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Missouri Supreme Court Expands Insurers' Right to Intervene in Tort Actions

19 Mar 2025

ABSTRACT: Shortly before the end of 2024, the Missouri Supreme Court issued a significant ruling, changing the landscape surrounding Missouri insurers’ rights and abilities to intervene in an underlying action under Missouri Rule of Civil Procedure 52.12(a)(2).

Background on McCrackin v. Mullen

In Jeromy McCrackin v. Tynan Mullen, et al., the Supreme Court was tasked with determining whether a circuit court wrongfully overruled Safeco Insurance Company of America’s (“Safeco”) motion to intervene in a wrongful death action for the limited purpose of seeking to stay the wrongful death action until a separate declaratory judgment action filed in federal court could be resolved. McCrackin v. Mullen, et al., No. SC100578, 701 S.W.3d 868 (Mo. banc 2024).

In the circuit court matter, Jeromy McCrackin (“McCrackin”) filed a wrongful death action against Tynan Mullen (“Mullen”) for the death of McCrackin’s son, who was shot and killed by Mullen and several others outside a pool hall in 2019. Although Mullen never requested that Safeco defend him in the wrongful death action, McCrackin sent several letters to Safeco, identifying Mullen as an insured under a homeowners policy issued to Mullen’s grandmother and requesting that Safeco settle the wrongful death claim against Mullen in exchange for payment of the liability limits.

Safeco declined McCrackin’s demands pursuant to an intentional act exclusion in the homeowners policy and filed a declaratory judgment action in federal court, seeking a declaration that Safeco’s policy did not cover McCrackin’s claims against Mullen. After Mullen and McCrackin moved to stay the declaratory judgment action until Mullen’s criminal case reached its conclusion, Safeco moved to intervene in the wrongful death action as a matter of right “for the limited purpose of staying the proceedings in [the] action until final resolution of its declaratory judgment action.”

The circuit court denied Safeco’s Motion to Intervene, and the wrongful death action proceeded to a bench trial resulting in a $16.5 million judgment against Mullen. Safeco appealed the circuit court’s denial of its Motion to Intervene.

Missouri Supreme Court’s Ruling

Although Missouri’s appellate courts have previously confirmed an insurer’s right to intervene for the sole purpose of seeking a stay while coverage is litigated in a separate declaratory judgment action, McCrackin is the first time the Missouri Supreme Court weighed in directly on this issue. In McCrackin, the Supreme Court held that Rule 52.12(a) “should be construed liberally to permit broad intervention” as “insurers situated like Safeco have an interest in protecting their right to defend the underlying tort action pursuant to Rule 52.12(a)(2), which creates the right to intervene for the limited purpose of seeking a stay in the tort action while coverage questions are litigated in a separate declaratory judgment action.” Id. at 876. Furthermore, McCrackin held that to the extent other cases suggest an insurer does not have a right to intervene for the sole purpose of seeking a stay so that coverage can be litigated in a separate declaratory judgment action, “such cases should no longer be followed.” Id. at 876, fn. 10.

Implications for Insurers

Although the Court recognized that it is unsuitable for an insurer to “have its cake and eat it too by both refusing coverage and at the same time continuing to control the terms of settlement in defense of an action it had refused to defend,” this was not what Safeco sought. Id. at 876. Rather, the Supreme Court concluded that Safeco’s conduct was appropriate as “disposition of the tort action may, as a practical matter, impair or impede Safeco's ability to protect its interest because, if the tort action concludes prior to the declaratory judgment action, there is no longer a tort action to defend, even if the federal court determines Safeco had a duty to defend.” Id.

When faced with a coverage question, insurers should protect their interests and ensure they have an opportunity to control and manage the underlying litigation. Missouri insurers can and should lean on the intervention and stay procedure addressed in McCrackin. Given the disposition of the Missouri Supreme Court, it is clear that “[i]nsurers with good faith coverage questions should file a declaratory judgment action simultaneous with the underlying tort action and seek a stay of the tort action until the declaratory judgment action is resolved.” Id.

No Bad Faith Found where Carrier Promptly Offered Policy Limits and Subsequent Demands Were Not Sufficiently Definite

29 Jan 2025

ABSTRACT: The Missouri Court of Appeals affirmed summary judgment for the insurer, ruling no bad faith where the carrier promptly offered policy limits. The claimant's subsequent demands for a 537.065 agreement were not sufficiently definite to constitute a “reasonable opportunity to settle.”

On December 3, 2024, the Missouri Court of Appeals, Western District affirmed the trial court’s order granting summary judgment in favor of insurance carrier and against insured who was suing for bad faith failure to settle.

Within a few weeks of receiving notice of the claim, the carrier had offered policy limits to counsel for the injured party. Rather than accepting the offer, the claimant’s attorneys made numerous requests for information and suggested that the settlement would need to include a 537.065 agreement.

Several months later, counsel for the claimant indicated they would settle the case for policy limits, but only if the insured entered into a 537.065 agreement. In the same correspondence, counsel for the claimant requested that the carrier provide a copy of the release it was proposing. The carrier responded with a release that included the carrier as a released party.

In the bad faith lawsuit, counsel for the insured argued this constituted a rejection of the claimant’s offer to settle within policy limits, and that it was evidence of the carrier’s failure to protect the interests of its insured.

