Minnesota Commercial Ry. v. General Star Indem.
| Decision Date | 05 August 2004 |
| Docket Number | No. CIV.02-4277 (RHK/AJB).,CIV.02-4277 (RHK/AJB). |
| Citation | 328 F.Supp.2d 1024 |
| Parties | MINNESOTA COMMERCIAL RAILWAY COMPANY, Plaintiff, v. GENERAL STAR INDEMNITY COMPANY, Defendant. |
| Court | U.S. District Court — District of Minnesota |
Max C. Ramsey and Jeanne H. Unger, Rider Bennett, LLP, Minneapolis, MN, for Plaintiff.
Mark J. Feinberg and Christopher R. Paar, Zelle, Hofmann, Voelbel, Mason & Gette, LLP, Minneapolis, MN, for Defendant.
Under Minnesota law, an insured person may not use estoppel to create insurance coverage unless the insurer unqualifiedly controlled the defense of an action against the insured. Between February 1, 2000 and February 1, 2001, Minnesota Commercial Railway Company ("the Railway") held an insurance policy with General Star Indemnity Company ("General Star") that covered claims made during the policy period. On July 23, 2001 — five months after the policy expired — the Railway submitted a claim to General Star stemming from an injury to one of its employees. After the employee sued the Railway, the Railway defended itself and eventually settled the matter. General Star denied coverage on May 17, 2002.
The Railway has sued General Star seeking a declaratory judgment that the insurer must cover the untimely claim. While acknowledging that it submitted the claim too late to be covered by the policy, the Railway contends that General Star accepted the claim and therefore is estopped from denying coverage. For its part, General Star denies accepting coverage. Both sides have now moved for summary judgment. Although these motions range broadly, they present a threshold legal question: Does Minnesota law permit an insured person to create insurance coverage through estoppel if the insurer did not control the defense in an action against the insured? Because the Court concludes that it does not, it will grant General Star's motion and deny the Railway's motion.1
Summary judgment is proper if, drawing all reasonable inferences favorable to the non-moving party, there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The moving party bears the burden of showing that the material facts in the case are undisputed. See Celotex, 477 U.S. at 322, 106 S.Ct. 2548; Mems v. City of St. Paul, Dep't of Fire & Safety Servs., 224 F.3d 735, 738 (8th Cir.2000). The court must view the evidence, and the inferences that may be reasonably drawn from it, in the light most favorable to the nonmoving party. See Graves v. Arkansas Dep't of Fin. & Admin., 229 F.3d 721, 723 (8th Cir.2000); Calvit v. Minneapolis Pub. Schs., 122 F.3d 1112, 1116 (8th Cir.1997). The nonmoving party may not rest on mere allegations or denials, but must show the existence of specific facts that create a genuine issue for trial. See Anderson, 477 U.S. at 256, 106 S.Ct. 2505; Krenik v. County of Le Sueur, 47 F.3d 953, 957 (8th Cir.1995).
General Star has moved for summary judgment on the ground that the insurer must control the insured's defense to be estopped from denying coverage where coverage does not exist.2 The Railway has filed a cross-motion arguing that Minnesota law permits such a claim where the insured can demonstrate prejudice. To resolve these motions, the Court must enter the thicket of insurance-related estoppel and reconcile two potentially contradictory strands of Minnesota jurisprudence.
For nearly one-hundred years, Minnesota courts have held that an insurer is "estopped from denying its liability under the terms of the policy" where it has "take[n] charge of the litigation" against an insured. Tozer v. Ocean Accident & Guar. Corp., 94 Minn. 478, 103 N.W. 509, 511 (1905). This rule addresses a deeply-held concern of the courts: that an insured who retained "no voice or interest in the litigation" would be left holding the bag for an insurer that had "substituted its interests and its judgment" for that of the insured. Patterson v. Adan, 119 Minn. 308, 138 N.W. 281, 283 (1912).
Public policy does not permit a litigant to so surrender control of his lawsuit to one who has no interest in the cause of action.... By undertaking the defense the company elected to treat plaintiff's cause of action, if he had any, as covered by its contract.... The undertaking to defend is of no value, and may be of great danger, to the assured, where he thus abandons all control of the suit to the company, if it does not mean that whatever liability is established shall be discharged.
