling – multiple claimants with insufficient policy limits to fully resolve each claim against the insured. House Bill 1531 was signed by the governor on June 1, and will become effective August 28, 2018. 

Prior to these amendments, Missouri law was unsettled as to which approach should be favored by an insurer in a multiple-claimant scenario without risking third-party bad faith claims, for which Missouri is notorious. This post looks at the approaches to this problem in Missouri and elsewhere under the common law, and then at the changes worked by the revised interpleader statute.

I.              THE STATE OF THE LAW PRIOR TO AUGUST 28, 2018

A.            FIRST-COME, FIRST-SERVE

The oldest rule for resolving an insurer’s duties when presented with multiple claims and insufficient limits to pay all claims and potential claims is “first in time, first in right,” or “first-come, first-served.” When multiple claimants bring lawsuits against one or more insured defendants seeking damages for bodily injuries or death arising from a single occurrence and, based on a reasonable evaluation, the policy limits are plainly insufficient to cover the insured’s total potential exposure, courts generally apply the rule “first in time, first in right.”  Voccio v. Reliance Ins. Cos., 703 F.2d l, 3 (1st Cir. 1983).  This principle “applies regardless of whether the priority is by way of judgment or by way of settlement.”  World Trade Ctr. Props. LLC v. Certain Underwriters at Lloyd’s of London, 650 F.3d 145, 151 (2d Cir. 20 11); Allstate Ins. Co. v. Russell, 13 A.D.3d 617, 788 N.Y.S.2d 401, 402 (N.Y. App. Div. 2004); Castorena v. Western Indemnity Co., 213 Kan. 103, 110, 515 P.2d 789, 794 (1973).

This means that the insurer is entitled to pay the first claimant who obtains a judgment, or the first claimant who presents a settlement demand within policy limits. A liability insurer “has discretion to settle whenever and with whomever it chooses, provided it does not act in bad faith.”  World Trade Ctr. Props. LLC v. Certain Underwriters at Lloyd’s of London, 650 F.3d 145, 151 (2d Cir. 2011); Allstate Ins. Co. v. Russell, 13 A.D.3d 617 (N.Y. App. Div. 2004). The first to settle rule does not literally require that the insurer settle the first claim that is presented, but absolves it of responsibility for later claims when it has reached a reasonable settlement with the first claimant to negotiate to settlement.

[W]hen faced with a settlement demand arising out of multiple claims and inadequate proceeds, an insurer may enter into a reasonable settlement with one of the several claimants even though such settlement exhausts or diminishes the proceeds available to satisfy other claims. Such an approach, we believe, promotes settlement of lawsuits and encourages claimants to make their claims promptly.

Texas Farmers Ins. Co. v. Soriano, 881 S.W.2d 312 (Tex. 1994). Soriano is generally considered the lead opinion on resolution of multiple-claimant problems.

It is generally agreed that the insurer can pay some claims and leave others unresolved, such that settlement exhausts policy limits so that the insured and other claimants are left without coverage under the policy. Liquori v. Allstate Ins. Co., 76 N.J. Super. 204, 208, 184 A.2d 12, 17 (N.J. Super. Ct. 1962).  When an insurer “has paid the full monetary limits set forth in the policy, its duties under the contract of insurance cease.”  Boris v. Flaherty, 242 A.D.2d 9, 12, 672 N.Y.S.2d 177, 180 (N.Y. App. Div. 1998).

It is also generally accepted that the insurer does not need to, and probably should not, wait until all claims are presented before determining which it will settle and how it will settle them. Hartford Casualty Ins. Co. v. Dodd, 416 F. Supp. 1216, 1219 (D. Md. 1976); State Farm Mutual Auto Ins. Co. v. Hamilton, 326 F. Supp. 931, 934 (D.S.C. 1971).  

Still, the insurer should make every attempt to settle as many claims as possible within policy limits. In Continental Casualty Insurance Company v. Peckham, 895 F.2d 830 (1st Cir. 1990), the court explained that, in a multiple-claimant case, the insurer should try to settle all or some of the claims so that the insured could be relieved from as much liability as is reasonably possible.  Id. at 835.  In doing so, the insurer is entitled to exercise “honest business judgment” as long as it attempts to resolve the multiple claims in good faith.  The court further recognized that, when the insurer is making a good-faith attempt to resolve multiple claims within the inadequate policy limits, the insurer is not required to make perfect judgments and is not automatically found in bad faith if the insured incurs liability beyond the policy limits.  Id.

However, the insurer must be careful to attempt to preserve policy funds for truly significant claims. In Brown v. United States Fidelity & Guaranty Co., 314 F.2d 675 (2d Cir. 1963), an insurer was found to have acted in bad faith for the “overeager” settlement of a claim in disregard of potential personal liability on the insured.  Id. at 682. That is, the insurer should not jump to settle a claim of minimal value, simply because it is presented first and easy to resolve, when this would deplete already insufficient policy funds and increase the insured’s exposure to an excess judgment. 

The “first in time” cases are obviously in tension with cases holding that the insurer must still attempt to preserve as much of the policy funds as possible to minimize the insured’s exposure to an excess judgment, and the reported cases are highly fact-specific without a bright-line rule. Moreover, there are no reported Missouri cases authorizing a “first in time” approach to settlement of multiple claims exceeding the policy limits.

B.           SEEK THE CLAIMANTS’ SUGGESTIONS ON A SPLIT

Insurers should attempt to resolve all claims if possible. One approach would be to determine whether the claimants would agree to a split of the policy proceeds. See Voccio v. Reliance Ins. Cos., 703 F.2d 1, 3 (1st Cir. 1983) (the fact that “the carrier met together with counsel for both [claimants] and sought suggestions on how to divide the money” was evidence of the insurer’s good faith); accord, Kinder v. Western Pioneer Ins. Co., 231 Cal. App. 2d 894, 902 (1965).

Voccio involved competing claims by the survivors of a decedent, and a minor who lost both legs in an auto accident. The insured maintained only $25,000 in combined liability limits. The insurer consulted with representatives of both claimants and proposed a 50/50 split. The decedent’s family accepted the settlement, but the minor refused, and obtained a substantial judgment. The First Circuit, nevertheless, found no bad faith because the insurer had reasonably attempted to resolve the situation.

There is no real harm in notifying the claimants that their claims are believed to exceed the policy limits, and seeking their input regarding an equitable division of the proceeds. This may help to inoculate the insurer from a later bad faith claim. 

Our sense is that, for claims that pre-date the amended interpleader statute, although there are no reported Missouri cases, Missouri courts would prefer to see an insurer attempt to resolve all claims globally based upon suggestions from the claimants as to how the funds should be divided. It is probably a good idea to make such a request as soon as possible after receipt of a demand. Even though it is unlikely that the claimants will actually provide an agreed-upon division of the policy proceeds, documenting that the insurer has identified the problem and seeking the claimants’ proposals probably can only help deter a future bad faith claim.

C.           PRO RATA

Missouri specifically approves payment of policy proceeds on a pro rata basis, based on the relative magnitude of each claim. Christlieb v. Luten, 633 S.W.2d 139, 140 (Mo. App. E.D. 1982); see also Geisner v. Budget Rent a Car of Mo., 999 S.W.2d 265, 268 (Mo. App. E.D. 1999). However, the Christlieb case involved distribution of policy proceeds following judgments in which the value of the claims were established by juries. 

In Countryman v. Seymour R-II Sch. Dist., 823 S.W.2d 515, 522 (Mo. App. S.D. 1992), plaintiffs in a garnishment action argued that an insurer is required to pay out policy proceeds on a pro rata basis.  The case notes that, other than Christlieb, there is no clear guidance in Missouri law for how to handle multiple claimants to an insufficient policy limit. Countryman, like Christlieb, found that it would be most equitable to divide the policy funds on a proportionate or pro rata basis under the facts of that case. However, this case is post-judgment, and does not address resolution of pre-suit claims.

These cases seem to support an insurer reaching its own good-faith determination of the relative value of the claims and attempting a pro rata distribution. However, these cases do not apply to settlement (as opposed to final judgment). As discussed elsewhere, if a claimant with a significant claim refuses to accept a pro rata distribution, the insurer must re-evaluate its position – Christlieb and others are not a “get out of jail free” card to allow the insurer to avoid bad faith. 

Obviously, in a pre-judgment settlement posture, the claimants may not be willing to accept a pro rata distribution, and/or may disagree regarding the relative values of their claims. As discussed more fully below, there are consequences to an insurer that loses the opportunity to settle at least one of the claims while attempting a global resolution. While proposing a pro rata allocation of the policy proceeds is acceptable, the insurer still must act to settle within or for the policy limits if possible if the claimants will not accept a pro rata distribution. If there is no agreement, then the insurer should proceed with either a “first in time” or “most valuable/greatest risk” approach.

D.           MOST VALUABLE CLAIM OR CLAIM PRESENTING THE GREATEST RISK OF EXCESS EXPOSURE

One of the leading cases on this issue is from across the border in Kansas, Farmers Ins. Exch. v. Schropp, 567 P.2d 1359 (Kan. 1977).  This case involved $25,000/$50,000 policy limits, and an auto accident which resulted in the death of the insured driver and injury to five surviving claimants.  A Mr. Schropp suffered the most severe injuries and the most damages. The insurer refused his settlement demand for $25,000, based on the other four claims.  Id. at 1363. This case is discussed in greater detail below, but Schropp eventually recovered on an assigned bad faith claim. Id. at 1364. 

While the reported case law in Missouri is less clear, the standard for bad faith in Missouri looks at whether the insurer has adequately protected the insured from a judgment in excess of the policy limits:

Circumstances that indicate an insurer’s bad faith in refusing to settle include the insurer’s not fully investigating and evaluating a third--party claimant’s injuries, not recognizing the severity of a third--party claimant’s injuries and the probability that a verdict would exceed policy limits, and refusing to consider a settlement offer. . . . Other circumstances indicating an insurer’s bad faith include not advising an insured of the potential of an excess judgment or of the existence of settlement offers.

Johnson v. Allstate Ins. Co., 262 S.W.3d 655, 662 (Mo. App. W.D. 2008). Where an insurance company, knowing that a claimant was badly injured and that liability was clear, and expecting the possibility of a significant adverse judgment in excess of the policy limits against its insured, refuses to offer the full amount of the policy limit in settlement of the claim, it is apparent the insurer placed its own financial interests before those of its insured. See Frank B. Connet Lumber Co. v. New Amsterdam Casualty Co., 236 F.2d 117, 126 (8th Cir. 1956). This is more complicated in a multiple-claimant context, but under Missouri law there is the clear potential for bad faith liability where the insurer does not take advantage of an opportunity to settle a large claim that would expose the insured to an excess judgment.

E.            DO NOT LOSE THE OPPORTUNITY TO SETTLE ONE CLAIM WHILE PURSUING SETTLEMENT OF ALL CLAIMS.

The lead Missouri case on these issues is not particularly helpful, but does demonstrate some of the potential pitfalls in failing to handle appropriately a multiple-claimant situation. The insurer should not overlook good opportunities to resolve substantial claims in pursuit of the goal of settling all claims. 

In Rinehart v. Shelter General Insurance Company, 261 S.W.3d 583 (Mo. App. W.D. 2008), the insured was driving drunk when he struck another vehicle, causing serious injuries to his passenger (Adkins) and the two occupants of the claimant vehicle (Ingram and Krohn).  The applicable policy limits were $50,000 per person / $100,000 per accident.  Claimants Ingram and Krohn demanded $50,000 each. Id. at 588.  The insurer advised that it was willing to tender the full policy limits, but advised that claimants Ingram and Krohn would have to reach an agreement with insured passenger Adkins as to the distribution of the proceeds. Claimants Ingram and Krohn refused to share the policy limits with Adkins. Id. at 589. Counsel for Ingram and Krohn presented another policy limits demand, and the insurer responded that it would settle the claims for two-thirds of the total policy limits.  Id. at 589.  Claimants Ingram and Krohn filed suit, and excess judgments were entered for more than $3.5 million to Ingram and over $1 million to Krohn.  Subsequently, the insured filed a bad faith action and a jury awarded $6.25 million in compensatory damages and $3 million in punitive damages. Id.

On appeal, the insurer argued that there was no evidence of bad faith because its sole objective was to settle all of the potential claims within the policy limits and, thus, protect the insured from any potential personal liability.  The court determined that the evidence demonstrated that the insurer did not really intend to settle Adkins’s claim, and, therefore, a jury could infer that the insurer had attempted to escape its full contractual obligation to the insured by only offering to pay two-third of the policy limits.  Id. at 596.  The court of appeals also found that a jury could reasonably find that the insurer had acted with reckless indifference to the insured’s financial interests by refusing to settle with Ingram and Krohn for the full policy limits.  Id. Rinehart suggests that it would be preferable to settle with a “big” claimant and to leave other claims unresolved, rather than to lose the opportunity to settle with the big claimant whose claim could well exceed policy limits.

II.            AFTER AMENDMENTS TO MISSOURI’S INTERPLEADER STATUTE

Missouri House Bill 1531 provides clear options for insurers faced with the multiple claimants, insufficient limits problem. The bill amends Mo. Rev. Stat. § 507.060 to specifically provide that an interpleader action may be filed in circumstances “including multiple claims against the same insurance coverage.” The amended statute provides that an interpleader claim may be filed where there are multiple “potential” claims against the insurer or insured.  

Under the new statute, so long as the insurer files an interpleader action within 90 days from receiving a settlement demand, the insurer is insulated from extra-contractual liability in “any other action,” specifically addressing the third-party bad faith problem. However, the insurer gets this “get out of jail free” card as to a potential bad faith claim only if it defends the insured in any bodily injury action even though it has deposited its limits into court in the interpleader. See Mo. Rev. Stat. § 507.060.4 (effective Aug. 28, 2018). Filing the interpleader and timely paying the policy limits into court following its order also insulates the insurer from a subsequent garnishment action by any of the claimants, who are prohibited from recovering from the insurer any amount beyond the limits deposited in the context of the interpleader. § 507.060.5.

This is significant because not only has Missouri been a bad faith trap for decades, there is case law in other jurisdictions holding that filing an interpleader action does not insulate insurers from potential bad faith claims. In Liberty Mut. Ins. Co. v. Davis, 412 F.2d 475 (5th Cir. 1969), the insurer chose to file an interpleader action when faced with multiple claimants and insufficient limits. It did not accept the first-presented demand for policy limits, but proceeded with the interpleader action. While the interpleader was pending, one of the injured claimants obtained a default judgment against the insured, and proceeded with garnishment and an assigned bad faith claim against the insurer. The bad faith claim went to trial.

The Fifth Circuit found that, while Liberty Mutual’s concerns about having to pay more than its policy limits were relevant to the ultimate jury question of bad faith, they did not, as a matter of law, justify the trial court’s directing a verdict for the insurer. It was for the jury to decide whether the insurer’s refusal to settle was primarily in its own interests and with too little regard for its insured’s interests.

When several claimants are involved, and liability is evident, rejection of a single offer to compromise within policy limits does not necessarily conflict with the interest of the insured. He hopes to see the insurance fund used to compromise as much of his potential liability as possible. Of course, if the fund is needlessly exhausted on one claim, when it might cancel out others as well, the insured suffers from the company’s readiness to settle. To put the point another way, even if liability be conceded, plaintiffs will usually settle for less than they would ultimately recover after trial, if only to save time and attorney’s fees. Each settlement dollar will thus cancel out more than a dollar’s worth of potential liability. Insured defendants will want their policy funds to blot out as large a share of the potential claim against them as possible. It follows that, insofar as the insureds’ interest governs, the fund should not be exhausted without an attempt to settle as many claims as possible. But where the insurance proceeds are so slight compared with the totality of claims as to preclude any chance of comprehensive settlement, the insurer’s insistence upon such a settlement profits the insured nothing. He would do better to have the leverage of his insurance money applied to at least some of the claims, to the end of reducing his ultimate judgment debt.

412 F.2d at 480-481.

The Fifth Circuit concluded that:

[E]fforts to achieve a prorated, comprehensive settlement may excuse an insurer’s reluctance to settle with less than all of the claimants, but need not do so. The question is for the jury to decide. As this Court put it in Springer v. Citizens Casualty Company, 5 Cir. 1957, 246 F.2d 123, 128- 129, it is “a question for jury decision whether the insurer had not acted too much for its own protection and with too little regard for the rights of the insured in refusing to settle within the policy limits”. [sic] Here, bearing in mind the existence of multiple claims and the insured’s exposure to heavy damages, did the insurer act in good faith in managing the proceeds in a manner reasonably calculated to protect the insured by minimizing his total liability? In many cases, efforts to achieve an overall agreement, even though entailing a refusal to settle immediately with one or more parties, will accord with the insurer’s duty. In other cases, use of the whole fund to cancel out a single claim will best serve to minimize the defendant’s liability. Considerable leeway, of course, must be made for the insurer’s honest business judgment, short of mismanagement tantamount to bad faith.

Id. at 481.

Although not an interpleader action, an insurer in Kansas filed a declaratory judgment action prior to the reduction of any of five competing claims to judgment. The court found that the insurer could still be liable for bad faith. Farmers Ins. Exch. v. Schropp, 567 P.2d 1359 (Kan. 1977). The facts of Schropp are discussed above. 

The Kansas Supreme Court faulted the insurer for not filing an interpleader action, but also held that the preferred method for resolving the problem was to invite all of the claimants to participate in a joint effort to distribute the available policy funds. Id. at 1364.  Even filing an interpleader may not have been enough to preclude bad faith liability. Filing a declaratory judgment action, however, was definitely not the correct course of action. Id. 

It is a strange and refreshing sensation to find Missouri law to be more favorable than that of other jurisdictions on third-party bad faith exposure. However, given the nature of the plaintiffs’ bar in the state and some problematic courts, we will keep an eye on how the amended § 507.060 is applied by the trial courts.

Related Services: Insurance

Attorneys: Angela Higgins

Amendments to 537.065 Providing for Notice to the Insurer and Intervention as of Right to be Applied Prospectively Only

July 25, 2018 | Lisa Larkin

A recent decision from Missouri’s Western District Court of Appeals, Desai v. Seneca Specialty Insurance Company, WD81220, involves retroactive vs. prospective application of certain amendments to § 537.065, RSMo. That statute allows a claimant and a tort-feasor to contract to limit recovery against the tort-feasor. It permits any person with a claim for damages against a tort-feasor to enter into an agreement with that tortfeasor whereby, in consideration of the payment of some amount, the claimant would agree that in the event of a judgment against the tort-feasor, he would limit his recovery as against the tort-feasor to the amounts of the insurance policy. Amendments to that statute, effective August 28, 2017, provide new protections to the insurer in the context of these agreement, which are often used to set up claims against an insurer for bad faith refusal to settle. Under the 2017 amendments, before a judgment may be entered against any tort-feasor who has reached such an agreement with a claimant, an insurer must be provided with written notice of the execution of the contract and must be given thirty days after receipt of the notice to intervene as a matter of right in any pending litigation involving the claim for damages. The pre-August 28, 2017, statute contains no such protections for the insurer. The rights to notice and to intervene contained in the amendments is important, therefore, because it seemingly allows the insurer to contest both liability and damages, and possibly coverage issues, as part of the underlying litigation.

In Desai v. Seneca Specialty Insurance Co., Seneca sought to intervene in the lawsuit filed by Neil and Heta Desai against Seneca’s insured, Garcia Empire, LLC. In October 2014, Neil Desai suffered a personal injury while being escorted from a Garcia Empire establishment. The Desais filed suit in May 2016, and Garcia advised Seneca of the suit. Seneca offered to defend Garcia subject to a full and complete reservation of rights regarding coverage, but Garcia rejected Seneca’s offer. In November 2016, the Desais and Garcia entered into a contract under § 537.065 wherein the Desais agreed to limit recovery of any judgment against Garcia to its insurance coverage. 

