Iowa Mut. Ins. Co. v. McCarthy

• Decision Date: 26 November 1997
• Docket Number: No. 96-1371,96-1371
• Citation: 572 N.W.2d 537
• Parties: IOWA MUTUAL INSURANCE CO., Appellee, v. Philip J. McCARTHY, Defendant, and Donna Rae Kelly, Individually and as the Administrator of the Estate of Leo J. Kelly, Deceased, and Amy Kelly, a Minor by Her Mother and Next Friend, Donna Rae Kelly, Appellant.
• Court: Iowa Supreme Court

Page 537

572 N.W.2d 537

IOWA MUTUAL INSURANCE CO., Appellee, v. Philip J. McCARTHY, Defendant and Donna Rae Kelly, Individually and as the Administrator of the Estate of Leo J. Kelly, Deceased, and Amy Kelly, a Minor by Her Mother and Next Friend, Donna Rae Kelly, Appellant.

No. 96-1371.

Supreme Court of Iowa.

Nov. 26, 1997.

Philip Willson of Willson & Pechacek, P.L.C., Council Bluffs, for appellant.

Roy M. Irish of Patterson, Lorentzen, Duffield, Timmons, Irish, Becker & Ordway, L.L.P., Des Moines, for appellee.

Considered by McGIVERIN, C.J., and LAVORATO, NEUMAN, ANDREASEN, and TERNUS, JJ.

TERNUS, Justice.

This appeal involves a dispute concerning liability insurance coverage for a wrongful death claim made by the appellant, Donna Rae Kelly, as administrator of the Estate of Leo Kelly and as next friend of Amy Kelly, against Philip J. McCarthy, an insured of the appellee, Iowa Mutual Insurance Company. Coverage turns on whether Leo Kelly was an employee of McCarthy at the time of Kelly's death, thereby triggering the employee exclusion contained in Iowa Mutual's policy.

The question of Kelly's employment status was submitted to the jury, which determined Kelly was not McCarthy's employee. The trial court entered a judgment notwithstanding the verdict in favor of Iowa Mutual, ruling Kelly was McCarthy's employee as a matter of law. Based on this ruling, the court rendered a declaratory judgment that Iowa Mutual's policy provided no coverage for the claims made by Kelly's estate against McCarthy.

The estate appealed. We reverse and remand.

I. Background Facts and Proceedings.

In 1993, Leo Kelly was fatally injured while making repairs to a harrow owned by Philip McCarthy. At the time of this accident, McCarthy was insured under a farm liability policy issued by Iowa Mutual. This policy excluded coverage for bodily injury sustained by "any employee ... as a result of his or her employment by the 'Insured.' "

Iowa Mutual commenced this declaratory judgment action against McCarthy and Kelly's estate to obtain a ruling that the employee exclusion precluded coverage for any claims made by the estate against McCarthy. The estate filed a cross-claim against McCarthy, asserting McCarthy was liable for damages arising from Kelly's death. Iowa Mutual provided an attorney to defend McCarthy on the wrongful death claim. Upon Iowa Mutual's request, the court severed the cross-claim from the declaratory judgment action, with the coverage claim proceeding to trial first.

The parties agreed coverage was controlled by the employee exclusion. Accordingly, the sole issue submitted to the jury was whether Kelly was an employee of McCarthy at the time of the accident. The jury answered a special interrogatory finding Kelly was not McCarthy's employee when the accident occurred.

Iowa Mutual filed a motion for judgment notwithstanding the verdict, claiming the evidence established that Kelly was McCarthy's employee as a matter of law. The insurer also filed a motion for new trial, alleging error in the court's admission of evidence and instructions to the jury. The court set aside the jury's verdict and ruled as a matter of law that Kelly was an employee of McCarthy. Consistent with this ruling, the court held no coverage existed for the cross-claim asserted by the estate. The estate filed this appeal.

After the declaratory judgment had been entered, McCarthy settled the estate's wrongful death action over Iowa Mutual's objections. Pursuant to the settlement agreement, McCarthy confessed judgment for $507,500. This offer of judgment was accepted by the estate and the district court entered a judgment against McCarthy in the stipulated amount. McCarthy paid $7,500 to the estate and obtained a partial satisfaction of judgment. The estate agreed it would collect the balance of the judgment from Iowa Mutual, not McCarthy. In addition, McCarthy assigned his rights against Iowa Mutual to the estate.

II. Issues on Appeal.

This appeal presents several issues. Initially, Iowa Mutual claims the coverage issues raised in this appeal are now moot because McCarthy has forfeited any coverage by his unauthorized settlement with the estate. The insurer also contends that because McCarthy did not appeal, the trial court's declaration of no coverage is final and binding on the claimant, as well as the insured.

