Umbrella Not Triggered by $20M Consent Judgment Which Also Violated Voluntary Payments and No Action Clauses

The United States District Court for the Eastern District of Tennessee, applying Tennessee law, found no breach of contract and held that the umbrella insurer had no liability for a $20 million Consent Judgment because the underlying was not exhausted prior to the entering of the Consent Judgment.

The case arises out of alleged carbon monoxide poisoning of Jessica and Travis Fritz (the “Frtizes”) that took place on February 15, 2014 at Laxmiji LLC, d/b/a the Mountain Vista Inn and Suites (“Laxmiji”).  The Fritzes were staying at the hotel when they sustained injuries caused by a carbon monoxide poisoning. At the time of the carbon monoxide incident, Laxmiji had two insurance policies: a commercial general liability policy issued by Liberty Surplus Insurance Corp. (“Liberty”) with limits of $1 million and an umbrella policy issued by St. Paul Fire and Marine Insurance Company (“St. Paul”) with a $5-million-per-occurrence limit.  Per the policy terms, the St. Paul policy applied after the Liberty policy was exhausted. The Fritzes sued Laxmiji.  Laxmiji never filed an answer but did forward the lawsuit to Madison Insurance Group (“MIG”).  The parties disagree as to whether MIG was the agent for Laxmiji’s insurance program.  However, MIG subsequently sent a letter to ProPoint Claims Services, LLC (“ProPoint”), Liberty’s claims administrator.  ProPoint disclaimed Liberty’s coverage.  The court granted the Fritzes motion for default judgment and entered a $20 million Consent Judgment.  The Fritzes and Laxmiji agreed to an assignment of the claim to benefits.  The Fritzes then filed the instant case for recovery of damages for breach of contract against Liberty and St. Paul as third-party beneficiaries of Laxmiji.  The Fritzes and Liberty reached a settlement and Liberty was dismissed from the lawsuit.  The only issue before the District Court was the breach of contract claim against St. Paul.  The parties filed cross motions for summary judgment.

The Fritzes alleged that St. Paul was in breach of contract in two ways: (1) St. Paul improperly denied coverage under the Liberty policy and (2) St. Paul failed to satisfy its obligation under the St. Paul policy.  The Fritzes argued that MIG was responsible for notifying St. Paul of Laxmiji’s claim, and given their purported agency relationship with St. Paul, their failure to do so effectively amounted to MIG denying coverage of Laxmiji’s claim on St. Paul’s behalf.  According to the depositions of MIG employees, MIG did not disclaim coverage on behalf of St. Paul.  It was MIG company practice to not notify an overlying carrier of a claim or suit if the underlying carrier disclaimed coverage.  The District Court ruled that there was nothing in the record that indicated that MIG, on behalf of St. Paul, disclaimed coverage of Laxmiji’s claims; rather the evidence showed that MIG took no action based on Liberty’s denial of coverage.

The Fritzes argued that St. Paul had a duty to defend Laxmiji because the St. Paul policy states that St. Paul will pay “all sums in excess of the Retained Limit” that arise due to “bodily injury … caused by an Occurrence.”  The District Court was unpersuaded by this argument because the plain language of the St. Paul policy also states that St. Paul’s duty to defend was only triggered once the Retained Limit from the underlying policy was exhausted, which the district court found did not occur during the underlying lawsuit.  The $1 million Retained Limit had not been exhausted at the time the parties entered into the Consent Judgment because the Retained Limit was only exhausted after Liberty settled with the Fritzes during the case at hand.

Not only did the District Court hold that St. Paul did not have a duty to defend, but it also held that St. Paul was not bound by the Consent Judgment.  The District Court also found that the Consent Judgment was not enforceable against St. Paul because Laxmiji violated several clauses of the St. Paul policy, namely the voluntary payment clause and the no action clause.  Therefore, the District Court granted summary judgment in favor of St. Paul and held that The Fritzes could not enforce the Consent Judgment against St. Paul.  Fritz v. St. Paul Fire and Marine Ins. Co., No. 3:17-cv-433-TAV-HBG (E.D. Tenn. Aug. 12, 2019).