The parties tried the case on August 17, 2017, and the court entered judgment in favor of the Desais and against Garcia on October 2, 2017. Within 30 days of the entry of judgment, Seneca filed a motion to intervene as a matter of right, arguing it was entitled to receive notice of the § 537.065 contract between Garcia and the Desais and to intervene as a matter of right in the lawsuit based on the August 28, 2017, amendments to § 537.065. 

The trial court denied the motion to intervene, holding the legislature did not expressly provide for the August 2017 amendments of § 537.065 to be applied to proceedings had or commenced under the statute prior to the amendment. The court of appeals affirmed. 

The appellate court rejected Seneca’s argument that the August 28, 2017, amendments applied because the judgment had been entered after the effective date. The plain language of the amended statute provides that an insurer shall be given notice and an opportunity to intervene before a judgment may be entered against any tort-feasor “after such tort-feasor has entered into a contract under this section.” Thus, the trigger point is the entry of the contract, not the date of the judgment. 

The appellate court also rejected Seneca’s argument that the 2017 amendments could apply to contracts entered before that date because the changes to the statute regarding notice and intervention were merely procedural and not a substantive change in the law. When Garcia and the Desais entered into their § 537.065 contract, however, Seneca had no right to notice and no standing to intervene as a matter of right. Yet, after the amendments, an insurer would have such standing and have the right to notice. Thus, that section, as amended, creates new legal rights in favor of an insurer which did not exist prior to the amendments. It also imposes new obligations and duties upon the insured, giving a contract entered before August 28, 2017, a different effect from that which it had when entered. Application of these amendments to contracts executed before August 28, 2017, therefore, would be impermissibly retrospective in nature, i.e., it would affect past transactions to the substantial prejudice of the parties. 

Thus, the appellate court concluded the notice and intervention provisions of amended § 537.065 apply prospectively only to § 537.065 contracts executed after the effective date of the amendments, August 28, 2017. For contracts entered before that date, such as that at issue in this case, the insurer does not have the protection of the new notice provision and the option to intervene as a matter of right. This opinion reaches only these two specific portions of the August 28, 2017, amendments to § 537.065. It remains to be seen how appellate courts will address the retroactive application of other portions, but this opinion gives some good insight into how the Western District is likely to approach the issue. 

Related Services: Insurance, Appellate and Commercial

Attorneys: Lisa Larkin

Missouri Upholds Pollution Exclusion to Relieve Insurance Company from Duty to Defend Toxic Tort Claims Arising from Industrial Pollution

November 27, 2017 | Martha Charepoo

In a recent decision, the Missouri Supreme Court for the first time considered the meaning and application of a pollution exclusion in a commercial general liability policy, landing unanimously on the side of the insurance company in favor of denying coverage to the insured. In Doe Run Resources Corp. v. St. Paul Fire and Marine Ins. Co. et al., the Supreme Court decided whether a policy’s pollution exclusion relieved the insurer from having to defend a lead mining company in numerous toxic tort lawsuits alleging injury from industrial pollution emitted from an overseas operation. The outcome turned on whether the exclusion was ambiguous, and, therefore, should be construed against the insurer in favor of coverage.

In defending its decision to deny coverage, the insurer had to contend with Missouri appellate precedent relied upon by the insured that found, where the insured’s business involved chemicals that might be deemed “pollutants”, a pollution exclusion is inconsistent with the insured’s reasonable expectations of coverage.  Hocker Oil Co. v. Barker-Phillips-Jackson, Inc., 997 S.W.2d 510 (Mo. App. S.D. 1999).  The trial court adopted Hocker and found that the pollution exclusion created an ambiguity in the policy because it did not specifically identify lead as a pollutant. Consequently, the trial court construed the exclusion against the insurer and entered summary judgment in the insured’s favor on coverage. The Court of Appeals agreed that the pollution exclusion was ambiguous and did not bar coverage for the toxic tort claims.

On transfer from the Court of Appeals, the Supreme Court took the opposite view of Hocker and instead followed a more recent Eighth Circuit decision involving the same insured (Doe Run) which upheld a pollution exclusion and applied it to claims alleging injury from exposure to hazardous waste byproducts of the insured’s production process. Doe Run Res. Corp. v. Lexington Ins. Co., 719 F.3d 876 (8th Cir. 2013). In doing so, the Supreme Court distinguished the facts of Hocker, which involved failure of a gasoline storage tank at a gas station, releasing 2,000 gallons of gasoline into the ground causing damage to neighboring property. The court said that this case is completely different because the alleged exposure here was to toxic lead byproducts released into the air by the insured’s production process, not the insured’s lead products themselves. In framing the facts of the case in this way, the court found this case to be identical to Lexington in which the Eighth Circuit found that a nearly identically worded pollution exclusion barred toxic tort coverage for claims from the insured’s Missouri facility. 

As a result of Doe Run, Missouri law is now clear that pollution exclusions are not inherently ambiguous as to toxic tort claims arising from exposure to industrial pollution rather than the insured’s product themselves, and insurers can probably rely on such an exclusion to deny coverage in such cases. 

Eighth Circuit Upholds Denial of Benefits Under ERISA-governed Insurance Policy

October 10, 2017

The Eighth Circuit Court of Appeals, in Donaldson v. Nat’l Union Fire Ins. Co. of Pittsburg, recently upheld the denial of benefits under an ERISA-governed insurance policy because the plan administrator’s interpretation of the disputed policy language was found to be reasonable.

Michele Donaldson filed a claim for accidental death and spousal benefits under an insurance policy issued to Schwan’s Shared Services, LLC by National Union Fire Insurance Company of Pittsburgh, PA.  Mrs. Donaldson’s claim arose after her husband was killed in a motor vehicle accident in which his vehicle was struck by another that crossed into his lane of traffic.  Mr. Donaldson was employed as a delivery driver with Schwan’s and was on his delivery route at the time of the accident.

The applicable insurance policy was an employee-benefit plan governed by the Employee Retirement Income Security Act (ERISA).  The policy provided insureds with financial security in the event of an accidental death or injury when traveling on business.  The policy provided “Hazards” that described specifically the circumstances under which coverage would be afforded.

Mrs. Donaldson filed her claim for accidental death and spousal benefits under Hazard H-12, which offered “24-Hours Accident Protection While On A Trip (Business Only).”  National Union denied the claim under Hazard H-12 because Mr. Donaldson was not on a business trip at the time of his death; instead, he was operating a vehicle that he had been hired to operate.  Following denial of her claim, Mrs. Donaldson filed a complaint in state court seeking an accidental death benefit on behalf of Mr. Donaldson’s estate in the amount of $286,000 and a spousal benefit of $50,000.  Following removal to the United States District Court for the Eastern District of Arkansas, the district court found that denial of Mrs. Donaldson’s claim was appropriate because National Union had reasonably interpreted the Policy language and there was no abuse of discretion.  Mrs. Donaldson’s complaint was dismissed with prejudice, which resulted in an appeal to the Eighth Circuit.

The ERISA-governed plan granted the plan administrator discretion to interpret the plan and to determine eligibility for benefits.  The Eighth Circuit reviewed National Union’s decision to deny benefits under the abuse of discretion standard, which required the Court to uphold the insurer’s decision as long as it was based on a reasonable interpretation of the policy and was supported by substantial evidence.  A number of relevant factors to aid the Court in its consideration have been determined in prior matters.  See King v. Hartford Life & Accident Ins. Co., 414 F.3d 994, 999 (8th Cir. 2005).  The dispositive factor, however, was whether the plan administrator’s interpretation of the disputed provisions was reasonable. 

Interpretation of the policy at issue turned on whether an exception listed in Hazard H-12 applied to the circumstances of the accident.  In its close examination of the policy language, the Eighth Circuit determined that the disputed exception language was ambiguous.  The Court held that where the terms of the plan are susceptible to multiple, reasonable interpretations, a plan administrator’s choice among the reasonable interpretations is not an abuse of discretion.  As both National Union and Mrs. Donaldson’s interpretations were equally reasonable, the Court deferred to the plan administrator’s interpretation of the disputed language and found no abuse of discretion by National Union.  The district court’s decision was affirmed.

The opinion in its entirety may be found here.

Timing of Changes to 537.065 Agreements and the Bad Faith Setup in Missouri

July 13, 2017 | Angela Higgins

On July 5, 2017, Missouri Governor Greitens signed the Senate Substitute for the Senate Committee Substitute for the House Committee Substitute for House Bills 339 and 714, which brings significant changes to Missouri third-party bad faith litigation. The legislation substantially amends Mo. Rev. Stat. § 537.065, and enacts a new statute, Mo. Rev. Stat. § 537.058.  The new § 537.058 and amended § 537.065 become effective on August 28, 2017.

I. WHAT CHANGES WITH THE NEW LEGISLATION

1. Time-limited demands

Under existing Missouri law, there are no meaningful requirements for a time-limited settlement demand from the claimant sufficient to form the basis of a claim for bad faith refusal to settle.  The new legislation enacts evidentiary rules that exclude evidence of a time-limited demand in a bad faith case, unless the demand meets the requirements of the statute.  A demand that does not meet these requirements “shall not be considered as a reasonable opportunity to settle for the insurer” and “shall not be admissible” in any lawsuit seeking extracontractual damages.

  • New § 537.058 requires that any time-limited demand to settle must be transmitted to the tortfeasor’s liability insurer, must be sent in writing by certified mail, and must reference the statute.
  • A time-limited demand must be left open for “not less than 90 days” from receipt by the insurer.  
  • The demand must specify a dollar amount or “applicable policy limits,” and must specify who will be released and what claims will be released if accepted.  
  • There must be an unconditional release of the insured for all liability in exchange for the payment demanded.  
  • The demand must reference a claim number, if known, the date and location of the loss, and a description of the injuries sustained by the claimant.  
  • The demand must be accompanied by a list of the names and addresses of all healthcare providers who treated the claimant from the date of the incident, and a HIPAA-compliant medical authorization.
  • If the claimant asserts a claim for wage loss, the demand must be accompanied by a list of all employers from the date of the incident until the date of the demand, accompanied by a written authorization to obtain employment records necessary to verify wages, earnings, compensation, or profits “however denominated.”
  • Claimant cannot demand that payment of the settlement funds be earlier than 10 days following the insurer’s receipt of a fully-executed unconditional release of the insured by the claimant.

2. Insureds are not permitted to enter into § 537.065 agreements unless the insurer has the opportunity to defend without reservation but refuses.

Most significantly, the amendments to § 537.065 now bar an insured from entering into an agreement with the claimant unless the tortfeasor’s insurer has the opportunity to defend without a reservation of rights, but refuses to do so.  Our read of the statute is that, if the insured wishes to refuse a defense offered under reservation, the insured must give the insurer an opportunity to withdraw its reservation and defend without reservation.

 3. Notice to insurers before a judgment may be taken against the insured if a § 537.065 agreement has been made with the claimant.

The amendments to § 537.065 now require that, where the insured tortfeasor has entered into a § 537.065 agreement with the injured claimant, no judgment may be entered against the insured before the tortfeasor’s liability insurer has been provided with written notice of the execution of the agreement, and at least 30 days have lapsed after the insurer’s receipt of such notice.

 4. Insurer’s right to intervene in personal injury/property damage lawsuit.

Insurers shall have 30 days after receipt of a notice that the insured has entered into a § 537.065 agreement to intervene in the underlying lawsuit.  The insurer is entitled to intervene as a matter of right, not permissively at the discretion of the court.  

Under existing law prior to this legislation, some Missouri courts have held that an insurer that has filed a declaratory judgment action may intervene in a tort action for the limited purpose of seeking a stay pending the determination of coverage, though such intervention has been permissive, rather than as a matter of right, and there has been a split of authority in the Missouri Courts of Appeals as to the propriety of intervention.  See, e.g., Whitehead v. Lakeside Hosp. Ass’n, 844 S.W.2d 475 (Mo. App. W.D. 1992) (permitting intervention); State ex rel. Mid-Century Ins. Co., Inc. v. McKelvey, 666 S.W.2d 457 (Mo. App. W.D. 1984) (same).  The new legislation resolves these issues in favor of intervention as a matter of right.

 5. The limitations of the revised § 537.065 apply regardless of what the agreement is called.

Regardless of how the parties denominate their agreement, if it has the effect of a covenant not to execute against the insured, it will be treated as an agreement under the amended statute.

II. MISSOURI LAW ON RETROACTIVE APPLICATION OF STATUTES.

The Missouri Constitution bars the legislature from passing any retrospective law:  “That no ex post facto law, nor law impairing the obligation of contracts, or retrospective in its operation, or making any irrevocable grant of special privileges or immunities, can be enacted.”  Article I, Sec. 13 Constitution of Missouri.  Technically, ex post facto is a term applicable only to criminal laws, where the term “retrospective” applies to civil rights and remedies.  State v. Thomaston, 726 S.W.2d 448, 459 (Mo. App. W.D. 1987).

“‘Retroactive’ or ‘retrospective’ laws are generally defined, from a legal viewpoint, as those which take away or impair vested rights acquired under existing laws, or create a new obligation, impose a new duty, or attach a new disability in respect to transactions or considerations already past.”  State ex rel. Clay Equip. Corp. v. Jensen, 363 S.W.2d 666, 668 (Mo. 1963).  “We have many times held that a statute is not retrospective in its operation within the constitutional prohibition, unless it impairs a vested right. . . .  Nor is an act retrospective if it but substitutes a remedy or provides a new remedy.”  Id. at 669.  

Rules of evidence are not deemed to be “vested,” substantive rights in Missouri.  “A right to have one’s controversies determined by existing rules of evidence is not a vested right.”  O’Bryan v. Allen, 108 Mo. 227, 232, 18 S.W. 892, 893 (1891).  In O’Bryan, the Missouri Supreme Court held that rules of evidence “pertain to the remedies which the state provides for its citizens” and “they neither enter into and constitute a part of any contract, nor can be regarded as being of the essence of any right which a party may seek to enforce.”  Id.  

Like other rules affecting the remedy, they must, therefore, at all times be subject to modification and control by the legislature; and the changes which are enacted may lawfully be made applicable to existing causes of action even in those states in which retrospective laws are forbidden; for the law as changed would only prescribe rules for presenting the evidence in legal controversies in the future, and it could not, therefore, be called retrospective even though some of the controversies upon which it may act were in progress before.

O’Bryan, 108 Mo. at 232, 18 S.W. at 893.  

“No person can claim a vested right in any particular mode of procedure for the enforcement or defense of his rights.  Where a new statute deals with procedure only, prima facie it applies to all actions [including] those which have accrued or are pending and future actions.”  Jensen, 363 S.W.2d at 669.  The constitutional bar on ex post facto or retrospective laws “does not apply . . . to a statute dealing only with procedure or the remedy.”  Id.  “A substantive law relates to rights and duties giving rise to the cause of action, while procedural statutes supply the machinery used to effect the suit.”  Patrick v. Clark Oil & Ref. Co., 965 S.W.2d 414, 415-16 (Mo. App. S.D. 1998).  “Statutes affecting the competency or discoverability of evidence are procedural.”  State ex rel. Faith Hosp. v. Enright, 706 S.W.2d 852, 854 (Mo. 1986)

The legislature has a clear and constitutional right to enact evidentiary statutes.  St. Louis v. Cook, 359 Mo. 270, 274, 221 S.W.2d 468, 469 (1949).  The Missouri Supreme Court in Jensen specifically held that evidentiary and procedural statutes apply to all actions within their scope, “whether commenced before or after the enactment, that is, unless a contrary intention is expressed by the legislature, and a statute affecting only the remedy may apply to a cause of action existing at the time the statute was enacted.”  363 S.W.2d at 669.  Thus, an evidentiary statute applies to actions already on file at the time the statute becomes effective.  “Laws which change the rules of evidence relate to the remedy only, may be applied to existing causes of action, and are not precluded from such application by the constitutional provision.”  O’Bryan v. Allen, 108 Mo. 227, 231-32, 18 S.W. 892, 893 (1891).  Evidentiary and procedural statutes apply to all pending cases which have not yet been reduced to a final judgment.  Claspill v. Missouri P.R. Co., 793 S.W.2d 139, 140 (Mo. banc 1990).  

In Enright, the Supreme Court entered an order of prohibition precluding discovery of hospital peer review committee materials based upon a statute enacted after the cause of action accrued.  706 S.W.2d at 856.  In Claspill, the Supreme Court precluded enforced a statutory provision that excluded from evidence information that was compiled for purposes of developing a highway safety construction project.  793 S.W.2d at 140.

Accordingly, it should be settled law in Missouri that evidentiary and procedural statutes can be applied to any action, including any pending action, that is tried after the effective date of the statute.

III. EFFECTIVE DATES OF VARIOUS ASPECTS OF THE LEGISLATION.

 A. Procedural aspect of the legislation that will apply to already-accrued claims and lawsuits in progress as of Aug. 28, 2017

  • The insurer’s right to intervene in a personal injury/property damage lawsuit if it knows or has reason to know that a § 537.065 agreement has been entered.  

This is a procedural aspect of the statute, and should be applicable to cases in progress and not yet reduced to a judgment as of August 28.

  • 30 days’ notice to insurers before a judgment may be taken against the insured.

This change to § 537.065 is a procedural change, which requires that notice be given to the insurer if the insured has entered into a § 537.065 agreement before judgment is entered against the insured.  This should apply to bad faith claims that have accrued in the sense that the claimant has made a policy limits demand to settle that was not accepted, but not where a judgment has already been taken against the insured.  Insurers should be prepared to argue that a judgment entered on or after August 28 is not valid if the insurer was not provided with 30 days’ written notice prior to its entry, even if the § 537.065 agreement was executed previously.

B. Changes that will apply only on and after Aug. 28, 2017

  • The insured’s ability to enter into § 537.065 agreements without notice to the insurer is probably not affected prior to August 28.  

Restrictions on the insured’s right of contracting may not be retroactively applied, under the Missouri Constitution’s ban on retrospective application of laws affecting substantive rights.  Contracting rights are among those specifically identified as being substantive.

  • Policy limits demands.

Policy limits demands made on or after August 28 must conform to the requirements of § 537.058, unless made within 90 days prior to a jury trial on the claim.

C. Evidentiary aspects of the legislation should be retroactively applied to accrued and pending claims.

New § 537.058.7 provides that any time-limited demand that does not comply with the requirements of the statute “shall not be admissible” in any lawsuit seeking extracontractual damages.  This is an evidentiary rule.  Under the authority described above, it should apply to the trial of bad faith claims after August 28.  Evidentiary statutes are typically applied to accrued and pending claims.

As we have previously discussed, the requirements of § 537.058 for a policy limits demand that would support a bad faith claim (that a demand be left open for 90 days and be accompanied by authorizations) are already required by the statute that authorizes recovery of prejudgment interest, Mo. Rev. Stat. § 408.040.  In 2005, as part of comprehensive tort reform efforts, the legislature amended § 408.040 to provide that, before a settlement demand could trigger the accrual of prejudgment interest, it must be transmitted by certified mail, be accompanied by an affidavit of the claimant and, where applicable, medical or wage loss records and authorizations, and be left open for 90 days.  

At least one court seemed to recognize the legislature’s intent that a demand in the format specified by § 408.040 was a necessary predicate for a bad faith claim.  See Johnson v. Allstate Ins. Co., 262 S.W.3d 655, 664 (Mo. App. W.D. 2008).  In Johnson, the court held that claimants’ “demand letter satisfied the requisites of Section 408.040, RSMo 2000, which authorizes individuals with a claim like the Johnsons' to make a demand to an insurance company for either the policy limits or for a specific amount of money.”  

