Royal Ins. Co. of America v. Kirksville College

• Decision Date: 23 September 2002
• Docket Number: No. 01-3645.,01-3645.
• Citation: 304 F.3d 804
• Parties: ROYAL INSURANCE COMPANY OF AMERICA; American Employers Insurance Co., Plaintiffs-Appellees, v. KIRKSVILLE COLLEGE OF OSTEOPATHIC MEDICINE, INC., Defendant-Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 804

304 F.3d 804

ROYAL INSURANCE COMPANY OF AMERICA; American Employers Insurance Co., Plaintiffs-Appellees, v. KIRKSVILLE COLLEGE OF OSTEOPATHIC MEDICINE, INC., Defendant-Appellant.

No. 01-3645.

United States Court of Appeals, Eighth Circuit.

Submitted: May 15, 2002.

Filed: September 23, 2002.

Thomas W. Rynard, argued, Jefferson City, MO (Richard D. Rhyne, on the brief), for appellant.

Julie J. Gibson, argued, Kansas City, MO (John J. Hayob, on the brief), for appellee.

Before BOWMAN, LOKEN, and BYE, Circuit Judges.

LOKEN, Circuit Judge.

Kirksville College of Osteopathic Medicine, Inc. ("Kirksville"), was sued by its neighbor, Lewistown Heet Gas Co. ("Lewistown"), for damages caused by a ruptured underground cistern. Kirksville's liability insurers, Royal Insurance Company of America and American Employers Insurance Company (collectively, "Royal") filed this diversity declaratory judgment action, seeking a ruling they had no duty to defend or indemnify Kirksville because of the absolute pollution exclusions in their policies. In a prior appeal, we held that the insurers breached their duty to defend a trespass claim and remanded for consideration of damages and the duty to indemnify. Royal Ins. Co. of Am. v. Kirksville Coll. of Osteopathic Med., 191 F.3d 959 (8th Cir.1999). On remand, the parties settled the issue of damages for breach of the duty to defend. The district court¹ then granted summary judgment in favor of Royal on the indemnity issue, and Kirksville appeals. Simply stated, the issues on appeal are whether the insurers may litigate the indemnity issue after breaching their duty to defend, and if so, whether Kirksville is collaterally estopped by a prior state court ruling that no trespass occurred. We affirm.

I. Background.

Kirksville entered into a contract to buy adjoining property from Lewistown. Before closing, a Kirksville contractor, PSR Construction, Inc. ("PSR"), entered the property to begin converting it into a parking lot for the College. Unfortunately, the site had been a coal gasification plant. The PSR crew struck and ruptured an underground storage tank, releasing coal tar wastes. Lewistown sued Kirksville and PSR in state court, asserting damage claims for negligence and trespass.

Royal initially defended Kirksville under a reservation of rights but withdrew its defense when the district court held there was no duty to defend, a ruling we reversed in the first appeal. Meanwhile, PSR had filed a motion for partial summary judgment in the state court action, arguing no trespass occurred because PSR had implied permission to work at the site. The state court granted the motion, and Lewistown filed a motion to reconsider. Before the state court ruled on this motion, Kirksville and Lewistown separately settled their part of the dispute. A few weeks later, the parties to the state court action stipulated to a dismissal of all claims against Kirksville and PSR with prejudice. No party asked the state court to vacate its prior order dismissing the trespass claim against PSR.

In its settlement with Lewistown, Kirksville agreed to purchase the property for $30,000, to pay damages of $270,000 for the property's reduced value, and to be responsible for any necessary environmental remediation. In this lawsuit, Kirksville claims the insurers are liable for the $270,000, plus approximately $5,000,000 in remediation costs. The district court granted Royal summary judgment, agreeing with the insurers (i) that they need only indemnify that portion of the settlement attributable to the covered trespass claim, and (ii) that Kirksville was collaterally estopped to relitigate the trespass issue by the state court's summary judgment ruling. We review the district court's grant of summary judgment de novo. Sargent Constr. Co. v. State Auto. Ins. Co., 23 F.3d 1324, 1326 (8th Cir.1994).

II. Discussion.

A. Coverage. In the prior appeal, we concluded that the pollution exclusions in the Royal policies excluded Lewistown's negligence claim against Kirksville, but not the trespass claim. Accordingly, Royal breached its duty to defend Kirksville in the state court action when Royal abandoned the defense in reliance on the district court's contrary ruling. When an insurance company refuses to defend its insured, the insurer loses its right to control the litigation and to reject what it considers an unfavorable settlement. See Whitehead v. Lakeside Hosp. Ass'n, 844 S.W.2d 475, 480-81 (Mo.App.1992). Thus, Kirksville was entitled to settle the state court action with Lewistown after Royal abandoned the defense.

