This story is reprinted with permission from FC&S Legal, the industry's only comprehensive digital resource designed for insurance coverage law professionals. Visit the website to subscribe.
A federal district court in Illinois has ordered Liberty Mutual Fire Insurance Company to pay a $4.5 million judgment, plus interest, notwithstanding its policy's $25,000 limits — and despite the fact that it did not find that the insurer had acted in bad faith in declining to defend a 16 year old in a negligence action.
Crash leads to severe brain injury
On the night of August 2, 2013, Michiah Risby drove a 2004 Pontiac Grand Prix insured by her mother, Kimberly Perkins, through Liberty Mutual, to a party in Peoria, Illinois. Her friend wanted to leave, but Ms. Risby did not. Somehow, Miquasha Smith obtained the keys to the car and dropped off the friend, with another person in the car. Ms. Risby maintained that she had not given Ms. Smith permission, but Ms. Smith said that she had permission to drive the car.
After dropping off the friend, Ms. Smith picked up two additional passengers. One of those passengers was Monteil Hyland. Ms. Smith crashed the car into a curb and two legally parked cars at 12:46 a.m. on August 3, 2013. The passengers were injured, and Mr. Hyland suffered a severe traumatic brain injury.
Peoria police prepared a crash report. Ms. Smith received 12 traffic citations. (After hiring an attorney, she pleaded guilty to one count of aggravated reckless driving and received 45 days in jail and 30 months of probation.)
At the time, Ms. Smith was 16 years old and had a restricted driver's license; she was driving after curfew and had more under-aged passengers in the car than was allowed. The police reported that Ms. Smith's version of the events "continue[d] to change." Ms. Smith's family did not have a car or car insurance.
Mr. Hyland's mother, Shannon Hyland, sued Ms. Smith, the driver, for negligence.
Conflicting statements
Kanisha Scott, Ms. Smith's mother, submitted a copy of the lawsuit to Liberty Mutual on August 15, 2013. She informed Liberty Mutual that she was sued by Ms. Hyland. She was asked if she had driven the car with permission, for which she responded that she had.
Heather Duehlmeyer, an employee of Liberty Mutual, referred the Hyland complaint against Ms. Smith to an attorney working for Liberty Mutual.
Liberty Mutual investigated the claim.
Liberty Mutual claimed it received a call from Ms. Perkins and relayed the information that her daughter "adamantly states that she did not give her permission for anyone to use vehicle." Liberty Mutual took recorded statements from both Ms. Smith, and Ms. Risby and Ms. Perkins together. Ms. Smith, the driver during the crash, and Ms. Risby, the named insured, gave conflicting statements to Liberty Mutual on the issue of whether Ms. Risby had given Ms. Smith permission to drive the car that evening.
According to Ms. Smith, Ms. Risby had given her permission to drive the car and had given her the keys.
According to Ms. Risby, when Ms. Smith had asked if she could drive the car, Ms. Risby had told her she could not. Instead, Ms. Risby had given the keys to a person named "Rob." Liberty Mutual did not take a statement from "Rob."
Coverage denied based on non-permissive driver
Based on the statements from Ms. Smith and Ms. Risby, Liberty Mutual denied coverage because it concluded that Ms. Smith was a non-permissive driver.
Robyn Brown from Liberty Mutual authored a coverage referral form, concluding that Ms. Smith was not credible and that she did not have permission to drive the insured vehicle. Therefore, Ms. Smith was not covered under the policy. The form did not discuss the duty to defend.
Michael Schlegel from Liberty Mutual made the final decision to deny coverage. In making this determination, Mr. Schelgel later testified that he also looked to the following: "The credibility of those parties or the apparent credibility based on those who spoke with them and the police report."
After this decision was made, Mr. Schlegel advised Ms. Brown to send a denial letter to Ms. Hyland's attorney and inform the insured that Liberty Mutual would not be defending her.
After confirming that the named insureds were not named in the lawsuit, she advised that the file should be closed. Ms. Brown then sent a denial letter to counsel for Ms. Hyland on September 23, 2013.
Ms. Smith never retained an attorney and, on the record at the hearing, stated that she represented herself. She offered no evidence and the trial court found her liable and entered judgment in favor of Ms. Hyland and against Ms. Smith.