Moreover, although claimants attempting the bad faith setup are in the habit of treating a policy limits demand as a one-time-only offer, there is usually no good faith basis for the drop-dead deadline.  The intent of the original § 537.065, and certainly the intent of the statute as amended by the present legislation, is to allow the claimant to recover the insurance policy proceeds, not to “blow up” the limits of the policy and recover more than the liability limits.  Accordingly, even where the claimant has previously made a demand that was not accepted prior to August 28, there appears to be no reason why the claimant could not be required to make a second demand in accordance with the new requirements, as the claimant has never had any substantive right under Missouri law to recover more than the insurance policy proceeds.

Related Services: Insurance

Attorneys: Angela Higgins

Insurance Bad Faith Litigation Reform is Sweeping into Missouri

May 5, 2017 | Angela Higgins

As practitioners and insurers doing business in Missouri know, this is one of the most insurer-hostile jurisdictions in the country. Missouri insurance law is something of a perfect storm of archaic insurance statutes, uneven jurisprudence, and outright collusion in service of the bad faith setup.  The Missouri legislature has recently taken important steps toward reforming these abuses, and the state’s new governor is expected to sign the legislation.

On April 26, the House passed the Senate Substitute for the Senate Committee Substitute for the House Committee Substitute for House Bills 339 and 714, which we will just identify by the House Bill numbers.  This legislation replaces Mo. Rev. Stat § 537.065 with provisions designed to take several pounds of weight off the scale in favor of bad faith plaintiffs.  Assuming Governor Greitens signs off, which is expected, § 537.065 will be repealed and replaced effective August 28, 2017.  H.B. 339 was sponsored by Representative Bruce DeGroot and H.B. 714 was sponsored by Representative Kevin Engler.

I.    REPEAL AND REPLACEMENT OF § 537.065

Together, H.B. 339 and 714 repeal and replace existing Mo. Rev. Stat. § 537.065.  H.B. 174 enacts an entirely new section, § 537.058, as follows:

1.  As used in this section, the following terms shall mean:

(1) "Extra-contractual damages", any amount of damage that exceeds the total available limit of liability insurance for all of a liability insurer's liability insurance policies applicable to a claim for personal injury, bodily injury, or wrongful death;

(2) "Time-limited demand", any offer to settle any claim for personal injury, bodily injury, or wrongful death made by or on behalf of a claimant to a tort-feasor with a liability insurance policy for purposes of settling a claim against such tort-feasor within the insurer's limit of liability insurance, which by its terms must be accepted within a specified period of time;

(3) "Tort-feasor", any person claimed to have caused or contributed to cause personal injury, bodily injury, or wrongful death to a claimant.

2. A time-limited demand to settle any claim for personal injury, bodily injury, or wrongful death shall be in writing, shall reference this section, shall be sent certified mail return-receipt requested to the tort-feasor's liability insurer, and shall contain the following material terms:

(1) The time period within which the offer shall remain open for acceptance by the tort-feasor's liability insurer, which shall not be less than ninety days from the date such demand is received by the liability insurer;

(2) The amount of monetary payment requested or a request for the applicable policy limits;

(3) The date and location of the loss;

(4) The claim number, if known;

(5) A description of all known injuries sustained by the claimant;

(6) The party or parties to be released if such time-limited demand is accepted;

(7) A description of the claims to be released if such time-limited demand is accepted; and

(8) An offer of unconditional release for the liability insurer's insureds from all present and future liability for that occurrence under section 537.060.

3. Such time-limited demand shall be accompanied by:

(1) A list of the names and addresses of health care providers who provided treatment to or evaluation of the claimant or decedent for injuries suffered from the date of injury until the date of the time-limited demand, and HIPAA compliant written authorizations sufficient to allow the liability insurer to obtain such records from the health care providers listed; and

(2) A list of the names and addresses of all the claimant's employers at the time the claimant was first injured until the date of the time-limited demand, and written authorizations sufficient to allow the liability insurer to obtain such records from all employers listed, if the claimant asserts a loss of wages, earnings, compensation, or profits however denominated.

4. If a liability insurer with the right to settle on behalf of an insured receives a time-limited demand, such insurer may accept the time-limited demand by providing written acceptance of the material terms outlined in subsection 2 of this section, delivered or postmarked to the claimant or the claimant's representative within the time period set in the time-limited demand.

5. Nothing in this section shall prohibit a claimant making a time-limited demand from requiring payment within a specified period; provided, however, that such period for payment shall not be less than ten days after the insurer's receipt of a fully executed unconditional release under section 537.060 as specified in subsection 2 of this section.

6. Nothing in this section applies to offers or demands or time-limited demands issued within ninety days of the trial by jury of any claim on which a lawsuit has been filed.

7. In any lawsuit filed by a claimant as an assignee of the tort-feasor or by the tort-feasor for the benefit of the claimant, a time-limited demand that does not comply with the terms of this section shall not be considered as a reasonable opportunity to settle for the insurer and shall not be admissible in any lawsuit alleging extra-contractual damages against the tort-feasor's liability insurer.

Existing § 537.065 is technically repealed and replaced, but the changes to the existing language are identified below, with the new language in bold.

1. Any person having an unliquidated claim for damages against a tort-feasor, on account of personal injuries, bodily injuries, or death, provided that, such tort-feasor's insurer or indemnitor has the opportunity to defend the tort-feasor without reservation but refuses to do so, may enter into a contract with such tort-feasor or any insurer on his or her behalf or both, whereby, in consideration of the payment of a specified amount, the person asserting the claim agrees that in the event of a judgment against the tort-feasor, neither such person nor any other person, firm, or corporation claiming by or through him or her will levy execution, by garnishment or as otherwise provided by law, except against the specific assets listed in the contract and except against any insurer which insures the legal liability of the tort-feasor for such damage and which insurer is not excepted from execution, garnishment or other legal procedure by such contract. Execution or garnishment proceedings in aid thereof shall lie only as to assets of the tort-feasor specifically mentioned in the contract or the insurer or insurers not excluded in such contract. Such contract, when properly acknowledged by the parties thereto, may be recorded in the office of the recorder of deeds in any county where a judgment may be rendered, or in the county of the residence of the tort-feasor, or in both such counties, and if the same is so recorded then such tort-feasor's property, except as to the assets specifically listed in the contract, shall not be subject to any judgment lien as the result of any judgment rendered against the tort-feasor, arising out of the transaction for which the contract is entered into. 

2. Before a judgment may be entered against any tort-feasor after such tort-feasor has entered into a contract under this section, the insurer or insurers shall be provided with written notice of the execution of the contract and shall have thirty days after receipt of such notice to intervene as a matter of right in any pending lawsuit involving the claim for damages.

3. The provisions of this section shall apply to any covenant not to execute or any contract to limit recovery to specified assets, regardless of whether it is referred to as a contract under this section.

4. Nothing in this section shall be construed to prohibit an insured from bringing a separate action asserting that the insurer acted in bad faith.

II.    THE PROBLEMS ADDRESSED BY THE LEGISLATION

A.    THE UNREASONABLE TIME-LIMITED DEMAND

This is not the Missouri legislature’s first attempt in recent memory to tackle the problem of the quick-trigger time-limited demand, which is the foundation of the bad faith setup.  In 2005, as part of comprehensive tort reform efforts, the legislature amended § 408.040 to provide that, before a settlement demand could trigger the accrual of prejudgment interest, it must be transmitted by certified mail, be accompanied by an affidavit of the claimant and, where applicable, medical or wage loss records and authorizations, and be left open for 90 days.  The expectation of many was that this would curtail the short-fuse time-limited demands that form the basis of Missouri’s bad faith tort claim.  Experience, however, has proven that attorneys looking to set up a bad faith claim are willing to forego the possibility of recovering prejudgment interest and continue to transmit short time-limited demands without documentation supporting the claim.  The courts briefly seemed to toy with holding that a demand in the format specified by § 408.040 was a necessary predicate for a bad faith claim.  See Johnson v. Allstate Ins. Co., 262 S.W.3d 655, 664 (Mo. App. W.D. 2008). In Johnson, the court held that claimants’ “demand letter satisfied the requisites of Section 408.040, RSMo 2000, which authorizes individuals with a claim like the Johnsons' to make a demand to an insurance company for either the policy limits or for a specific amount of money.”  However, this language was not subsequently interpreted to require that demands be made in conformity with § 408.040 to support a bad faith claim.

The new § 537.058 pulls from the prior changes to § 408.040, and requires that demands be left open for 90 days and be accompanied by medical and wage authorizations.  Subsection 7 of this new statute is intriguing, and we hope it is interpreted as the legislature intended.  This subsection provides that a time-limited demand that does not comply with the requirements of the statute shall not be admissible in a lawsuit “alleging extracontractual damages” (i.e., an amount exceeding the insurance policy limit(s)). 

This subsection is triggered by the filing of a claim for extracontractual recovery “by a claimant as an assignee of the tort-feasor or by the tort-feasor for the benefit of the claimant.”  The Missouri Supreme Court, in Scottsdale Ins. Co. v. Addison Ins. Co., 448 S.W.3d 818 (Mo. banc 2014), appears to have authorized the assignment of bad faith claims from the insured to the claimant, a departure from Missouri’s general rule that tort causes of action are not assignable and cannot be subrogated.  However, in practice we are not seeing cases explicitly filed by the claimant/judgment creditor as an assignee of the insured. 

Moreover, while it is understood that the filing of a bad faith claim by the insured or putative insured is “for the benefit” of the claimant, in practice both the insured and claimant vehemently resist this conclusion, going to extraordinarily lengths to attempt to conceal their § 537.065 agreement and their cooperation in the lawsuit, and expressly denying that the insured is merely recovering money as a pass-through for the claimant.  As a practical matter, there are probably two options to establish that the insured has filed the claim “for the benefit of the claimant.”  The first would be to authorize routine discovery of § 537.065 agreements, which the Missouri courts have historically resisted.  The second would be for the courts to presume that a bad faith action, where the underlying judgment remains unsatisfied, is presumptively for the benefit of the claimant/judgment creditor.  Either option would be an improvement over the current circumstances.

This statute does not specifically address a related, troubling problem in Missouri bad faith litigation.  In Catron v. Columbia Mut. Ins. Co., the Missouri Supreme Court held that the goal behind recognition of the tort of bad faith failure to settle claims is not to provide redress to the injured party.  723 S.W.2d 5, 6 (Mo. 1987).  Rather, the goal of a bad faith claim is to provide redress to the insured for an insurer’s bad faith refusal to settle.  Catron, 723 S.W.2d at 6.  Damages recoverable in a bad faith refusal to settle claim are limited to “the amount of money which the insured was forced to pay on the claim not settled by virtue of a judgment of liability in excess of the policy limits.”  Dyer v. Gen. Am. Life Ins. Co., 541 S.W.2d 702, 704-05 (Mo. App. St. L. 1976) (citing Zumwalt v. Utilities Ins. Co., 360 Mo. 362, 228 S.W.2d 750 (Mo. 1950) and Landie v. Century  Indem. Co., 390 S.W.2d 558 (Mo. App. 1965), where both insureds paid the amount of the excess judgment against them).  The essence of a bad faith cause of action is that the insured suffered tangible economic loss as a result of her insurer’s tortious refusal to settle claims against her.  Like any tort claim, damages are an essential element of the cause of action.  Heartland Stores, Inc. v. Royal Ins. Co., 815 S.W.2d 39, 41 (Mo. App. W.D. 1991).  “Actual damages are compensatory and are measured by the loss of injury sustained.”  Stiffelman v. Abrams, 655 S.W.2d 522, 531 (Mo. banc 1983) (citing Chappell v. City of Springfield, 423 S.W.2d 810, 814 (Mo. 1968); State ex rel. St. Joseph Belt Ry. Co. v. Shain, 108 S.W.2d 351, 356 (Mo. 1937); Hussey V. Ellerman, 215 S.W.2d 38, 42 (Mo. App. St. L. 1948)). 

What has always been problematic is the Missouri courts’ willingness to allow an insured to argue that he or she has sustained damages measured by a judgment from which the insured is fully protected by virtue of a § 537.065 or similar agreement.  Other courts resist this conclusion, and Missouri’s position is inconsistent with logic and well-settled precedent.  A Texas court, for example, held that allowing the insured, protected by a covenant not to execute, to collect all or part of the judgment amount “perpetrates a fraud on the court, because it bases the recovery on an untruth, i.e., that the judgment debtor may have to pay the judgment.” H.S.M. Acquisitions, Inc. v. West, 917 S.W.2d 872, 82 (Tex. App. Corpus Christi 1996) (citations omitted).  “Allowing recovery in such a case encourages fraud and collusion and corrupts the judicial process by basing the recovery on a fiction.... the courts are being used to perpetrate and fund an untruth.” Id.  Allowing an insured with a §537.065 agreement to recover the amount of the underlying judgment, apparently for the benefit of the claimant/judgment creditor, is a legally dubious proposition.  To the extent that Missouri might have an interest in penalizing insurers for not settling claims, punitive damages are recoverable in bad faith actions.  Permitting insureds to recover as “damages” amounts which do not represent damages actually sustained by them is utterly unjustified, however.  A bad faith action can be “for the benefit of the claimant” in securing the insurance policy proceeds to the claimant/judgment creditor without misrepresenting the amount of damages that were actually sustained by the insured. 

B.    RIGHT TO KNOW OF § 537.065 AGREEMENTS AND TO INTERVENE

As a preliminary matter, one odd aspect of Missouri insurance law that is not fully addressed by this legislation is the courts’ belief that any reservation of rights or coverage question presents an insurmountable conflict of interest that constitutes an insurer’s breach of its duty to defend, freeing the insured from the cooperation clause of the policy.  See State Farm Mut. Auto. Ins. Co. v. Ballmer, 899 S.W.2d 523, 527 (Mo. banc 1995).  In virtually every other jurisdiction, an insurer may defend through Cumis counsel without the inexplicable brinksmanship created by the Missouri courts, in which insurers are often pressured to drop their coverage defenses and defend without reservation at a time when they have minimal information about the claim (and certainly less than the insured).  Why the Cumis counsel approach is not acceptable in Missouri remains a mystery. 

The amended § 537.065, however, will allow an insurer the opportunity to either defend without reservation, or to intervene in the tort action (presumably to litigate its coverage defenses) before judgment may be taken against the insured or putative insured.  This is a tremendously favorable development for insurers who have generally learned only after the fact that their insured has entered into a § 537.065 agreement and stipulated to judgment, often in cases that are truly defensible as to liability and/or damages.  The new provisions of § 537.065, which deem any covenant not to execute, however denominated, as falling within the scope of the statute, will also be helpful in securing disclosure of these types of agreements.

III.    CONCLUSION

The Missouri legislature’s efforts to reform bad faith litigation are welcome, and long overdue.  The current assembly has emphasized litigation reform, and we look forward to providing a final report on the session later this month.

Related Services: Insurance

Attorneys: Angela Higgins

Missouri Supreme Court Addresses Insurer Intervention, Garnishment Proceedings and Bad Faith Findings

December 20, 2016

Allen v. Bryers and Atain Specialty Insurance Company, — S.W.3d —, 2016 WL 7378560 (Mo. banc, December 20, 2016)

In a recent opinion, the Missouri Supreme Court addressed the timing for an insurer’s intervention in a case involving a Section 537.065 between the plaintiff and an insured, as well as the more-than-bare-bones showing required for a finding of insurer bad faith.

In the underlying action, plaintiff Allen obtained a $16 million personal injury award against defendant Bryers, the property and security manager for an apartment complex in Kansas City, after defendant’s handgun discharged and severely injured plaintiff while the plaintiff was on premises.  The defendant’s insurer informed defendant that there may not be coverage under the property owner’s policy given the nature of the altercation and injury.  The insurer reserved the right to deny coverage and then filed a declaratory judgment action in federal district court to determine coverage issues.

Shortly thereafter and while the declaratory judgment action was pending, plaintiff sent the insurer a letter demanding the policy limits ($1 million) in exchange for releasing all claims against defendant and the insurer.  Upon the insurer’s refusal to settle for the policy limits, the plaintiff and the defendant entered into a Section 537.065 agreement, which allows a claimant and a tortfeasor to contract to limit recovery to insurance coverage.  The plaintiff then filed suit against defendant Bryers.  The insurer informed Bryers that it had retained counsel on his behalf under a reservation of rights to deny coverage, but Bryers refused to accept the insurer’s reservation of rights and counsel appointment.  Soon thereafter, defendant Bryers consented to the entry of judgment against him consistent with the Section 537.065 agreement.

After entry of judgment, the insurer filed a motion to intervene for the limited purpose of seeking a stay of the personal injury action until the declaratory judgment action was resolved and to litigate the coverage issues.  It also asserted that an inherent conflict of interest existed between Bryers and the insurer.  The circuit court denied intervention, finding that because the insurer denied any and all coverage, it had no standing to contest the Section 537.065 agreement.  The circuit court then held a bench trial, at which Bryers offered no evidence and presented no defense, and entered judgment for plaintiff in the amount of $16 million.  After the judgment became final, the plaintiff filed an execution/garnishment/sequestration application with the insurer as garnishee.

In the garnishment proceedings, the insurer again denied Bryers was entitled to indemnity and asserted several other defenses, including that the Section 537.065 agreement was the result of fraud or collusion, that the judgment was unreasonable, that Bryers violated his duties under the policy, and that it had not acted in bad faith in handling the underlying claim.  Then, almost a year after the $16 million judgment became final, the insurer filed a second motion to intervene and a motion to set aside the underlying tort judgment on the basis of fraud.  The garnishment court overruled both motions, entered summary judgment in plaintiff’s favor and ordered the insurer to pay $16 million, stating the amount above the policy limits was appropriate because the insurer had breached its duty to defend and had failed to settle within the policy limit.

In addressing whether there was any circuit court error in refusing to allow the insurer to intervene, the Supreme Court noted the insurer had the right to appeal the circuit court’s initial denial of its application to intervene when the final judgment was entered in the underlying tort action.  Insurer did not do so and any circuit court error in denying that first motion was abandoned.  The second motion to intervene, filed almost a year after the underlying tort judgment was entered, was untimely as the circuit court lost jurisdiction over this matter 30 days after entry of judgment.  Insurer could not have filed an authorized after-trial motion to extend the circuit court’s jurisdiction because it was not a party to the action.

As to the insurer’s motion with the garnishment court to set aside the underlying tort judgment because it was the result of fraud, collusion, and misrepresentation, the Supreme Court noted the civil procedure rules allow such a motion to be filed only by parties, which the insurer was not.  The insurer failed to secure intervention in the underlying tort action on two separate occasions and never became a party to the suit.

As to the garnishment action, the Supreme Court found the insurer had wrongfully refused to defend Bryers.  Once the insurer unjustifiably refused to defend or provide coverage, then the insured was free to enter into the agreement with the plaintiff to limit his or her liability to the insurance policy limits.  The Court held the insurer had an opportunity to manage and control the underlying tort action but declined to do so at its own risk.  As a result, the insurer was bound by the result of the underlying litigation and cannot re-litigate any facts that were actually determined in the underlying case and were necessary to the judgment.

Finally, as to the insurer’s claim that the $16 million award in the garnishment action was excessive, the Court found that, while the garnishment court found the insurer had refused to defend and refused to settlement, it made no finding that the insurer had done so in bad faith.  Bad faith requires more than just an erroneous denial of coverage.  Rather, bad faith in this context is the intentional disregard of the financial interest of the insured in the hope of escaping the responsibility imposed upon the insurer by its policy.  Because the garnishment court did not make any explicit finding that the insurer had acted in bad faith, it erred in awarding the full amount of the underlying tort judgment, and plaintiff was entitled only to the policy limits of $1 million.

