Drafting §537.065 Agreements: A Cautionary Tale
A recent decision by the Eastern District Court of Appeals illustrates the importance of carefully drafting §537.065 settlements as the failure to do so may confer an unintended benefit onto insurance carriers to the detriment of the underlying tort claimant.
Hunter v. Moore
The lawsuit arose after Brittany Hunter was sexually assaulted at the Delta Motel in 2012. Hunter filed suit against the motel as well as Charles Moore, Sr., the manager of the motel, alleging that the motel and Moore caused or contributed to cause the sexual assault. The motel’s insurer, American Family, agreed to defend Moore under a reservation of rights and filed a Declaratory Judgment to determine its coverage obligations.
Moore’s personal counsel informed American Family that Moore was rejecting American Family’s defense and requested American Family withdraw its reservation of rights and dismiss Moore from the Declaratory Judgment action. American Family seemingly agreed to dismiss Moore and to withdraw its reservation of rights, however, prior to dismissing Moore, American Family filed a motion for summary judgment asking the court to find it did not need to provide any kind of coverage to Moore. Moore’s personal counsel then informed American Family that a §537.065 settlement agreement had been reached between Moore and Hunter leading to American Family dismissing Moore from the Declaratory Judgment action.
The agreement reached between Hunter and Moore provided that:
- Hunter would only satisfy any judgment against Moore with the proceeds of the American Family policy unless Moore’s income exceeded $50,000 in any year;
- Moore would authorize Hunter’s counsel to pursue all claims against American Family;
- Moore would cooperate with Hunter in prosecuting the claims against American Family; and
- Moore and Hunter would share equally in the proceeds of the claims against American Family.
Less clear was whether Moore and Hunter agreed that Moore would concede liability or submit to an uncontested trial. Hunter’s counsel testified he intended for Moore to submit to an uncontested trial and not to cross-examine Hunter’s liability and damage expert’s but did not specifically insert a provision into the .065 saying so. Ultimately the trial court, finding a mutual mistake, reformed the .065 agreement adding in a provision preventing Moore from allowing American Family to control the defense of the liability case and requiring Moore to either agree to a consent judgment or an uncontested hearing to determine liability and damages. Moore, with American Family now providing his defense, appealed.
The Eastern District quickly brushed aside American Family and Moore’s argument that the .065 was not enforceable based on American Family’s ‘withdrawal’ of its reservation of rights and providing a defense. The pendency of a declaratory judgment action is deemed a denial and in the face of a denial of coverage, the insured is free to enter into settlement agreements that protect his interests.
However, the Eastern District found the trial court erred in reforming the .065 to include the provision requiring Moore to agree to a consent judgment or to an uncontested hearing to determine liability and damages as Moore never intended this provision to be a part of the .065. In so finding, the Eastern District discredited Hunter’s underlying counsel’s testimony that the spirit of the §537.065 requires a party to agree to a consent judgement or admit liability and instead relied on Moore and his personal counsel’s testimony that he neither intended to submit to a consent judgment or an uncontested hearing.
As a result of the decision, Hunter has lost significant leverage against American Family as she no longer has the ability to rapidly reduce her claim to judgment. Nor can she freely execute against Moore’s personal assets. Importantly, as the .065 now stands, American Family will still be able to protect its own financial interest by providing a full defense to Moore.
While the Eastern District’s decision may not have broad implications on Missouri bad faith litigation, it does highlight the importance of carefully negotiating and drafting §537.065 agreements to most effectively place the loss on the carrier who is wrongfully denying coverage.
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