The court of appeals disagreed. Instead, it found that the claimant’s demand for a settlement that included a 573.065 agreement was not sufficiently definite because claimant’s counsel never provided a proposed version of the agreement. As a result, and in view of the fact that the carrier had offered its policy limits on numerous occasions, the court found that the carrier did not act in bad faith. Instead, according to the court, claimant’s attorneys “simply refused [the carrier’s] attempts to pay its policy limits to release [the insured].”

The takeaway from this decision is that Missouri courts will not find an insurer liable for bad faith where there is a documented history of the carrier’s attempts to settle the case for the policy limits, and where plaintiff’s counsel conditions the settlement on terms that are not sufficiently clear to constitute a reasonable opportunity to settle.

Bryan Roy Escabusa v. Safe Auto Insurance Company, 2024 Mo. App. LEXIS 876, WL4940663 (Motion for rehearing/transfer pending.)

Hard Stop: 8th Circuit Upholds Finding Car Sex Related Injury Not Covered Under Driver's Insurance Policy.

27 Aug 2024

ABSTRACT: The 8th Circuit Court of Appeals recently upheld a US District Court for the Western District of Missouri’s decision denying coverage for bodily injuries stemming from HPV transmitted during sexual activity in an insured vehicle.

On August 2, 2024, the 8th Circuit Court of Appeals, in a highly anticipated decision upheld a US District Court for the Western District of Missouri’s decision denying coverage for bodily injuries stemming from HPV transmitted during sexual activity in an insured vehicle.

The Plaintiff was a Missouri woman identified in court documents as M.O., who claimed she had unprotected sex with her partner in his insured vehicle at least once in late 2017. According to records, M.O. claimed her partner was aware he had the human papillomavirus (HPV) but neglected to warn her or to take precautions to prevent her contracting the STD.

In February 2021, M.O. filed a $1,000,000 claim against GEICO Insurance for injuries stemming from HPV related complications. She argued the language of the GEICO policy was so broadly worded that her injuries fell under the bodily injury provisions. Under Kansas law, where the policy was issued, ambiguities in policy language are to be constructed most favorably to the insured. Nevertheless, GEICO denied the claim.

Meanwhile, in March 2021, M.O. and the insured agreed to arbitration and entered into a Contract to Limit Recovery to Specified Assets and Arbitration Agreement Pursuant to Section 537.065 RSMo, also known as an “065 Agreement.” M.O. was awarded $5,200,000 by a Missouri arbitrator who found the policy holder acted negligently. M.O. filed an application to confirm the arbitration in Missouri state court and GEICO sought to intervene but was denied.

The trial court granted M.O.’s motion to confirm and GEICO appealed. In 2023, the Missouri Supreme Court found GEICO had a right to intervene before judgment pursuant to the 065 Agreement and ruled unanimously to vacate the award and remand the case. At that time, the case gained widespread notoriety for the unique and salacious nature of the claim and unusually high award at issue.

Following the denial of M.O.’s $1,00,000 claim, GEICO filed a declaratory judgment action in the U.S. District Court of Kansas. After the case was transferred to the Western District of Missouri, GEICO filed for summary judgment. The District Court granted GEICO’s motion finding the policy required injuries to arise out of the “use” of the automobile and that sexual activity was not “using” the automobile under Kansas insurance law.

M.O. appealed that decision and the 8th Circuit Court of Appeals heard oral arguments on the case in June of this year. GEICO argued the policy should only apply when using the auto for vehicular purposes, and that even if it were foreseeable that people may have sex in a car it did not mean such use is an appropriate use that should be covered by insurance. GEICO further argued an award to M.O. under the policy would transform an automobile policy into a general liability policy without restriction.

The 8th Circuit agreed with GEICO finding no causal relationship between the injury and the use of the vehicle under the policy. In its August 2 Order upholding the grant of summary judgment for GEICO, the 8th Circuit stated:

No causal relationship exists between [the insured] and M.O.'s decision to shelter in an automobile for a sexual encounter as opposed to choosing to shelter in a house, or not shelter at all […] Thus, it cannot be said that [the insured’s] negligent transmission of HPV to M.O. arose out of the use of the automobile.

The 8th Circuit also rejected M.O.’s argument that the policy language should be interpreted in her favor, stating: “under Kansas law, we "determin[e] the intention of the parties to an insurance policy" by considering "what a reasonable person in the position of the insured would understand [the policy] to mean." The Court found, that as written, the policy did not present an ambiguity and that a reasonable person in the position of the insured “would not believe that his automobile insurance covers any bodily injury for which he becomes liable.” As such, the Court upheld the District Court’s decision in rejecting coverage and granting summary judgment in favor of the insurer, GEICO.

Assault and Battery Exception in Insurance Contract Applies Even When Plaintiff Was Not The Intended Target, Eighth Circuit Finds

17 Oct 2023

ABSTRACT: In a premises liability case involving allegations of negligence and assault and battery, an insurance company whose policy has an assault and battery exception need not defend an insured, so long as the assault and battery is within a narrow scope of foreseeable harms arising from the negligence.

Insurance policies often contain exclusionary clauses that limit the scope of coverage arising from certain types of incidents. In some cases, the “concurrent-proximate-cause” rule applies, which states that “an insurance policy will be construed to provide coverage where an injury was proximately caused by two events—even if one of these events was subject to an exclusion clause—if the differing allegations of causation are independent and distinct.” Taylor v. Bar Plan Mut. Ins. Co., 457 S.W.3d 340, 347 (Mo. banc 2015). However, Missouri courts have favored a narrow application of this rule, holding that a covered cause must be “wholly separate” from the excluded cause for the rule to apply, even going so far as to note an example where negligent hiring of a maniac who commits arson may not be foreseeable, but negligent hiring of a pyromaniac would be. See Great Lakes Ins. SE v. Andrews, 33 F.4^th 1005, 1008 (8^th Cir. 2022).