When the insured settles a claim after the insurer has breached its duty to defend, it is clear the insurer remains obligated to reimburse the insured for any settlement obligation covered by the liability policy. However, Kirksville would have us go further, arguing that Royal should be punished for its refusal to defend by being precluded from arguing the coverage issue. This issue of Missouri law is important in this case for two reasons. First, the duty to defend is broader than the duty to indemnify because the insurer's duty to defend arises when there is merely the potential for coverage. McCormack Baron Mgmt. Servs., Inc. v. Am. Guar. & Liab. Ins. Co., 989 S.W.2d 168, 170-71 (Mo.1999). Second, Kirksville's settlement with Lewistown encompassed multiple claims, only one of which — the trespass claim — was covered by Royal's liability policies.

We conclude this issue is governed by our recent decision in Esicorp, Inc. v. Liberty Mut. Ins. Co., 193 F.3d 966 (8th Cir.1999). In Esicorp, as in this case, the insurer breached its duty to defend, and the insured then settled the underlying action, which included claims for covered property damage and larger claims for economic losses not covered by the insurer's liability policy. Applying Missouri law, we concluded that "an insurer's liability when the insured has settled the underlying action may not exceed the policy coverages; therefore, a settlement encompassing both covered and noncovered claims must be fairly apportioned between the two." 193 F.3d at 971, followed in Esicorp, Inc. v. Liberty Mut. Ins. Co., 266 F.3d 859, 863-64 (8th Cir.2001). In other words, even when it has breached the duty to defend, an insurer is still "entitled to a trial on the coverage issue." Butters v. City of Independence, 513 S.W.2d 418, 425 (Mo.1974); accord Dickman Aviation Servs., Inc. v. U.S. Fire Ins., 809 S.W.2d 149, 152 (Mo.App.1991).

B. Collateral Estoppel. The district court held that collateral estoppel bars Kirksville from relitigating the issue of whether it trespassed on the Lewistown property, and therefore Royal is entitled to summary judgment because "there is no covered offense." Kirksville appeals that ruling. "The application of collateral estoppel in diversity cases is determined according to state law." Nanninga v. Three Rivers Elec. Coop., 236 F.3d 902, 906 (8th Cir.2000).

Under Missouri law, a court considers four factors when determining whether the equitable doctrine of collateral estoppel should be invoked:

(1) whether the issue decided in the prior adjudication was identical to the issue presented in the present action; (2) whether the prior adjudication resulted in a judgment on the merits; (3) whether the party against whom estoppel is asserted was a party or was in privity with a party to the prior adjudication; and (4) whether the party against whom collateral estoppel is asserted had a full and fair opportunity to litigate the issue in the prior suit.

James v. Paul, 49 S.W.3d 678, 682 (Mo. 2001). Kirksville concedes the issues were identical, but argues the district court misapplied the remaining factors.

Kirksville first argues that the state court's grant of partial summary judgment dismissing the trespass claim against PSR was not a final judgment on the merits to which collateral estoppel may apply. We disagree. After the state court entered partial summary judgment in favor of PSR, Lewistown filed a motion to reconsider. Before the state court ruled on that motion, Lewistown and Kirksville entered into a settlement agreement in which they agreed "to jointly pursue their claims against PSR [and others]," to cooperate in that effort and share in any recovery, and to realign Kirksville as a party plaintiff for this purpose. Less than two months later, Lewistown, Kirksville, and PSR filed a Stipulation for Dismissal with Prejudice reciting that all claims had been settled. The state court then entered a final judgment dismissing all their claims with prejudice. No party asked the court to vacate its prior ruling that PSR did not commit a trespass.

As the district court recognized, an order granting partial summary judgment dismissing one of several claims or parties is normally not final and appealable. See, e.g., Fed.R.Civ.P. 54(b). However, "[p]reclusion seems warranted so long as the court clearly intended to terminate all proceedings as to the claims or parties involved and no attempt to appeal was thwarted...." 18A CHARLES ALAN WRIGHT, ARTHUR R. MILLER & EDWARD H. COOPER, FEDERAL PRACTICE & PROCEDURE: JURISDICTION 2D § 4432, at p. 60 (2002). Here, Lewistown filed a motion asking the state court to reconsider its adverse ruling. Had this motion been denied, Lewistown could have appealed the trespass ruling at the end of the case. Instead, the parties settled, and the trespass claim was dismissed with...