Link to Mo. Sup. Ct. Opinion
Christine Ewing died from injuries she sustained falling from a portable rock climbing wall at a minor league baseball game.[2] Her parents sued the baseball team’s owner, who had primary and excess insurance policies. After settling with the owner, and in the course of the proceedings against the insurers, four issues arose: (1) whether the excess liability policy required exhaustion of the primary policy before it would apply; (2) whether the rock climbing wall was an “amusement device” within the meaning of the policy’s amusement device exclusion; (3) whether the court was permitted to examine the reasonableness of the underlying judgment; and (4) whether the excess insurer’s refusal to defend was justifiable. The Supreme Court of Missouri held that the excess policy did not require exhaustion, the rock climbing wall was not an “amusement device,” the court was not permitted to examine the reasonableness of the underlying judgment, and the excess insurer’s refusal to defend was unjustifiable.
I. Facts and Holding
Christine’s parents, Kathleen Schmitz and Craig Ewing, filed a wrongful death lawsuit against the owner of the portable rock wall, Marcus Floyd, and the owner of the minor league baseball team, Columbia Professional Baseball (CPB).[3] After the parents settled their case against Floyd for $700,000, they proceeded with their suit against CPB.[4] In that suit, the parents asserted CPB was vicariously liable because it exclusively controlled and possessed the premises where Floyd had operated the portable rock wall.[5]
CPB notified both its primary insurer, Virginia Surety Company (Virginia Surety), and its excess insurer, Great American Assurance Company (Great American), of the wrongful death lawsuit filed against it, requesting defense or indemnification.[6] Virginia Surety denied any duty to defend or indemnify CPB because its policy, providing coverage of $1 million, contained an exclusion for injuries resulting from an amusement device, which Virginia Surety contended was applicable.[7] Because Virginia Surety denied coverage, Great American also denied coverage under its $4 million excess policy, asserting its policy provided the same terms as Virginia Surety’s.[8] The parents and CPB then entered into a settlement agreement per Revised Statutes of Missouri § 537.065, where they agreed that if a judgment was entered against CPB, the parents would limit any recovery specifically to the insurance policies.[9] There was no settlement regarding CPB’s liability or damages, as those matters instead would be submitted to the trial court per the agreement.[10]
At a later bench trial, the parents presented evidence of their damages and CPB’s liability, to which CPB neither objected nor offered defense.[11] The trial court held that CPB was liable for Christine’s death and found damages to be $4,580,076.[12] CPB did not appeal this judgment.[13]
The parents next filed an equitable garnishment lawsuit pursuant to Revised Statutes of Missouri § 379.200 against both insurers in order to recover the trial court’s judgment of damages.[14] In that lawsuit, they filed a motion for summary judgment, asserting the amusement device exclusion did not include a rock climbing wall.[15] The equitable garnishment court concluded that a rock climbing wall was not an amusement device within the meaning of the exception.[16] Virginia Surety and the parents then entered into a settlement agreement.[17] For $700,000, the parents agreed to release their claims against Virginia Surety to the full extent of the $1 million policy limit, and the parents filed a partial satisfaction of judgment for $1 million.[18]
However, the equitable garnishment lawsuit against Great American for the outstanding liability of $2,880,076 remained.[19] After considering whether the trial court’s judgment was valid and whether Great American was bound by it, what the amount of a reasonable judgment should be, and whether Great American’s policy covered the judgment, the equitable garnishment court found that the trial court’s award of $4,580,076 in damages was unreasonable because damages should have been $2.2 million.[20] Additionally, because the parents settled their claim against Virginia Surety for less than $1 million, the court found that since the primary policy was therefore not exhausted to its limit, Great American’s excess policy was not triggered to cover the $2.2 million in damages.[21]
The parents appealed the trial court’s decision to the Missouri Court of Appeals, Western District, which affirmed and held that Great American was not obligated to make the excess insurance payments.[22] The Supreme Court of Missouri, en banc, granted transfer.[23]
A. Insurance Contract Provisions
Regarding the insurance contract, the Supreme Court of Missouri looked at two issues: Great American argued that the rock wall was an amusement device under its policy’s exclusion and the parents challenged the alleged exhaustion requirement, claiming that payment was due with or without exhaustion.[24] The Supreme Court of Missouri stated that in interpreting an insurance policy, it uses the meanings of terms as understood by an ordinary person purchasing the insurance.[25] The court explained that ambiguous insurance policies are construed against the insurer, and a policy is ambiguous if “there is duplicity, indistinctness, or uncertainty in the meaning of the language in the policy.”[26]
1. Settlement as Exhaustion