UnitedHealth Plan Holders Win Class Certification in ERISA Lawsuit

May 3, 2016

The District Court for the Northern District of California recently granted certain members of UnitedHealth health plans class certification in their suit alleging improper denial of benefits.  Plaintiffs in the putative classes in David Wit, et al. v. United Behavioral Health allege that they were improperly denied coverage for mental health and substance use disorder treatment by United Behavioral Health (“UBH”), which administers mental health and substance use disorder benefits under their health insurance plans.

The named Plaintiffs in the action sought coverage for mental health or substance use disorder treatment under ten different health insurance plans.  Based on electronic data produced by UBH, however, the Court concluded that coverage may have been denied to putative class members under as many as 3,000 different health insurance plans.

In the operative complaints, Plaintiffs asserted two claims: 1) breach of fiduciary duty; and, 2) arbitrary and capricious denial of benefits.  The breach of fiduciary duty claim is based on the theory that UBH is an ERISA fiduciary under 29 U.S.C. § 1104(a), and therefore owes a duty to discharge its duties with care, skill, prudence, and diligence, and solely in the interest of the participants and beneficiaries. According to Plaintiffs, UBH violated this duty by developing guidelines that are far more restrictive than those that are generally accepted, even though Plaintiffs’ health insurance plans provided for coverage of treatment that is consistent with generally accepted standards of care.  Additionally, Plaintiffs alleged UBH prioritized cost savings over members’ recovery of benefits.

The arbitrary and capricious denial of benefits claim is based on the theory that UBH improperly adjudicated and denied Plaintiffs’ requests for coverage by, inter alia, relying on the overly restrictive coverage guidelines.

A class action may be maintained under Rule 23 of the Federal Rules of Civil Procedure if all of the requirements of Rule 23(a) are satisfied and the plaintiff demonstrates that one of the requirements of Rule 23(b) is met. Rule 23(a) requires that a plaintiff seeking to assert claims on behalf of a class demonstrate: 1) numerosity; 2) commonality; 3) typicality; and 4) fair and adequate representation of the interests of the class (“adequacy”). Fed. R. Civ. P. 23(a).

In addition to the explicit requirements of Rule 23, all federal circuit courts have read into an ascertainability requirement into the rule.  However, there is a split among the circuits on the definition of ascertainability.  The majority, including the 9th Circuit which encompasses the Northern District of California, use a heightened ascertainability standard requiring:

1) whether the class can be ascertained by reference to objective criteria;

2) whether the class includes members who are not entitled to recovery; and

3) whether the putative named plaintiff can show that he will be able to locate absent class members once a class is certified.

The 8th Circuit, where the majority of our firm’s ERISA cases are litigated, recently adopted a less rigorous ascertainability standard in Sandusky Wellness Ctr., LLC v. Medtox Scientific, Inc., No. 15-1317, 2016 U.S. App. LEXIS 7992 (8th Cir. May 3, 2016), requiring only that the class be defined in reference to objective criteria.

The parties in Wit did not dispute that the numerosity, adequacy, and typicality requirements were met, leaving only the commonality and ascertainability requirements to be considered by the Court.

In opposition to Plaintiff’s claim of commonality, UBH argued that the commonality requirement is not met because Plaintiffs’ claims turned on: 1) thousands of different insurance plans, 2) 169 different coverage guidelines, and 3) the unique clinical presentation of each class member.  The Court disagreed and found that the resolution of the claims will turn on several common legal and factual questions sufficient to satisfy the requirements of Rule 23, including:

  • whether UBH was acting as an ERISA fiduciary;
  • when UBH developed the guidelines at issue and adopted a policy of applying them to all coverage determinations;
  • whether the guidelines are consistent with generally accepted standards;
  • whether UBH breached its fiduciary duty by using its guidelines to adjudicate claims for coverage;
  • what remedies are available to the classes.

In finding for Plaintiffs’ on the ascertainability requirement, the Court rejected UBH’s contention that the proposed classes are not ascertainable because it is not administratively feasible to determine which UBH benefits plans are governed by ERISA, which claims were denied under the guidelines, and what specific aspects of the guidelines were relied upon in denying the claim.  The Court concluded that information regarding the reason for individual claim denials, including the guidelines used in the determination, stored on at least one UBH database, would be sufficient to identify individuals who were denied coverage for purposes of ascertaining class membership.

U.S. District Court for the Northern District of California case number: 3:14-cv-02346

A CGL Policy May Provide A Duty To Defend Data Breach Claims – 4th Circuit Court of Appeals Decision

April 14, 2016

The 4th Circuit Court of Appeals has ruled that a commercial general liability policy (CGL) may cover a data breach, at least for the purposes of a duty to defend. In a case involving the publication of private medical records on the internet, the federal appellate court agreed with the lower federal district court in Virginia that coverage included in a CGL for personal and advertising injury applied.  The Travelers Indemn. Co. of Amer. v. Portal Healthcare Solutions, LLC, slip op., Case No. 14-1944 (4th Cir. April 11, 2016).

The underlying class-action complaint alleges that Portal and others engaged in tortious conduct that resulted in the plaintiffs’ private medical records being available on the internet for more than four months. During the alleged tortious conduct, Portal was insured under two CGL insurance policies issued by Travelers,  in 2012 and 2013. Travelers argued its 2012 and 2013 CGL policies did not require it to defend Portal because the class-action complaint fails to allege a covered “publication” by Portal or any other covered conduct within the scope of the CGL policies. 

The federal appellate court, in finding that Travelers has a duty to defend Portal from the class action, characterized those arguments as “efforts to parse alternative dictionary definitions”.  The federal appellate court applied the Virginia “Eight Corners’ Rule” by looking to “the four corners of the underlying complaint” and “the four corners of the underlying insurance policies” to determine whether Travelers is obliged to defend Portal. 

The 4th Circuit Court agreed with the lower court’s opinion that the class-action complaint at least potentially alleges a publication of private medical information by Portal that constitutes conduct covered under the policies. The federal appellate court further explained that such conduct, if proven, could have given unreasonable publicity to, and disclosed information about, patients’ private lives, because any member of the public with an internet connection could have viewed the plaintiffs’ private medical records during the time the records were available online. 

This ruling significantly increases the risk of future coverage claims for data breach losses under traditional CGL policies, based on its broader interpretation of the term “publication” as used in those policies.

Insuring Companies from Cyber Risk and Liability

April 1, 2016

Recently, privacy, data breaches, and cyber security issues have taken center stage in the media.  In the event of a data breach, a company faces a multitude of expenses both internally and externally including but not limited to investigation, business loss, and remediation.  Companies are responding to the risk of data breach events, in part, by seeking insurance coverage.  Insurance carriers are accommodating this need by selling policies to protect companies in the event of a breach.

Generally, coverage for cyber risk and liability is divided into two classes: First-Party coverage and Third-Party coverage. First-party coverage applies to protect the insured from the costs to its business in the case of a breach. Examples of such costs include expenses like business loss/interruption and replacing/repairing equipment that may have been damaged or affected during the breach.

Third-party coverage applies to the costs an insured may have to pay to third parties or due to injuries of third-parties. Examples of such coverage include judgments as a result of a lawsuit and other expenses a company would have to pay to a third-party, expenses associated with notification of a breach to affected persons and credit monitoring.  Also, third-party coverage can insure expenses in responding to government regulators after a breach for purposes of investigation into the breach or penalties/fines as a result hereof.  Investigation into the cause of a data breach is often times costly and time-consuming.

There is not a “one-size-fits-all” policy with respect to insuring cyber liability.  Instead, policies can be tailored to the needs of the company seeking coverage.  By way of example, coverage and premiums can vary based on the following:

  • The industry in which a company operates;
  • The geographical area in which the company operates (local, national, international);
  • The size of the company;
  • Coverage for actions of third party vendors storing/accessing a company’s information;
  • Effective date of the policy (retroactive v. date policy purchased);
  • Remediation coverage; and
  • Business loss.

The above-bulleted list is not comprehensive but highlights some differences between policies.  Not every carrier will have the same types or level of coverage available.  Furthermore, policies insuring from cyber liability can include clauses that exclude certain events from coverage.

For a company, the decision to purchase cyber liability insurance is not always an easy one.  A company is well-advised to evaluate its risk, exposure, and needs to ensure it purchases the correct level and type of coverage.  Often times, policies have room for negotiation with respect to coverage and price.  Costs can vary between carriers, even for similar levels of coverage.  A company should also be informed on the specific requirements that are sometimes included in a policy.  For example, certain policies may require that a company engage in preventative measures to ensure that its costumer’s data is safely stored.  The issue with some policies, however, is that it will include language like “due care” which is difficult to define.  A company that fails to adhere to the requirements of policy may be denied coverage in the event of a data breach.  When purchasing a policy, a company should also be aware of not only the total limits of the policy, but of any sub-limits.  Specifically, a policy may limit the amount of coverage for investigation, notification, and remediation portions of a breach event that may be smaller than the overall coverage limit.

Cyber liability insurance policies will continue to evolve due to the dynamic nature of cyber security.  Companies are well advised to continuously monitor the risks, exposure, and needs to ensure that they have adequate protection in the event of breach.

8th Circuit Denies UIM Coverage Again Based Upon Mo. Supreme Court Decision in Rodriguez v. General Accident Insurance Company

January 5, 2016

For a third time in four years, the 8th Circuit has denied UIM coverage to an insured based upon the Missouri Supreme Court’s decision in Rodriguez v. General Accident Insurance Company of America, 808 S.W.2d 379 (Mo. banc 1991).  In Amco Insurance Company v. Judith Williams, et al. (16-2723), the 8th Circuit affirmed the district court’s grant of summary judgment pursuant to Rodriguez despite the insured’s efforts to discredit the decision based upon contrary recent Missouri Court of Appeals decisions.

Kelly D. Williams died when her car was hit by Dylan A. Meyer’s vehicle. After settling with Meyer’s insurance company, Judith and Robert Williams submitted a claim for underinsured motorist (UIM) coverage.  AMCO Insurance Company sued, seeking a declaration of no coverage under Kelly’s auto policy. Both parties moved for summary judgment.

Meyer’s insurance had a limit of $250,000, which was paid to the Williamses. Because their damages exceed this amount, the Williamses sought $100,000 in UIM coverage under their auto policy with AMCO. The policy’s declarations page listed a UIM limit of $100,000 per person and $300,000 per accident. The Underinsured Motorists Coverage–Missouri Endorsement defined “underinsured motor vehicle” as “a land motor vehicle or trailer of any type to which a bodily injury liability bond or policy applies at the time of the accident but its limit for bodily injury liability is less than the limit of liability for this coverage.”

The Williamses moved for summary judgment, arguing the policy was ambiguous and provided UIM coverage. AMCO cross-moved, asserting no coverage because Meyer’s vehicle was not an “underinsured motor vehicle.” Relying on the Missouri Supreme Court’s decision in Rodriguez, the district court granted summary judgment for AMCO and the Williamses appealed.

In Rodriguez, the tortfeasor’s vehicle had a $50,000 liability policy.  After collecting the $50,000, the insured sought the balance of damages under her policy’s UIM coverage which had a $50,000 limit per vehicle. The company declined, emphasizing the policy’s definition of “underinsured motor vehicle.” The insured sued, claiming the policy was ambiguous and must be construed in favor of coverage.

The Missouri Supreme Court rejected the insured’s arguments, finding the “contract between [the company] and the [insured] clearly states that an underinsured motor vehicle is a vehicle whose limits for bodily injury liability are ‘less than the limit of liability for this coverage.’”  The court held, “[s]ince [the tortfeasor’s] coverage is equal to the limit of liability under the [insured’s] policy, [the tortfeasor] was not an underinsured motorist as defined by the [] policy.”

Among their many arguments, the Williamses attempted to discredit Rodriguez, despite conceding it was “the only Missouri Supreme Court case that directly addresses the definition of “underinsured motor vehicle” at issue here, and that it has not been overruled by the Supreme Court despite “numerous opportunities to revisit” it.  Rather, they argued that numerous cases since Rodriguez have considered policies defining an “underinsured motor vehicle” as one with liability limits less than the insured’s UIM limits, yet because of ambiguities in the policies, the insureds were entitled to collect the UIM coverage even though they had collected the same amount as or limits greater than the UIM coverage from the tortfeasor.  However, the 8th Circuit noted that the cases cited by the Williamses were all Missouri Court of Appeals decisions, which it was not bound to follow.  Rather, the Court is “bound by the decisions of the Missouri Supreme Court regarding issues of substantive state law” such as Rodriguez.

The definition of “underinsured motor vehicle” in Rodriguez was identical to the definition in the Williamses’ policy with AMCO and 8th Circuit found that the same analysis applied in affirming the district court’s grant of summary judgment.  This marks the third time the 8th Circuit has relied on Rodriguez to find similar UIM provisions unambiguous. See Burger v. Allied Prop. & Cas. Ins. Co., 822 F.3d 445 (8th Cir. 2016) and Owners Ins. Co. v. Hughes, 712 F.3d 392 (8th Cir. 2013).

Supreme Court of Missouri Reverses Trial Court Order Setting Aside Default Judgment Against Insurance Company

June 16, 2015

Bate v. Greenwich Insurance Company 464 S.W.3d 515 (Mo.banc June 16, 2015)

The Supreme Court of Missouri, en banc, reversed a trial court order setting aside a default judgment against an insurer, based on improper service/absence of personal jurisdiction, because the plaintiffs properly served the insurer via the Director of the Missouri Department of Insurance, pursuant to § 375.906, RSMo. This case is significant for insurers because the Court’s analysis is instructive on the requirements for service of process on an insurer defendant via the Missouri Department of Insurance, as well as the proper timing and valid bases for setting aside a default judgment.

The plaintiffs were injured in a vehicle collision. They sued the driver of the opposing vehicle and obtained a $3 million judgment. The plaintiffs then filed suit against Greenwich Insurance Company, seeking underinsured motorist coverage under an insurance policy issued to the employer of one of the plaintiffs.

Pursuant to § 375.906, RSMo, copies of the Petition and Summons were delivered by the Sheriff to the Director of the Missouri Department of Insurance, Greenwich’s designated agent for acceptance of service of process. The Director forwarded same to Greenwich via first-class mail and filed an affidavit of service with the trial court. Greenwich failed to respond to the Petition, and the plaintiffs obtained a default judgment against Greenwich in the amount of the underlying judgment ($3 million).

Over two years later, Greenwich filed a motion to set aside the Default Judgment as void under Rule 74.06(b)(4). The basis for the Motion was that service of process was invalid under Rules 54.15 and 54.20. The trial court agreed with Greenwich and set aside the Default Judgment as void, stating service was improper, and therefore, the court did not have personal jurisdiction over Greenwich. The plaintiffs appealed, and the Supreme Court of Missouri granted transfer after opinion by the Court of Appeals.

The Supreme Court of Missouri found service was proper under § 375.906, as copies of the Petition and Summons were delivered to the Director, which constituted personal service on Greenwich, and the Director forwarded same to Greenwich via first-class mail, and submitted an affidavit of service. Greenwich argued the plaintiffs did not technically comply with the statute because an office worker, rather than the Director, Deputy Director, or Chief Clerk, signed for the process. The Court labeled this argument a “hyper-literal” construction of the statute, and did not consider it because Greenwich failed to preserve it for appellate review.

Alternatively, Greenwich argued § 375.906 was unavailable as a method of service, because the plaintiffs’ claims did not fall within the language of the statute, which required the insurance policy to be issued in Missouri, liability to accrue in Missouri, or the plaintiffs to be named beneficiaries or assignees of benefits under the policy. The Court disagreed, labeling this argument an untimely merits defense under Rule 74.05, rather than a jurisdictional challenge under Rule 74.06. Rule 74.05 merits defenses are limited to challenges made within one year after entry of default judgment, and Greenwich failed to assert the defense until more than two years after entry of the Default Judgment. The one-year time bar does not apply to jurisdictional challenges under Rule 74.06, which must be raised “within a reasonable time.”

Greenwich also argued the plaintiffs improperly failed to comply with Rules 54.15 and 54.20, in addition to the service requirements in § 375.906. Rules 54.15 and 54.20 require the Director to forward a copy of a summons and petition to the insurance company by registered or certified mail, requesting a return receipt, and to file an affidavit of compliance attaching a copy of the return registered or certified mail receipt. The Court disagreed, finding Rule 54.18 permits statutory service in lieu of service under the Missouri Supreme Court Rules. Thus, plaintiffs were free to elect service under § 375.906, in lieu of service under Rules 54.15 and 54.20.

Because plaintiffs met the requirements of § 375.906, the Court found plaintiffs properly served Greenwich. Thus, the Court reversed the trial court’s order setting aside the default judgment and remanded the case.

Class Actions Based on Wrongful Application Of Labor Depreciation In Property Insurance Claims Are Active In Missouri

April 10, 2015

Three separate class actions have been filed in Missouri challenging how depreciation is used in calculating the actual cash value of property damage under homeowners and commercial property insurance policies. In the past insurers used replacement-cost-less-depreciation to calculate actual cash value. This calculation takes the entire estimated replacement cost of property (materials, labor and other items) and depreciates the property based on age and condition. The Missouri class actions allege only materials should be depreciated as a component of the replacement cost, and labor should not be depreciated.

The Missouri class actions raising the labor depreciation issue are McLaughlin v. Fire Insurance. Exchange., 1316-CV11140 (16th Circuit Court for Jackson County, Mo.); Bellamy v. Nationwide Affinity Insurance Company, 1516-CV06346 (16th Circuit Court for Jackson County, Mo.); and Riggins v. American Family Mutual Insurance Company, 2:14-cv-04171-NKL (W.D. Mo.). No rulings on the merits or class certification in any of the three class actions have been rendered.

Developments in Missouri Bad Faith Law: Scottsdale Insurance

December 16, 2014

The bad faith environment in Missouri is generally hostile to carriers, with marked movement toward plaintiffs in the last ten years. The Missouri Supreme Court has now issued a ruling in Scottsdale Ins. v. Addison Ins. Co., Case No. SC93792 (on transfer from the Western District Court of Appeals) which will have a significant, and generally negative, impact on the landscape of bad faith liability in Missouri.

Bad Faith Pre-Scottsdale. 

Zumwalt v. Utilities Insurance Company, 228 S.W.2d 750, 756 (Mo. 1950) established the tort of “bad faith refusal to settle” in Missouri. Zumwalt held that, by virtue of the insurer’s exclusive right to investigate, defend, and settle claims under the policy, it has a duty to protect the insured’s financial interests. Hence, “bad faith on the part of the insurer would be the intentional disregard of the financial interest of the insured in the hope of escaping the responsibility imposed upon it by its policy.” Id. at 754. The Supreme Court’s opinion in Scottsdale reaffirms Zumwalt. Slip Op. at p. 12.

Over time, the Missouri case law, mostly at the intermediate appellate level, has attempted to refine what constitutes “bad faith”:

An insurer’s bad faith in refusing to settle is a state of mind, which is indicated by the insurer’s acts and circumstances and can be proven by circumstantial and direct evidence. Id. Circumstances that indicate an insurer’s bad faith in refusing to settle include the insurer’s not fully investigating and evaluating a third--party claimant’s injuries, not recognizing the severity of a third--party claimant’s injuries and the probability that a verdict would exceed policy limits, and refusing to consider a settlement offer. . . . Other circumstances indicating an insurer’s bad faith include not advising an insured of the potential of an excess judgment or of the existence of settlement offers.

Johnson v. Allstate Ins. Co., 262 S.W.3d 655, 662 (Mo. App. W.D. 2008). Scottsdale does not generally break any new ground on what constitutes bad faith.

The specific elements of the bad faith refusal to settle claim are generally recognized to have been established by Dyer v. Gen. Am. Life Ins. Co., 541 S.W.2d 702, 704 (Mo. App. 1976). The elements of the tort appear to be that:

(1) the liability insurer has assumed control over negotiation, settlement, and legal proceedings brought against the insured;

(2) the insured has demanded that the insurer settle the claim brought against the insured;

(3) the insurer refuses to settle the claim within the liability limits of the policy; and

(4) in so refusing, the insurer acts in bad faith, rather than negligently.

