Allstate Ins. Co. v. Hayes

• Decision Date: 13 April 1993
• Docket Number: No. 92228,No. 4,92228,4
• Parties: ALLSTATE INSURANCE COMPANY, a foreign corporation, Plaintiff/Counter-Defendant-Appellee, v. Daniel HAYES, et al., Defendants, and William Keillor, Personal Representative of the Estate of Susan Keillor, Deceased, Defendant/Counter-Plaintiff-Appellant. Calendar
• Court: Michigan Supreme Court

Page 743

499 N.W.2d 743

442 Mich. 56

ALLSTATE INSURANCE COMPANY, a foreign corporation Plaintiff/Counter-Defendant-Appellee, v. Daniel HAYES, et al., Defendants and William Keillor, Personal Representative of the Estate of Susan Keillor, Deceased Defendant/Counter-Plaintiff-Appellant.

No. 92228.

Calendar No. 4.

Supreme Court of Michigan.

Argued Oct. 13, 1992.

Decided April 13, 1993.

[442 Mich. 57] Chasnis, Dogger & Grierson, P.C. by John A. Chasnis, Saginaw, for plaintiff/counter-defendant-appellee.

Gross & Nemeth by James G. Gross, Detroit, for amicus curiae.

Philip D. Swann, Burton, for defendant/counter-plaintiff-appellant.

Loptin, Miller, Freedman, Bluestone, Erlich, Rosen and Bartnick by Richard E. Shaw, Detroit, for amicus curiae, Michigan Trial Lawyers Assn.

OPINION

BOYLE, Justice.

In an action for declaratory judgment brought by an insurer against the insured and the injured party, the question presented is whether a default judgment entered against the insured deprives the trial court of its power to declare the rights and liabilities of the parties remaining before it. We hold that it does not. We also hold that the default judgment entered against the insured does not bind the injured party. Because the court had the authority to declare the parties' rights even after the default of the insured, William Keillor was entitled to contest Allstate's request for a declaration of no coverage. We reverse the decision of the Court of Appeals and remand this case for consideration of the remaining issues.

I

Twenty-year-old Daniel Hayes was about to enter the United States Air Force. On March 8, 1986, one week before his planned entry date, Hayes gave himself a going away party at the home of a friend whose mother worked at night. Hayes bought two kegs of beer for the partygoers and charged each one dollar to cover the costs. Eighteen-year-old Scott Koppelberger attended Hayes' party and allegedly was intoxicated when he left early the next morning. Susan Keillor was on her way to work at 6:30 a.m., when her vehicle was involved in a head-on collision with Koppelberger's vehicle. Ms. Keillor was killed instantly.

William Keillor, individually and as personal representative of the estate of Susan Keillor, filed an action against Koppelberger, Hayes, and others, alleging negligence, wrongful death, ¹ and violations of the dramshop act. ²

Hayes, who lived with his father at the time, tendered the defense of the action to his father's homeowner's insurer, Allstate Insurance Company. The attorney Allstate hired for Hayes answered the Keillor complaint, and, two months later, Allstate sent Hayes a reservation of rights letter.

Allstate filed a complaint requesting a declaration that the policy did not provide liability coverage for Hayes' alleged actions. It asserted that coverage was precluded both by the criminal/intentional acts exclusion and the automobile exclusion. Allstate named Hayes and others, including Keillor, as defendants in the action.

Keillor responded by filing an answer which admitted Allstate's allegation of an actual controversy between the parties and asked for a declaration that coverage under the policy existed. ³ Keillor also filed a counterclaim against Allstate and a cross-claim against Hayes, which independently requested a declaration of coverage. Hayes did not respond either to Allstate's complaint or Keillor's cross-claim for declaratory judgment.

Before the default judgment was entered, Allstate's attorney obtained a nonmilitary affidavit from Hayes, which stated, in effect, that Hayes understood the legal ramifications of Allstate's contesting coverage under the policy, and that Hayes had chosen not to retain his own attorney to contest the coverage question. On the basis of the affidavit, the court granted a default judgment in favor of Allstate and Keillor.

Allstate moved for summary disposition against Keillor in part on the basis of Hayes' default. Under MCR 2.116(C)(8), Allstate alleged that Keillor had not stated a claim upon which relief could be granted. Nor, according to Allstate, had Keillor alleged a valid defense to Allstate's action under MCR 2.116(C)(9). Furthermore, Allstate claimed that no genuine issue of material fact existed under MCR 2.116(C)(10) because Hayes' alleged liability arose out of an illegal purchase and resale of alcohol and the use of an automobile. Moreover, Allstate argued that because the default judgment had already determined that the policy Allstate issued to Hayes' father did not provide liability coverage for Hayes, it barred coverage and bound Keillor.