Id. To take any other view Faber v. Roelofs, 311 Minn. 428, 250 N.W.2d 817, 820 (1977).
Minnesota courts have applied this rule to the present day. See Mutual Serv Casualty Ins. Co. v. Luetmer, 474 N.W.2d 365, 368 (Minn.Ct.App.1991) (); Iowa Nat'l Mut. Ins. Co. v. Liberty Mut. Ins. Co., 464 N.W.2d 564, 568 (Minn.Ct.App.1990) (); Gamble-Skogmo Inc. v. St. Paul Mercury Indem. Co., 242 Minn. 91, 64 N.W.2d 380, 388-89 (1954) ().
But despite its frequent application, assumption-of-defense estoppel is a narrow rule. For instance, it does not apply where "the insurer refuses and will not accept such defense" of the insured. Globe Indem. Co. v. Hansen, 231 F.2d 895, 906 (8th Cir.1956). It is also inapplicable where the insurer avails itself of "the simple procedure of giving a notice of a reservation of rights." Faber, 250 N.W.2d at 821. Finally, it does not apply where "the insurer did not take up and conduct the defense knowing [the relevant facts]." Humphrey v. Polski, 161 Minn. 61, 200 N.W. 812, 812 (1924). Thus, as the Eighth Circuit has noted, "it is only when the insurer, with full knowledge of the facts, unqualifiedly assumes and conducts the defense of an action against its assured that it is estopped by a judgment against him." Bettinger v. Northwestern Nat'l Cas. Co., 213 F.2d 200, 205 (8th Cir.1954) (emphasis added).
This line of cases, however, is arguably at odds with a more recent Minnesota Supreme Court decision. In a terse, six-paragraph opinion from 1979, the Minnesota Supreme Court held that an insured may not use estoppel to broaden the scope of insurance coverage. In Shannon v. Great American Insurance Co., 276 N.W.2d 77 (Minn.1979), the supreme court explained:
The doctrine of estoppel may not be used to enlarge the coverage of an insurance policy.... The policy considerations in support of this principle are well founded, for it would be wholly improper to impose coverage liability upon an insurer for a risk not specifically undertaken and for which no consideration has been paid.
Id. at 78 (citations omitted). As with assumption-of-defense estoppel, Minnesota courts routinely apply this rule. See, e.g., Continental Ins. Co. v. Bergquist, 400 N.W.2d 199, 201 (Minn.Ct.App.1987) (); Malakowsky v. Johannsen, 374 N.W.2d 816, 819 (Minn.Ct.App.1985) ( ).
In harmonizing these principles, the Eighth Circuit has made clear that the assumption-of-defense cases operate as an exception to the rule of Shannon. In Northwest Airlines v. Federal Ins. Co., 32 F.3d 349, 352 (8th Cir.1994), the court weighed and ultimately dismissed the applicability of the assumption-of-defense rule before invoking Shannon:
We recognize that the Minnesota Supreme Court held that the insurer waived its defense of noncoverage in Faber v. Roelofs. In that case, however, it did so because the insurer never reserved its right to deny coverage and took control and dominion of the defense of the action.
Id. (citation omitted). Likewise, in Transamerica Ins. Co. v. International Broad. Corp., 94 F.3d 1204, 1207 (8th Cir.1996), the Eighth Circuit concluded that the assumption-of-defense cases are an exception to, rather than overridden by, the Shannon rule.
The Railway reads Transamerica to suggest that an insured may expand the scope of coverage by showing prejudice rather than the insurer's control of the litigation. This is not so. Although prejudice may be necessary to establish estoppel under Minnesota law — indeed, it is an element — it is not sufficient.3 Were generalized prejudice enough to enlarge the coverage of an insurance policy, the rule of Shannon would be a nullity. Because prejudice is an element of estoppel, there would be no case in which an insured could actually establish estoppel in which he could not expand coverage. Put another way, estoppel claimants could avoid Shannon in every instance simply by proving the elements of their case. The Railway's reading, in short, would obliterate Shannon.
By latching onto the Eighth Circuit's discussion of prejudice, the Railway has imported a related but irrelevant doctrine into this case: the effect of an untimely reservation of rights. Under Minnesota law, "[a]bsent prejudice...
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