These elements have been altered by Scottsdale.

The Scottsdale Appeal.

Scottsdale is an action by an excess insurance carrier and insured against a primary carrier, in which it was alleged that the primary carrier refused to settle the claim within its policy limits, in bad faith. The primary carrier declined to accept a $1 million policy-limits demand, and the claimants ultimately filed a wrongful death action. The excess carrier became involved, and ultimately the case settled after the excess carrier tendered $1 million of its $2 million limits, and the primary carrier paid its $1 million limit. The case resolved at mediation, with the primary carrier paying out its policy limits and the insured not exposed to any excess judgment.

One reason that we have been watching this case is that the Western District Court of Appeals held that the elements of the bad faith claim identified in Dyer are not the true elements of the cause of action, and established its own elements for the claim:

(1) That the insurer has the authority to settle a claim against its insured within (or by payment of) the policy limits;

(2) That the insurer has the opportunity to settle a claim against its insured within (or by payment of) the policy limits;

(3) That the insurer fails to settle a claim against its insured within (or by payment of) the policy limits in bad faith; and

(4) That the insured suffers damage as a proximate result.

Scottsdale Ins. Co. v. Addison Ins. Co., 2013 Mo. App. LEXIS 1141, *54, 2013 WL 5458918 (Mo. App. W.D. Oct. 1, 2013). The Western District expressly rejected the prior requirement that the claimant make a clear and definite demand within or for policy limits, instead applying a more amorphous standard of an “opportunity to settle,” which requires the insurer to be proactive to create such an opportunity.

In Missouri, the Supreme Court does not review the holding of the intermediate appellate court. When the Supreme Court accepts transfer, what it is reviewing is the ruling of the trial court. Accordingly, the Western District’s opinion is of no legal effect, and it is important to note that the Supreme Court did not adopt the Western District’s proposed new elements of bad faith. 

It appears from the Supreme Court’s opinion that bad faith will only lie where the insurer “refuses to settle a claim within the limits of the policy,” Slip Op. at p. 12, which seems to rest upon a clear and definite settlement offer from the claimants. The Western District’s proposed requirement that the insurer act to create settlement opportunities was not expressly adopted by the Supreme Court.

What is New in Scottsdale.

There are several new, and unfavorable, developments from the Supreme Court in Scottsdale.

1.    Bad Faith Claims Are Assignable.

Bad faith has always been a tort under Missouri law, not a contract claim. It has widely been accepted that bad faith claims, as torts, are not assignable, based upon a long-standing Missouri prohibition on the assignment of tort claims (which, for example, bars subrogation and lien claims against an insured’s personal injury recovery). Scottsdale holds that bad faith refusal to settle claims are torts, but are nevertheless assignable. Slip Opinion at pp. 17-18. 

2.    Bad Faith Claims May be Maintained Even if the Insured Sustains No Damages.

Probably the most surprising aspect of the Supreme Court’s decision in Scottsdale is that an insured may bring a bad faith refusal to settle claim even though it has not been exposed to a judgment in excess of its policy limits. In Scottsdale, the case ultimately settled at mediation for policy limits.

In light of the particular facts of Scottsdale, the excess carrier’s grievance with the primary carrier is obvious – had the primary carrier accepted an early $1 million limits demand, the excess carrier would not have had to pay any portion of its limits. There is no contractual relationship between the primary and excess carriers, and this case represents the creation of a new duty under Missouri law owed by the primary carrier to the excess carrier to attempt to resolve claims within the primary limits without implicating the excess limits.

While the interests of the excess carrier are understandable in this context, Scottsdale does not provide a clear roadmap for carriers to understand their duty to the insured. Here, within 18 months after receiving the claim, the matter was resolved at mediation within policy limits, exposing the insured to no excess judgment. The primary carrier defended the insured. The Court’s explanation of this holding is unusual, in that it uses what appears to be a contractual rationale for permitting a bad faith tort claim to proceed under these circumstances, stating that the insurer’s good faith consideration of settlement offers is “part of what the insured pays for with its premiums.” Slip Op. at p. 14. However, under either contractual or tort theories, damages are always an essential element of the cause of action. Entirely absent from the court’s analysis in Scottsdale is an explanation of how the insured had been harmed by the primary carrier’s supposed delay in accepting a policy-limits demand. The court simply holds that the insured has lost “the benefit of an important obligation owed by the insurer,” regardless of whether the insured has sustained any actual financial loss. Slip Op. at p. 14.

Furthermore, some of the opinion appears to be dicta unrelated to the particular facts of this case. The court states that the insured should have the option to settle, perhaps through execution of a “covenant not to enforce” or Mo. Rev. Stat. § 537.065-type agreement, without needing to proceed to an excess judgment.  Slip Op. at pp 13-14. Whether the insured has the option to treat the insurer’s obligations under the policy as breached and to pursue its own settlement is certainly a frequent issue in these cases, but is a scenario that is not presented by the facts of Scottsdale and this language is, therefore, of questionable precedential effect. 

However, both this language and the express holding of Scottsdale suggest that insurers will not have much luck in arguing that an insured who is fully protected by a 537.065 agreement may have sustained some damages provable on a bad faith claim, but that the amount of those damages is not the amount of the judgment from which the insured is fully protected by virtue of the covenant not to execute. The Missouri courts continue to carve out exceptions to fundamental legal principles in the insurance context – insurers begin to occupy an arena in which they alone can be liable without proof of damages.

3.    An Insurer May Act in Bad Faith Even if it Tenders its Policy Limits.

Again, surprisingly, the Supreme Court held that even payment of policy limits in connection with a full release of claims against the insured is not enough to insulate the carrier from a bad faith claim. In so doing, the court holds that the insured “lost its opportunity to fully settle the claim” within the primary policy limits. Slip Op. at p. 15. Certainly, the excess carrier was impacted by these facts, but the insured? The insured has also paid premiums for its excess coverage – why is a settlement that requires contribution from the excess policy harmful to the insured?  The court does not elaborate.

While this is understandably an issue for the excess carrier, how a supposed delay in accepting a policy limits demand that ultimately results in a full release within policy limits, after the insured has been provided with a defense, could give rise to damages sufficient to maintain a bad faith claim on the part of the insured is mystifying. The court states that “mere payment up to the policy limits does not make Wells Trucking whole or put Wells Trucking in the same position” as if the insurer had settled sooner (Slip Op. at 15), but identifies absolutely no actual loss sustained by the insured as a result of the supposed delay.

4.    Excess Carriers Can Pursue Bad Faith Claims Against Primary Carriers.

This is one of the biggest developments in Scottsdale, as it truly is a new statement of Missouri law. As noted above, the insured can expressly assign its bad faith rights to an excess carrier. Additionally, the court found that an excess carrier has a right of contractual subrogation to pursue the insured’s bad faith claim against the primary carrier, even in the absence of an assignment by the insured. The excess carrier also has a right of equitable subrogation to recover sums that it was required to pay by virtue of the primary carrier’s bad faith. The court declined to create a direct duty owed by a primary carrier to the excess carrier – the excess carrier’s remedies are derivative of the insured’s bad faith claim. However, as noted above, the insured appears not to have sustained any actual financial loss that would support recovery in tort or contract with respect to the primary carrier’s conduct. The court held that an excess carrier can recover its own damages by “piggybacking” onto the insured’s supposed bad faith claim, without needing to prove that the insured sustained damages.

5.    No Need for the Insured to Demand Settlement.

This is an element of Dyer v. Gen. Am. Life Ins. Co., 541 S.W.2d 702, 704 (Mo. App. 1976) that has long been in question, and the Supreme Court has now definitely put paid to the insured’s demand for settlement as a prerequisite for a bad faith claim. See Slip Op. at pp. 12-13 fn. 5.

Conclusion.

Ultimately, Scottsdale has significantly altered the bad faith landscape in Missouri. This case continues a recent trend that dramatically expands bad faith liability in the state. See, e.g., Columbia Cas. Co. v. HIAR Holding, L.L.C., 411 S.W.3d 258, 263 (Mo. banc 2013) (imposing bad faith liability upon the insurer without requiring the policy holder to prove any of the elements of bad faith, including, critically, the insurer’s bad faith mental state). Carriers operating in the state should be mindful of the risks and potential exposure on bad faith claims.

Excess Insurer v. Primary Insurer: Supreme Court of Missouri Recognizes Right of Excess Insurer to Recover from Primary Insurer for Bad Faith Failure to Settle Within Policy Limits

December 9, 2014

Scottsdale Ins. Co. v. Addison Ins. Co., et al. 2014 WL 6958157 (Mo. banc. December 9, 2014)

In a matter of first impression, the Supreme Court of Missouri, en banc, affirmed a decision by the Missouri Court of Appeals, Western District, holding in Scottsdale Ins. Co. v. Addison Ins. Co., et al., that an excess insurer may recover on a theory of equitable subrogation amounts contributed from an excess policy as a result of a primary insurer’s bad faith failure to settle a claim within policy limits. The underlying personal injury claim arose out of an automobile accident involving a Wells Trucking employee that resulted in the death of the other driver. Wells Trucking had a primary liability policy with United Fire & Casualty Co. ($1,000,000 limit), and an excess policy with Scottsdale Insurance Co. ($2,000,000 limit). The Scottsdale policy specified it would not apply unless and until the underlying United Fire Policy had been exhausted.

The decedent’s family demanded (and Scottsdale requested) United Fire settle for its $1,000,000 policy limits, but United Fire failed to do so. The decedent’s family later increased their settlement demand to $3,000,000. United Fire and Scottsdale participated in mediation with the family, and the family agreed to accept a total settlement payment of $2,000,000, with United Fire and Scottsdale each contributing $1,000,000.

Scottsdale filed suit against United Fire, asserting various theories of recovery, including one for equitable subrogation. ¹ United Fire filed a motion for summary judgment arguing Scottsdale had no right under Missouri law to bring an equitable subrogation claim for an alleged bad faith failure to settle a claim within policy limits. The trial court granted United Fire’s motion and entered judgment in its favor.

On appeal, Scottsdale raised several issues, including that the trial court erred in entering summary judgment because Missouri law should permit an excess insurer to pursue a primary insurer for bad faith failure to settle within the primary policy limits under an equitable subrogation theory. After an opinion by the Court of Appeals, in which the Court of Appeals reversed the trial court’s judgment, and recognized an excess insurer’s ability to recover from a primary insurer for bad faith failure to settle on a theory of equitable subrogation, the case was transferred to the Supreme Court of Missouri.

The Scottsdale Court acknowledged that Missouri courts have recognized the doctrine of equitable subrogation in various contexts dating to the 19th Century. The Court looked to other jurisdictions and found that most jurisdictions have recognized equitable subrogation as a proper claim for an excess insurer to recover from a primary insurer’s wrongful refusal to settle. The Court decided that Missouri should align itself with the majority of jurisdictions on the issue. ² Therefore, the Court reversed the trial court’s judgment and remanded the case.

Before the Court could determine whether the trial court’s legal error necessitated a reversal, however, it had to determine whether United Fire negated any of the essential elements of Scottsdale’s bad faith refusal to settle claim.

The Scottsdale Court set forth three essential elements of the claim: 1) a liability insurer reserves the exclusive right to contest or settle any claim; 2) a liability insurer prohibits the insured from voluntarily assuming any liability or settling any claims without consent; and 3) a liability insurer is guilty of fraud or bad faith in refusing to settle a claim within the limits of the policy.

The Court concluded the trial court erred in ruling that Scottsdale could not establish all of the essential elements of the claim. First, the Court rejected United Fire’s argument that a judgment against the insured for an amount in excess of the policy limits is an essential element of the claim. Requiring an excess judgment would force the insured to go to trial after its insurer wrongfully refuses to settle, instead of permitting the insured to protect itself from further liability by settling. The Court reasoned that allowing a bad faith refusal to settle claim when the insured settles fosters Missouri’s policy of encouraging settlements. Further, an insurer’s obligation to act in good faith when settling a third party claim is part of what the insured pays for with its premiums. When the insurer refuses to settle, the insured loses the benefit of this important obligation, regardless of whether there is an excess judgment or a settlement.

The Court also found that United Fire’s ultimate payment of its policy limits did not negate the essential element of the liability insurer’s bad faith failure to settle within its policy limits. United Fire’s failure to act on the decedent’s family’s earlier settlement demands was in bad faith and caused Wells Trucking to lose its opportunity to fully settle the claim within United Fire’s policy limits. United Fire’s later payment of the policy limits did not make Wells Trucking whole or put Wells Trucking in the same position as if United Fire had performed its obligations to settle in good faith.

This case is significant for primary insurers because it shows mere payment of the primary policy limits may not insulate them from liability for bad faith refusal to settle when a primary insurer had an opportunity to settle the claim within the primary policy limits and failed to do so. The case is significant for excess insurers because it provides precedent for equitable subrogation claims to recoup monies paid to resolve claims that could have been resolved earlier without reaching the excess coverage layer.

¹ This article will focus solely on the equitable subrogation claim and will not address Scottsdale’s alternative theories of liability.
² The Court also noted Scottsdale could properly pursue a bad faith refusal to settle a claim under the theories of assignment and contractual subrogation, but not based on a duty owed directly to Scottsdale.

Supreme Court of Missouri Holds CGL Policy Covers Statutory Damages Claim for Violations of Telephone Consumer Protection Act (TCPA)

December 25, 2013

Columbia Casualty Company v. Hiar Holding, LLC 411 S.W.3d 258 (Mo.banc 2013)

In Columbia Casualty, the Supreme Court of Missouri held that statutory damages for violations of the TCPA were firmly within the “property damage” and “advertising injury” coverage provided by a CGL policy. The Court rejected an argument that TCPA statutory damages are considered fines or penalties precluded from coverage under a CGL policy, abrogating Olsen v. Siddiqi, 371 S.W.3d 93 (Mo.App. E.D. 2012).

The insurer, Columbia Casualty Company, refused to defend its insured, Hiar Holding, LLC, in a class action brought against Hiar for alleged violations of the TCPA. The class plaintiffs alleged hotel proprietor Hiar used a marketing services company to send approximately 12,500 unsolicited advertising facsimiles, approximately 10,000 of which were received. The class plaintiffs sought injunctive relief and statutory damages under the TCPA of $500 per occurrence. Columbia refused to defend, on the basis that the claims were outside the policy coverage provisions or otherwise excluded from coverage. Columbia rejected a settlement offer to Hiar for an amount within its coverage limits ($1,000,000 per occurrence, or $2,000,000 aggregate). Hiar defended at its own expense before agreeing to a class-wide settlement of $5,000,000 (with liability limited to insurance assets).

The class brought a garnishment action against Columbia for the settlement amount, plus post-judgment interest. Columbia sought a declaratory judgment clarifying its duties to defend and indemnify the class’ claims under Hiar’s policy. The class’ garnishment action was stayed pending resolution of the declaratory judgment action. The trial court found Columbia owed Hiar a duty to defend the class action and a duty to indemnify Hiar for the full settlement, including interest, and that Columbia acted unreasonably and in bad faith in failing to do so. Columbia appealed.

The Supreme Court rejected Columbia’s argument that coverage for “property damage” and “advertising injury” does not encompass fines and penalties imposed for TCPA violations. The Court followed the 8th Circuit’s opinion in Universal Underwriters Insurance Company v. Lou Fusz Automotive Network, Inc., 401 F.3d 876 (8th Cir. 2005). The 8th Circuit in Universal Underwriters found that a TCPA $500 per occurrence statutory damages award is not a penalty. Rather, it represents a liquidated sum for uncertain and hard to quantify actual damages, including loss of use of equipment, expense of supplies, and inconvenience and annoyance of unsolicited faxed advertisements. The Court overruled the Olsen v. Siddiqi case, which held that the $500 per occurrence statutory damages provision is penal in nature.

The Supreme Court also rejected Columbia’s argument that “property damage” coverage was not invoked because the sending of junk faxes was intentional, rather than accidental, and thus not an “occurrence” as defined by the policy. Columbia also argued that Hiar’s intentional actions were excluded from coverage under the policy’s “expected or intended” injury exclusion. The Supreme Court relied on the trial court’s factual determination that Hiar’s actions reflected negligent conduct, as Hiar did not intend toviolate the TCPA and did not intend injury to the class. The trial court made this finding because Hiar apparently believed that the marketing company it hired had the consent of the fax recipients to receive Hiar’s advertising faxes.

The Supreme Court also found coverage existed under the “advertising injury” policy language because the class’ TCPA claims included privacy rights violations.

This decision is significant for its abrogation of the Olsen case in favor of the Universal Underwriters holding and for its clarification of the law in Missouri that statutory damages under the TCPA are not considered fines or penalties that are necessarily incompatible with coverage under a CGL policy. Missouri courts will look to the insurance policy language to determine the scope of coverage, as well as the potential application of exclusions.

Excess Insurer v. Primary Insurer: Court of Appeals Recognizes Right of Excess Insurer to Recover From Primary Insurer for Bad Faith Failure to Settle Within Policy Limits

October 1, 2013

SCOTTSDALE INS. CO. V. ADDISON INS. CO., ET AL., 2013 WL 5458918 (MO.APP. W.D. OCTOBER 1, 2013)

In a matter of first impression, the Missouri Court of Appeals, Western District, held in Scottsdale Insurance Company v. Addison Insurance Company, et al., that an excess insurer may recover on a theory of equitable subrogation amounts contributed from an excess policy as a result of the primary insurer’s bad faith failure to settle a claim within policy limits.

The underlying personal injury claim arose out of an automobile accident involving a Wells Trucking employee and which resulted in the death of the other driver. Wells Trucking had a primary liability policy with United Fire & Casualty Co. ($1,000,000 limit), and an excess policy with Scottsdale Insurance Co. ($2,000,000 limit). The Scottsdale policy specified it would not apply unless and until the underlying United Fire policy had been exhausted.

The decedent’s family demanded (and Scottsdale requested) United Fire settle for its $1,000,000 policy limits, but United Fire failed to do so. The decedent’s family later increased their settlement demand to $3,000,000. United Fire and Scottsdale participated in mediation with the family, and the family agreed to accept a total settlement of $2,000,000, with United Fire and Scottsdale each contributing $1,000,000.

Scottsdale filed suit against United Fire, asserting seven alternative theories of recovery, including one for equitable subrogation.1 United Fire filed a motion for summary judgment, arguing Scottsdale had no right under Missouri law to bring an equitable subrogation claim for an alleged bad faith failure to settle a claim within policy limits. The trial court granted United Fire’s summary judgment motion and entered judgment in its favor.

On appeal, Scottsdale raised several issues, including that the trial court erred in entering summary judgment because Missouri law should permit an excess insurer to pursue a primary insurer for bad faith failure to settle within its policy limits under an equitable subrogation theory.

The Scottsdale court acknowledged that Missouri courts have recognized equitable subrogation claims in other contexts, but Missouri courts had yet to determine whether equitable subrogation could be employed to permit an excess insurer to recover for a primary insurer’s bad faith failure to settle. The Scottsdale court looked to other jurisdictions and found that most jurisdictions have recognized these claims. The court decided that Missouri should align itself with the majority of jurisdictions on the issue.

The court’s stated rationale was twofold: (1) to be consistent with the intended import of excess coverage as being implicated only after exhaustion of primary coverage; and (2) to promote the policy of encouraging settlements. To hold otherwise would permit a primary insurer to benefit from the fortuity of the insured’s excess coverage and act as a disincentive to negotiate in good faith to settle a claim within primary policy limits.

