Insured With No Risk of Personal Loss May Not Enter Into Assignment of Case Against Insurer
Minnesota allows an insurer to protect its insured – when coverage is in dispute – from a judgment excess of its policy limits. It also allows an insured – when coverage is in dispute – to make a deal with the plaintiff if not protected by the insurer to assign the insured’s right to sue the plaintiff for bad faith. The two types of agreement are contradictory and an insured may only be protected by one.
In American Family Mut. Ins. Co. v. Donaldson, United States Court of Appeals, Eighth Circuit, — F.3d —-, 2016 WL 1639159 the insured, protected by the first agreement also entered into a second agreement allowing the plaintiff to sue the insurer for an excess verdict obtained from an arbitrator.
American Family Mutual Insurance Company (American Family) brought this declaratory judgment action to determine whether an umbrella insurance policy it issued to Todd Patton provided any coverage for an automobile accident in which a passenger in a vehicle driven by Todd’s son, Jacob Patton, was seriously injured.
In April 2011, Jacob Patton obtained his driver’s license. He was eighteen years old at the time. About one week later, Jacob decided to drive his father’s Chevrolet minivan after he had been drinking. Jacob’s friend, John Donaldson, was a passenger in the vehicle. A pedestrian observed Jacob driving erratically and called 911. When a police officer responded to the 911 call, saw the vehicle and turned on his siren, Jacob panicked and tried to flee. Shortly thereafter, but not before reaching speeds exceeding at least sixty miles per hour, Jacob lost control of the minivan and collided into a tree. Donaldson suffered serious injuries in the accident and was hospitalized for almost a month following multiple surgeries. Jacob was also taken to the hospital and had his blood drawn for analysis, which revealed a blood alcohol concentration of .20.
At the time of the accident, American Family insured the Pattons’ vehicle under an automobile policy providing $100,000 in coverage. Jacob’s father, Todd, had also purchased an umbrella policy from American Family with policy limits of $1,000,000.
THE SETTLEMENT AGREEMENTS
Within just months of the accident, American Family negotiated the terms of a Drake–Ryan settlement with Donaldson in which American Family agreed the automobile policy provided primary coverage to Donaldson for the injuries arising out of the accident and further agreed to pay the full policy limits of the automobile policy. American Family did not, however, agree that its umbrella policy provided coverage but left Donaldson free to pursue a claim against the excess policy. Significantly, a Drake–Ryan settlement protects an insured defendant from any further personal liability, except to the extent a plaintiff may successfully pursue a claim against the policy limits of an excess carrier. The settlement in this case specifically provided that, by accepting the full policy limits of the automobile policy and preserving the right to pursue coverage under the umbrella policy, Donaldson would “refrain from collecting or attempting to collect any unsatisfied portion of such judgments from the personal assets of Todd Patton and Jacob Patton.”
In response to the declaratory judgment action, the Pattons obtained a new attorney in the state district court action. The new attorney then entered into a Miller–Shugart settlement with Donaldson which admitted liability and provided for a binding arbitration to set the amount of damages. The arbitrator ultimately set the amount of damages at $1,250,000. The arbitration award was filed with the state district court, and a final judgment was entered pursuant to the award.
In this separate declaratory judgment action, American Family filed a motion for summary judgment primarily contending that Jacob Patton’s conduct at the time of the accident fell within the umbrella policy’s intentional act exclusion. Jacob Patton was convicted of felony criminal vehicular operation of a motor vehicle as a result of his conduct in the accident which injured Donaldson.
Donaldson asserted the umbrella policy’s severability clause triggered separate coverage for Todd Patton even assuming one or both of the contested exclusions for intentional acts and violations of law might bar coverage for Jacob Patton. Thus, severability demands that policy exclusions be construed only with reference to the particular insured seeking coverage.
The district court rejected the Pattons’ argument regarding the severability clause and again granted summary judgment to American Family, concluding the violation-of-law exclusion also barred coverage as to both Jacob and his father, Todd.
Although the parties and the district court devote most of their attention to the umbrella policy’s exclusions, with Donaldson also emphasizing the policy’s severability clause. The Eighth Circuit believed it was prudent to first address the more fundamental question whether the Pattons violated the policy’s cooperation clause since, if they did, the other issues would become moot.
American Family argues the Pattons violated the policy’s cooperation clause by entering into a Miller–Shugart settlement after American Family had already protected them from any personal liability in the Drake–Ryan settlement. No Minnesota court appears to have addressed the propriety of an insured entering into a Miller–Shugart settlement after already enjoying full protection from personal liability under a Drake–Ryan settlement because of the transparent incongruity of doing so.
Under Minnesota law, the only reason for permitting an insured to compromise an insurer’s ability to contest liability by entering into a Miller–Shugart agreement is to avoid the potential of the insured’s personal exposure where the insurance company has denied the existence of coverage for an underlying claim. Stated differently, the only time an insured is permitted to disregard the obligation to cooperate with the insurer is when there is a risk of personal exposure for the entire amount of any damage award due to the insurer’s denial of the existence of coverage.
Minnesota cases have explained the balancing of an insured’s duty to cooperate with an insurer’s duty to defend and indemnify, focusing on the insured’s potential personal exposure as a primary reason he may ignore his reciprocal duty to cooperate by entering into a Miller–Shugart agreement during periods when coverage is in doubt.
In this case, American Family admitted the existence of coverage as the primary carrier on the automobile policy, but denied coverage as the excess carrier under the umbrella policy. There is no need to resolve that complication. The Pattons did not risk liability for the entire amount of any damage award when they entered the Miller–Shugart settlement because American Family had already provided them full protection from personal liability under the earlier Drake–Ryan settlement.
The Eighth Circuit agreed with American Family that the breach of the cooperation clause was material and prejudicial under the circumstances of this case. First, the breach here was material since the Miller–Shugart settlement foreclosed the possibility of a later settlement in which the insurer could participate. Second, the breach was prejudicial because it compromised the rights American Family enjoyed prior to the settlement to contest liability and the amount of damages.
The Pattons agreed to an entry of judgment against Todd and Jacob jointly and severally, making no allowance for the possibility that Todd may not be negligent or that Donaldson’s comparative fault may reduce part of the judgment, robbing American Family of an attempt to raise legitimate defenses to liability claims.
The Eighth Circuit Court of Appeals concluded that the Pattons breached the umbrella policy’s cooperation clause by entering into a Miller–Shugart agreement after already being protected from personal liability in the Drake–Ryan settlement, and that such breach was material and prejudicial.
It was therefore unnecessary to address the other coverage issues raised by the parties in this appeal.
This case is a perfect example of how an insured can breach the covenant of good faith and fair dealing by working with a plaintiff to gain damages, including bad faith tort damages, when the insurer had fully protected its insureds. Fortunately, for the insureds, the insurer may not sue them for bad faith tort damages although they clearly forced their insurer, improperly into litigation that was unnecessary and also attempted to eliminate the rights to defend the action.
Barry Zalma, Esq., CFE, practiced law in California for more than 49 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.
He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.
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