The parents urged the Supreme Court to reverse the equitable garnishment court’s finding that their settlement with Virginia Surety did not constitute exhaustion.[27] They argued that the plain language of the Great American policy provided that the excess insurer should pay once the underlying provider was “obligated to pay” its full amount, not just after it actually paid its full amount.[28] The parents supported their argument with the provision in the Great American policy that described “When ‘Loss’ is Payable,” which states: “[c]overage under this policy will not apply unless and until the Insured or the Insured’s ‘underlying insurance’ is obligated to pay the full amount of the ‘Underlying Limits of Insurance.’[29] When the amount of ‘loss’ has finally been determined, we will promptly pay on behalf of the insured the amount of ‘loss’ falling within the terms of the policy.”[30]
The court agreed with the parents in reasoning that this provision indicates Great American would promptly pay the amount of “loss” under the policy as long as the insured’s underlying coverage became obligated to pay the full amount of its limit and the amount of loss was finally determined.[31] The court found that because “obligated to pay” has a different meaning than “has already paid,” the primary policy was exhausted upon settlement, even though for less than its limit, and the Great American policy should have triggered to cover the outstanding liability.[32]
However, Great American pointed to a provision establishing how its limits of insurance apply.[33] That provision provides, in relevant part: “if the ‘Underlying Limits of Insurance’ . . . are either reduced or exhausted solely by payment of ‘loss,’ such insurance provided by this policy will apply in excess of the reduced underlying limit.”[34]
Great American claimed that “exhausted solely by payment of ‘loss’” means that the underlying limits of insurance require total exhaustion before it is obligated to pay.[35] The court disagreed and found that this argument ignored that the complete phrase is “if the “Underlying Limits of Insurance” . . . are either reduced or exhausted solely by payment of ‘loss,’” which instead contemplates that the underlying limits of insurance may be reduced rather than exhausted.[36]
Further, the court pointed to the second paragraph of the same provision, which states that the Great American policy does not apply to “‘loss’ that is within the ‘Underlying Limits of Insurance’ which the insured has agreed to fund by self-insurance or means other than insurance.”[37] The court found that “means other than insurance” indicates that the policy recognized the underlying limits of insurance may be satisfied by something other than insurance, like the parties’ settlement.[38]
The court held that the policy in this case was unambiguous and that Great American’s obligation to pay the parents was not contingent on exhaustion of Virginia Surety’s limit.[39] Because Great American had to “promptly pay” once Virginia Surety was obligated to pay the full amount of the underlying limits of insurance and the amount of loss was finally determined, the Supreme Court held the equitable garnishment court erred in holding differently.[40]
2. Amusement Device Exclusion
In a cross-appeal, Great American contended that the equitable garnishment court erred in granting the parents’ partial summary judgment motion because its policy’s exclusion of incidents “[a]rising out of the ownership, operation, maintenance or use of any amusement device,” included the rock climbing wall.[41] The policy defined “amusement device” as “any device or equipment a person rides for enjoyment, including, but not limited to, any mechanical or non-mechanical ride, water slide (including any ski or tow when used in connection with a water slide), bungee operation or equipment.”[42] Great American argued that the rock climbing wall was indeed a “ride” under the policy’s definition of “amusement device.”[43]
The equitable garnishment court concluded that the amusement device exclusion was unambiguous, that the definition of “amusement device” applied to any “ride,” and that since a rock climbing wall was not a “ride,” the exclusion was inapplicable.[44] The Supreme Court of Missouri agreed that the amusement device exclusion was unambiguous.[45] “Ride” was not defined in the policy, so the Supreme Court used the dictionary definition of the word, “to travel or become conveyed by a vehicle (as a carriage, an automobile, or a railroad train): become carried.”[46] The court found that “ride” indicates that a separate force delivers the physical exertion to move, while a person instead climbs a rock wall with his or her own physical exertion.[47] The court held that because a rock climbing wall does not require the person to “ride” it, it is not an “amusement device” under the policy.[48]
B. Applicability of the Gulf Insurance Test
The parents also claimed that the equitable garnishment court erred in ruling that the trial court’s $4,580,076 judgment was subject to the test established by Gulf Insurance v. Noble Broad., which held that “a reasonableness standard is appropriate in determining the enforceability of section 537.065 settlements.”[49] The parents argued Gulf Insurance was inapplicable because, by its very terms, the test is used only to determine the reasonableness of settlements.[50] However, Great American argued that applying the Gulf Insurance test to the judgment was correct because it was the result of a settlement rather than a trial on the merits.[51] The court found that though Great American argued that the trial was not an adversarial proceeding because CPB did not present a defense, CPB had an opportunity to present a defense but declined to do so.[52] The Supreme Court agreed with the parents in finding the Gulf Insurance test only applies to § 537.065 settlements and that the award of damages in this case was a valid judgment entered after a bench trial instead of a settlement.[53] Thus, the court held the $4,580,076 judgment was not subject to the Gulf Insurance reasonableness test.[54]