The trial court granted Allstate's motion and found as follows:

(1) That Defendant, William Keillor, Personal Representative of the Estate of Susan Keillor, Deceased, does not have standing to contest the ambiguity and/or application of language within the insurance policy entered into between Allstate Insurance Company and David Hayes;

(2) That the criminal act exclusion within the Allstate Insurance Company homeowner's policy between Allstate Insurance Company and David Hayes is not ambiguous, and is applicable to the crime of illegally purchasing and/or illegally selling alcohol, thereby excluding coverage with respect to the case as presented;

(3) That the motor vehicle exclusion within the Allstate Insurance Company homeowner's insurance policy is applicable to the fact situation herein for those reasons more fully set forth within State Farm v. Huyghe, 144 Mich.App. 341 [375 NW2d 442 (1985) ], and consequently, coverage is unavailable for the claims before the Court; and

(4) That Default Judgment as to Defendant, Daniel Hayes, entered on September 26, 1988, finding that the homeowner's policy does not provide liability insurance coverage to said Daniel Hayes for the injuries complained of, is an effective bar to coverage for Daniel Hayes, and is binding upon Defendant, William Keillor.

Keillor appealed as of right in the Court of Appeals, and the Court of Appeals affirmed. 190 Mich.App. 499, 476 N.W.2d 453 (1991). It held that Keillor did not have standing in an action for declaratory judgment to contest the policy coverage because Keillor was not a third-party beneficiary. The Court also stated that "[o]nce the insured conceded that there was no coverage and had a default entered against him, defendant could not continue to pursue the action to enforce the insurance contract." Id. at 502, 476 N.W.2d 453. Keillor appealed, and this Court granted leave. 439 Mich. 1002, 484 N.W.2d 667 (1992).

We now hold that once Allstate began its action for declaratory judgment and alleged that an actual controversy existed between itself and its insured and Keillor, the trial court could declare the rights and responsibilities of all interested parties before it. This power was not destroyed by virtue of the default judgment entered against the insured. Although the court might have refused to declare the rights of the remaining parties, leaving Keillor to pursue the underlying tort action ⁴ and, if successful, a garnishment action against Allstate, it was within its discretion to allow the action to continue and declare the rights of the parties remaining before it.

II

The parties frame the issues involved in terms of standing, the binding effect of default judgments, and the rights of "stranger[s] to the contract." Specifically, Keillor argues that the tort victim has a sufficient interest in the tortfeasor's insurance policy to give the victim "standing to litigate coverage issues" where the victim was named by the insurer as a defendant in the action for declaratory judgment. Keillor also argues that a default judgment against a "non-answering insured defendant" does not bind the injured party who "appears and vigorously defends on the merits of the coverage issues."

Allstate also frames its issues in terms of standing, but does not differentiate between standing to prosecute an independent claim for declaratory judgment, and the "standing" of an injured party joined as a defendant by the insurer to litigate the coverage question. Furthermore, Allstate argues that its insured "agreed that the contract does not apply to a claim against the indemnitee, ⁵ and the parties to the indemnity contract allow[ed] the entry of judgment determining no right or duty of indemnity exists," and therefore Keillor, as a "stranger to the contract" cannot "contest contractual language[.]" ⁶

We do not reach the issue whether an injured party has a "vested" interest from the time of the injury, which would permit the institution by the injured party of an action for declaratory relief. ⁷ That is not the issue here. Nor is the issue whether Keillor could present a case or controversy sufficient to invoke the jurisdiction of the court as plaintiff. The precise issue is whether Keillor, as a joined defendant, has standing in a declaratory action instituted by the insurer to pursue the action to a final determination of policy coverage. The Court of Appeals held that because Keillor was not a third-party beneficiary of the insurance contract, he "could not continue to pursue the action" after the insured's default. 190 Mich.App. at 502, 476 N.W.2d 453. While the Court of Appeals correctly concluded that Keillor was not a third-party beneficiary, it erred in concluding that third-party-beneficiary status was necessary to allow Keillor to "continue to pursue the action" for a declaration of coverage. The nature of the procedural remedy is to declare interests not yet vested. Thus, the fact that the injured party is not a third-party beneficiary of the insurance contract is not determinative of his "standing" to continue the action for a declaration of his rights as a conceded real party in interest.

III

Procedure should be the "handmaid of justice," a means to an end. Instead ... procedure tends to become rigid, stereotyped, and over-technical, an end in itself, often seemingly...