Policyholder’s Settlement with Underlying Plaintiff Was Not Enforceable against Its Insurer, Eighth Circuit Affirms

May 15, 2017 | Insurance Coverage

The U.S. Court of Appeals for the Eighth Circuit has affirmed a district court’s decision that a settlement agreement reached between a policyholder and the company that was suing it was not enforceable against the policyholder’s insurance carrier.

The Case

The Interlachen Property Owners Association sued Kuepers Construction, Inc., alleging design and construction defects in a townhome complex that Kuepers had built in Crow Wing, Minnesota.

Kuepers’ insurer agreed to defend Kuepers under its professional liability insurance policy. Although the policy covered only design defect claims, Kuepers’ insurer continued defending Kuepers even after the design defect claims had been dismissed.

The construction defect claims went to trial, and a jury awarded Interlachen $2.147 million in damages. Kuepers appealed. In order to stay execution of the judgment pending appeal, Kuepers demanded that its insurer post a $2.147 million supersedeas bond. Kuepers’ insurer refused, asserting that it had no obligation to finance an appeal of claims not covered in the liability policy.

Meanwhile, Interlachen appealed the dismissal of its design defect claims, seeking to reinstate those claims against Kuepers.

Less than one week later, Kuepers and Interlachen settled their dispute pursuant to an agreement under which Kuepers stipulated to a $2 million judgment on the design defect claims in return for Interlachen’s pledge to seek recovery of the judgment solely against Kuepers’ insurer. Interlachen subsequently withdrew its notice of appeal.

After Kuepers’ insurer learned of the agreement, it went to court, seeking a declaration that the agreement was unenforceable.

The U.S. District Court for the District of Minnesota entered summary judgment for Kuepers’ insurer. It concluded that:

  • Kuepers’ insurer had never breached its policy or abandoned its duty to defend Kuepers;
  • Kuepers had not provided its insurer with notice of the agreement; and
  • The agreement raised legitimate concerns of reasonableness.

Interlachen and  Kuepers appealed to the Eighth Circuit.

The Eighth Circuit’s Decision

The circuit court affirmed. It agreed with the district court that the settlement agreement was not enforceable against the insurer.

The case is James River Ins. Co. v. Interlachen Property Owners Ass’n, No. 16-2994 (8th Cir. Apr. 17, 2017).

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