In Scaglione v. Acceptance Indem. Ins. Co.,the Eighth Circuit considered whether an insurance company’s decision to not defend its insured against a claim of negligence arising out of injuries sustained in a shooting fell within this rule.On June 16, 2019, Sominkcole Conner was a patron at Voce Bar in downtown St. Louis, which was owned by Steven Scaglione. A dispute broke out between two other patrons, and Conner, an innocent bystander, was struck by a stray bullet. Scaglione’s insurance carrier, Acceptance Indemnity Company, refused to provide him with a defense. Accordingly, Conner and Scaglione agreed to arbitration, and Conner obtained a $2.5 million arbitration award, which was later confirmed by the Circuit Court of the City of St. Louis.

Conner filed an equitable-garnishment action against Acceptance. Scaglione filed a cross claim, alleging Acceptance had, in bad faith, refused to settle Conner’s claim, failed to defend or indemnify him, and breached its fiduciary duty. Acceptance filed motions to dismiss both Conner’s and Scaglione’s claims based on the assault-and-battery exclusion in the contract, which excluded, “[a]ny claims arising out of Assault and/or Battery.” The district court granted the motions, finding the assault-and-battery exclusion in Scaglione's policy barred coverage. Scaglione and Conner appealed to the Eighth Circuit.

On appeal, Scaglione and Conner argued that: (1) the assault-and-battery exclusion only applied to assault or battery committed by the insured or the insured’s employees, not other patrons; (2) the exclusion only applied to claims of the intended victim of the assault and battery, not innocent bystanders; and (3) the concurrent-proximate cause rule applied because Connor’s injury arose from Scaglione’s negligence, which did not depend on the assault and battery.

The Eighth Circuit affirmed the decision below, finding the policy exclusion for “[a]ny claims arising out of Assault and/or Battery” was plain and unambiguous. The exclusion contained no words suggesting a limitation regarding the perpetrator of the assault or battery, and likewise contained no limiting language suggesting that injuries to innocent bystanders did not fall within the exclusion.

The Eighth Circuit also rejected the appellants’ argument under the concurrent-proximate-cause rule, finding that Scaglione’s negligence was not “independent and distinct from the excluded assault and battery.” The Court focused on whether Conner’s injury was within the scope of foreseeable harms from Scaglione’s negligence. Here, because the underlying petition alleged that Scaglione was aware that bar patrons were often armed with dangerous weapons, and that Scaglione failed to provide adequate security measures, Conner’s assault and battery was within the risk of foreseeable harms flowing from Scaglione’s negligence. Because the injury was foreseeable, the concurrent-proximate-cause rule did not apply, and, therefore, the exclusion barred coverage.

Key Takeaways

The court’s opinion illustrates several key points for consideration by insurance companies and legal practitioners alike:

Assault and battery exclusions in insurance contracts are valid regardless of whether the intended target of the assault and battery is the injured person, assuming policy language similar to the exclusion before the Eighth Circuit is used.
Insurance companies and their counsel must be sure to assert, and prove, an assault and battery occurred in any responsive pleadings to the court.
Insurance companies must ensure all exclusions in a policy remove any ambiguity in order to be enforceable in Missouri.
For the concurrent-proximate cause-doctrine to avoid the application of an exclusion, the non-excluded cause must be truly independent and distinct, with a focus on foreseeability.

* Andrew Snively, Law Clerk, assisted in the research and drafting of this post. Snively is a 3L student at Pepperdine Caruso School of Law.

Missouri, Illinois, and Kansas 2022 Notable Insurance Law Decisions

06 Feb 2023

ABSTRACT: Our Insurance Law Blog 2022 year-end review encapsulates significant jury verdicts and decisions affecting insurance cases across the nation. View the post for a non-exhaustive list of insurance cases with national and regional implications that deserve attention.

Missouri

M.O. v. Geico Gen. Ins. Co., 2023 Mo. LEXIS 4 (Mo. banc. 2023).

A couple’s back seat dalliance became the basis of an insurance claim that attracted national attention in 2022. The plaintiff alleged that she contracted HPV after engaging in sexual activity with defendant in his vehicle, which was insured by GEICO. After making an insurance claim, the plaintiff and defendant entered into a §537.065 agreement and arbitrated the matter, resulting in a $5.2 million arbitration award. GEICO was not notified of the §537.065 agreement or arbitration until after the arbitration occurred. When GEICO moved to intervene in the lawsuit prior to the circuit court’s entry of judgment, it was allowed to, but only after the circuit court’s entry of judgment affirming the arbitration award. GEICO’s post-judgment motions challenging the judgment and arbitration award were denied. After the Western District of Missouri affirmed the circuit court’s judgment, the Missouri Supreme Court ultimately vacated the circuit court’s judgment finding that the circuit court should have granted GEICO’s motion to intervene prior to entry of judgment, thereby allowing GEICO to challenge the arbitration award.

Estate of Max Overbey v. Universal Underwriters Ins. Co., 645 S.W.3d 641 (Mo. App. W.D. 2022).

