In Chicago Insurance Company v. Archdiocese of St. Louis, --- F.3d ----, 2014 WL 304839 (8th Cir. Jan. 29, 2014), the 8th Circuit Court of Appeals, applying Missouri law, affirmed the district court’s grant of summary judgment in favor of the insurer, holding that the policyholder failed to establish that it was potentially liable for a wrongful death suit it settled with the underlying claimant.

The underlying lawsuit was brought against the policyholder in Missouri state court, premised on the theory that a priest employed by the policyholder sexually molested a young boy, eventually leading to the boy’s suicide. Id. at *1. The policyholder moved to dismiss the underlying action, and the state trial court dismissed all but three claims: two alleging intentional conduct, and the “wrongful death claim,” which alleged that the policyholder “inappropriately, recklessly and or intentionally placed [the boy] in a knowingly dangerous environment . . . which acts caused [the boy’s] emotional and psychological’ harm and directly caused or contributed to [the boy’s] death.” Id.

In the coverage action, the federal district court ruled that “because the wrongful death claim in the underlying complaint alleged a form of negligence against a religious organization, the Archdiocese could not be held legally liable under current Missouri Supreme Court precedent.” Id. The district court also ruled in the insurer’s favor on the two claims alleging intentional conduct, on the ground that they did not fall within the definition of “occurrence” in the policy. Id. The Archdiocese did not challenge the “occurrence” ruling on appeal. Id. at *5 n.3.

The policy at issue agreed to indemnify the policyholder for “‘sums paid as damages in settlement of a claim or in satisfaction of a judgment for which the insured is legally liable.’” *2. The district court noted that even though the term “legally liable” was not defined in the policy, “it is generally understood that ‘[t]he term “legal liability,” as used in a policy of insurance, means a liability such as a court of competent jurisdiction will recognize and enforce between parties litigant.’” Id. at *2 (quoting Steven Plitt et al., 7A Couch on Insurance § 103:14 (2013 rev. ed.)). In affirming the decision, the 8th Circuit relied on Missouri law, which held that “to recover under a pure indemnity policy, the insured must show ‘that he was legally liable to [the injured claimant], and that the amount of the settlement he made and the other items demanded was reasonable, and the burden is on him to so show.” Id. (quoting Brinkman v. W. Auto. Indem. Assoc., 218 S.W. 944, 946 (Mo. Ct. App. 1920)).

The policyholder argued that the district court erred by requiring it to show actual liability to establish coverage, when Missouri law required only potential liability. Id. The court determined that it need not decide whether Missouri followed a potential liability standard because the policyholder did not prove that it faced even potential liability in the underlying action. Based on Missouri Supreme Court precedent rejecting negligence-based claims against religious organizations as violating the First Amendment, the 8th Circuit held that the policyholder “failed to show settlement was in reasonable anticipation of liability.” Id. at *3. Moreover, the court ruled that there was no authority “that allows a settling insured to recover under an indemnity policy where governing law does not permit the claimant’s underlying cause of action against the insured.” Id. at *4. The court also rejected the policyholder’s argument that once the state court in the underlying action denied its motion to dismiss as to the wrongful death claim, the coverage issue was decided. Id.

This decision is important to the extent it holds that a policyholder is not entitled to coverage for a settlement if the policyholder could have defended the case and established that it was not liable. Moreover, as a Circuit Court of Appeals decision, it may be persuasive to other courts evaluating the reasonableness of underlying settlements, both in similar circumstances, and more generally.