Liberty Mutual did not provide a defense for Ms. Smith in Ms. Hyland's case and it did not file a declaratory judgment action seeking a determination on the issue of the duty to defend or the duty to insure.
Breach of duty
A judgment was entered against Ms. Smith for $4,594,933.85. She assigned Ms. Hyland any claims against Liberty Mutual for failure to defend Ms. Smith, and Ms. Hyland sued Liberty Mutual for breach of insurance contract and duty to defend.
Ms. Hyland did not allege bad faith or tortious conduct on the part of Liberty Mutual. According to Ms. Hyland, Liberty Mutual had a duty to defend Ms. Smith in the lawsuit she had filed against her and had breached that duty by failing to defend her or defend her under a reservation of rights, or file a declaratory judgment action regarding its duty to defend or indemnify. Ms. Hyland pointed out that her personal injury lawsuit had made no reference to the issue of permission.
She alleged that as a direct and proximate result of this breach of duty, a judgment had been entered against Ms. Smith in the amount of $4,594,933.85.
Ms. Hyland moved for summary judgment.
Damages an additional insured can recover
Liberty Mutual stopped contending that it had breached the duty to defend. It argued that the case was about the damages a putative additional insured could recover if an insurer had erroneously — but not in bad faith — failed to defend.
The Liberty Mutual Policy
The policy stated:
Part A – Liability Coverage
A. We will pay damages for "bodily injury" or "property damage" for which any "insured" becomes legally responsible because of an auto accident. Damages include prejudgment interest awarded against the "insured." We will settle or defend, as we consider appropriate, any claim or suit asking for these damages. In addition to our limit of liability, we will pay all defense costs we incur. Our duty to settle or defend ends when our limit of liability for this coverage has been exhausted by payment of judgments or settlements. We have no duty to defend any suit or settle any claim for "bodily injury" or "property damage" not covered under this policy.
B. "Insured" as used in this Part means:
1. You or any "family member" . . .
2. Any person using "your covered auto".
The policy also stated that a person was not covered under the policy when:
8. Using a vehicle without a reasonable belief that the "insured" is entitled to do so. . . .
Decision against Liberty Mutual
The district court granted Ms. Hyland's motion for summary judgment.
In its decision, the district court noted that Ms. Hyland's complaint stated that "Defendant Miquasha Smith drove her vehicle" and described the vehicle as "a 2004 Pontiac Grand Prix driven by Defendant Miquasha Smith." The 2004 Pontiac Grand Prix involved in the accident was a "covered auto" listed in the policy's declarations, the district court added, observing that it was "undisputed that the lawsuit was silent on the issue of permissive use."
Therefore, the district court ruled, Ms. Smith could have fallen within the policy into the "Any person using 'your covered auto'" category. "Ms. Smith potentially fell within the policy coverage, triggering Liberty Mutual's duty to defend," the district court declared.
The district court was not persuaded by Liberty Mutual's argument that Ms. Risby was adamant she had not given Ms. Smith permission to drive her car, stating that, "when faced with two separate and conflicting versions of events, the claim potentially fell within the [p]olicy's coverage."
Breached its duty to defend
The district court then addressed whether damages should be limited to the $25,000 policy limit, and ruled that they should not be so limited.
According to the district court, even absent bad faith, damages for breach of the duty to defend could be in excess of the policy limits and were "measured by the consequences proximately caused by the breach." The district court noted that Liberty Mutual had breached its duty to defend, and that the trial court had found the damages to be $4,594,933.85. That amount, the district court said, was not "unforeseeable" because, due to Liberty Mutual's breach, Ms. Hyland had pursued a default judgment and had put Liberty Mutual on notice that she was planning on pursuing a default judgment in the absence of a defense for Ms. Smith.
The district court then held that the default judgment in excess of $4.5 million had been "proximately caused" by Liberty Mutual's breach.
Finally, the district court ordered post-judgment interest on the entire judgment amount.
The case is Hyland v. Liberty Mutual Fire Ins. Co., No. 1:15-cv-01264-JES-JEH (C.D. Ill. Aug. 7, 2017).
Steven A. Meyerowitz, Esq., is the director of FC&S Legal, the editor-in-chief of the Insurance Coverage Law Report, and the founder and president of Meyerowitz Communications Inc. Email him at smeyerowitz@meyerowitzcommunications.com.
© Touchpoint Markets, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.