This case is one of many lawsuits arising from a Kansas City, Missouri used car dealership’s “drive for life” program. The program advertised low monthly payments and the ability to exchange vehicles every six months. The plaintiffs in this case were made to sign a sales contract that obligated them to a high-interest loan in an amount significantly more than the actual value of the vehicle as well as subjecting them to various hidden fees. When the plaintiffs attempted to trade in their vehicle after six months, the dealership disavowed any knowledge of the “drive for life” program, leaving plaintiffs with a high interest car loan. A jury found in favor of plaintiffs and awarded actual and punitive damages.

The plaintiffs then brought an equitable garnishment action against the dealership’s insurer seeking indemnity for the entire amount of the judgment. The circuit court was not swayed by the insurer’s argument that the underlying act was not an “occurrence” under the policy because the policy definition of “occurrence” required the loss to be an accident resulting in an injury that was not intended or expected. However, the Appellate Court reversed the trial court’s judgment reasoning that an intentional act of fraud which caused damage that was foreseeable, meriting the award of punitive damages, could not also be an “accident,” and therefore, the loss was not an “occurrence” under the policy.

Great Lakes Ins. SE v. Andrews, 33 F.4^th 1005 (8^th Cir. 2022)

A patron of the “Tool Shed Lounge” bar was attacked by an employee of the bar in the parking lot and was struck repeatedly on his head and body. He brought suit against the bar and its owner, ultimately obtaining a judgment in his favor. The bar’s insurer brought a declaratory judgment action to determine if the bar’s insurance policy provided coverage for the damages resulting from the attack. The Eighth Circuit, applying Missouri law, affirmed the District Court’s determination that that the insurance policy’s assault, battery, or physical altercation exclusion was unambiguous and precluded coverage for the attack.

M.P. v. Trexis One Ins. Corp., 652 S.W.3d 685 (Mo. App. S.D. 2022).

An individual was riding a bicycle through an RV park when he was struck by a golf cart and injured. The injured individual made a claim under his uninsured motorist automobile policy. The policy stated that the insurance would apply if the injury arose out of the operator’s ownership, maintenance, or use of an uninsured motor vehicle. The policy, however, excludes from the definition of “uninsured motor vehicle” any vehicle or equipment “[d]esigned mainly for the use off public roads while not on public roads” (emphasis added). The parties agreed that the golf cart was a motor vehicle designed mainly for use off public roads, but disagreed whether the subject road where the accident occurred was a “public road.”

“Public road” was not defined under the subject policy, so the Court’s applied its plain and ordinary meaning to the term. The accident occurred in a parking lot adjacent to a road that was on private property. Additionally, the road, while accessible for restricted use by the public, was not used by the public freely and commonly, was not commonly used by the public as a shortcut to access a public road, and guests who entered the subject RV park were required to check in with the park’s office. Furthermore, a state-issued driver’s license was not required to operate a vehicle on the subject road and postal, delivery, and emergency vehicles did not freely drive on the road. The court, applying these facts, determined that the subject road was not a “public road” as used in the insurance policy and, therefore, because the accident did not occur on a public road, the golf cart did not qualify as a “uninsured motor vehicle,” and the policy did not provide coverage for the accident.

Illinois

Sheckler v. Auto-Owners Ins. Co., 2022 IL 128012

This case arose from an apartment’s non-functioning gas stove. A technician was hired to inspect the stove and make repairs, but when the technician left to obtain parts for the stove, the tenants turned the stove on causing gas inside the apartment to ignite resulting in a fire. The Illinois Supreme Court determined that an insurer which provided liability and property damage coverage to the landlord did not owe a duty to defend the tenant against the technician’s contribution claim because the tenant was not an insured nor additional insured under the policy. The Supreme Court rejected the argument that the tenants were implied co-insureds under the policy, distinguishing its holding in Dix Mut. Ins. Co. v. LaFramboise, 149 Ill. 2d 314, 323, 173 Ill. Dec. 648, 597 N.E.2d 622 (1992), noting that the Dix case concerned a cause of action based on equitable principles, while the technician’s contribution claim did not.

Illinois Farmers Ins. Co. v. Godwin, 2022 IL App. (3d) 210001

A passenger was killed in a single-vehicle accident when the driver and passenger were returning to Illinois from a trip to New Mexico. The driver and the driver’s mother were named insureds on an insurance policy issued by Farmers. The driver’s father and mother were divorced and lived in different residences. At the time of the accident, the driver was operating his father’s vehicle, which was not listed on the Farmers policy.

Farmers filed a declaratory judgment action seeking a determination that it had no duty to defend and/or indemnify the driver for the accident claiming that an exclusion applied which excluded coverage for bodily injury arising out of the use of any vehicle other than an insured car that is available for regular use by the insured or a family member.

The Appellate Court determined that the father was not a “household driver,” even though the driver resided with his father roughly 50% of the time. The policy specifically listed the driver and driver’s mother as insureds while listing the driver’s mother’s address as the insureds’ residence. The Appellate Court further determined that the driver’s use of his father’s vehicle was not “regular,” because it was contingent upon driver being at his father’s house, driver making a reasonable request to use the vehicle, and upon father’s granting of permission to use it. Therefore, the vehicle driven during the accident did not fit within the exclusion under the insurance policy, and the Appellate Court determined there was liability coverage under the Farmers policy.