The estate disputes these contentions and asserts the trial court erred in granting Iowa Mutual a judgment notwithstanding the verdict. It argues there was sufficient evidence to generate a jury question on whether Kelly was McCarthy's employee. Iowa Mutual responds that the trial court correctly ruled as a matter of law that Kelly was an employee and not an independent contractor at the time of his death. The insurance company contends that, even if the trial court erroneously entered a judgment in its favor, it was entitled to a new trial for two reasons: (1) the trial court abused its discretion in admitting evidence of and instructing on an employer's filing requirements under federal tax laws and Iowa's workers' compensation law; and (2) the court erred by instructing the jury on the test for determining when a worker is an independent contractor.

III. Mootness of Appeal.

Iowa Mutual claims the present appeal has been rendered moot by the insured's unauthorized settlement with the claimant. ¹ The insurance carrier asserts McCarthy's actions breached two conditions in the policy: (1) the clause requiring the insured to cooperate "in the investigation, settlement, or defense" of any claim or suit against the insured; and (2) the prohibition against the insured "voluntarily mak[ing] any payment, assum[ing] any obligation, or incur[ring] any expense" without Iowa Mutual's consent. Iowa Mutual argues these breaches void any coverage otherwise available to McCarthy, rendering any coverage determination moot. See Grace v. Insurance Co. of N. Am., 944 P.2d 460 (Alaska 1997) (discussing effect of insured's settlement of underlying action on insurer's liability to pay under excess liability policy); cf. Simpson v. United States Fidelity & Guar. Co., 562 N.W.2d 627 (Iowa 1997) (discussing effect of insured's settlement of underlying suit on liability of underinsured motorist carrier).

"In general, an action is moot if it no longer presents a justiciable controversy because the issues involved have become academic or nonexistent." Buchhop v. General Growth Properties & Gen. Growth Management Corp., 235 N.W.2d 301, 302 (Iowa 1975). "[O]ur test of mootness is whether an opinion would be of force or effect in the underlying controversy." Wengert v. Branstad, 474 N.W.2d 576, 578 (Iowa 1991). In other words, will our decision in this case "have any practical legal effect upon an existing controversy"? 5 Am.Jur.2d Appellate Review § 642, at 321 (1995). We think it will and, therefore, hold that the present appeal is not moot.

As we have noted, the insurer's claim of mootness rests on the insured's settlement of the underlying wrongful death claim. The settlement documents before us reveal that the estate intends to pursue collection of the balance of the stipulated judgment from Iowa Mutual. That controversy--the insurer's liability for the stipulated judgment--will clearly be affected by a ruling in the case before us. If we had decided to affirm the trial court's judgment that Iowa Mutual's policy provides no coverage for the claim made against its insured, it would follow that Iowa Mutual would not be liable for the insured's settlement of that claim. Consequently, a decision favorable to the insurer would have resolved the underlying controversy. Our contrary decision reinstating the jury verdict and holding Iowa Mutual has coverage for the estate's wrongful death claim will not resolve the remaining controversy, but will preclude any defense by Iowa Mutual that coverage is excluded by the employee exclusion. Thus, an opinion in the present appeal will "be of force or effect in the underlying controversy." Wengert, 474 N.W.2d at 578. Consequently, this appeal is not moot.

We acknowledge, as argued by Iowa Mutual, that a declaratory judgment on the coverage issue is irrelevant if the insured has forfeited coverage by his settlement with the claimant. In that way, the events transpiring since the trial court's declaratory ruling have the potential of rendering the current appeal moot. But the effect of the insured's settlement on Iowa Mutual's obligation to pay the stipulated judgment has not yet been litigated, and we deem it ill advised to decide Iowa Mutual's liability in the context of a mootness claim. Therefore, we proceed to determine the issues presented in this appeal.

IV. Standing of Claimant to Pursue this Appeal.

Iowa Mutual challenges the estate's ability to pursue this appeal. It points out the judgment of noncoverage is final as to McCarthy, who did not appeal from the trial court's ruling. See Morris Plan Co. v. Bruner, 458 N.W.2d 853, 855 (Iowa App.1990) (holding party's failure to appeal within time limit makes district court ruling final as to that party). Thus, argues Iowa Mutual, although the estate subsequently obtained, as part of the wrongful death settlement, an assignment of McCarthy's rights against Iowa Mutual, McCarthy had no rights to assign. Kelly's estate responds that a third-party claimant can litigate coverage in his or her own right and, therefore, the estate is not dependent on the assignment from McCarthy to establish standing to pursue this appeal.

We think this question was settled in Farm & City Insurance Co. v. Coover, 225 N.W.2d 335 (Iowa 1975). In that case, the insurance company had commenced a declaratory judgment action to determine coverage for claims arising from an automobile collision. Coover, 225 N.W.2d at 336. The company named as defendants its insured and the third-party claimant injured in the accident. Id. The claimant's motion to dismiss the petition against him...