Insurers Assume the Risk When Disputing Coverage While Not Defending Their Insureds

Personal injury lawyers must often navigate complex and confusing insurance policies that might be available to compensate their injured clients. Insurance policy types may include general liability, professional liability, medical payment, health insurance, and in a recent truck accident case decided by the Indiana Court of Appeals, an MCS-90 Endorsement. An MCS-90 is known to truck-accident attorneys as a federally-mandated endorsement to an insurance policy that ensures federally-regulated motor carriers will meet their public financial responsibility obligation in the event of a breach of the terms of the policy by the insured motor carrier. This has been described by at least one court as “suretyship by the insurance carrier to protect the public.”

In Prime Insurance Co. v. Wright, a motorist injured in a truck accident filed a state-court lawsuit against multiple defendants, including the at-fault truck driver and multiple trucking companies. One of the insured trucking companies, Riteway Trucking, Inc., did not cooperate with Prime Insurance and did not appear or present any defense. Choosing not to defend Riteway, Prime also filed a separate federal court declaratory judgment action seeking a declaration that it had no duty to defend or indemnify Riteway or any of the defendants. The injured motorist then moved for default judgment against Riteway and other defendants on both liability and damages. Prime was next granted permission to intervene in the state-court lawsuit. The state court then entered a default judgment in favor of the injured motorist against the trucking companies, including Riteway, in the amount of $400,000. Prime filed an answer and sought to set aside the default judgment and to obtain discovery in the state-court action. The state court denied the motion to engage in discovery but stayed the state court action pending the federal court action.

The federal court entered an order that Prime did not owe any duty to defend or indemnify Riteway, because Riteway had failed to meet its obligations under its insurance policy with the insurance carrier. However, the insurance policy also contained an MCS-90 Endorsement, which was separate from and in addition to the liability policy issued to Riteway. Under Federal law, motor carriers must maintain proof of financial responsibility, and an MCS-90 Endorsement is in effect a guarantee by an insurance company to protect the public where a federal motor carrier is responsible for an accident causing personal injury to a member of the public. The federal court ordered that Riteway would be liable for any payments the insurance carrier made under the MCS-90 Endorsement under the policy.

After the federal court’s decision, the state court denied Prime’s motion to set aside the default judgment against Riteway. Prime appealed and argued on appeal that the trial court abused its discretion by denying its motion to set aside the default judgment. The Indiana Trial Rules state a trial court may grant a request for relief from a default judgment under Indiana Trial Rule 60(B) for, among other things, (1) mistake, surprise, or excusable neglect, or (8) any [other] reason justifying relief from the operation of the judgment.

The Indiana Court of Appeals reasoned Prime’s interest in the underlying state-court lawsuit was at the “crux” of the issue. Prime issued a liability policy to Riteway and further issued an MCS-90 Endorsement. Prime did not defend Riteway and planned to contest whether the MCS-90 Endorsement applied under the facts of this case. As to intervention under Indiana law, such is warranted only if the intervening party demonstrates (1) an interest in the subject of the action, (2) disposition of the action may as a practical matter impede the protection of that interest, and (3) representation of the interest by existing parties is inadequate. The Court reasoned Prime’s continuing interest in the underlying matter was subject to further legal determination and therefore contingent.

The Indiana Court of Appeals concluded that Prime’s interest did not warrant reversing the default judgment entered against Riteway. The Court stated that “[Prime] cannot both deny its obligation to its insured and, at the same time, seek to litigate questions relating to liability and damages.” Such would grant the insurance carrier “a second bite at the apple in its attempt to escape a potential future obligation.”

Truck accident lawyers and insurance companies alike would do well to pay attention to the Court’s warning when considering litigation strategy in their next injury case. You can read the opinion here.