Nationwide Prop. & Cas. Ins. Co. v. State Farm Fire & Cas. Co., 2022 Ill. App. (1st) 210267

This dispute between insurance companies arose from an accident that resulted in the death of a 13-year-old. The 13-year-old was fatally struck by a dump truck while riding his bike. The dump truck was being operated by an employee of a Davis Concrete as he was returning to a road construction project. Davis Concrete had a commercial general liability policy issued by Nationwide. Davis Concrete subcontracted some of its work to RJ&R Trucking and Excavating, who was insured by an automobile, commercial general liability, and umbrella policies.

The wrongful death suit was settled for $3.5 million, of which Nationwide paid $400,000. Nationwide then brought a declaratory judgment action against State Farm seeking a determination that the State Farm commercial general liability policy’s automobile exclusion was inapplicable and seeking indemnity for the $400,000 that it paid towards the settlement. The Appellate Court determined that because the underlying Complaint contained allegations of negligence that were independent of the operation of the dump truck (claiming negligence due to not having a flagman present to direct traffic), that the auto exclusion was not applicable. Nationwide was, thus, entitled to indemnification for the full $400,000 that it paid towards the settlement.

Unique Ins. Co. v. Tate, 2022 IL App. (1st) 210491

An individual was involved in an accident with an ambulance owned and operated by the City of Chicago Fire Department. He sued the fire department, but the fire department was granted summary judgment because it was immune from liability for negligent operation of a motor vehicle under the Local Governmental & Governmental Employees Tort Immunity Act, 745 ILCS 10/5-106. After summary judgment was granted, the individual made a claim with his insurer seeking indemnity under his policy’s uninsured motorist coverage arguing that because the fire department was immune from liability, a denial of his uninsured motorist claim would violate public policy by depriving him and other drivers of their right to recovery.

The Appellate Court found that under the plain terms of the policy, the ambulance did not fit within the definition of an “uninsured motor vehicle,” the definition of which explicitly excludes any vehicle or equipment owned or operated by a self-insurer or owned by any governmental unit or agency. The ambulance was owned by the self-insured fire department, which is also a governmental agency and, therefore, not an uninsured vehicle. The Appellate Court also found the injured party’s public policy arguments unpersuasive.

Kansas

Granados v. Wilson, 62 Kan.App.2d 10, 505 P.3d 794 (2022)

After a fatal accident in Kansas City, Kansas, the tortfeasor notified his insurer of the accident, but denied causing the accident. The claims adjuster determined the tortfeasor was at fault, but did not contact the wife of the decedent, did not interview any of the 12 listed witnesses on the police report, did not inspect the vehicles, and did not contact the wife’s insurer. The tortfeasor’s insurer first learned of a claim from the decedent’s wife when she filed a wrongful death lawsuit in Wyandotte District Court.

The tortfeasor’s insurer offered to settle the lawsuit for the policy limits of $25,000. The wife’s attorney sent a letter to the tortfeasor’s insurer rejecting the offer and scolding the insurance company from not having offered the policy limits “a long time ago.” The attorney argued that the insurer had a duty to promptly initiate settlement and made a demand to settle the case for just under $3 million. During a bench trial, the District Court found damages in the amount of $4,603,777.52, the amount of which was later appealed and ultimately negotiated and stipulated between the parties as $3,353,777.52 in damages.

The wife brought suit against the tortfeasor’s insurer for the full amount of the judgment. After a bench trial, the Court entered judgment in the wife’s favor. The insurer appealed and the Appellate Court determined that, while the claims adjuster’s investigation did not meet industry standards, failing to do so did not necessarily expose the insurer to damages in excess of its policy limits. For an insurer to be liable for a judgment in excess of its policy limits, there must be a causal connection between an insurer’s breach of duty to its insured and the excess judgment. Here, the Appellate Court found no such causal connection and the insurer was only liable for the judgment in the amount of its policy limits.

Illinois Federal Court Re-Affirms Insurance Coverage Exclusions Matter

03 Feb 2023

ABSTRACT: In Crum & Forster Specialty Ins. Co. v. Spike’s Pub & Grub, No. 3:21-CV-1722-NJR, 2023 U.S. Dist. LEXIS 1360 (S.D. Ill. Jan. 4, 2023), the United States District Court for the Southern District of Illinois found that an insurance company owed no duty to defend a pub for a stabbing that took place on its premises, but denied the insurance company’s request for a declaration that it owed no duty to indemnify the pub.

In the underlying action, Devin Elliott filed a lawsuit against Spike’s Public House in the Circuit Court of St. Clair County, Illinois, alleging that Spike’s sold alcoholic beverages to Corey Lyell, causing Lyell’s intoxication. While intoxicated, Lyell attacked Elliott and stabbed him multiple times. Elliott asserted two claims against Spike’s – negligence for failing to keep security personnel on the premises and for violating Illinois’s Dram Shop Act.

Spike’s was insured under a CGL policy issued by Crum & Forster Specialty Insurance Company (“CFSIC”) and sought coverage for the claims asserted against it. CFSIC advised it owed no obligation to defend or indemnify Spike’s based on the terms of the policy. CFSIC filed a Complaint for Declaratory Judgment in the United States District Court for the Southern District of Illinois, seeking a declaration that it owed no duty to defend or indemnify Spike’s. Spike’s and Elliot both failed to answer and, consequently, default was entered against them pursuant to Fed. R. Civ. P. 55(a). CFSIC then filed a motion for default judgment.