C. Unjustifiable Refusal to Defend
Finally, Great American argued that it should not be bound by the $4,580,076 judgment, claiming that in order for an insurer to be bound by a § 537.065 agreement, the insurer must have unjustifiably refused to defend or provide coverage.[55] Great American asserted that its refusal to defend was justified.[56] The Supreme Court found that as CPB’s insurer, Great American had to shield CPB from liability.[57] It also held that because the rock climbing wall was not an amusement device, Great American’s refusal to defend was unjustified.[58] The court further held that once an insurer unjustifiably refuses to defend or provide coverage, the insured may enter into an agreement with the plaintiff to limit its liability.[59] “[The insurer] cannot 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.”[60] Finally, the court rejected Great American’s claim that its refusal was an honest mistake, and found Great American was bound to the trial court’s judgment because it had an opportunity to control and manage the trial but failed to use it.[61]
In conclusion, the Supreme Court of Missouri reversed and remanded the trial court regarding exhaustion and the reasonableness test.[62] In all other respects, the judgment was affirmed, and all concurred.[63]
II. Legal Background
After the Supreme Court interpreted the insurance policies in question, the main dispute of law in the case was whether the Gulf Insurance reasonableness test was applicable to the parties’ § 537.065 agreement. Section 537.065 provides in relevant part that a person with a claim for damages arising from bodily injury or death may enter into a contract with the tortfeasor, the tortfeasor’s insurer, or both, and that in the resulting contract, the person asserting the claim agrees, in exchange for an amount in consideration, that in the event of a judgment against the tortfeasor there will be no garnishment proceeding or other levy brought against the tortfeasor’s assets that were not specified in the contract.[64]
In Gulf Insurance, the Supreme Court of Missouri directly addressed for the first time the reasonableness requirement of § 537.065 settlement agreements.[65] The court found that it was necessary in Gulf Insurance to decide whether reasonableness, along with fraud and collusion, should be a part of the analysis in determining the enforceability of § 537.065 settlement contracts.[66] The Supreme Court determined that a reasonableness standard is appropriate in assessing the enforceability of § 537.065 settlements because requiring a settlement to be reasonable strikes a balance between the interests of the insured and the interests of the insurer.[67] If the insurer refuses to defend, § 537.065 allows the insured to enter an agreement to limit exposure to liability under its insurance policies, and likewise, the insurer will not have to pay a settlement that is unreasonable in proportion to the damages incurred.[68] The Supreme Court held that the test of whether the settlement amount is reasonable is what a reasonably prudent person in the position of the defendant would have settled for on the merits of the plaintiff’s claim.[69] Further, the burden of proving the reasonableness of the settlement contract is on the insurer, who has elected not to participate in the underlying case.[70]
III. Comment
The Supreme Court of Missouri’s decision in Schmitz clarifies and enforces the proper application of the Gulf Insurance reasonableness test in the context of § 537.065 settlement agreements. As the court acknowledged, if it had held otherwise, the doctrine of collateral estoppel would be frustrated.[71] If Great American’s proposed application of the Gulf Insurance test was promulgated by the court, insurers would be encouraged to deny coverage, knowing that the insureds would wish to avoid exposure to liability beyond the insurance policy, and so would then enter into a § 537.065 agreement limiting damages.[72] Once the plaintiff filed an equitable garnishment lawsuit against the insurer, the insurer would challenge the reasonableness of the trial court’s finding of liability and damages.[73] As a result, the plaintiff would have to re-litigate its claims for the equitable garnishment court.[74] The outcome would be that all insurers would receive “two bites of the apple”—once when the trial court determines liability and damages, and once when the equitable garnishment court determines reasonableness.[75] Therefore, the Supreme Court’s ruling in Schmitz, that the reasonableness test only applies to actual § 537.065 settlement agreements and not trial judgments (whether or not the insured put on a defense), preserves the holding of Gulf Insurance, which the Schmitz court stated struck “an appropriate balance between the interests of the insured and the interests of the insurer.”[76]
Secondly, the decision possibly sets the stage for judicial interpretation of excess insurance policies that require exhaustion of an underlying policy before coverage is triggered. The Supreme Court interpreted the policy in the instant case differently than the Western District Court of Appeals did, though both courts analyzed the policy in accordance with the “plain meaning” of the language approach and turned to the dictionary when a term was undefined. As there is no prior case involving interpretation of the exact “exhaustion clause” language in the Great American insurance contract, the Supreme Court’s decision lays precedent for any future cases involving similar policies.
