In Hyland v. Liberty Mutual Fire Ins. Co., No. 1:15-cv-01264-JES-JEH, 2017 WL 3388161 (C.D. Ill. Aug. 7, 2017), the U.S. District Court for the Central District of Illinois granted plaintiff's motion for summary judgment for breach of contract finding that Liberty Mutual ("Liberty") breached its insurance policy when it failed to defend a 16-year-old driver who caused catastrophic brain injury to her passenger. The court ordered Liberty to pay a $4.5 million judgment despite its policy limits of $25,000 and despite plaintiff making no allegations of bad faith. The ruling is on appeal.
1) The Crash
Kimberly Perkins' 2004 Pontiac Grand Prix was insured with Liberty. On the night of August 2, 2013, Perkins' daughter, Michiah Risby, drove the car to a party. Risby's friend, Miquasha Smith, ultimately obtained the keys to Risby's Grand Prix and left the party. Risby maintained that she did not give Smith permission to drive the vehicle, but Smith stated that she had permission to drive it. After leaving the party in Risby's Grand Prix, Smith picked up additional passengers, one of whom was Monteil Hyland. Around 1 a.m., Smith crashed Risby's Grand Prix into a curb and parked cars. Hyland suffered a severe traumatic brain injury as a result of the crash.
Smith received 12 traffic citations. She also had a restricted driver's license, was driving after curfew, and had more under-aged passengers in the car than was allowed. The police reported that Smith's version of the events that night "continue[d] to change." Smith's family did not have a car or car insurance.
2) The Negligence Lawsuit and Liberty's Coverage Investigation
Due to Hyland's severe brain injuries, his mother sued Smith for negligence. On receipt of the compliant, Smith's mother submitted the lawsuit to Liberty. Liberty asked Smith if, at the time of the accident, she had Risby's permission to drive the Grand Prix. Smith responded in the affirmative.
Liberty assigned the lawsuit to an attorney and began its investigation. Liberty received a call from Risby's mother, Kimberly Perkins, who repeatedly denied that her daughter had given Smith permission to drive the vehicle from the party. Liberty also took the recorded statements of Perkins, Risby, and Smith, which resulted in conflicting statements about whether Smith had permission to drive the vehicle. Risby stated that she did not give the keys to Smith, but instead gave them to another person. Liberty did not take a statement from that other person.
3) The Policy
The subject policy states the following:
Part A – Liability Coverage
- We will pay damages for "bodily injury" or "property damage" for which any "insured" becomes legally responsible because of an auto accident. Damages include prejudgment interest awarded against the "insured." We will settle or defend, as we consider appropriate, any claim or suit asking for these damages. In addition to our limit of liability, we will pay all defense costs we incur. Our duty to settle or defend ends when our limit of liability for this coverage has been exhausted by payment of judgments or settlements. We have no duty to defend any suit or settle any claim for "bodily injury" or "property damage" not covered under this policy.
- "Insured" as used in this Part means:
- You or any "family member" ...
- Any person using "your covered auto".
Under "exclusions," the policy states that a person is not covered under the policy when:
- Using a vehicle without a reasonable belief that the "insured" is entitled to do so ....
4) Liberty's Denial of Coverage
Liberty determined that Smith did not have permission to drive the Grand Prix on the night of the crash and denied coverage. In a letter dated September 23, 2013 directed to Hyland's counsel and Smith, Liberty explained:
It is our understanding that, at the time of the accident, [neither] our insured nor her daughter Michiah Risby gave permission to Miquasha Smith to drive the vehicle. Accordingly, she could not have had a reasonable belief that she was entitled to drive the vehicle. Therefore Exclusion A. 8 applies to bar liability coverage for the accident.
And in another letter to Smith, Liberty stated:
If you have any information you believe may affect Liberty's coverage determination, please bring it to my attention immediately.
Neither Smith nor her counsel provided Liberty with contrary information.
Hyland's counsel thereafter sent a letter to Liberty with a copy of Hyland's negligence complaint against Smith and advising as follows:
This office will proceed to prove up a judgment against Miquasha A. Smith and issue supplementary process to Liberty Mutual Insurance Company concerning coverage of the vehicle in question.
Liberty wrote back continuing to deny coverage based on Smith's lack of permissive use of the Grand Prix at the time of the accident.
5) The Negligence Trial
The negligence action proceeded to trial. Smith stated on the record that she was defending herself, but she offered no evidence in her defense. Accordingly, the court found Smith liable for the injuries to Hyland and entered judgment in Hyland's favor. Liberty stood on its denial of coverage and did not provide a defense for Smith, defend Smith under a reservation of rights, or file an action for declaratory relief to determine whether it had a duty to defend Smith and/or indemnify Smith.
The trial court ultimately entered a judgment against Smith for $4,594,933.85. After the judgment was entered, Smith assigned to Hyland any and all claims she had against Liberty.
6) The Breach of Duty to Defend Lawsuit
Hyland, holding the assignment from Smith, filed suit against Liberty for breach of contract and breach of the duty to defend. Hyland did not allege any bad faith or tortious conduct against Liberty. Hyland simply alleged that Liberty had a duty to defend Smith and breached that duty by 1) refusing to defend Smith, 2) refusing to defend Smith under a reservation of rights, and 3) refusing to file a declaratory relief action to determine the coverage dispute. Hyland's suit focused on the allegations of her negligence complaint, which did not make any allegation of whether Smith had permission to drive the vehicle. As such, the complaint triggered Liberty's duty to defend Smith. Hyland alleged the direct and proximate result of Liberty's breach of its duty to defend Smith was a judgment of damages in the amount of $4.5 million.
The parties moved for summary judgment. But Liberty no longer contested that it had breached the duty to defend and instead focused on the damages Hyland sought. Liberty claimed that it only owed Hyland $25,000, the policy limits. Liberty contended that 1) Hyland had not alleged bad faith, 2) Smith did not incur any out of pocket defense costs, 3) the refusal to defend did not cause the default judgment, and 4) $4.5 million would be an impermissible windfall because it is "far beyond" the $25,000 that Smith would have been entitled to had Liberty not breached the contract.
The district court disagreed with Liberty and granted Hyland's motion for summary judgment. First addressing the duty to defend, the court explained that the complaint against Smith in the negligence action alleged that the vehicle involved in the accident was a "2004 Pontiac Grand Prix driven by Miquasha Smith," which is the covered automobile as listed in the declaration page of the subject policy. The court also noted that the initial lawsuit was "silent on the issue of permissive use." Accordingly, Smith could have fallen within the coverages of the policy which was enough to trigger Liberty's duty to defend Smith.
Second, the court determined that even in the absence of bad faith, the damages from failing to defend were "measured by the consequences proximately caused by the breach." The court held that the $4.5 million awarded to Hyland in the negligence action were "proximately caused by the breach" of the duty to defend and were not "unforeseeable" because when Liberty refused to defend Smith, Liberty knew that Hyland was pursuing a default judgment against Smith.
7) The Take Away
If it stands on appeal, this decision will serve as a warning of sorts to liability insurers. Where a question of coverage exists, the insurer should take steps to preserve its right to contest coverage, whether under a reservation of rights and/or by filing a declaratory judgment action to determine coverage. As the opinion highlights, simply denying coverage based on a policy exclusion and taking no action could result in exposure to a judgment millions of dollars over the policy limits, even absent any allegations of bad faith or any tortious conduct on the part of the insurer.
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