In its motion for default judgment, CFSIC first argued there was no coverage because the bodily injury alleged in the underlying Complaint was not caused by an “occurrence” as the term was defined in the policy and, thus, there was no duty to defend. The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The underlying Complaint alleged Spike’s sold alcohol to Lyell, causing his intoxication, and, because of his intoxication, Lyell attacked Elliott. It went on to allege that Lyell intended to and did cause harm.

Because of the procedural default, Elliot and Spike’s failed to dispute CFSIC’s argument that the policy offered no coverage because the underlying Complaint did not allege bodily injury from an “occurrence” – i.e., an accident. Accordingly, the court found that CFSIC was entitled to default judgment as to Count I (negligence).

Interestingly, the decision did not elaborate on or state that it agreed with CFSIC’s position. It merely stated Elliott and Spike’s failed to dispute CFSIC’s argument and “accordingly” found CFISC was entitled to default judgment. Conversely, the Court expressly agreed with CFSIC’s second argument.

CFSIC’s second argument was that even if the Complaint contained sufficient allegations to support coverage, the policy contained a Total Liquor Liability Exclusion that barred coverage. The Court agreed. The exclusion stated insurance did not apply to bodily injury or property damage for which any insured may be held liable by reason of: (1) “[c]ausing or contributing to the intoxication of any person”; or (2) "[a]ny statute, ordinance or regulation relating to the sale, gift, distribution or use of alcoholic beverages.” Because of these express terms, the Court held the exclusion applied, and CFSIC was entitled to default judgment as to Count II (Illinois Dram Shop Act).

CFSIC also asked the Court to declare it owed no duty to indemnify Spike’s, but the Court declined to do so, noting, “[i]t is well established that the duty to indemnify is narrower than the duty to defend.” More specifically, the “general rule” in the Seventh Circuit is that “a suit to determine an insurer’s obligations to indemnify its insured is premature until the insured as been determined to be liable to somebody.” Bankers Tr. Co. v. Old Republic Ins. Co., 959 F.2d 677, 680 (7th Cir. 1992). Because the underlying action was still pending, a ruling on CFSIC’s obligation to indemnify would be premature. Consequently, the Court denied CFSIC request, without prejudice.

There is no doubt that this opinion is favorable to insurers. While more elaboration would have been ideal regarding the existence of a duty to defend, the Court nonetheless held the insurer was entitled to a default judgment as to that issue. Furthermore, the Court held that the exclusion applied, thus barring coverage, thereby re-affirming that exclusions do matter.

No Liability Coverage for Company Owner Operating Personal Vehicle in Course and Scope of Employment (Illinois Court of Appeals)

12 Jan 2023

In a DJ action filed by a commercial liability carrier, an Illinois Appellate Court held that an insurer had no duty to defend or indemnify a self-employed driver who was operating his personal vehicle during the course and scope of employment. In the underlying negligence claim, the injured plaintiff alleged personal injury and property damage when a truck driven by the owner of a construction company struck the open door of her parked car as she was getting out. The owner’s truck was purchased by him in his own name and insured through his personal auto insurance.

The owner’s construction company was a named insured on a CGL policy that defined "insured" to include, "an organization" and its "executive officers...but only with respect to their duties [as officers]." The policy excluded claims "arising out of the ownership, maintenance [or] use ... of any ... 'auto'... owned by or rented or loaned to any insured."

The injured plaintiff argued the truck was not "owned" or "used" by an insured because the driver was acting in his capacity as a company officer at the time of the accident. Since he was not being sued in his personal capacity, the plaintiff argued, he was not an "insured" and the "auto" exclusion did not apply.

In affirming summary judgment for the insurance company, the court found that counsel for the injured plaintiff had made numerous binding "judicial admissions" at the trial court level, and specifically that the driver was acting as an employee of the company at the time of the accident. This is important because as an employee, the “auto exclusion” provision in the insurer’s policy applied to bar coverage.

Ultimately, as an employee of the company, and with a claim against the company for coverage regarding to an accident that occurred with the owner, the insurer was correct in examining the policy and applying the coverages, and exclusions, to the circumstances of the accident. Here, because owner was driving his personal vehicle at the time of accident, despite being an employee of the company (and even being in the course and scope of his employment), the “auto exclusion” in the insurer’s policy applied to bar coverage.

Erie Ins. Exch. v. Petrovic, 2022 IL App (1st) 210628-U; 2022 Ill. App. Unpub. LEXIS 1876.

Appeals Court Affirms Household Exclusion to Limit UIM Claim

09 Jan 2023

ABSTRACT: The Court of Appeals for the Eastern District of Missouri recently upheld the use of a “household exclusion” in an insurance policy to drastically limit the recovery available in claim made against a member of the same household.

The case of Mendelson v. Bankers Standard Insurance Company involved a single car accident wherein the driver, Paul Mendelson, was killed and his wife, Betty Mendelson, was injured. The Mendelsons had an insurance policy with Bankers Standard Insurance Company (“Bankers Standard”) that included both liability and underinsured motorist (UIM) coverage in the amounts of $500,000 each. However, both portions of the policy included a “household exclusion” that limited coverage in instances of bodily injury to an insured or a family member. In such cases, the policy limits for both coverages would be limited to the amount of the state-mandated minimum liability coverage under the Missouri Financial Responsibility Law, which was $25,000. After the accident, Mrs. Mendelson made a claim for liability coverage based on the alleged negligence of Mr. Mendelson, as well a claim for underinsured motorist coverage, arguing that Mr. Mendelson’s liability coverage of $500,000 was insufficient to fully cover her damages. Bankers Standard filed for summary judgment, arguing that the above limits applied. The trial court granted Bankers Standard’s motion for summary judgment, applying the household exclusions and limiting recovery to $25,000 for both the liability and UIM coverages.

