Settlement found no bar to umbrella coverage
Injured party settled with primary insurer for less than the full limits of its policy

By Michelle Lore
May 20, 2002
Reprinted with Permission of Minnesota Lawyer

Where an injured party, an insured and a primary insurer settled a claim for less than primary policy limits and the injured party agreed to absorb the gap between the settlement amount and the policy limits, coverage under an umbrella policy became available, the Court of Appeals has ruled.

The insured, whose auto insurance included $500,000 of bodily injury coverage, was driving a car that struck and injured a woman. The insured settled with the injured woman for $425,000 and then sought coverage under an umbrella policy with a limit of $3 million. The umbrella carrier sought a declaration that there was no coverage because the primary insurer had not paid the limit of its primary policy.

An Olmsted County District Court judge determined that the insured could reach the umbrella coverage despite the settlement for less than the primary policy limits.

The Court of Appeals affirmed.

"Certainly, the effective and expeditious resolution of lawsuits is a commendable goal; one fully consistent with the public policy of Minnesota," wrote retired Judge Doris Ohlsen Huspeni, sitting by appointment. "Indeed ... Minnesota has a history of approving and encouraging partial settlements of claims."

The 14-page decision, Cincinnati Insurance Company v. Franck, et al. , is Minnesota Lawyer No. CA-460-02. Judge Gordon W. Shumaker dissented.

Rochester attorney Paul R. Dahlberg, who represents the injured party, believes the decision will assist injured parties in moving forward with their lives more quickly.

"It allows injured parties to make a good recovery without being held hostage to the interests of insurance companies," he said.

Liability companies are not likely to settle unless they are able to save money on the underlying policy, Dahlberg observed. This decision increases the chances of resolving both issues - the underlying policy coverage and the umbrella coverage - by settlement, he said.

"It's another tool to help us and the insurance companies try to compromise," he observed. "It leads to more settlements, not more litigation."

The attorney for the umbrella carrier, Peter C. Sandberg of Rochester, declined to comment on the decision.

The outer limits

Joyce Penniston was driving a car owned by her husband when she struck and seriously injured plaintiff Francine Franck.

AMICA Mutual Insurance Company provided primary liability insurance for the Pennistons, with a bodily injury limit of $500,000. The Pennistons also carried additional insurance under a personal umbrella liability policy written by Cincinnati Insurance Company. The policy had bodily injury limits of $3 million, but payments would be made only "over and above the amounts provided for in the basic policies."

Franck and her husband entered a settlement agreement and release with the Pennistons and AMICA for $425,000. The agreement provided that the payment was in partial satisfaction of any claim the Francks may have against the Pennistons to the extent of the first $500,000, but that the Pennistons would have no personal liability in excess of $425,000. The Francks also released AMICA, agreeing that $500,000 would be credited against any judgment in the Francks' favor, and reserved claims against the Pennistons up to Cincinnati's limits.

The Francks then sued the Pennistons. Cincinnati initially tendered defense of the action to AMICA, but later assumed its own defense of the lawsuit. Cincinnati brought an action seeking a declaration that there was no coverage under the umbrella policy because AMICA had not paid the limit of it's primary policy.

The District Court judge ruled that Cincinnati's umbrella policy provided bodily injury coverage, finding it significant that the policy did not contain any language requiring the primary policy limits to be exhausted before coverage under the umbrella policy is available. The judge rejected the notion that the primary policy had to be exhausted, and concluded that in any event, the settlement reached by the parties exhausted the primary policy limit. Cincinnati appealed.

Policy language

Huspeni began by examining Cincinnati's policy, wherein the company agreed to provide "[e]xcess insurance over and above the amounts provided for in basic policies." It was undisputed that the "basic policy" applicable here was AMICA's primary policy with a $500,000 bodily injury limit.

Cincinnati's policy required that the insured maintain basic coverage of $500,000, and provided that it would pay only the amount which is "more than the required basic policy limits and more than any other collectible insurance." If there was other insurance in addition to the basic policy, the other insurance would pay first and the Cincinnati policy would be in excess of the other insurance.

It was undisputed that Cincinnati's policy was an "umbrella" policy that provided "excess" insurance coverage. Applying Cincinnati's policy language in its ordinary sense, the excess coverage is over and above the amounts provided in the AMICA policy, Huspeni observed.

Although the Francks and Pennistons argued that the absence of an exhaustion clause in the Cincinnati policy was relevant, the court did not address that issue. Instead, the court found that the critical question on appeal was whether the District Court judge correctly assessed the effect of the settlement agreement on the availability of umbrella coverage. The Court of Appeals concluded that the answer was "yes."

Critical question

In arriving at this conclusion, the court first rejected Cincinnati's argument that the settlement required it to "drop down" and provide coverage at lower limits, thus forcing an increase in premiums for umbrella policies.

"Cincinnati's duty to indemnify will be only for amounts over and above the primary policy limit," Huspeni wrote. "The duty to defend has already been assumed, and Cincinnati is not seeking to recover the costs of defense."

Turning next to relevant caselaw, Huspeni explained that in the 1982 case of Drake v. Ryan , the Minnesota Supreme Court adopted the reasoning of the Wisconsin Supreme Court in Loy v. Bunderson . After a thorough discussion of public policy considerations, the Drake court approved a settlement under which the plaintiff could reserve a claim against a defendant's excess liability carrier for damages exceeding the limits of the primary policy. On balance, the Drake court determined, "public policy considerations favor the enforcement of modified Loy releases in Minnesota." The Drake court left for "another day," however, the case involving umbrella insurers.

Noting that the day is here, Huspeni turned to another Wisconsin case. In 1985, the Wisconsin Supreme Court, in Teigen v. Jelco of Wisconsin, Inc. , stated that the desirability of Loy -type agreements lies in the encouragement of partial settlements in future cases, thereby fostering effective and expeditious resolution of lawsuits.

In the case at bar, the Court of Appeals concluded that the Teigen rationale mirrored that of Drake and that the public policy considerations of Drake and Teigen are identical.

Huspeni pointed out that the effective and expeditious resolution of lawsuits is a commendable goal - one fully consistent with the public policy of this state. As the District Court judge noted, Minnesota has a history of approving and encouraging partial settlements of claims, Huspeni observed.

Addressing the umbrella insurer's concerns, the Court of Appeals noted that it is unlikely that plaintiffs will settle claims against primary insurers for deep discounts simply to take a chance against the excess coverage. The court found that it is more in keeping with the expressed policy of Minnesota to encourage partial settlement of claims and prompt payment to injured parties.

"The Drake court adopted the rationale of Loy . The Teigen court declared the public policy considerations of Loy to be equally applicable in cases involving umbrella policies," Huspeni wrote. "We conclude that the public policy considerations of Drake also should be equally applicable in cases involving umbrella policies."

Thus, the court determined that it was proper to invoke coverage under the umbrella policy.

In his dissent, Shumaker pointed out that although the settlement undoubtedly benefited AMICA, the Francks, and the Pennistons, it surely did not benefit the umbrella insurer.

"Thus, the laudable goal of benefit to settling disputants is turned on its head if some of the parties can contrive to benefit themselves at the expense of a nonsettling party," wrote Shumaker. "Additionally, it is unlikely that the justice system is benefited in any respect by a judicial re-writing of the insurance contract to which insureds and umbrella insurer agreed."

Shumaker also observed that under the plain language of the umbrella insurance contract, there is no coverage available until a claim exceeds the limit of the underlying policy. "Only in a fictional sense has the claim here exceeded the limit of the underlying policy," he wrote.