The Eighth Circuit Court of Appeals, applying Minnesota law, recently held that entering a Miller-Shugart agreement after entering a Drake-Ryan agreement breaches the cooperation clause of the umbrella policy voiding coverage under the policy. The facts in American Family Mut. Ins. Co. v. Donaldson, — F.3d —, No. 15-1465, (8th Cir. Apr. 26, 2016), make the holding clear.
After a night of drinking, Jacob Patton took his father’s minivan for a drive. His friend, John Donaldson, was a passenger in the vehicle. When a police officer attempted to pull Patton over, he panicked and fled. Patton lost control of the vehicle and hit a tree. Donaldson suffered serious injuries and was hospitalized for nearly a month following multiple surgeries. Patton’s BAC was .20.
American Family insured Patton under an auto policy with $100,000 in primary limits. Patton’s father was also insured under an umbrella policy with American Family providing $1,000,000 in coverage. After the accident, American Family negotiated a Drake-Ryan settlement with Donaldson for the auto policy limits. American Family did not, however, agree that its umbrella policy provided coverage and left Donaldson free to pursue a claim against the excess policy.
While a Drake-Ryan settlement protects an insured defendant from personal liability, the plaintiff may pursue a claim against the defendant up to the policy limits of any excess or umbrella coverage. 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 could not collect from the Pattons’ personal assets.
Donaldson brought suit against the Pattons. American Family then commenced a declaratory judgment action alleging it had no duty to defend or indemnify the Pattons, because Jacob Patton’s conduct at the time of the accident fell within the umbrella policy’s intentional act exclusion. American Family continued to provide a defense to the Pattons under a reservation of rights. The Pattons, however, retained new counsel who was not assigned by American Family.
With the new attorney, the Pattons entered a Miller-Shugart settlement in which Jacob Patton admitted liability and agreed to a binding arbitration to set the amount of damages. Miller v. Shugart, 316 N.W.2d 729 (Minn. 1982). Entering into a Miller-Shugart was a curious decision here because Miller-Shugart agreements are usually limited to when an insurer has abandoned its insured by denying both the duties to defend and indemnify an insured under the terms of a policy. The abandoned insured then consents to having a judgment entered against him in exchange for the plaintiff’s agreement to release the insured from any personal liability and to satisfy any judgment only out of the contested insurance proceeds. Having not abandoned the Pattons, American Family elected not to appear at the arbitration. The arbitrator set damages at $1,250,000 and judgment was entered in state court.
In the coverage action, the district court sided with American Family and held coverage did not apply under the intentional act exclusion. While Donaldson’s appeal was pending, Jacob Patton was convicted of felony criminal vehicular operation as a result of the accident. The conviction triggered a second policy exclusion for violations of law, and the Eighth Circuit remanded the case.
The Eighth Circuit held the Pattons violated the umbrella policy’s cooperation clause by entering the Miller-Shugart agreement American Family had protected the insureds from personal liability in the Drake-Ryan settlement. The panel held that 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. Indeed, the insured’s potential personal exposure is the only basis for ignoring his reciprocal duty to cooperate by entering into a Miller–Shugart agreement during periods when coverage is in doubt.
Relying on Buysse v. Baumann–Furrie & Co., the Eighth Circuit found two prerequisites must be satisfied before an insured may enter a Miller-Shugart settlement and override the duty to cooperate: 1) the insurer must be denying the existence of any coverage for the underlying claim; and 2) the insured must be risking liability for the amount of any damage award from the underlying claim. In other words, a Miller–Shugart settlement does not “fit,” and an insured violates his duty to cooperate, unless those two conditions are present.
Applying the test, the panel concluded the Pattons, and thereby Donaldson, failed the second part of the test because the Pattons did not risk liability for the entire amount of any damage award when they entered the Miller–Shugart settlement. American Family had already protected them from personal exposure with the earlier Drake–Ryan settlement.
The holding helps clarify the insured’s duty to cooperate up to and until the time the insurer “abandons” him by refusing to indemnify and defend its insured. In other words, insurers can void a policy if the insured is not abandoned, but prejudices its rights by entering a Miller-Shugart.