Frankenmuth Mut. Ins. Co. v. Williams by Stevens
| Decision Date | 23 December 1997 |
| Docket Number | No. 43S03-9501-CV-2,43S03-9501-CV-2 |
| Citation | 690 N.E.2d 675 |
| Parties | FRANKENMUTH MUTUAL INSURANCE COMPANY, Appellant (Garnishee-Defendant below), v. Jena WILLIAMS, by Next Friend Tracy STEVENS, Appellee (Plaintiff below). |
| Court | Indiana Supreme Court |
Timothy W. Woods, Shawn P. Ryan, Edward P. Benchik, South Bend, for Appellant.
Jay A. Rigdon, Warsaw, for Appellee.
We earlier held in this case that the defendant's insurance carrier had received adequate notice of a tort complaint filed against the insured so as to trigger its duty to defend. We now examine the extent to which the carrier is bound to a settlement effected by the insured.
According to stipulated or otherwise undisputed facts, Betty White began babysitting children in her home in 1988. (R. at 41.) In early 1989 she began keeping Tracy Stevens's two daughters, including Jena Williams. On one of these occasions, White's husband molested Jena. 1
In October 1989, Jena and her mother filed a civil action against White's husband, accusing him of battery. They alleged that Jena sustained permanent emotional damages that have required and will continue to require professional care. White's husband admitted the molestation in his answer.
White and her husband held a homeowner's insurance policy with Frankenmuth Mutual Insurance Company. Although White's husband did not notify Frankenmuth that he had been sued for molesting Jena, the company learned that he had been accused of child molestation. Frankenmuth did not know that a civil action had been filed against White's husband, but it sent him a reservation of rights letter in March 1990, announcing its belief that the homeowner's policy did not cover child molestation. Frankenmuth also interviewed White's husband, and he admitted the molestation.
In June 1990, Jena added a second count to her complaint. It alleged that White herself had "negligently failed to supervise Jena Williams while she was in her home," and that White's own negligence was a cause of Jena's injuries. (R. at 15.) The amended complaint further alleged that White "knew or should have known of the conduct and propensities" of her husband but that she "failed to take adequate steps to insure that he would not be able to unlawfully touch Jena." (R. at 15.) In her answer, White denied the allegations and added that Stevens "seldom, if ever[,] paid" for the babysitting services White performed. (R. at 18.)
Although White did not notify Frankenmuth of the new count or forward to it copies of any litigation-related documents, Frankenmuth knew generally about the new count. A few months after Jena added the new count, Frankenmuth received a subpoena duces tecum and a request for production of documents held by a non-party.
In November 1990, Frankenmuth sent a letter to the attorney representing both White and her husband. The letter stated that the couple's insurance policy did not cover White's husband for the molestation. The company also requested copies of any documents related to the civil action against him, so that it could determine its duty to defend him.
At the beginning of 1991, the couple's attorney moved to withdraw from representing White because she was seeking to divorce her husband, whom the attorney continued to represent. The motion was granted.
In April 1991, White herself entered into a consent judgment with Jena and Stevens without Frankenmuth's knowledge or consent. The settlement granted judgment to Jena and Stevens on the negligent supervision count and awarded them $75,000, but it repeatedly stated that it did not affect the battery count against White's husband.
At the time of the consent judgment, the parties also entered into a covenant under which Jena and Stevens agreed not to execute the judgment against White's personal assets, but it left them free to recover the judgment from Frankenmuth under the homeowner's insurance policy. In June 1991, Williams commenced a proceeding supplemental to recover the judgment from Frankenmuth.
Frankenmuth moved for summary judgment on three grounds. First, it argued that White had breached her notice and cooperation duties under the policy by failing either to inform the company of the suit against her or to provide the company with legal documents relating to the suit. Second, the company argued that White's claim was excluded from the policy's coverage because Jena's injuries had resulted from the intentional act of White's husband. Third, Frankenmuth argued that White's babysitting amounted to a business activity that was excluded from coverage under the policy.
The trial court denied Frankenmuth's motion for summary judgment but granted Jena's. The trial judge believed that the decision of the Court of Appeals in Liberty Mutual Ins. Co. v. Metzler, 586 N.E.2d 897 (Ind.Ct.App.1992), trans. denied, compelled him to hold that Frankenmuth was collaterally estopped from opposing the action to recover the judgment because it had declined to defend White, its insured.