Based on the foregoing rationale, the Scottsdale court held that the trial court erred as a matter of law in entering judgment in favor of United Fire on the equitable subrogation count. Before the court could determine whether the trial court’s legal error necessitated reversal, however, it had to determine whether the trial court erred in concluding that the uncontroverted facts negated Scottsdale’s ability to establish the essential elements of the claim.

Noting that the Missouri Supreme Court has not expressly delineated the essential elements of a claim for bad faith failure to settle, the Scottsdale court set forth four essential elements, based on its review of other Missouri appellate opinions: (1) the insurer has the authority to settle a claim within policy limits; (2) the insurer has an opportunity to settle within policy limits; (3) the insurer fails to settle within policy limits; and (4) the insured suffers damage as a result.

The court concluded that the trial court erred in ruling that Scottsdale could not establish all of the essential elements of the claim. First, the trial court erred by concluding that a judgment in excess of the policy limits is an essential element of the claim. There is no binding authority in Missouri to support that and, while many bad faith failure to settle cases are filed after an excess judgment is entered, that is not the only means that can give rise to such a claim. For example, a settlement in excess of the policy limits, like the one in Scottsdale, can give rise to a claim. Therefore, the lack of an excess judgment was immaterial to whether Wells Trucking could have established a claim for bad faith failure to settle, and also immaterial to whether Scottsdale could establish a right to equitable subrogation.

Second, the trial court erred by concluding that United Fire did not actually fail to settle within its policy limits because it in fact had paid its policy limits following the settlement reached at mediation. Rejecting that argument, the Scottsdale court found that a primary insurer’s mere payment of its policy limits, at some point, does not negate the essential element of failing to settle within the policy limits. “Unless the payment of policy limits alone yields a resolution of the claim, it is axiomatic that the primary insurer has failed to settle the claim within its policy limits.” In other words, the insurer does not satisfy its duty to protect the financial interests of an insured merely by remitting payment of its policy limits, if the evidence demonstrates that the insurer had the opportunity to fully settle a claim within the policy limits but failed in bad faith to do so. Therefore, it was legally irrelevant that, at a later point in time, United Fire contributed its $1,000,000 policy limits towards a settlement that exceeded the limits of the primary policy

In summary, the Scottsdale court held that the trial court committed legal error when it determined that Missouri does not recognize an excess insurer’s ability to recover from a primary insurer for bad faith failure to settle on a theory of equitable subrogation. The trial court also committed legal error when it concluded that Scottsdale could not establish the essential elements of the claim based on the uncontroverted facts. As a result, the appellate court reversed the trial court’s judgment as to those points and remanded for further proceedings.

The case is significant for primary insurers because it shows that the mere payment of the primary policy limits may not insulate them from liability for a bad faith failure to settle claim if the primary insurer had an opportunity to settle the claim within the policy limits and failed to do so. The case is significant for excess insurers because it provides precedent for equitable subrogation claims to recoup monies paid to resolve claims that could have been resolved earlier without reaching the excess coverage layer.

1 This article will focus solely on the equitable subrogation claim and will not discuss Scottsdale’s six alternative theories of liability.

Insurance Reservation of Rights Letters in Kansas

July 17, 2013

A reservation of rights letter informs the insured of the carrier's potential defenses to coverage under the policy. The following is a brief overview of some of the requirements for ROR letters in Kansas. As always, please contact a licensed and qualified attorney for recommendations specific to your circumstances.

Applicable Statutes and Regulations

There are no specific statutes or regulations that govern reservation of rights letters in Kansas.

Timing of the Reservation of Rights Letter

Kansas law requires an insurer to provide a defense to an insured if there is a potential for liability under the policy.  State Farm Fire & Casualty Co. v. Finney, 244 Kan. 545, 553, 770 P.2d 460 (1989). As discussed more fully below, failure to defend can expose the insurer to potential liability for sums in excess of the policy limits under “bad faith” theories of recovery. Accordingly, where there are arguable bases to deny coverage, the best practice is for an insurer to defend subject to a reservation of rights to later deny coverage.

The insurer must issue a unilateral reservation of rights, or enter into a mutual “non-waiver agreement” with the insured, that is “clear” and “timely.” Bogle v. Conway, 199 Kan. 707, 714, 433 P.2d 407 (1967). The insurer may change its coverage position as it learns facts that place the claim outside of the policy’s coverage. Id.   

There has been no precise definition of what constitutes “timely” notice under Kansas law. Whether an ROR is timely depends on the facts of the case. Continental Ins. Co. v. Wilco Truck Rental, Inc., 1986 Kan. App. LEXIS 1491 (Kan. Ct. App. Nov. 6, 1986).

Three years is too long to wait to send an ROR. Bogle, supra. Six months after suit was filed and 4 months after the insurer assumed the defense of the insured was timely notice, however. Wilco Truck Rental, supra. Relevant to the inquiry on timeliness is whether the insured suffered any prejudice as a result of the late ROR. Id. The facts considered by the Wilco Truck Rental court were whether the insured had adequate time to meaningfully defend the case, attempt a settlement, and, if necessary, to prepare for trial. Id. 

Required Content of the Reservation of Rights Letter

The ROR letter must clearly disclaim liability under the policy (and set forth the specific facts and policy language that justify this position), and it must give notice that the insurer reserves the right to use these defenses to coverage in any action to collect on the policy. Bogle, supra.

“Vague” or “ambiguous” reservations will not be effective. Note that even a mutual non-waiver agreement that is signed by the insured (as opposed to a unilateral reservation of rights letter) will not be effective to prevent an estoppel or waiver argument if the agreement does not clearly express the factual and policy grounds for the potential denial of coverage. Bogle, 199 Kan. at 711-13, 433 P.2d at 411- 12.

In drafting a mutual non-waiver agreement or unilateral reservation of rights, the insurer should attempt, insofar as possible, to use “plain English” explanations geared toward an unsophisticated audience in explaining its position. Id. The agreement or ROR should set forth the specific policy language that applies, and explain how the known facts appear to place the claims outside of coverage. Id. The non-waiver or ROR must clearly explain that the insurer may ultimately deny coverage for the claim, which would leave the insured personally exposed to a judgment that is not covered by the policy. Id.

Independent Counsel for the Insured

Unlike in Missouri, a Kansas insured has no right to refuse a defense offered under a reservation of rights. However, where there is a conflict of interest between the insured and the insurer, the insurer should hire independent counsel to defend the insured.Patrons Mut. Ins. Assoc. v. Harmon, 732 P.2d 741 (Kan. 1987); U.S. v. Daniels, 163 F.Supp.2d 1288 (D. Kan. 2001). As a matter of practice, when the insurer believes that there are valid bases for denying coverage, it should obtain the insured’s agreement regarding the selection of defense counsel.

The Consequences of Failure to Issue a Proper ROR

As a general rule, defending without a proper reservation of rights results in estoppel that prevents the assertion of coverage defenses in a later action to collect on the policy. “[A] liability insurer by assuming and conducting the defense of an action brought against the assured where with knowledge of facts taking the accident, injury, etc., outside the coverage of the policy -- and without disclaiming liability and giving notice of its reservation of rights -- is thereafter precluded in an action upon the policy [i.e., garnishment] from setting up the defense of non-coverage.” Snedker v. Derby Oil Co., 164 Kan. 640, 644, 192 P.2d 135 (Kan. 1948). “The insurer’s conduct in this respect operates as an estoppel to later contest an action upon the policy, regardless of the fact that there has been no misrepresentation or concealment of material facts on its part, and notwithstanding the facts may have been within the knowledge of the insured equally as well as within the knowledge of the insurer.” Id.

Notwithstanding the above, the Kansas Court of Appeals has held that there is no bright-line rule that insurers who fail to provide a defense under reservation of rights are inevitably estopped from raising coverage defenses. Aselco, Inc. v. Hartford Ins. Group, 21 P.3d 1011 (Kan. Ct. App. 2001). This case recognizes the general, and correct, principle that the insurer’s failure to issue a proper reservation of rights letter or failure to defend should not create coverage where none exists under the unambiguous terms of the policy. As a best practice, however, insurers should always issue reservation of rights letters and should retain counsel acceptable to the insured whenever there is a potential basis to deny coverage.  

Insurers should also be aware that issuance of a proper reservation of rights preserves the identified defenses to coverage, including the “no liability” defense, even if the underlying tort action proceeds to judgment against the insured. Davin v. Athletic Club of Overland Park, 32 Kan. App. 2d 1240, 1242-1243, 96 P.3d 687, 690 (2004). That is, the insurer may argue that the insured was not liable to the underlying plaintiff in a subsequent garnishment or other coverage action, even in the face of a judgment against the insured in the tort action.

Potential Bad Faith Exposure

Under Kansas law, a bad faith claim is a contract claim. Moses v. Halstead, 477 F. Supp. 2d 1119, 1126 (D. Kan. 2007). There is an implied duty of good faith in the insurance contract, which requires the insurer to act with “reasonable care” toward the interests of the insured. Glenn v. Fleming, 247 Kan. 296, 309, 799 P.2d 79, 88 (1990).

The duty to act in good faith and without negligence applies to a liability insurer’s coverage decision if the insurer uses lack of coverage as the reason for rejecting a reasonable settlement offer within policy limits.  Associated Wholesale Grocers, Inc. v. Americold Corp., 261 Kan. 806, 846, 934 P.2d 65, 90 (1997); Halstead, 477 F. Supp. 2d at 1126. The Kansas Supreme Court in Americold stated that “[a]lthough we have previously said that something more than mere error of judgment is necessary to constitute bad faith, ... negligence or a lack of good faith in the coverage investigation or the decision to deny coverage leading to a mistake in failing to settle breaches the insurer's duty.”  Id.

Kansas has adopted a five-factor test to determine whether a denial of coverage justifies the insurer’s rejection of a settlement offer within policy limits: (1) whether a reservation of rights letter was issued; (2) efforts or measures taken by the insurer to resolve the coverage dispute promptly or in such a way to limit any potential prejudice to the insured; (3) the substance of the coverage dispute or the weight of legal authority on the coverage issue; (4) the insurer’s diligence and thoroughness in investigating the facts specifically pertinent to coverage; and (5) efforts made by the insurer to settle the liability claim in the face of the coverage dispute. Americold, 261 Kan. at 846, 934 P.2d at 90.

Particularly in light of the second Americold factor, insurers should always consider filing a declaratory judgment action in order to obtain a prompt determination of the coverage dispute. Inevitably, settlement demands will be made in the case, and if the insurer rejects such demands on the basis of lack of coverage, potential bad faith liability comes into play.

Missouri Allows the Formation of "Rent-A-Captive" Insurers

June 19, 2013

A captive insurance company is a risk-management organization that is formed by one or more non-insurer parent companies, usually to provide more affordable coverage for risk. Captives are a form of self-insurance, but with defined “policy terms” that can make it easier for the company to obtain affordable coverage (including more affordable layers of coverage through excess policies and reinsurance). With a captive insurer, the parent(s) can recover “premium” amounts that were not needed to pay claims.

There are two broad categories of captive insurers. “Direct” or “pure” captive insurers are owned by a single parent company and directly insures only its parent’s risk. Group captives will provide insurance to multiple companies, often affiliated companies or members of a shared industry.

Captive insurers are popular – estimates are that most Fortune 500 companies have some form of captive insurance. The vast majority of captives are domiciled off-shore, with Bermuda the leading destination for formation of a captive carrier. Vermont holds the title for U.S. state with the largest share of the captive business.

Missouri is looking to change that, by making existing captive regulations more favorable and by expanding the types of locally-domiciled captives to include “sponsored” captive insurers. Taking effect on August 28, 2013, Senate Bill 287 adopts a number of provisions favorable to companies looking to establish a captive carrier in Missouri. 

Missouri will now allow for the creation of sponsored, protected-cell captives (also known as “rent-a-captives”). A sponsored captive may be incorporated as one of four types of entity: (1) a stock insurer with its stock divided into shares held by the stockholders, (2) a mutual corporation, (3) a non-profit corporation, or (4) a member-managed limited liability company. 

The sponsor need not be an insurance company, but must be approved by the director of insurance in its discretion, after an evaluation of the financial stability and experience of the sponsor. Risk retention groups may not sponsor or participate in a captive insurer in Missouri.

Participants in a sponsored captive can include associations, corporations, LLCs, partnerships, trusts, and other business entities. The sponsor may also be a participant.

The capital requirement for a sponsored captive is only $500,000, and the minimum premium tax is $7,500 for the captive as a whole (not as to each protected cell). The maximum tax liability is calculated as an aggregate of each cell’s liability, however. The assets of two or more protected cells may be combined for purposes of investment, and this combination does not defeat the limited liability and segregation of assets for claims-processing and accounting purposes.

Missouri has historically seen a small market share of the captive business. Its move to allow rent-a-captives, particularly because sponsors need not be licensed insurers, is an aggressive move to increase Missouri’s participation in the captive insurer market.

Insurance Reservation of Rights Letters in Missouri

June 5, 2013

A reservation of rights letter informs the insured of the carrier’s potential defenses to coverage under the policy. The following is a brief overview of some of the requirements for ROR letters in Missouri.  As always, please contact a licensed and qualified attorney for recommendations specific to your circumstances.

Applicable Statutes and Regulations

There are no specific statutes or regulations that govern the drafting of a reservation of rights letter. However, Title 20, Division 100 of the Missouri Code of State Regulations generally applies to claims handling practices. 20 CSR 100-1.050 contains specific provisions regarding denials of claims, which should be followed when drafting reservation of rights letters. Mo. Rev. Stat. § 375.1007(12) also identifies improper claims handling practices with respect to notices of denials of coverage.

Timing of the Reservation of Rights Letter

 While there are no regulations specifically applicable to ROR letters, an insurer must advise an insured of its acceptance or denial of a claim within 15 working days after the submission of all forms necessary to establish the nature and extent of any claim.   20 CSR 100-1.050(1)(A). 

If more time is required to investigate the claim, the insurer must write to the insured within 15 working days after the submission of the claim and explain why more time is needed. 20 CSR 100-1.050(1)(C). If the investigation remains incomplete, the insurer must write to the insured within 45 days from the date of the original notification and every 45 days thereafter, setting forth the reasons that additional time is needed. Id. Investigation of claims should ordinarily be completed within 30 days after the insurer receives notice of the claim. 20 CSR 100-1.050(4). 

Required Content of the Reservation of Rights Letter

There is no particular statutory or regulatory language that must be included in a reservation of rights letter. A proper ROR must contain a clear disclaimer of potential liability for coverage, with the grounds for such, along with any facts necessary for the insured to make an informed decision as to whether the insured will accept the defense under a reservation of rights. Brooner & Assocs. Constr., Inc. v. W. Cas. & Sur. Co., 760 S.W.2d 445 (Mo. App. W.D. 1988). The Missouri cases do not explicitly state how much analysis of the bases for non-coverage must be addressed in the ROR letter, but there is case law upholding as proper letters that identify the specific policy provisions at issue and how the facts or claims implicate those coverage positions.   See, e.g., id.  The best practice is for the insurer to set out a thorough analysis of how the policy language applies to the facts and claims. 

Insurers should also be guided by the Missouri regulations on denials of claims. All potentially applicable policy language must be specifically identified in the reservation of rights letter. 20 CSR 100-1.050(1)(A) (“No insurer shall deny any claim on the grounds of a specific policy provision, condition or exclusion unless reference to that provision, condition or exclusion is included in the denial.”) The reservation of rights must be communicated in writing, and a copy retained in the claim file. Id.

Any potential grounds for denial of coverage should be stated in the letter, and supplemental reservations of rights letters issued as the facts are developed and claims amended.

The Insured’s Right to Refuse a Defense Offered Under a Reservation of Rights

Missouri is one of a minority of states that allows an insured to refuse a defense offered under a reservation of rights. State Farm Mut. Auto. Ins. Co. v. Ballmer, 899 S.W.2d 523, 527 (Mo. banc 1995). A defense under a reservation of rights presents a potential conflict of interest between the insurer and the insured, because the insurer may have a greater interest in developing facts establishing non-coverage rather than in defending against the insured’s liability. State ex rel. Rimco, Inc. v. Dowd, 858 S.W.2d 307, 308 (Mo. App. E.D. 1993). 

If the insured rejects the defense under a reservation of rights, the insurer has three options: (1) defend without a reservation of rights, (2) withdraw from representing the insured in the underlying action, or (3) file a declaratory judgment action to determine the scope of coverage. Truck Ins. Exchange v. Prairie Framing, LLC, 162 S.W.3d 64, 88 (Mo. App. W.D. 2005). Filing a declaratory judgment action is the preferred and recommended course of action in that event.

If the insurer files a declaratory judgment action, it is treated as a refusal to defend the insured, and if unjustified, the insurer is deemed to have waived its right to control the defense and is bound by the strategy decisions made by the insured.  “If its decision concerning coverage is wrong [the insurer] should be bound by the decision it has made.” Ballmer v. Ballmer, 923 S.W.2d 365, 369 (Mo. App. W.D. 1996).  Filing a declaratory judgment action to determine the construction of the insurance company’s own policy will not insulate the insurer against a bad-faith claim.  Ganaway v. Shelter Mut. Ins. Co., 795 S.W.2d 554, 562 (Mo. App. S.D. 1990).

If the insured rejects a defense offered under a reservation of rights and coverage is later found, the insurer will be liable for the insured’s defense costs. Fuller v. Lloyd, 714 S.W.2d 698 (Mo. App. W.D. 1986).

Intervention in the underlying tort action to seek a coverage determination has been approved in the Western District Court of Appeals (State ex rel. Mid-Century Ins. Co. v. McKelvey, 666 S.W.2d 457 (Mo. App. W.D. 1984); Whitehead v. Lakeside Hosp. Ass’n, 844 S.W.2d 475, 479 (Mo. App. W.D. 1992)), but the practice is less clear in the Eastern District, where it appears to be disfavored (State ex rel. Rimco, Inc. v. Dowd, 858 S.W.2d 307, 309 (Mo. App. E.D. 1993)). 

When a tendered claim is in litigation, the insurer should issue a reservation of rights letter as soon as it becomes apparent that the insurer has or may assert coverage defenses, so that the insured may make an informed decision whether to accept or refuse the defense under a reservation of rights. 

The Consequences of Failure to Issue a Proper ROR

Missouri courts profess to accept the general rule that neither waiver nor estoppel will establish coverage that otherwise does not exist under the policy.  Martin v. United States Fid. & Guar. Co., 996 S.W.2d 506, 511 (Mo. 1999); Great W. Cas. Co. v. Wenger, 748 S.W.2d 926, 928 (Mo. App. W.D. 1988). As a matter of practice, however, Missouri courts frequently discuss waiver and estoppel in a manner that could invalidate policy exclusions. See, e.g., Shahan v. Shahan, 988 S.W.2d 529 (Mo. 1999) (analyzing potential waiver of the household exclusion in an automobile liability policy).

An insurer that defends a case with an awareness of facts that would defeat coverage, but without a reservation of rights, may be held to have waived its defenses to coverage. Mistele v. Ogle, 293 S.W.2d 330, 334 (Mo. 1956) (“It is defending an action with knowledge of noncoverage under a policy of liability insurance without a non-waiver or reservation of rights agreement that precludes the insurer from subsequently setting up the fact and defense.”) “It is the insurer’s unequivocal conduct, knowingly contrary to the claim provisions of its contract, that betrays the insurer’s purpose to relinquish its right to rely on the contractual language.” Brown v. State Farm Mut. Auto. Ins. Co., 776 S.W.2d 384, 387 (Mo. 1989). Prejudice to the insured is not an element of waiver. Id. Waiver arises only where the insurer has knowingly acted contrary to its coverage defenses. Id.