-Jackie Whipple
[1] No. 91098 (Mo. April 26, 2011) (en banc). The West reporter citation is Schmitz v. Great Am. Assurance, Co., 337 S.W.3d 700 (Mo. 2011) (en banc).
[2] Id. at 703; Schmitz v. Great Am. Assurance Co., Nos. WD 71160 & WD 71198, 2010 WL 2160748, at *1 (Mo. App. W.D. June 10, 2010).
[3] Schmitz, 337 S.W.3d at 704.
[4] Id.
[5] Id.
[6] Id.
[7] Id.
[8] Id.
[9] Id. The statute provides that a person with a claim for damages arising from bodily injury or death may enter into a contract with the tortfeasor, the tortfeasor’s insurer, or both. In the resulting contract, the person asserting the claim agrees, in exchange for an amount in consideration, that in the event of a judgment against the tortfeasor there will be no garnishment proceeding or other levy brought against the tortfeasor’s assets that were not specified in the contract. Mo. Rev. Stat. § 537.065 (2000); see also infra Part II.
[10] Schmitz, 373 S.W.3d at 704.
[11] Id.
[12] Id.
[13] Id.
[14] Id. The equitable garnishment statute provides that upon the recovery of a final judgment against any person, firm, or corporation by a person with a claim for damages arising from bodily injury or death, the person with the claim is entitled to have the defendant’s insurance money applied to the satisfaction of the judgment. If the judgment is not satisfied within thirty days after the date when it is rendered, the person with the claim may proceed in equity against the defendant and the insurance company to reach and apply the insurance money to the satisfaction of the judgment. Mo. Rev. Stat. § 379.200 (2000).
[15] Id.
[16] Id. at 704-05
[17] Id. at 705
[18] Id.
[19] Id.
[20] Id.
[21] Id.
[22] Schmitz, 2010 WL 2160748 at *1, 10.
[23] Schmitz, 373 S.W.3d at 705.
[24] Id.
[25] Id. at 705-06 (citing Seeck v. Geico Gen. Ins. Co., 212 S.W.3d 129, 132 (Mo. 2007) (en banc)).
[26] Id. at 706.
[27] Id.
[28] Id.
[29] Id. at 706, n.5 (“‘Underlying Limits of Insurance’ is defined as ‘the total sum of the limits of all applicable “underlying insurance” . . ., including self-insurance or means other than insurance.’ Here, the underlying limits of insurance were $1 million.”).
[30] Id. at 706.
[31] Id.
[32] Id.
[33] Id.
[34] Id. at 706-07.
[35] Id. at 707.
[36] Id. (emphasis added).
[37] Id. (emphasis added).
[38] Id.
[39] Id.
[40] Id.
[41] Id. at 707-08.
[42] Id. at 708.
[43] Id.
[44] Id.
[45] Id.
[46] Id. (citing Webster’s Third New International Dictionary Unabridged 1952 (1993)).
[47] Id.
[48] Id.
[49] Id.
[50] Id.
[51] Id.
[52] Id.
[53] Id. at 709.
[54] Id.
[55] Id.
[56] Id.
[57] Id. at 710.
[58] Id.
[59] Id.
[60] Id. (quoting Rinehart v. Anderson, 985 S.W.2d 363, 371 (Mo. App. W.D. 1998)).
[61] Id.
[62] Id. at 711.
[63] Id.
[64] Mo. Rev. Stat. § 537.065 (2000).
[65] Gulf Ins. Co. v. Noble Broad., 936 S.W.2d 810, 815 (Mo. 1997).
[66] Id.
[67] Id. at 815.
[68] Id. at 816.
[69] Id. (citing Miller v. Shugart, 316 N.W.2d 729, 735 (Minn. 1982)).
[70] Id.
[71] Schmitz, 337 S.W.3d at 709.
[72] Id.
[73] Id.
[74] Id.
[75] Id.
[76] Id.