On appeal, Mendelson first argued that the UIM household exclusion violated Missouri public policy. In so doing, she contended that courts allow the “stacking” of uninsured (UM) and UIM coverages where UM and UIM coverages were treated identically. In those cases, the courts noted that Missouri law requires a minimum UM coverage, and further allows an insured with UM coverage on multiple vehicles to add them together, or “stack” them, to increase the amount of coverage available. However, Missouri law does not mandate UIM coverage. Mendelson argued that since insureds may stack their mandated UM coverages, in instances where insurance policy language functionally treats UM and UIM coverages as the same, courts have stopped insurers from attempting to block stacking of UIM benefits as well. Here, Mendelson sought to apply this rationale to suggest that, to the extent that her policy treats UM and UIM coverage the same, and non-statutory exclusions cannot reduce UM coverage, the Court should prevent Bankers Standard from applying the household exclusion in a UIM claim.

The Appeals Court was not persuaded, noting that Mendelson’s case had little in common with the issues involved in stacking cases. Even though this policy may lump UM and UIM coverages together in some areas, the court found the policy considerations in UM stacking cases did not apply here. To the contrary, Missouri courts have repeatedly upheld household exclusions limiting coverage to the minimum amount required by law ($25,000), and in the absence of any applicable public policy, the language of the contract in those instances prevails.

Mendelson next argued that the household exclusion was unenforceable because the policy is ambiguous in the way it seemingly grants $500,000 of coverage in one part of the policy, but elsewhere purports to reduce the coverage to $25,000 by way of an exclusion. The Court acknowledged that an ambiguity may exist if contractual language is reasonably open to reasonably different interpretations or uncertainty, including instances where a contract seemingly promises something at one point but later takes it away. However, it notes that insurance contractual provisions must be read in the context of the policy as a whole, and in doing so, did not find any ambiguity in Bankers Standard’s policy.

Indeed, the Court noted that exclusions are common in insurance policies and do not automatically create an ambiguity. Rather, as in this case, a policy may provide coverage subject to clear, applicable limitations appearing later in the policy. Here, the declarations page noted $500,000 in UIM coverage, and clearly indicates that it contemplates both the language of the policy itself and any endorsements. An introductory section of the policy further describes how it will note the specific losses that it will not pay for using exclusions. Then, as suggested, the policy notes how UIM coverage is available, but specifically lists the household exclusion under “damages we won’t pay.” Upholding summary judgment and a cap on the applicable coverage, the Court determined that an ordinary consumer would understand and anticipate that his/her coverage is subject to limitations stated later in the policy. As such, the policy was not ambiguous. The appeal was denied, and the household exclusion was upheld, limiting the otherwise $500,000 in UIM coverage to $25,000.

This Opinion reiterates the importance of analyzing a policy in its entirety. One must note how UM and UIM coverages are differentiated in the policy, and the context they are applied. Insurance contracts often spend just as much time detailing what is not covered as what is, and when clearly worded, the effects can be significant. In Mendelson, the Court of Appeals reinforces the importance of determining coverage through careful cross-referencing of the stated limits within the policy and all applicable endorsements. Failure to appreciate not only the coverages, but the limits, can lead to shocking outcomes for insureds. However, for insurance companies, this case reinforces that clear language and reiterating to the insured the application of the entire policy, coverages and limitations, will have a better chance of leading to the intended application of coverage as written.

The Illinois Supreme Court Finds Equitable Subrogation Principles Do Not Apply to Third-Party Contribution Claims for Negligence Against Tenants

27 Dec 2022

The Illinois Supreme Court unanimously held an insurer has no duty to defend or indemnify a tenant of an insured property against a third-party contribution claim where the tenant is not a covered insured under the policy.

In a 7-0 decision, the Illinois Supreme Court unanimously reversed the Third District Appellate Court’s holding that an insurer has a duty to defend or indemnify tenants against third-party contribution claims. Sheckler v. Auto-Owners Ins. Co., 2022 IL 128012, ¶ 47.

The facts of Sheckler v. Auto-Owners involve an insurance coverage dispute following a fire that occurred at a rental property located in Pekin, Illinois. There, Monroe and Dorothy Sheckler entered into a lease agreement for an apartment owned by Ronald McIntosh. Id. at ¶ 4. McIntosh maintained an insurance policy with Auto-Owners for the apartment, which included first-party dwelling and third-party landlord liability coverage. Id. at ¶ 5.

The first-party dwelling provision covered the apartment premises for fire damage. Id. The third-party landlord liability provision covered claims brought by third parties that the insured “becomes legally obligated to pay as damages because of or arising out of bodily injury or property damage.” Id. The third-party landlord liability provision further provided a duty to defend clause for any claim or suit for damages covered by the policy. Id. The provision, however, excluded from coverage “property damage to property occupied or used by an insured or rented to or in the care of, any insured.” Id. The policy declarations listed McIntosh and his wife as the only named insureds. Id.

