The Western District of the Missouri Court of Appeals has again construed the effect of the 2017 amendments to Mo. Rev. Stat. § 537.065, which gave insurers a limited right to intervene and protect their interest when their insured enters into a settlement agreement pursuant to the statute.
In Knight v. Knight, the Court ruled insurers must be notified of the 537.065 Agreement “before a judgment may be entered” but does not provide an insurer an opportunity to intervene before the insured’s liability or damages are determined.
In Knight, a grandson brought suit against his grandparents for injuries the grandson suffered while riding a Jet Ski under his grandparents’ supervision. The grandparents’ insurer declined to defend or indemnify grandparents under the policy at issue.
Following the insurers denial of coverage, the grandson entered into a “Settlement Agreement and Agreement to Limit Recovery to Certain Assets” pursuant § 537.065. The agreement provided the claims would be resolved at a binding arbitration where grandparents would not object to grandson’s evidence, cross-examine any witnesses, or offer any evidence of their own. In addition, the agreement provided that grandparents would notify its insurer of the agreement “no sooner than thirty days before Judgment is entered.”
At the conclusion of the arbitration, the arbitrator found the grandfather negligent and awarded grandson $6 million in compensatory damages.
After the arbitrator determined liability and damages, the grandparents notified their insurer of the agreement and subsequently sought confirmation of the arbitration award in the circuit court. The insurer intervened pursuant to § 537.065.2 and denied liability on behalf of grandparents and simultaneously moved to set aside the arbitration award.
However, the circuit court confirmed the award and the Western District Court of Appeals affirmed.
Mo. Rev. Stat. § 537.065 allows a claimant and a tortfeasor to enter into an agreement in which the plaintiff agrees to collect any judgment that may be entered against the tortfeasor from certain specified assets. Typically, when entering into these agreements, the claimant agrees to limit collection to the tortfeasor’s liability insurer, thereby protecting the tortfeasor’s personal assets.
Under such agreements, the tortfeasor agrees not to contest the issues of liability or damages in the underlying action, which often leads to a judgment in an amount far in excess of any applicable policy limits. In a subsequent proceeding to collect on such a judgment, the tortfeasor’s insurer is bound by the determinations of liability and damages made in the underlying action.
In 2017, the Missouri legislature amended § 537.065 with the intent to provide insures with a limited right to intervene in third party tort actions before liability and damages have been determined, thus reducing the number of large and uncontested judgments obtained pursuant to § 537.065 agreements.
However, based upon Knight, claimant’s attorneys will likely assert that the amendments did not effectively accomplish this intent — but instead, had little to no substantive effect despite the legislature’s clear intent to effect change in the prior operation of the statute. Specifically, the Knight Court explained:
In amending § 537.065, the General Assembly plainly intended to address the scenario which played out innumerable times under the pre-2017 version of [§ 537.065], in which: an injured party and an insured/tortfeasor enter an agreement which eliminates the insured’s personal liability exposure; they then continue to litigate the injured party’s claim in circumstances in which the insured may have little incentive to vigorously defend, and might even be contractually prohibited from doing so; the injured party obtains a substantial money judgment against the insured; and the injured party then seeks to bind the insured’s liability insurer to the outcome of the litigation, even though the insurer did not participate in, and might even have been unaware of, that litigation.
Prior to Knight¸ insureds asserted that they were entitled to give notice to their insurer of the § 537.065 Agreement, wait more than 30 days, and then institute an arbitration proceeding to defeat the insurer’s statutory right to intervene.
Now, claimants will likely argue that Knight allows them to dispense with such notice altogether. Specifically, insureds might argue that they need not give notice of the § 537.065 Agreement until after the arbitration proceedings have been fully resolved. Thus, the insurer is only given notice after the issues of liability and damages have been determined.
In short, under that view, Knight would provide insureds a safe haven from having to worry about violating their contractual duty to cooperate by allowing them to have uncontested awards entered against them without the insurer even knowing about. This is the exact scenario the Missouri legislature was trying to avoid with the 2017 amendments to § 537.065.
Despite recognition of the legislature’s clear intent for the 2017 amendments, the Court refused to apply that intent. Instead, the Court focused on the terms that were explicitly included in the statute and ignored those terms that were clearly implied.
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