COURT DECISIONS

Rough Notes, Apr 2006

Chitwood was involved in an accident with another vehicle, and three people were injured. All three sued Foster Brothers. At first, Reliance defended the suit. Later, Continental provided an attorney. The parties agreed that Continental was the primary insurer and Reliance was the secondary insurer.

Before trial, Continental reached settlement with the injured parties. For a payment of $600,000, Continental was released from any liability, and the parties agreed to limit any other recovery against Foster Brothers to the proceeds of the Reliance policy. In addition, the injured parties agreed that they would not seek payment under the Reliance policy unless the judgment against Foster Brothers exceeded $750,000, and that they would seek recovery only for the portion of the judgment that exceeded $750,000.

Reliance reached its own settlement agreement with the injured parties, agreeing to pay $250,000 in exchange for their agreement to dismiss the lawsuit. It then filed a separate action alleging several theories of recovery against Continental. Under that action, Reliance sought recovery of the $250,000 it paid the injured parties, under the theory that it could take assignment of Foster Brothers' indemnity rights under the lease agreement with Chitwood. It also argued that because Continental had paid only $600,000, it had not reached the policy limits of $750,000, and it therefore must pay the additional $150,000. Reliance argued that Continental breached its duty as a primary insurer to the secondary insurer, and it argued that Continental owed it $41,244.23 in attorneys' fees that Reliance incurred in the personal injury action. Finally, Reliance argued it was entitled to prejudgment interest on all amounts claimed.

The lower court, applying Missouri law, found in favor of Chitwood and Continental. Specifically, the lower court found that Reliance could not obtain Foster Brothers' indemnity rights against Chitwood. To allow this would be the same as allowing Reliance, Chitwood's insurer, to pass its loss to the insured-the same risk for which it had accepted premiums. The court also found that Continental's settlement agreement with the injured parties exhausted its liability, and that there was no evidence of bad faith on the part of Continental to indicate it had breached some duty to Reliance. On the issue of attorneys' fees, Continental agreed to pay the $41,244.23; however, the court denied Reliance's request for prejudgment interest. Reliance appealed the lower court's decision.

The United States Court of Appeals, Eighth Circuit, reviewed the case. It agreed with the lower court's decision to deny Reliance's request for recovery of $250,000 from Chitwood under an indemnification theory. Like the lower court, it found that Missouri recognized the "anti-subrogation rule," which prevents an insurer from passing its loss to the insured. To allow this would be to allow the insurer to "avoid coverage for the very risk for which it accepted premiums" and create "a conflict of interest that might deprive an insured of a vigorous defense."