Sixth Circuit Finds Insurer Responsible for $3,000,000 Consent Judgment

In an unpublished decision handed down Friday, June 19, 2020, the U.S. Court of Appeals for the Sixth Circuit held that Hamilton Specialty Insurance is responsible for a $3,000,000 settlement entered into by its insured after Hamilton refused to defend the insured in litigation arising out of a fire.[1] 

Hamilton Specialty Insurance refused to defend its insured

Transition Investment, LLC purchased an insurance policy from Hamilton to cover several rental properties owned by Transition.  While one of the locations was under lease to a tenant, a fire broke out, destroyed the building, killed three people, and injured a fourth. 

The inured party and the estates of the deceased individuals filed suit in Wayne County, Michigan, against Transition, claiming that Transition failed to provide a habitable premise and failed to properly maintain a stove on the property, which allegedly caused the fire. 

Transition asked its insurance company, Hamilton, to defend it, but Hamilton refused.  Hamilton claimed that the insurance policy excluded the damages caused by the fire.  Transition, without the assistance or approval of Hamilton, then entered a consent judgment of $3,000,000 with the plaintiffs to settle their claims. 

The plaintiffs then filed an action to garnish the $3,000,000 judgment from Hamilton. Hamilton, in turn, sought a declaratory judgment in the U.S. District Court for the Eastern District of Michigan, asking the court to find that it was not liable for the consent judgment. 

Hamilton had no basis for refusing to defend Transition

The district court found it “outrageous” that Hamilton denied coverage and refused to defend its insured because it could have done so “without giving up any rights” to contest coverage later.  The court therefore granted summary judgment in favor of Transition, finding that Hamilton was responsible for the $3,000,000 consent judgment.  Hamilton appealed that finding to the Sixth Circuit. 

Under Michigan law, an insurer must defend its insured from a lawsuit.  If coverage “is at all arguable,” then the insurer must defend the insured.  By breaching its duty to defend, the insurer becomes liable “for the costs of defense as well as any reasonable, good faith settlement paid by the insured.” 

Often, insurers will defend cases where coverage is questionable under a “reservation of rights.”  An insurance company can defend its insured while reserving its right to deny later the claim, as long as the insurer informed its insured of the potential coverage dispute and that it is reserving its right to challenge coverage under the policy. 

In this case, Hamilton did not appraise its insured of any reservation of rights. It simply refused to defend the claim.  As to this, the appellate court stated, “Hamilton made its choice, so we need not prove its strategical wisdom.” 

Hamilton argued it had no duty to defend Transition because the policy unambiguously did not cover damages from the fire.  The appellate court disagreed with Hamilton. It found that the exclusionary clauses on which Hamilton relied did not inarguably prohibit coverage. 

Hamilton had a “duty to defend” Transition under Michigan law

When analyzing an insurance company’s duty to defend, the court is not concerned with whether a claim would ultimately be covered under the policy. Instead, the court examines whether there was any arguable way in which the claim could fall under the provisions of the policy. 

If there is any possibility of coverage, the insurer’s duty to defend is triggered.  Thus, in the declaratory judgment action at issue on appeal, all Transition needed to provide was an “arguable interpretation” of the policy that permitted coverage.  According to the court, “[t]o show Hamilton’s duty to defend, Transition doesn’t have to give the winning argument – only a possible argument.” 

Had Hamilton defended its insured under a reservation of rights, it would have been allowed to challenge coverage under a more exacting standard. Still, since it merely chose not to defend at all, Transition was required to prove only that an arguable basis for coverage existed.  According to the court, the state court complaint against Transition provided Hamilton no basis to rule out coverage at the time it made that decision.

Another interesting aspect of the case is that the court upheld the insured’s consent judgment despite a clause in the policy explicitly prohibiting the insured from settling the case or entering into a consent judgment without Hamilton’s permission.  The court reasoned that “the first party to breach a contract cannot complain about the other party’s subsequent breach.” 

Under Michigan law, an insurer that “wrongfully refuse[s] to defend” the insured, “releases the insured from its agreement not to settle suits without its consent.”  Moreover, Michigan law views insurance claims settlements as presumptively reasonable unless the challenging party presents contrary evidence.  Because Hamilton did not challenge the reasonableness of the settlement, the court did not examine the issue and found Hamilton responsible for the full amount of the $3,000,000 consent judgment. 

A clear message to insurance companies

This decision sends another signal to insurers that they are not allowed to simply leave their policyholders out in the cold when they get sued.  While the decision may seem to strip Hamilton of defenses on the merits of the claim, Hamilton could have avoided the situation entirely by just defending Transition under a reservation of rights.  Instead, it chose to refuse to provide a defense to its insured.  As a result of the Sixth Circuit’s recent decision, Hamilton must now live with $3,000,000 in consequences for that decision. 

[1] Hamilton Ins. Co. v. Transition Investment, LLC, No. 19-1935, 2020 WL 3397743 (6^th Cir. 2020) (not selected for publication)