This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480A.08, subd. 3 (2004).

 

STATE OF MINNESOTA

IN COURT OF APPEALS

A06-95

 

 

Innsbruck Village Association,

Appellant,

 

vs.

 

Stock Roofing, Inc.,

Respondent,

 

Transcontinental Insurance Company,

an Illinois corporation, et al.,

Respondents.

 

 

Filed December 26, 2006

Affirmed
Klaphake, Judge

 

Hennepin County District Court

File No. CT 03-10042

 

David J. McGee, Debra M. Newel, Natalie R. Walz, Thomsen & Nybeck, P.A., 3300 Edinborough Way, Suite 600, Edina, MN  55435 (for appellant)

 

John R. Keena, Hullmuth & Johnson PLLC, 10400 Viking Drive, Suite 560, Eden Prairie MN 55344 (for respondent Stock Roofing, Inc.)

 

William Hart, Stacy A. Broman, Meagher & Geer, P.L.L.P., P.A., 33 South Sixth Street, Suite 4400, Minneapolis, MN  55402 (for respondents Transcontinental Insurance Co.)

 

            Considered and decided by Klaphake, Presiding Judge, Worke, Judge, and Ross, Judge.

U N P U B L I S H E D   O P I N I O N

KLAPHAKE, Judge

            Appellant Innsbruck Village Association entered into a Miller-Shugart settlement with respondent Stock Roofing, Inc. (Stock Roofing), which was insured by respondents Transcontinental Insurance Company, Continental Casualty Company, and American Casualty Company (respondents).  Appellant challenges the district court’s denial of its request for leave to serve a supplemental garnishment summons and complaint on respondents. 

             Because we conclude that Stock Roofing violated its duty of cooperation by entering into a Miller-Shugart settlement when respondents had not fully denied coverage, causing the settlement to be unenforceable, we affirm.

D E C I S I O N

            This court makes a de novo review of the district court’s interpretation of case law.  County of Hennepin v. Hernandez, 554 N.W.2d 618, 619 (Minn. App. 1996).  But we defer to the district court’s findings of fact, unless clearly erroneous.  Minn. R. Civ. P. 52.01.

            An insured is permitted to unilaterally settle a claim covered by an insurance policy without violating the insured’s duty to cooperate, if the insurer is denying all liability for coverage.  Miller v. Shugart, 316 N.W.2d 729, 733-34 (Minn. 1982).  A Miller-Shugart settlement made without the insurer’s involvement is binding on the insurer only if:  “(1) the insured did not violate its contractual duty to cooperate with the insurer; (2) the settlement is not the product of fraud or collusion; and (3) the settlement is reasonable and prudent.”  S.G. v. St. Paul Fire & Marine Ins. Co., 460 N.W.2d 639, 643 (Minn. App. 1990), review denied (Minn. Nov. 28, 1990). 

            “In an authentic Miller-Shugart settlement, the insurer has denied all coverage[.]”  Buysse v. Baumann-Furrie & Co., 481 N.W.2d 27, 29 (Minn. 1992) (Buysse II).  But a Miller-Shugart settlement is not appropriate when an insurer admits to some coverage.  See Bob Useldinger & Sons, Inc. v. Hangsleben, 505 N.W.2d 323, 330 (Minn. 1993) (holding that when insurer admits to some coverage, Miller-Shugart settlement deemed to be in bad faith); Buysse II, 481 N.W.2d at 29 (finding agreement unenforceable when insurer admitted to coverage, but disputed whether claim limits were $500,000 or $1 million); Burbach v. Armstrong Rigging & Erecting, Inc., 560 N.W.2d 107, 109-10 (Minn. App. 1997) (concluding that insurer had not denied all coverage when it made substantial offer of settlement rejected by plaintiff), review denied (Minn. June 11, 1997); Steen v. Those Underwriters at Lloyds, 442 N.W.2d 158, 162 (Minn. App. 1989) (stating that where insurer acknowledged liability for some of allegations, but where bases for liability were at issue, insured breached duty of cooperation by entering into Miller-Shugart settlement), review denied (Minn. Aug. 15, 1989).  In contrast, Miller-Shugartsettlements are upheld where the insurer has completely denied coverage.  See McNicholes v. Subotnik, 12 F.3d 105, 107 (8th Cir. 1993); Miller, 316 N.W.2d at 733-34.

            Here, respondents admitted in their reservation of rights letter that the policies covered negligence resulting in water damage, but simultaneously denied coverage for the breach of warranty and contract claims.  At the same time, respondents stated that they were not waiving their right to deny coverage on “other grounds” or to clarify coverage issues with a declaratory judgment action.  Respondents subsequently brought a declaratory judgment action in federal district court, asking that the court declare respondents were not liable for some or all of the damages because appellant’s claims did not fall within the scope of the policies or were barred by policy exclusions.  Appellant asserts that this constitutes a complete denial of coverage.  But respondents never denied their responsibility to cover Stock Roofing’s acts of negligence that were not outside the scope of the policies or otherwise excluded by the policies, and participated in settlement discussions with appellant and Stock Roofing.

            The purpose of Miller-Shugart settlements is to permit an insured to enter into a favorable settlement while the issue of coverage is in doubt.  See Miller, 316 N.W.2d at 733-34.  But a Miller-Shugart settlement is not intended as a vehicle to shift liability for all acts, covered or not, onto the insurer.  See Buysse v. Baumann-Furrie & Co., 448 N.W.2d 865, 873 (Minn. 1989) (Buysse I) (stating disapproval of settlement in which insured and plaintiff stipulated that various acts of negligence resulted in damages in excess of $1 million, where insured argued that policy limits were $500,000); Steen, 442 N.W.2d at 161 (concluding that when insured and plaintiffs stipulated that all damages were attributable to negligence, which was covered by policy, parties intended to shift risk of loss for harmful conduct to insurer, despite exclusions in the policy).  Here, by stipulating that all damages were the result of Stock Roofing’s negligence, appellant and Stock Roofing effectively shifted all liability to respondents, without permitting respondents to raise legitimate defenses to those claims.

            When a Miller-Shugartsettlement causes a breach of the cooperation clause that is material and results in prejudice to the insurer, the insurer can void coverage, even when the settlement does not bind the insurer or prevent it from contesting coverage.  Steen, 442 N.W.2d at 162.   An insurer can still successfully contest coverage under a policy, even after a Miller-Shugart settlement.  Id.  But in the ensuing garnishment action, the insurer (1) has to defend against a settlement under the “relaxed standard of ‘what a reasonably prudent person in the position of the [insured] would have settled for on the merits of plaintiff’s claim’”; (2) may not have the right to a jury trial; and (3) loses cooperation from the insured, who must testify on behalf of the plaintiff that the agreement was reasonable.  Id. at 162-63.  This prejudices the insurer’s attempts to raise legitimate defenses to liability claims.

            The insured, Stock Roofing, breached its duty of cooperation and caused prejudice to respondents by entering into a Miller-Shugart settlement when respondents had not denied all coverage, and by stipulating that the basis for all damages was negligence covered under the policies.  We conclude, therefore, that the Miller-Shugart settlement was unenforceable, and that the district court did not err by denying appellant’s request to serve a supplemental garnishment summons and complaint.

            Affirmed.