8th Circuit Holds Insurer That Breached
December, 2002
Facts
In Royal Ins. Co. v. Kirksville College of Osteopathic Medicine, Inc., 304 F.3d 804 (8th Cir. 2002), “Kirksville” had entered into a contract to buy adjoining property from Lewistown Heet Gas Co. (“Lewistown”). Kirksville wanted to convert the property into a parking lot for the college. Before closing, a Kirksville contractor, PSR Construction, Inc. (“PSR”), entered upon the property to begin the conversion. The PSR crew struck and ruptured an underground storage tank, releasing coal tar waste. Lewistown sued Kirksville and PSR in state court, asserting damage claims for negligence and trespass.
Royal initially defended Kirksville under a reservation of rights, but withdrew its defense when the district court in this diversity declaratory judgment action held there was no duty to defend. That ruling was subsequently reversed by the Eighth Circuit, which held that the insurers breached their duty to defend the trespass claim, although agreeing that the negligence claim was not covered because of the policies’ absolute pollution exclusions, and remanded the matter for consideration of damages and the question of the duty to indemnify. Royal Ins. Co. v. Kirksville College of Osteopathic Medicine, 191 F.3d 959 (8th Cir.1999)). On remand, the parties settled the issue of damages for breach of the duty to defend but not the indemnity issue.
While the declaratory action was proceeding in federal court, the contractor, PSR, moved for partial summary judgment in the state court action, arguing that no trespass had occurred because it had implied permission to work at the site. The state court granted that motion and Lewistown filed a motion to reconsider. Before ruling on the motion to reconsider, Kirksville and Lewistown separately settled their part of the dispute and a few weeks later all parties to the state court action stipulated to a dismissal of all claims against Kirksville and PSR with prejudice. Significantly, no party asked the state court to vacate its prior order dismissing the trespass claim against PSR.
In the settlement, Kirksville agreed to purchase the property for $30,000.00 and to pay damages of $270,000.00 for the property’s reduced value as well as being responsible for environmental remediation. In the declaratory action, therefore, Kirksville claimed the insurers were liable for the $270,000.00 plus approximately $5 million in remediation costs. The district court granted Royal summary judgment, holding that they need only indemnify that portion of the settlement attributable to a covered trespass claim; and second, that Kirksville was collaterally estopped to relitigate the trespass issue in view of the state court’s summary judgment ruling.
Analysis
The Eighth Circuit Court phrased the issues on appeal simply as “whether the insurers may litigate the indemnity issue after breaching their duty to defend, and if so, whether Kirksville is collaterally estopped by a prior state court ruling that no trespass occurred.”
The Insurer’s Right To
Litigate Indemnity
Although “it is clear the insurer remains obligated to reimburse the insured for any settlement obligation covered by the liability policy...”, Kirksville asked for more and argued that Royal should be punished for its refusal to defend by being precluded from arguing the coverage issue entirely. Citing its own decision in Esicorp, Inc. v. Liberty Mut. Ins. Co., 193 F.3d 966 (8th Cir. 1999), the Court noted that “an insurer’s liability when the insured has settled the underlying action may not exceed the policy coverages; therefore, a settlement encompassing both covered and noncovered claims must be fairly apportioned between the two” and held that under Missouri law an insurer is still entitled to a trial on the coverage issue even when it has breached the duty to defend.
The Collateral Estoppel Issue
The real rub from the insured’s prospective came by reason of the manner in which it settled the state court case. Since there was a valid order granting the contractor’s motion for partial summary judgment on the ground that no trespass had occurred at the time that the settlement was consummated, that order constituted a finding by a court of competent jurisdiction that no trespass had occurred and the district court held that collateral estoppel barred Kirksville from relitigating the issue of whether it trespassed and therefore granted Royal summary judgment because “there is no covered offense”.
The Eighth Circuit noted that “although the partial summary judgment order became final, had the settling parties agreed to vacate that ruling as part of the settlement, the ruling would not give rise to collateral estoppel.” But the ruling was not vacated and Lewistown’s right to appeal was rendered moot by the settlement.
Learning Point:
The Eight Circuit itself gives the insured its practice pointer by observing that had the settlement documents in the state court case included a vacatur of the summary judgment order on the trespass issue, it may have preserved its right to litigate the coverage issue. We suggest the settling parties should also have tried to make a fair allocation, if possible, of damages attributable to trespass if they wished to preserve the right to argue for indemnification. In this case, however, the facts suggest that the order granting summary judgment on the trespass issue entered by the state court reflected the true fact of the matter and that no portion of the claim was attributable to any actionable trespass and therefore indemnification in any amount would have been inappropriate.
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