In King’s Cove Marina, LLV v. United Fire & Cas. Co., A19-0078 (Minn. April 14, 2021), the Minnesota Supreme Court rules on the “your work” exclusion in a standard CGL policy as well as set forth the rule on Miller-Shugart settlement allocations.
In the underlying liability case, Lambert Construction entered into a Miller-Shugart settlement agreement with Plaintiff, King’s Cove. Lambert’s insurer, United Fire & Casualty Co., denied any duty to indemnify but defended Lambert uder a reservation of rights. United Fire brought a declaratory action, to resolve coverage. While that action was pending, Lambert stipulated to a $2 million judgment against it, to be collected from its insurer, United Fire. King’s Cove then brought a garnishment action against United Fire, alleging all of the settled claims represented covered damages.
The district court determined United Fire’s policies covered all of the claimed damages and that the Miller-Shugart Agreement was enforceable. The Court of Appeals reversed, finding that some of the claimed damages were covered and that the Miller-Shugart Agreement was unreasonable as a matter of law, because it failed to allocate between covered and uncovered claims. The Minnesota Supreme Court reversed in part, concluding that United Fire did not cover all of the damages, but that the Agreement was not per se unreasonable and unenforceable simply because it did not allocate covered and uncovered claims.
First, the Court analyzed whether the United Fire policies provided coverage. Some of King’s Cove’s claimed damages were for the cost to repair or replace the siding and roofing done by Lambert. United Fire asserted that Exclusion L (for “property damage” to “your work arising out of it or any part of it and included in the products-completed operations hazard”) applied. King’s Cove argued that the claimed damages fell under a separate “Products Completed Operations Aggregate Limit,” and thus the exclusions in the commercial general liability policy were inapplicable. The Court rejected that, concluding the Products-Completed Operations Hazard limit is just a different applicable limit, but remains subject to exclusions of the Property Damage Coverage. Separate limits did not make the policy ambiguous or render coverage illusory.
Second, as a matter of first impression, the Court concluded that in cases involving a single defendant, damages need not be allocated for a Miller-Shugart settlement agreement to be reasonable. The court provides a two-step inquiry for district courts to analyze the reasonableness of such agreements. First, district courts should ask what a reasonably prudent person in the position of defendant would have settled for at the time of settlement. Second, and only if the agreement is reasonable, the district court must then consider how a reasonable person in the position of the insured would have valued and allocated the covered and uncovered claims at the time of settlement. Both tests are objective and require the district court to consider issues of liability, damages, and risks of trial. But a settlement is not per se unenforceable simply because it does not allocate between covered and uncovered damages, contrary to existing Eighth Circuit precedent on the issue.
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