More commonly, the question will be the effect of the insurer’s failure to state all potential defenses to coverage in a reservation of rights letter. In such cases, the insured will typically be required to prove estoppel, not waiver, to argue that the insurer should be barred from arguing a coverage defense not previously identified. “[E]stoppel, with some element of unfairness, lack of notice, or other detriment to the insured, rather than voluntary waiver . . . is the preferred theory.” Brown, 776 S.W.2d at 388. Proof of prejudice to the insured is required to support an estoppel theory; the mere trouble and expense of bringing suit to establish coverage is not sufficient prejudice to support estoppel. Id.                                                                       

“[U]nder an estoppel theory, the insurer must first announce a specific defense and subsequently seek to rely instead on an inconsistent theory.” Brown, 776 S.W.2d at 388 (emphasis added). Only where the announcement of a specific defense to coverage “lulls the insured into relying to his detriment and subsequent injury” on the stated position is estoppel an issue. Id. “And where the insurer’s initial denial is stated in such a way that it reasonably implies the subsequently, but more specifically stated, consistent reason for denial, the insured cannot claim she changed her position or relied to her detriment on the insurer’s initial denial; estoppel may not be invoked.” Id. at 389 (emphasis added).

To the extent that coverage defenses which are not set forth in the initial ROR letter are consistent with the stated defenses, estoppel should not bar the assertion of these defenses. Nevertheless, the best practice is to be comprehensive in identifying all available coverage defenses. Overlooking the nuanced analysis set forth in Brown, many commentators and lower courts cite the case for the proposition that, when an insurance company denies liability on specific grounds, it “waives all grounds not so specified,” which is the general holding of that case.

Missouri has not recognized the theory of “procedural bad faith.” Failure to promptly provide a reasonable explanation of the basis for a denial of coverage constitutes an improper claims practice. Mo. Rev. Stat. § 375.1007(12). There is no private right of action under the claims handling statutes, however.

Reimbursement for Non-covered Claims is Unsettled Under Missouri Law

An insurer’s right to seek reimbursement of defense or indemnity payments for non-covered claims remains unsettled under Missouri law. At the intermediate appellate level, courts have held that the issuance of a reservation-of-rights letter does not allow an insurer the right to seek repayment from its insured for indemnity payments on non-covered claims.  See, e.g., Benton House, LLC v. Cook & Younts Ins., Inc., 249 S.W.3d 878, 881 (Mo. App. W.D. 2008) (citing cases).

However, if the insurer does not defend and later obtains a determination that some claims were not covered by the policy, federal courts, relying on their interpretation of Missouri law, have held that a settlement must be apportioned between covered and non-covered claims. Esicorp, Inc. v. Liberty Mut. Ins. Co., 193 F.3d 966, 971 (8th Cir. 1999); accord, Nodaway Valley Bank v. Continental Cas. Co., 715 F. Supp. 1458, 1465-67 (W.D. Mo. 1989), aff’d, 916 F.2d 1362 (8th Cir. 1990).

Missouri Court of Appeals Applies "All Sums" Doctrine and Reinstates $62M verdict Against Lloyd's of London

April 19, 2013

On April 16, the Missouri Court of Appeals for the Eastern District reinstated a jury verdict against Certain Underwriters at Lloyd’s of London for $62.5 million under various excess liability policies issued to Doe Run Resources Corporation (“Doe Run”), a lead mining and smelting company operating in St. Francois County, Missouri, related to environmental remediation efforts by the company.  The decision is noteworthy as it represents a new statement of Missouri law on “all sums” versus “pro rata” allocation of multiple policy years’ coverage, and a reversal of this court’s prior position on the issue.

Prior to trial, the court granted summary judgment in favor of Lloyd’s on its argument that there was no coverage for three of the six mining sites, which were not in operation during the policy periods implicated by Doe Run’s claims.  Notwithstanding this ruling, the jury was provided a verdict form to assess damages for all six mining sites, and did find in Doe Run’s favor on all six.  The jury also returned a verdict for vexatious refusal to pay on each of the sites.  The court reduced the jury’s verdict based upon its prior rulings, to $5 million.  Both sides appealed.  The Eastern District Court of Appeals reversed the trial court’s rulings in favor of Lloyd’s, and reinstated the $62.5 million jury verdict against the underwriters.

ALL SUMS VERSUS PRO RATA COVERAGE

The “all sums” dispute arises in the context of liabilities for which there is a long latency period, typically toxic tort or environmental clean-up cases, in which liability-provoking events occurred in multiple policy periods.  It is not unusual for insurance policies, particularly historic ones, to provide coverage for “all sums which the insured shall become legally obligated to pay as damages” resulting from a covered occurrence within the policy period. 

The policyholder’s argument for “all sums” coverage is that the policyholder should be able to choose any policy period in which there was a covered occurrence or covered wrongful act, and exhaust all coverage available under policies applying to that time frame, without regard to other policies that might provide coverage.  The theory is that the entirety of the damages are part of the “all sums” covered by the selected policies, and that the insured’s “reasonable expectation” is that any given policy will provide coverage, up to its limits, for “all sums” resulting from the covered occurrence or acts.  Under “all sums” treatment of claims, “when multiple policies are triggered to cover the same loss, each policy provides indemnity for the insured’s entire liability, and each insurer is jointly and severally liable for the entire claim.”  Rubenstein v. Royal Ins. Co., 694 N.E.2d 381, 388 (Mass. App. Ct. 1998).  While “all sums” is deemed to be the majority rule, fewer than a dozen states have specifically applied this doctrine.

“Pro rata” coverage is the alternate approach to coverage.  Most courts that employ the “pro rata” approach allocate an insurer’s indemnity obligations on a pro rata basis by the insurer’s time on the risk.  For example, if an insurer has a six-year period of coverage and the exposure period is thirty years, the insurer would be responsible for one-fifth of the damages, up to the limits of its policies.  Alternately, some courts apply pro rata based upon each insurer’s respective percentage of the total available limits.  See Owens-Illinois, Inc. v. United Ins. Co., 650 A.2d 974 (N.J. 1994).

With respect to our local jurisdictions, Kansas has rejected “all sums” and adopted a pro rata approach based on time on the risk.  Atchison, Topeka & Santa Fe Ry. Co. v. Stonewall Ins. Co., 71 P.3d 1097 (Kan. 2003).  Illinois accepts the “all sums” approach (Zurich Ins. Co. v. Raymark Indus. Inc., 514 N.E.2d 150 (Ill. 1987)), but there is a split amongst the intermediate appellate courts as to whether there should be pro rata allocation before reaching excess policies where there are time periods in which the claimant was uninsured or self-insured. Cf. Outboard Marine Corp. v. Liberty Mut. Ins. Co., 283 Ill.App.3d 630, 642, 670 N.E.2d 740 (Ill. App. 2d Dist. 1996) (pro rata required) and Caterpillar, Inc. v. Century Indem. Co., 2011 WL 488935 (Ill. App. 3d Dist. Feb. 1, 2011) (all sums required). 

CHOICE OF LAW

Lloyd’s sold excess insurance policies to Doe Run covering policy years 1952-61.  During this time frame, Doe Run was headquartered in New York City and had mining operations in several states.  Lloyd’s Reply Brief, 2013 WL 1614613, *1.  Doe Run’s broker was located in New York.  Id.  The trial court found that New York law governed.  Choice of law was critical to this case, because New York does not accept the “all sums” approach, instead applying pro rata allocation.  See Mt. McKinley Ins. Co. v. Corning, Inc., No. 602454/02 (N.Y. Supreme Ct. Sept. 7, 2012).

The Court of Appeals reversed on this issue, finding that the six mining sites at issue were located in Missouri, and that this being the “location of the risk,” Missouri law should apply.  This appears to be a strained interpretation of choice of law rules.  At the time the policies were issued, in New York, they covered Doe Run’s world-wide risks, including mining operations located in New York, Pennsylvania, Texas, Montana, Louisiana, Missouri, and foreign countries including Canada, Algeria, Morocco, Argentina, and Peru.  Lloyd’s Reply Brief, 2013 WL 1614613, *1, *25.  Lloyd’s attempted to distinguish these policies from those discussed in Crown Center Redevelopment Corp. v. Occidental Fire & Cas. Co., 716 S.W.2d 348 (Mo. App. W.D. 1986), in which each insured risk site was specifically identified in the policy, because the Doe Run policies did not specifically identify any particular Missouri sites of operations, just Doe Run’s general corporate operations world-wide.  Lloyd’s Reply Brief, 2013 WL 1614613, *25.  We tend to agree with Lloyd’s that the Court’s finding that Missouri had the “most significant relationship” with the policies is strained.

DOE RUN REVERSES EASTERN DISTRICT COURT OF APPEALS’ PRIOR HOLDING ON PRO RATA ALLOCATION

The Doe Run case is notable because it marks the first Missouri case to apply “all sums with stacking,” a doctrine being pioneered in California, as well as being a reversal of this very court’s prior application of pro rata allocation.  See Continental Cas. Co. v. Med. Protective Co., 859 S.W.2d 789, 792 (Mo. App. E.D. 1993) (“Where the loss is caused not by a single event but by a series of cumulative acts or omissions, we believe the fair method of apportioning the loss among consecutive insurers is by application of the ‘exposure theory’ utilized in cases of progressive disease such as asbestosis. . . . Recognizing that words such as ‘bodily injury’ and ‘occurrence’ as used in typical insurance policies covering an accident or common disease, become inherently ambiguous when applied to a cumulative, progressive disease, the court held that proration of the loss among consecutive insurers should be based upon the period each was exposed to potential liability”).  The Doe Run opinion does not reference this decision or explain its departure from the court’s earlier approach.

As the Missouri Supreme Court has not yet ruled on “all sums” versus “pro rata” allocation, the only case law on “all sums” versus pro rata allocation is two conflicting opinions from the same intermediate court of appeals.  There are additional interesting issues presented by Lloyd’s appeal, including the arguments regarding vexatious refusal to pay, particularly in light of the unsettled state of Missouri law on “all sums” versus pro rata and this very court’s prior ruling in support of pro rata allocation.  We expect that Lloyd’s will pursue transfer to the Supreme Court, and will update with any news on that front.

UPDATE: The Missouri Supreme Court denied transfer.

Recent Missouri Western District Appellate Case Restores Prior Law that Authorizes Exclusion of Co-Employee Claims Under Auto Liability Policies

March 13, 2013

Auto liability carriers often field claims by one employee of an insured policyholder against another employee. It has long been the rule in Missouri that one employee is not liable to the other except for intentional conduct or in extraordinary circumstances, which generally precludes coverage for co-employee claims under auto liability policies. The Western District Court of Appeals briefly introduced a wrinkle to this well-established jurisprudence, which appears to have righted itself in the recent case of Hansen v. Ritter, 375 S.W.3d 201 (Mo. App. W.D. 2012).

An employer has a nondelegable duty to provide a reasonably safe work environment for employees. Kelley v. DeKalb Energy Co., 865 S.W.2d 670, 672 (Mo. banc 1993). Because that duty cannot be delegated to individual employees, suits against co-employees for breach of the duty to maintain a safe working environment are generally barred by the workers’ compensation remedy. State ex rel. Taylor v. Wallace, 73 S.W.3d 620, 621 (Mo. banc 2002). The only exception to the workers’ compensation law’s bar on claims against co-employees for injuries that result from an affirmative act by a co-employee that causes injury, beyond mere negligence. Id. at 621-22. (Taylor was subsequently overruled only to the extent of its holding that the workers’ comp bar defense was not waived if not raised at the first opportunity. See McCracken v. Wal-Mart Stores East, LP, 298 S.W.3d 473, 478-79 (Mo. banc 2009)). The contours of the “something more” required to hold one liable to a co-employee are not entirely clear, but the standard has been repeatedly affirmed by the courts. See, e.g., Burns v. Smith, 214 S.W.3d 335 (Mo. 2007). Negligent driving is not “something more.” Taylor, supra.

That is the well-established regulatory scheme everywhere but in the Western District, apparently. In Robinson v. Hooker, 323 S.W.3d 418 (Mo. App. W.D. 2010), the Western District held that the workers’ compensation statute, Mo. Rev. Stat. § 287.010 et seq., did not bar co-employee claims. Robinson v. Hooker found that the workers’ compensation statute was required to be strictly construed following amendments in 2005. Because the statute only expressly refers to “employers,” not “co-employees,” as being entitled to the benefit of the comp bar, the Western District declined to bar co-employee claims. 

Notably, no other appellate district followed the Western District’s lead, and the court has reversed itself in substance, if not expressly, in Hansen v. Ritter, 375 S.W.3d 201 (Mo. App. W.D. 2012). In backtracking from Robinson v. Hooker, the Hansen court observed that “[t]hough Robinson abrogated affording immunity under the Act to co-employees alleged to have breached an employer’s non-delegable duty, Robinson did not comment on the contours of a co-employee's common law liability for the negligent injury of fellow employees in the workplace.”   Id. at 207. The court then returned to the pre-Robinson framework that barred co-employee claims by finding that employers had non-delegable duties to provide a safe workplace at common law, and that most co-employee claims therefore were not cognizable under the common law of Missouri. 

“[T]he pressing question is whether the negligent co-employee is also liable. At early common law, the answer to this question was no. The ‘nondelegable duties are duties of the employer to his employees and not of fellow servants to each other.’”  Hansen, 375 S.W.3d at 210. “[W]e conclude that at common law, a co-employee who has violated an independent duty to an injured employee will be ‘answerable to such person for the consequences of his negligence,’ . . . . However, a co-employee’s independent duties owed to fellow employees do not include the duty to perform the employer’s non-delegable duties.” Id. at 213-14. 

After an extensive attempt to distinguish Robinson from the abundant case law barring co-employee claims under the workers’ compensation act, Hansen ultimately accepted the “something more” test for co-employee liability. Id. at 216. While Hansen goes to great lengths to maintain that Robinson correctly abolished the workers’ compensation bar to co-employee claims, the end result of Hansen is a bar to most co-employee claims under the same standards, using the same terminology, as the pre-Robinson case law. To date, no reported cases cite either Robinson or Hansen. While this has been a confusing episode in the Western District, the end result appears to be no functional alteration to existing law on co-employee claims, and because such claims are not viable under Missouri law, there should be no coverage under auto liability policies unless such policies expressly provide coverage applicable to the circumstances.

Of note to auto liability insurers, the bar on co-employee claims does not create liability under the employer’s uninsured motorist coverage, and this well-established jurisprudence should remain intact following Robinson and Hansen. There are two principal cases that support the denial of UM claims by co-employees, Zink v. Allis, 650 S.W.2d 320 (Mo. App. W.D. 1983) and Seymour v. Lakewood Hills Association, 927 S.W.2d 405 (Mo. App. E.D. 1996).

In each of these cases, the injured employee was a passenger in a company-owned vehicle.  In each case, the auto liability policy held by the employer contained a fellow-employee exclusion clause, excluding claims by an employee for injuries caused due to the actions of another employee, mirroring the workers’ comp bar on such claims. 

In Zink, the plaintiffs were the survivors of an employee killed while a passenger in a company truck driven by another employee.  See 650 S.W.2d at 321. The substance of the plaintiffs’ argument was that, due to a fellow-employee exclusion in the liability policy, the negligent driver was “uninsured” for purposes of determining whether that policy's uninsured motorist coverage was applicable.  Id. at 322.

The Zink court found, based upon policy language, that liability under the uninsured motorist policy was contingent on whether the vehicle in which the decedent was riding was insured, not whether the driver was insured.  650 S.W.2d at 321. Because a liability policy covered the vehicle in question, the plaintiffs could not avail themselves of the uninsured motorist coverage.  Id. at 322–23.

The Zink court then addressed the issue of whether the fellow-employee exclusion within the policy caused that policy to fail to meet the mandatory minimum requirements of the uninsured motorist statute.  The court found that a fellow-employee exclusion is rational, reflecting the different responsibilities owed by an employer to its employees, as opposed to those owed to the general public.  Id. at 323–24.  That exclusion is premised, at least in part, upon the employee’s protection under the workers’ compensation statutes, id., so the continued viability of the longstanding bar on co-employee claims is important to the enforcement of co-employee exclusions in liability policies.  

In Seymour, the plaintiff was an employee injured as a passenger on a trash truck driven by another employee, when that vehicle struck a tree.  The plaintiff claimed against the employer’s uninsured motorist coverage.  The trial court sustained the insurance company’s motion for summary judgment, premised upon the grounds that the uninsured motorist insurance policy contained a “fellow-employee” coverage exclusion.  927 S.W.2d at 407. On appeal, the Eastern District initially followed the approach of Zink, noting that the vehicle was not truly an uninsured motor vehicle, as it was covered by a liability policy. Id.

The Seymour court then made a much broader statement, declaring that “uninsured motorist coverage need not extend to ‘any liability on account of bodily injury or death of an employee of the insured while engaged in the employment, other than domestic, of the insured.’”  Seymour, 927 S.W.2d at 408.  As the exclusion within the policy (a “fellow employee” exclusion) was authorized under § 303.190.5 (Missouri’s financial responsibility law), the court held that the exclusion was not in violation of public policy.  Id. 

Again, the rationale for approving co-employee exclusions in liability policies is substantially derived from what, prior to Robinson, appeared to be well-settled law barring co-employee claims, so Hansen is a puzzling but welcome decision. We suspect that Robinson and Hansen will have no practical impact upon the administration of co-employee claims under auto liability policies. We will, as always, continue to monitor and report upon developments in this area of Missouri law.

Missouri's Equitable Garnishment Practice: Hope for Reversing Course?

March 4, 2013

This is the fourth and final post in our series about Missouri’s equitable garnishment statute. As discussed in our prior posts on this topic, § 379.200 is currently applied in circumstances never intended by the legislature or the early case law, contrary to well-established fundamentals of equity jurisprudence, and with tremendous burdens falling primarily upon auto liability insurers who operate in the state. The courts have gone far afield from the express intent of the statute to allow judgment creditors to resort to equitable garnishment only if garnishment at law is not available, and equitable garnishment proceedings have become absolutely routine in Missouri. Is there any hope of escaping this misguided statutory regime? We think there might be.

As an initial matter, as discussed more fully in the first post on this topic, the circumstances that necessitated an equitable garnishment procedure no longer exist as a result of revisions to the insurance statutes in 1929. To the extent that carriers operating in the state have influence with state legislators, it is worth advocating for repeal of § 379.200, because it is no longer necessary and has been grossly misused and misunderstood for decades. Missouri and Alabama are the only states still utilizing a routine equitable garnishment cause of action for purposes of collecting insurance policy proceeds, and judgment creditors are certainly able to accomplish the same end in every other state without need of this antiquated statute. Other jurisdictions allow equitable garnishment actions under the common law in circumstances truly comporting with the requirements of equity, where there is no adequate remedy at law, which need not change in Missouri.

Appellate review is also key. Surprisingly, we could locate no appellate briefing, let alone reported case law, in which any party has argued that the history of the statute and/or equitable requirements bar virtually all actions for equitable garnishment. As best we can determine, State ex rel. Anderson v. Dinwiddie, 224 S.W.2d 985, 987 (Mo. banc 1949), which held that the predecessor to § 379.200 was not the sole and exclusive means to garnish insurance policy proceeds, has never been cited on appeal.   Lajoie v. Central West Cas. Co., 71 S.W.2d 803, 812 (Mo. App. 1934), which held that the purpose of the equitable garnishment statute was “only to furnish some adequate remedy where the remedy at law was inadequate or did not exist, so that, by the two, the entire field would be covered,” has likewise never been cited.   The same is true for other cases cited in our previous posts. These remain good law, but “lost” in the sense that they have not been presented on appeal. This statute has long been so poorly understood by practitioners and by the courts that there appears to be an opportunity to educate the courts regarding its real purpose and history.