The Court of Appeals reversed, concluding that Frankenmuth had not received sufficient notice of the civil action to trigger its duty to defend. Frankenmuth Mut. Ins. Co. v. Williams, 615 N.E.2d 462 (Ind.Ct.App.1993).
We granted transfer and rendered a preliminary decision, holding that the subpoena duces tecum and the document request constituted sufficient actual notice to trigger Frankenmuth's duty to defend. Frankenmuth Mut. Ins. Co. v. Williams, 645 N.E.2d 605 (Ind.1995). Because Frankenmuth failed to defend White, we held that the company was "bound at least to the matters necessarily determined in the lawsuit." Id. at 608.
Because up to that point the litigation had focused on the notice issue, however, we set the case for oral argument and further briefing in order to determine whether Frankenmuth was properly foreclosed from raising its contractual defenses. 2 We now hold that Frankenmuth is collaterally estopped from raising any defense under the clause excluding intentional acts from coverage. On the other hand, Frankenmuth is not estopped from raising the business activity defense, but remaining questions of fact require a remand for consideration of this defense.
Frankenmuth has vigorously argued that the consent judgment is not covered by the homeowner's policy because the injuries to Jena resulted from an intentional act. The policy excludes coverage for personal injuries that are "caused intentionally by or at the direction of any insured." (R. at 68.) Throughout the appellate process Frankenmuth has also increasingly emphasized its contention that child molestation is not an "occurrence" or "accident" within the general scope of the policy's coverage. We think the issues underlying these arguments were necessarily determined in the consent judgment, such that Frankenmuth is collaterally estopped from raising them now. See Frankenmuth, 645 N.E.2d at 608.
Frankenmuth's intentional-act arguments are essentially an attempt to conflate the conduct of White with that of her husband in order to bring the consent judgment within the intentional act exclusion. The fundamental problem with this strategy, however, is that Jena never alleged that White engaged in any intentional conduct or participated in the molestation. Jena's complaint accused White of only negligent supervision, which supposedly exposed Jena to the risk that White's husband would molest Jena. 3
Although White has never been accused of any intentional act in this litigation, Frankenmuth did not defend her. Perhaps as a result, White entered into a consent judgment, admitting to the only wrong of which she was accused, negligence. The consent judgment clearly left unimpaired the count charging White's husband with battery. Frankenmuth, once absent, is now estopped from complaining that all of Jena's damages flowed from the intentional act of molestation, rather than White's own negligence.
If the negligent complaint had gone to trial, Betty White might well have won. Where a person's negligence creates a situation in which a third party might commit an intentional tort or criminal act, the negligence is not a proximate cause of any resulting injuries unless the negligent person "realized or should have realized the likelihood that such a situation might be created, and that a third person might avail himself of the opportunity to commit such a tort or crime." Restatement (Second) of Torts § 448 (1965); cf. Hooks SuperX, Inc. v. McLaughlin, 642 N.E.2d 514, 520-21 (Ind.1994) (). A factfinder in White's case would have had to decide (1) whether she was negligent and (2) whether she knew or should have known that her husband would molest Jena. Particularly in light of White's deposition testimony that she had no idea her husband was capable of child molestation, a factfinder might well have concluded that any negligence on her part was not a proximate cause of any of the injuries.
But that possibility will remain forever speculation, for White entered into the consent judgment when Frankenmuth did not defend her. That judgment represents a final legal conclusion that White committed negligence, that the negligence was a legal cause of Jena's injuries, and that damages for White's exposure of Jena to the risk of molestation amounted to $75,000. The time has passed for claiming that White's negligence was not a proximate cause of Jena's injuries. As the Court of Appeals observed in Liberty Mutual, an insurer may "refuse to defend or clarify its obligation by means of a declaratory judgment action," but "it does so at its peril." 586 N.E.2d at 902 (internal quotation marks omitted).
The cases Frankenmuth cites in opposition to this result are not on point. In Great Cent. Ins. Co. v. Roemmich, 291 N.W.2d 772 (S.D.1980), for example, the insurance company brought a declaratory...
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