In August 2015, the Shecklers notified McIntosh that the apartment’s gas stove was not working properly. Id. at ¶ 8. McIntosh hired a technician to inspect the stove and make repairs. Id. When the technician left the apartment to obtain stove parts, the Shecklers attempted to mask the gas odors by spraying Febreze over the stove range. Id. When the Shecklers turned the stove on shortly thereafter, the stove ignited, resulting in a fire that caused substantial property damage. Id. As a result, McIntosh submitted a claim and Auto-Owners paid McIntosh for the damages incurred due to the fire. Id.

Auto-Owners subsequently filed a subrogation action against the technician, who then filed a third-party complaint for contribution against the Shecklers. Id. at ¶ 10. In response, the Shecklers filed an independent declaratory judgment action against Auto-Owners, McIntosh, and the technician. Id. at ¶ 11. They asserted that Auto-Owners had a duty to defend and indemnify them against the technician’s third-party contribution claim under the policy. Id. The parties then filed cross-motions for summary judgment. Id. at ¶ 12. Specifically, the Shecklers relied on the Supreme Court’s decision in Dix Mut. Ins. Co. v. LaFramboise, 149 Ill. 2d 314, 323, 173 Ill. Dec. 648, 597 N.E.2d 622 (1992) in support of their argument that Auto-Owners had a duty to defend. Id. The circuit court disagreed and ruled that Auto-Owners did not owe a duty to defend. The Shecklers appealed. Id. at ¶ 13.

On appeal, the Third District reversed the circuit court’s judgment. Id. at ¶ 15. The court determined that the Shecklers were implied coinsureds under the policy based on equitable subrogation principles. Id. Specifically, the court reasoned that since the Shecklers’ rent payments ultimately accounted for the insurance premiums paid by McIntosh, said payments served as a form of reimbursement. Id. Based on these facts and Dix, the court found that Auto-Owners had a duty to defend. Id. at ¶¶ 15-18. Auto-Owners appealed.

The question presented to the Supreme Court concerned whether Auto-Owners owed a duty to defend or indemnify the Shecklers against the technician’s third-party contribution claim. Id. at ¶ 31. The Court determined that the holding of Dix was irrelevant. Id. at ¶¶ 39-40. Specifically, the Court found that Dix concerned a subrogation action based on equitable principles whereas the third-party claim against the Shecklers did not. Id. at ¶ 39. In so doing, the Court notably agreed with Presiding Justice McDade's dissenting opinion in Dix, wherein he asserted that Dix did not provide “a general rule that whenever tenants pay rent and their landlords insure the leased premises that the tenants are automatically coinsureds under the insurance policy as a matter of law.” Id. at ¶ 20. Accordingly, the Court held Auto-Owners owed no duty to defend or indemnify the Shecklers. Id. at ¶ 47.

The Court’s holding effectively limits the application of Dix in landlord/tenant claims. It is therefore incumbent upon insurers to carefully account for the specific facts and policy language of the claim before it. Particularly, whether a third-party contribution claim asserted against a tenant arises out of equitable subrogation principles or negligence.

Insurer Wins Coverage Dispute for COVID-19 Business Losses

09 Nov 2022

In The One Group Hospitality, Inc. v. Employers Insurance Company of Wausau, the United States District Court for the Western District of Missouri dismissed an insured business owner’s claim for the costs of suspending and limiting its restaurant operations during the COVID-19 pandemic under an “all risk” insurance policy. The court’s decision to terminate the litigation at the pleading stage was based on the express language of the policy limiting coverage to “direct physical loss or damage,” as well as a contamination exclusion.

The insured, an owner and operator of restaurants around the country, was forced to shut down its operations for cleaning and decontamination, and otherwise limit its operations, to comply with governmental restrictions on occupancy. The insured had purchased an “all risk” policy that insured against “all risks of direct physical loss or damage.” The policy also contained a “contamination exclusion,” precluding claims for costs and loss of use of property that resulted from contaminants. The policy’s definition of “contaminant” included viruses. Based on these policy provisions, the court found that there was no coverage, and that coverage would be excluded in any event under the “contamination exclusion,” because although the virus is technically physically present, it did not physically alter any structure it attached to, nor was there reason to think it could. The court also found that governmental orders limiting use of the property did not constitute physical damage.

Given the insured’s presence in various states, the court discussed decisions involving similar facts and policies in eight other jurisdictions where the outcome was the same. For example, the Seventh Circuit, applying Illinois law, held that the loss of use of property alone, without any damage or alteration to the property, was not sufficient to assert a claim for physical damages. The Eighth Circuit, while noting a lack of Missouri precedent, has also required some physical loss, such as alteration, contamination, or destruction.

The court noted that even if the presence of a substance that required cleaning did constitute “physical” damage, the damages would be limited to costs or losses incurred to clean the properties, and would not include damages resulting from government-ordered closures or the mere threat of customers bringing in the virus. Regardless, a contamination exclusion would preclude coverage for costs and damages as a result of a virus present on the property. While some policies might leave the door open to contamination claims because of a covered loss, in cases where the contamination itself is not a covered loss, courts have dismissed claims for coverage.

This decision reflects the ongoing and evolving responses to the COVID-19 claims in courts throughout the country. Each case requires fact-specific application of the applicable policy language. However, despite the toll the pandemic has taken on us all, some courts appear to be reluctant to extend insurance coverage beyond claims for physical damage to property. Additionally, certain policies contain exclusions that may preclude claims based solely on viruses. In litigation involving insurance coverage, one must pay special attention to the wording of the allegations regarding property damage in the context of the applicable policy language.