Litigants must argue at every opportunity that the availability of an adequate remedy at law deprives the court of subject matter jurisdiction over equitable garnishment claims. Lack of subject matter jurisdiction is never waived, and may be raised by any party at any time whenever it appears that the court lacks jurisdiction of the matter. We would like to see more carriers filing routine motions to dismiss in response to equitable garnishment actions, and following up on these issues on appeal.

Moreover, Missouri has available a process for interlocutory appeal that could be well-suited to obtaining review of the equitable garnishment statute. A writ of prohibition restrains a judge from acting in excess of his or her jurisdiction, and is filed with the court of appeals in the district in which the circuit court is located. In our experience, writs arising out of denials of dispositive motions are particularly well-suited for review on a writ of prohibition. Initially, the process is less formal than an appeal, and is governed by Rules 84.24 and 97.03. The writ petition is accompanied by suggestions in support and a writ summary, but no special binders, record on appeal, or other formalities are required. 

There is no deadline to file a writ petition following the interlocutory ruling to be challenged, though it is customary to do so within thirty days. Each appellate division has a writ panel that serves, in rotation, for 3-4 weeks at a time, comprised of one judge designated as the presiding judge and one additional judge. If a writ petition is granted, a third judge is added, to compose the panel. The Eastern District has a “writ attorney” who can assist in answering questions about the process, and the Western District’s staff attorneys are also quite helpful. 

Rulings on writ petitions can come down very quickly, often within two weeks. The initial ruling is as to whether there appears to be merit to the writ petition. If the preliminary writ is granted, a full appellate briefing schedule is commenced, with the party supporting the ruling acting on behalf of the court in defending the ruling. Denials of preliminary writs are not reported, and do not prejudice the ability to present the same issues on appeal after entry of judgment. If the Court of Appeals denies a writ petition, it is possible to file directly with the Missouri Supreme Court, under the same procedure.

Ultimately, it is unclear if the Missouri appellate courts would be receptive to the arguments against the routine use of the equitable garnishment action presented in this series. The unusual “lost years” history of the courts’ and practitioners’ misunderstanding of this statute, coupled with the fact that each of the early cases cited in this series remains good law, seem to present a promising opportunity to educate the courts and obtain relief from this antiquated statute.  We look forward to seeing an insurer present these issues on appeal. 

The Burdens Imposed by Missouri Equitable Garnishment Practice

January 7, 2013

Aside from the technical and traditional objections to allowing a proceeding in equity where garnishment at law is appropriate, Missouri’s equitable garnishment statute imposes a number of burdens upon insurers and insureds alike. As discussed in our prior posts on this topic, the current state of practice with respect to Missouri’s equitable garnishment statute is inconsistent with both the legislative intent and the early history of opinions construing the statute, and today we will explore some of the unnecessary harm that results from more recent jurisprudence.

There Is No Right to Recover Attorneys’ Fees for Wrongful Equitable Garnishment

A garnishee is entitled to recover costs and attorneys’ fees associated with an unsuccessful garnishment at law. Mo. Rev. Stat. § 525.240; Rule 90.18. An equitable garnishment action, however, does not provide for the payment of attorneys’ fees to the prevailing garnishee. Johnston v. Sweany, 68 S.W.3d 398, 404 (Mo. banc 2002). Because an equitable garnishment does not provide for the recovery of attorneys’ fees to the wrongfully-garnished insurer, plaintiffs prefer this method for reaching insurance policy proceeds, particularly in cases of doubtful coverage. Indeed, the Johnston v. Sweany court notes that the avoidance of legal fees for wrongful garnishment is an “advantage” to the equitable proceeding.

It is difficult to read Johnston v. Sweany as accomplishing any purpose other than to treat insurers differently from all other contracting parties, and to expose them to non-compensable expenses, including attorneys’ fees, alone of all garnishees. The legislative history of § 379.200 does not express this policy, and there is no evidence that the current practice is what the Missouri legislature intended when it enacted § 379.200.

Joinder of the Insured Burdens the Insured and Tends to Thwart Federal Removal

Section 379.200 also allows the joinder of the insured. There is no apparent reason for this in an action to recover the proceeds of a legally enforceable policy, because the equitable garnishment statute only allows the judgment creditor to collect from the insurer those sums that are due under the policy, and provides for no other form of recovery against the insured. Mazdra v. Selective Ins. Co., 398 S.W.2d 841, 845-46 (Mo. 1966). The insured’s rights cannot be affected by an equitable garnishment action.   

As discussed in our first post on this topic, joinder of the insured in an equitable garnishment may have been sensible in the early days of the 20th century, when an insured and insurer could conspire to cancel an auto liability policy, or “settle” disputed questions of coverage under the policy, thereby rendering the policy unenforceable at law after the accident. The insured may have engaged in wrongful conduct that should be considered by the court in equity. Because Section 379.195 now fixes an insurer’s liability at the time of the accident, however, the conduct of the insured subsequent to the accident is irrelevant. Requiring the insured to “defend” a garnishment action simply exposes the insured to unreimbursed legal expenses.

The presence of the insured in the equitable garnishment action also frustrates removal to federal court. The Eighth Circuit has held that garnishments at law are removable. Randolph v. Employers Mutual Liability Ins. Co. of Wisconsin, 260 F.2d 461, 464-65 (8th Cir. 1958) (as a matter of federal law, garnishment is a separate proceeding for removal purposes); Hayes v. Pharmacists Mut. Ins. Co., 276 F. Supp. 2d 985, 987 (W.D. Mo. 2003). Despite arguments that the insured (from whom no relief can be obtained in the equitable garnishment proceeding) is, at best, a nominal party, or should be realigned with the judgment creditor, the federal courts have proven hostile to attempts to remove equitable garnishment actions where the insured shares citizenship with the judgment creditor (which is usually the case). See, e.g., Prendergast v. Alliance General Ins. Co., 921 F. Supp. 653, 655 (E.D. Mo. 1996). There is no practical reason why a garnishment at law should be removable to the federal court and an equitable garnishment should not, given that exactly the same relief is afforded under either cause of action (namely, payment of the insurance policy proceeds).

Joinder of the Insured Encourages the Filing of Bad Faith Claims

The equitable garnishment action also may become a vehicle for the insured’s assertion of a bad faith refusal to settle cross-claim against the insurer. In addition to inviting the filing of such a claim by the insured, the equitable garnishment proceeding allows the judgment creditor’s attorney to drive the litigation of the bad faith claim. 

The judgment creditor and his or her attorney, both of whom may well be material fact witnesses with respect to the insured’s bad faith claim, are active participants in discovery. This presents a significant potential for prejudice to the insurer, in that there is no ordinary provision for “sequestering” counsel or parties in a case with multiple claims such that these potential witnesses do not have access to other witnesses’ testimony. The judgment creditor’s attorney is a witness with personal knowledge of the facts underlying the bad faith cross-claim, and should be expected to be deposed and testify with respect to the cross-claim. While we have had success severing bad faith claims from equitable garnishment claims for these reasons, this is an additional expense that the insurer bears solely by virtue of this proceeding in equity rather than at law.

Discovery in an Equitable Garnishment Proceeding is Considerably Broader

Equitable garnishment actions are not subject to the same limited discovery imposed on garnishments at law.  Many Missouri circuit courts have established mandatory standard interrogatories for garnishments at law. Moreover, with exposure to payment of attorneys’ fees for wrongful garnishment, judgment creditors pursuing garnishment at law tend to be more circumspect in their discovery requests.

There is no such limitation on discovery in an equitable garnishment proceeding. Insurers face, in many cases, years of seemingly endless discovery regarding everything from the insurer’s claims-handling practices to the wording of every automobile policy in every state in the nation. Missouri’s liberal discovery rules permit a party discovery not only with respect to the claims or defenses of the party seeking discovery, but also into “the claim or defense of any other party.” Rule 56.01(b)(1). Particularly where joined with a bad faith claim, the judgment creditor may drive expansive discovery into matters with no bearing upon his or her equitable garnishment action, including discovery into the insurer’s claims file, its investigation of the accident, and its relationship with its insureds. The insurer is prejudiced by being required to disclose its confidential, proprietary, and trade secret business information to a party with no need to discover such information.

As practitioners can attest, unrestrained discovery often comprises the bulk of a party’s expenditures in litigation. Where an insurance policy is typically construed as a matter of law by the court, the protracted discovery permitted in equitable garnishment actions is especially pernicious.

Hope for Reversing Course on Equitable Garnishment

The current state of jurisprudence on equitable garnishment is inconsistent with the legislative history of the statute and with early, and still relevant, precedent construing the purposes and limits of the remedy. In our next post, we will examine strategies for the insurer to reverse this course.

What happened to the "equity" component of Missouri's equitable garnishment statute?

December 21, 2012

Equity is a jurisprudential concept brought to America by the English colonists, and traces its roots and defining principles back centuries to the time when the King or Queen of England ruled over the courts at law, and the church administered justice in equity. The fundamental premise of equity is that an equitable remedy will not be available if the plaintiff has a cause of action at law. See Glueck Realty Company v. City of St. Louis, 318S.W.2d 206, 211 (Mo. 1958). Equitable relief is extraordinary and should not be afforded when a legal remedy exists. Umphres v. J.R. Mayer Enterprises, Inc., 889 S.W.2d 86 (Mo. App. E.D. 1994). 

As discussed in our prior post on Missouri’s equitable garnishment statute there has been a curious “lost years” period in which the Missouri courts have been seemingly unaware of early and still-good law regarding the purposes and limitations of the equitable garnishment remedy. Early Missouri courts found that “[a] remedy in equity is never available except when there is no adequate legal remedy, and it was the purpose of [§379.200] to furnish such remedy only when there is no adequate legal remedy….If execution can be satisfied by garnishment or otherwise, the equitable procedure is not available.” Lajoie v. Central West Casualty. Co., 71 S.W.2d 803, 812 (Mo. App. K.C. 1934) (emphasis added). 

The purpose of the equitable garnishment statute is “only to furnish some adequate remedy where the remedy at law was inadequate or did not exist, so that, by the two, the entire field would be covered.” Lajoie, 71 S.W.2d at 813. The equitable garnishment remedy was never intended to be a remedy of first resort. Id. Unlike garnishment at law, which can be obtained immediately following entry of judgment, there is a 30-day waiting period for equitable garnishment, during which time the judgment creditor is supposed to be pursuing garnishment at law. Id. at 812-13. Garnishment at law pre-existed the equitable garnishment remedy.

“[T]here can be no doubt but that the remedy of ‘equitable garnishment’ is a long recognized part of the equity jurisprudence of this state, and that it serves to fill that void created when the normal processes of law are found to be inadequate.” Linder v. Hawkeye-Security Ins. Co., 472 S.W.2d 412, 414 (Mo. banc 1971) (emphasis added). Early courts found that equitable garnishment “was not designed to become operative so long as the fund might be reached by execution and garnishment” or “otherwise satisfied at law.” Lajoie, 71 S.W.2d at 812.

The remedy afforded by Section 379.200 is in the nature of a “creditors’ bill” at equity. Schott v. Continental Auto Ins. Underwriters, 31 S.W.2d 7, 12 (Mo. 1930Dinwiddie, 224 S.W.2d at 987; Lajoie, 71 S.W.2d at 812. A creditors’ bill permits a party to enforce the payment of debts out of equitable assets which cannot be reached by execution at law. Publicity Bldg. Realty Corp. v. Thomann, 183 S.W.2d 69, 72 (Mo. 1944). The legislature intended that equitable garnishment be available under the same circumstances as the creditor’s bill – only when funds could not be reached through garnishment. Lajoie, 71 S.W.2d at 812. Equitable garnishment “becomes operative only when the insurance policy proceeds cannot be reached by execution and garnishment or otherwise satisfied at law.” Id. If garnishment will reach the insurance policy proceeds, equitable garnishment is not available. Id.

Garnishment at Law is an Adequate Remedy

Judgment creditors seeking to garnish an insurance policy have a legal remedy available to them – garnishment at law under Chapter 525. Johnston v. Sweany, 68 S.W.3d 398, 404 (Mo. banc 2002). “[W]hen a plaintiff has a full, complete, and adequate remedy at law, he cannot invoke the jurisdiction of a court of equity to obtain the same relief he could get at law.” Strong v. Crancer, 76 S.W.2d 383, 385 (Mo. 1934). 

Even where a plaintiff brings a statutory equitable action, the court’s equity jurisdiction “hinges upon whether the petition, seeking equitable relief, affirmatively shows by the statement of facts, that plaintiff’s law remedy was inadequate.” Collins v. Shive,  261 S.W.2d 58, 60 (Mo. banc 1953). Allegations and proof of inadequacy of plaintiff’s legal remedy are jurisdictional.

An equitable garnishment action only permits a judgment creditor to obtain the insurance money as provided by the terms of the policy language. Linder v. Hawkeye-Security Ins. Co., 472 S.W.2d 412, 415 (Mo. 1971); Mo. Rev. Stat. § 379.200. No other equitable relief may be afforded in a § 379.200 action – it is solely limited to awarding the insurance policy proceeds. A court may not, in an equitable garnishment action, award “extra-contractual” sums not provided for by the insurance policy. Linder, 472 S.W.2d at 415. 

Since garnishment at law is inadequate only if it does not permit the judgment creditor to enforce the policy and collect the policy proceeds, and garnishment at law provides for precisely the same remedy, it is difficult to imagine circumstances in which garnishment at law would be inadequate. See State ex rel. Anderson v. Dinwiddie, 224 S.W.2d 985, 987 (Mo. banc 1949); Lajoie, 71 S.W.2d at 812. Not one of the reported cases of equitable garnishment since the 1930s has involved any of the “mischief” designed to be addressed by Mo. Rev. Stat. § 379.200 or any factual circumstances in which garnishment at law would not have been an adequate remedy at law. Missouri courts have, nevertheless, routinely permitted judgment creditors to bring equitable garnishment claims without even the barest allegation that the garnishor lacks an adequate remedy at law, much less factual allegations specifying how and why garnishment at law could possibly be inadequate under modern insurance laws.

Missouri state and federal courts continue to allow plaintiffs to bring equitable garnishment claims against insurers to this very day, in complete disregard of the bedrock principles of equity jurisdiction. In our next post on this topic, we will explore some of the burdens imposed upon insurers and insureds by the current state of Missouri law on equitable garnishment.

Raiders of the Obsolete Statute: Equitable Garnishment in Missouri

December 10, 2012

Imagine the intrepid archaeologist who reaches through a century’s worth of cobwebs to grab a long-sought relic, only to be chased from the temple by a rolling stone ball of doom. You will have some appreciation for the absurdity of Missouri’s equitable garnishment action, a curious relic of an era that predates modern insurance law, and which is fraught with peril for insurers.

Missouri’s equitable garnishment statute became obsolete shortly after its passage. It does not join the list of humorous obsolete statutes like the one that makes it illegal to transport a wild bear down the highway, however. Plaintiffs continue to file equitable garnishment actions, and in a future post we will consider the many ways in which this proceeding bedevils insurers.

Mo. Rev. Stat. § 379.200 was enacted in 1925, in substantially the same form as it exists today. It provides:

Upon recovery of a final judgment against any person…for loss or damage on account of bodily injury or death…if the defendant in such action was insured against said loss or damage at the time when the right of action arose, the judgment creditor shall be entitled to have the insurance money, provided for in the contract of insurance…applied to the satisfaction of the judgment, and if the judgment is not satisfied within thirty days after the date when it is rendered, the judgment creditor may proceed in equity against the defendant and the insurance company to reach and apply the insurance money to the satisfaction of the judgment.

Equitable garnishment did have a purpose when first codified. One can only garnish a contract (at law) if the contract exists and is enforceable at the time of garnishment. Linder v. Hawkeye-Security Ins. Co., 472 S.W.2d 412, 415 (Mo. 1971). In the early days of automobiles and auto liability policies, it was not unusual for “craftily worded” insurance policies and collusive recession of policies to preclude garnishment at law. See Schott v. Continental Auto Ins. Underwriters, 31 S.W.2d 7, 11-12 (Mo. 1930). For example, policies would be worded so as to pay only after the insured paid the judgment (precluding garnishment in the event of an insolvent insured), or, after an accident, the insurer would cancel the policy, leaving nothing for the judgment creditor to garnish. See id. 

Early auto insurance policies often provided that only the insured, and not the injured party, could sue the insurer to recover sums due under the policy (so-called “no action” clauses). See Schott, 31 S.W.2d at 11.   Policies often also provided that they were payable only following trial on the issues of liability and damages, and that the policy would not be payable upon settlement or entry of a consent judgment. Id.

Only four years after passing the original form of Section 379.200, however, Missouri passed comprehensive insurance laws, including what is now Section 379.195, which fixes the insurer’s liability at the time of the accident, regardless of whether the policy remains in force or whether the insured pays anything toward a judgment. The problem for which 379.200 was enacted was fixed. And yet equitable garnishment lives on.

One of the many absurdities associated with the equitable garnishment action is the “lost years” period in which courts ruled that equitable garnishment was the only way to collect on an insurance policy, seemingly unaware of early and still good Missouri law interpreting Section 379.200 and the effect of Section 379.195. Missouri’s equitable garnishment jurisprudence was long mired in an inexplicable series of mistaken opinions that concluded that the equitable garnishment statute provided the sole and exclusive means for a judgment creditor to obtain insurance policy proceeds. See, e.g., Zink v. Employers Mutual Liability Ins. Co. of Wisconsin, 724 S.W.2d 561, 564 (Mo. App. W.D. 1986) (holding that § 379.200 is the judgment creditor’s sole remedy against the insurer, precluding a garnishment action under Chapter 525); accord Wood v. Metropolitan Property & Casualty, 10 S.W.3d 571, 573 (Mo. App. 2000).

The federal courts relied on these cases to conclude that insurance policies, alone of all contracts, could not be garnished under Missouri law, but could only be collected via the equitable garnishment remedy. See Glover v. State Farm Fire and Cas. Co., 984 F.2d 259, 260 (8th Cir. 1993); overruled by implication by Johnston v. Sweany, 68 S.W.3d 398, 404 (Mo. banc 2002).  

For decades, early decisions of the Missouri Supreme Court and courts of appeals that construed the equitable garnishment statute appear to have been lost; entirely overlooked were their holdings that garnishment at law is always an appropriate means by which a judgment creditor may collect on an insurance policy and that equitable garnishment is a procedure of last resort when garnishment at law has failed. The Missouri Supreme Court had expressly held that the predecessor to § 379.200 was not the sole and exclusive means to garnish insurance policy proceeds. See State ex rel. Anderson v. Dinwiddie, 224 S.W.2d 985, 987 (Mo. banc 1949). The remedy afforded by Section 379.200 “did not operate to exclude the existing legal right by execution and garnishment” at law. Lajoie v. Central West Cas. Co., 71 S.W.2d 803, 812 (Mo. App. 1934). “The act does not require that the judgment creditor shall proceed in equity or not at all.” Id. at 813. The equitable garnishment statute did not supplant existing legal remedies to reach insurance policy proceeds; “[i]t was its purpose only to furnish some adequate remedy where the remedy at law was inadequate or did not exist, so that, by the two, the entire field would be covered.” Id. 

These cases (which remain good law) were apparently overlooked for decades. It was not until 2002 that the Missouri Supreme Court resolved the confusion of the “lost years” by holding that an insurance policy is a contract and garnishment at law is, of course, available to a judgment creditor seeking liability insurance proceeds. See Johnston v. Sweany, 68 S.W.3d 398, 404 (Mo. banc 2002). Many misconceptions and misapplications of the equitable garnishment law remain, however. In our next post on the equitable garnishment action, we will examine the lost understanding of the “equitable” requirement for the invocation of this remedy. 

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The BSCR Insurance Blog examines topics and developments of interest to insurance carriers, with a particular focus on Missouri and Kansas law. Learn more about the editor, Angela M. Higgins, and our Insurance practice.

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