New York Marine appealed to the Montana Supreme Court, arguing that the trial court had erred in finding that the stipulated agreement was reasonable and enforceable and that it had improperly entered judgment on the agreement because New York Marine had defended its insured throughout the underlying litigation. New York Marine maintained that a stipulated judgment entered into without the consent or participation of the insurer was proper only when the insurer had refused to provide a defense to its insured.

Junkermier and the plaintiffs conceded that New York Marine had not violated its duty to defend. They contended, though, that New York Marine had violated other duties under the insurance contract, the “constellation” of which had resulted in the abandonment of Junkermier by its insurer, “just as certain as if it ha[d] breached the duty to defend.”

Specifically, they argued that New York Marine had failed to affirm coverage under the policy or to file a declaratory judgment action to determine coverage; refused to settle within policy limits when liability was reasonably clear and damages were in excess of policy limits; and misrepresented to its insureds that policy limits were eroded by defense costs. They maintained that because New York Marine effectively had abandoned Junkermier, Junkermier was entitled to enter into a stipulated judgment without New York Marine's consent and that the trial court had properly presumed that the stipulated judgment was reasonable.

The Montana Supreme Court's Decision

The court reversed.

In its decision, the court pointed out that a pretrial stipulated judgment may be enforceable against a defendant's liability insurer if the insurer breached its contractual obligation to defend the insured. The court explained that an insurer that breached its duty to defend was “bound by its insured's settlement and any resulting judgment so long as the settlement [was] reasonable and not the product of collusion.” This was, the court continued, because a breach of the duty to defend was “a material breach of the contract” that relieved the insured of the reciprocal contract duty to cooperate with the insurer, and equity thus estopped the insurer from denying coverage and raising other contract defenses in subsequent litigation. In that instance, according to the court, a stipulated settlement was “presumed reasonable” and the burden was “on the insurer to rebut that presumption.”

The court then said that when an insurer accepted the defense of the claim, and might have prevailed at trial had the insured and the claimants not settled without the insurer's participation, “no presumption of the insured's liability” generally arose from the fact or amount of settlement.

The court noted that, in this case, New York Marine had accepted defense of the claim and had provided a defense throughout the relevant proceedings. It then rejected the argument that if the defense had failed, the stipulated agreement was the only way Junkermier could protect itself from an excess verdict after New York Marine rejected the offer to settle for policy limits.

The court reasoned that the remedies available for breach of contract and for statutory violations provided redress for any injuries Junkermier would have faced from New York Marine's allegedly improper actions. “Junkermier was not powerless to protect itself without a stipulated settlement agreement presumed reasonable by the [trial c]ourt.” For example, the court observed, before trial, Junkermier could have assigned any claim arising from the insurer's alleged violations to the plaintiffs in exchange for a covenant not to execute any resulting excess verdict against the insureds; alternatively, Junkermier could have sought and paid a settlement to the plaintiffs and sought recovery from New York Marine for itself in a breach of contract or statutory claim.

The court concluded that:

When an insurer has provided a defense to its insured, a [trial c]ourt may not approve a stipulated agreement entered into without the consent or participation of the insurer that will be deemed presumptively reasonable against the defending insurer. If the third-party claimant and the insured decide to settle without the insurer's participation, a court may approve the stipulated judgment as between those parties in the underlying liability case, but it will not be presumed reasonable as to the insurer when the insurer is providing a defense. In such cases, the insured must pursue its separate breach of contract or [statutory] claims against the insurer and will bear the burden of proving all elements of those claims, including damages.

The case is Draggin' Y Cattle Co., Inc. v. Junkermier, Clark, Campanella, Stevens, P.C., No. DA 17-0731 (Mont. April 24, 2019). Attorneys involved include: For Appellant: Gary M. Zadick (argued), Ugrin, Alexander, Zadick, P.C., Great Falls, Montana. For Appellees: Timothy B. Strauch (argued), Strauch Law Firm, PLLC, Missoula, Montana; David R. Paoli, Paoli Law Firm, P.C., Missoula, Montana. For Amicus Montana Trial Lawyers Association: Justin P. Stalpes, Beck, Amsden & Stalpes, PLLC, Bozeman, Montana; Gregory Munro (argued), Attorney at Law, Missoula, Montana.