Miller v. Shugart
316 N.W.2d 729, 1982 Minn. LEXIS 1494 (1982)
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Rule of Law:
An insured does not breach the policy's cooperation clause by settling directly with a claimant when the insurer is disputing coverage. The insurer will be bound by such a settlement up to its policy limits if the claimant can prove the settlement was reasonable and prudent and not the product of fraud or collusion.
Facts:
- Lynette Miller was severely injured in a one-car accident while a passenger in a vehicle owned by Barbara Locoshonas and driven by Mark Shugart.
- Locoshonas was insured under an auto liability policy with Milbank Mutual Insurance Company.
- Milbank contended that Shugart was not operating the vehicle with the owner's permission and was therefore not covered under the policy.
- While Milbank litigated the coverage question, Miller offered to settle with Locoshonas and Shugart.
- Milbank was invited to participate in settlement negotiations but refused, citing the ongoing coverage dispute.
- Miller, Locoshonas, and Shugart executed a settlement stipulation in which the defendants confessed judgment for $100,000.
- The stipulation provided that the judgment was collectible only from any applicable insurance proceeds and that Locoshonas and Shugart would have no personal liability.
Procedural Posture:
- Milbank filed a declaratory judgment action in a trial court to determine whether its policy covered Shugart.
- The trial court entered judgment in that action, finding that the policy provided coverage for both Locoshonas and Shugart.
- Miller then commenced a personal injury action against Locoshonas and Shugart.
- Milbank appealed the trial court's declaratory judgment decision to the state's highest court, which summarily affirmed the finding of coverage.
- After coverage was affirmed, Miller initiated a garnishment proceeding against Milbank to collect on the stipulated judgment from her personal injury suit.
- In the garnishment action, the trial court granted summary judgment for Miller, ordering Milbank to pay the $50,000 policy limit plus interest on the full $100,000 judgment.
- Milbank (appellant) appealed the summary judgment order in the garnishment proceeding to the Minnesota Supreme Court, with Miller as the appellee.
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Issue:
Does an insured breach the cooperation clause of an insurance policy by entering into a settlement with a plaintiff, without the insurer's consent, while the insurer is actively litigating the issue of coverage?
Opinions:
Majority - Simonett, Justice.
No. An insured does not breach the duty to cooperate by entering into a reasonable settlement to protect their interests while the insurer contests coverage. While an insured has a duty to cooperate, they also have a right to protect themselves from a plaintiff's claim, especially when their insurance coverage is in doubt. An insurer that disputes coverage cannot compel its insured to forgo a settlement that eliminates the insured's personal liability. By choosing to contest coverage, the insurer bears the risk that the insured will enter into an independent settlement. However, such a settlement is not automatically binding on the insurer; the claimant bears the burden of proving that the settlement was reasonable and prudent and was not the product of fraud or collusion. In this case, there was no evidence of fraud or collusion, and given the severity of Miller's injuries and the clear liability, the settlement was reasonable as a matter of law up to the $50,000 policy limit.
Analysis:
This landmark decision establishes the framework for what is now commonly known as a 'Miller-Shugart settlement' in Minnesota law. It provides a mechanism for insureds to protect themselves from personal liability when their insurer defends under a reservation of rights or disputes coverage entirely. The ruling shifts a significant strategic risk to the insurer; if it wrongly denies coverage and the insured enters into a reasonable settlement, the insurer is bound by it. This creates an incentive for insurers to resolve coverage disputes promptly or to defend without a reservation of rights to maintain control over the litigation and settlement process.
