The Minnesota Supreme Court has held that “the insurance policy does not cover all of the claimed property damage and a Miller-Shugart settlement agreement that fails to allocate between covered and uncovered claims is not per se unreasonable and unenforceable.”
Our prediction, below, was wrong for the most part. While the Minnesota Supreme Court both affirmed and reversed the Court of Appeals decision in favor of the insurer, on balance, it would appear that the insurer had a better day than the insured before the Supreme Court.
As pointed out in the first paragraph of this post, the Minnesota Supreme Court addressed two separate questions, which can be rephrased: (1) under the facts of the case and the applicable insurance policy, did the insured have coverage under the policy? We read the decision to answer, in effect, “Yes, but not much;” and (2) did the insured’s deal with the injured property owner (a so-called Miller-Shugart agreement) fail because it did not distinguish between “covered” and “uncovered” claims? The Minnesota Supreme Court’s answer was, “Not necessarily.”
In short, it looks as if the insured (and King’s Cove, the injured party, who entered into the Miller-Shugart agreement) has some but little coverage and did not torpedo that coverage by failing to distinguish between covered and uncovered claims in the Miller-Shugart agreement. It seems the case will go back to the trial court for on-going analysis of the reasonableness of the settlement and then analysis of the allocation between covered and uncovered claims (or, alternately, the litigants will cut their legal fee losses and cut a deal rather than continue the fight.)
Below is the original post, from several months ago and before the Minnesota Supreme Court issued its decision this week (4/14/2021):
“A” sued “B” for breach of contract and negligence arising from construction work that B agreed to perform for A.
B had insurance and asked its insurer for coverage and also to undertake its defense (and the costs of defense (including attorneys’ fees)) under the insurance policy.
B’s insurer agreed that some of A’s claims fell within the policy’s coverage but took the position that some did not.
A and B reached an agreement to settle the lawsuit. B agreed that A’s damages exceeded $5 million. They agreed to a settlement of about $2 million, and B agreed that A could step into B’s shoes and seek coverage under B’s insurance policy. (This arrangement is known in Minnesota as a “Miller-Shugart Settlement.”)
This is the scenario in King’s Cove Marina v. Lambert Construction, LLC, et al. In Kings Cove, the trial court reviewed the $2 million settlement and concluded that it was fair and reasonable under the circumstances (and not some kind of collusion to over-reach or get a wind-fall against the insurer).
But the King’s Cove settlement made no distinction between “covered claims,” the claims for which there was insurance coverage and “uncovered claims,” for which there was none. Citing a decision out of the U.S. Court of Appeals (8th Cir.), the Minnesota Court of Appeals reversed the district court, holding:
[A] Miller-Shugart settlement agreement that encompasses both covered and non-covered damages under the insured’s commercial general-liability insurance policy, but fails to allocate between covered and non-covered damages, is . . . unreasonable as a matter of law.https://bit.ly/32RyQ6i
This case has attracted quite a bit of attention in the insurance industry. There is a coverage component (i.e., did the Court of Appeals properly analyze the insurance policy?) and a Miller-Shugart component (when a settlement does not distinguish between covered and uncovered claims, is the settlement per se unreasonable (that is, “unreasonable as a matter of law”)?).
The Minnesota Supreme Court has accepted King Cove’s appeal (here is the petition for review). (Here is the response to the petition.) Minnesota appellate powerhouse lawyers Kay Nord Hunt and Mark Bradford will square off on October 5. Minnesota Litigator will predict a win for Bradford, counsel for King’s Cove but we’ll see. Stay tuned.