Klepper v. Ace American Ins. Co., No. 15A05-1212-CC-645 (Ind. Ct. App. Dec. 5, 2013)

Indiana Court of Appeals permits class action plaintiffs to pursue theory of bad faith claims handling even after dismissal of the class’s breach of contract claim.

Pernod Ricard USA LLC operated a distillery in Lawrenceburg, Indiana from January 2002 until June 2007. During the distillation process, ethanol was released into the air, causing mold to grow on the exterior of nearby buildings. William Klepper’s property near the distillery was damaged by the emissions.

In 2005, Klepper brought a class action lawsuit against Pernod on behalf of similarly situated property owners. The class action complaint alleged nuisance, negligence, trespass, and illegal dumping. Pernod tendered the claim to its insurers, XL Insurance America, which insured Pernod from January 1, 2001 to January 1, 2003, and ACE American Insurance Company, which insured Pernod from January 1, 2003 until January 1, 2004. When ACE received the claim in March 2005 it mistakenly classified it as an underage drinking matter and closed its file.

In October 2007, ACE was advised that the claim was not an underage drinking matter and that XL had been providing Pernod with a defense. XL sought contribution from ACE for the cost of defense and ACE agreed to contribute 49 percent of Pernod’s defense costs under a full reservation of rights. ACE reimbursed XL for its portion of the previously-incurred defense costs and contributed to ongoing costs until resolution of the underlying lawsuit.

In January 2009, the trial court granted summary judgment for Pernod on the illegal dumping claim, prompting settlement discussions. During those discussions, XL and Pernod asked ACE to contribute $1,000,000 toward a settlement agreement, but ACE refused and instead offered to contribute $250,000.

A mediation was held on April 14, 2009. ACE attended the mediation, but left before it was over. After ACE’s departure, the Class, XL and Pernod reached an agreement whereby judgment in the amount of $5,200,000 would be entered against Pernod. Pursuant to the agreement, Pernod would contribute $1,200,000 and XL would contribute $1,000,000 to a common fund for the immediate use and benefit of the Class. The remaining $3,000,000 was to be collected from ACE “to the extent the damages fall within the scope of the ACE Commercial General Liability Policy.”

On May 11, 2009, the Class filed a third amended complaint which included a claim for declaratory judgment regarding coverage under the ACE policy. In August 2009, the Class agreed to dismiss its claims against Pernod with prejudice and to release Pernod and XL from any future claims upon receipt of the $2,200,000 payment. The trial court approved the settlement in September 2009.

On December 29, 2010, the Class filed a fourth amended complaint asking the trial court to declare that up to $3,000,000 in damages, attorney fees, and post-judgment interest may be collected from ACE under its policy. The fourth amended complaint also included bad faith and unfair claims handling allegations against ACE.

By agreement of the parties, the case was assigned to a special master for resolution of six issues, including whether coverage existed under the policy. In its briefing to the special master, ACE relied upon the policy’s “legally obligated to pay” and “voluntary payment” provisions to assert that it owed no coverage under the policy. The “legally obligated to pay” provision stated that ACE “will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.” ACE argued that because, pursuant to the settlement agreement, Pernod was released of liability, Pernod was not legally obligated to pay the $3,000,000 to the Class and, therefore, ACE also could not be liable to pay the unpaid balance. ACE also argued that because Pernod settled the Class’s claims without ACE’s consent, the “voluntary payment” provision, which stated that “No insured will, except at the insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent,” precluded coverage.

In response, the Class argued that ACE was not permitted to (1) use the settlement as a tool to avoid coverage under the cited provisions; or (2) challenge Pernod’s liability on the damages fixed in the settlement. Instead, the Class argued that the court was tasked not with applying various terms of the policy, but rather with balancing the policyholder’s need to protect itself where the insurer refuses to commit to indemnity and the right of an insurer to protect itself from unreasonable settlement.

The special master concluded that ACE properly relied on the policy’s “legally obligated to pay” and “voluntary payment” provisions holding, “ACE honored its obligation. As a matter of law, Pernod breached its obligation by entering into the agreed judgment without the consent of ACE and the Class, as its assignee, will have to live with the consequences of Pernod’s breach.” On October 9, 2012, ACE asked the trial court to adopt the special master’s report and to enter final judgment in its favor. On December 17, 2012, the trial court entered an order adopting the report, but declined to enter final judgment on all issues, instead directing entry of only the six specific issues that the parties had agreed would be resolved by the special master. Both Pernod and the Class appealed the trial court’s order.

The trial court concluded that ACE neither abandoned Pernod nor breached the policy. The trial court explained that ACE’s refusal to contribute more than the offered $250,000 did not constitute an abandonment because ACE took the position that its obligations were limited by a $10,000 per claim deductible, relied on the ongoing nature of the emissions compared to its limited coverage for a 1-year period, and believed that there had not been an “occurrence” as defined by the policy. Likewise the Court held that ACE was not in breach and was permitted to rely on the “voluntary payment” and “legally obligated to pay” provisions of the policy.

Despite affirming the ruling that ACE owed no coverage, the trial court declined to dispose of all of the Class’s claims. The trial court agreed with the Class that, regardless of coverage, an insurer may breach the covenant of good faith in ways other than the wrongful denial of coverage, including, for example, by its handling of the claim. This, the trial court explained, was consistent with the notion that “an insured who believes that an insurance claim has been wrongfully denied may have available two distinct legal theories, one in contract and one in tort, each with separate, although often overlapping, elements, defenses and recoveries.” Given the two distinct theories upon which the Class sought to recover, the trial court determined that it could not conclude that the resolution of the contract dispute necessarily disposed of the tort-based bad faith claim for improper claims handling.