Missouri insurers can breathe a sigh of relief as the Missouri Court of Appeals, Western District, finds an insured’s fraudulent conduct precludes indemnity obligations under an “intentional acts” exclusion. The Court of Appeals found the claimant could not prove coverage applied to an underlying punitive judgment resulting from fraudulent sales tactics.

Estate of Max Overbey v. Universal is the latest chapter in the seemingly endless saga of litigation surrounding the Chad Franklin auto dealerships, and a deceptive marketing program that violated the Missouri Merchandising Practices Act. Here, the Court of Appeals reversed a lower court’s equitable garnishment judgment against Universal Underwriters Insurance Company and Zurich American Insurance Company (collectively “Universal”). The Court of Appeals found the legal principles and evidence that established the right to submit the punitive damages to a jury also established that the insured acted with purpose, triggering the policy’s intentional conduct exclusions.

In the underlying litigation Overbey sought equitable garnishment on a verdict awarding punitive damages on a claim. An equitable garnishment claim requires the judgment creditor to prove three elements: (1) the claimant obtained a judgment against an insured; (2) the policy was in effect when the incident occurred; and (3) the insurer’s policies covered the damages awarded in the underlying judgment. Here those damages centered on Overbey’s MMPA claim against Chad Franklin and his used car dealership Chad Franklin National Auto Sales North, LLC (“NAS”). The claim arose from a vehicle purchased as part of NAS’ “drive for life” program, which promised low monthly payments and the ability to exchange vehicles every six months but failed to disclose various purchase and finance fees and failed to deliver the promised $43 monthly payments.

Overbey prevailed at the initial trial by introducing evidence that Franklin falsely inflated the price of the car purchased; Franklin charged the $34,000 for a car worth only $20,000; Franklin added $3,000 in hidden fees to purchase; Franklin repeatedly dismissed concerns raised by Overbey; and Franklin disavowed knowledge of the drive for life program. Overbey also introduced testimony from the Attorney General’s office regard 70 plus other complaints about similar conduct by Franklin, and the testimony of four other aggrieved customers of Franklin. The evidence demonstrated Franklin repeatedly and intentionally used deceptive business practices in furtherance of a fraudulent scheme.

The approved jury instruction provided in relevant part, “if you believe the conduct of defendant was outrageous because of defendant’s evil motive or reckless indifference to the rights of others, then you may award punitive damages to punish defendant and to deter defendant and others from like conduct.”

The pertinent policy provisions provided coverage for “all sums the INSURED legally must pay as DAMAGES because of INJURY to which this insurance applies … caused by an OCCURRENCE.” “Occurrence” was defined as an accident resulting in injury not intended nor expected from the standpoint of a reasonably prudent person.

The Court of Appeals reversed the trial court decision, emphasizing the inconsistency in allowing a party to assert on one hand that the insured acted fraudulently to merit the imposition of punitive damages, and to simultaneously assert the same conduct did not establish intentional conduct. Because the policy’s definition of “occurrence” excluded intentional conduct that foreseeably caused financial injury, and because the evidence presented in the MMPA action showed the insured’s actions were intentional and the harm was reasonably foreseeable, coverage did not apply and Overbey failed to meet his burden of demonstrating coverage for the underlying judgment.

The Court of Appeals stopped just short of creating a bright line rule that would establish the assessment of punitive damages as equivalent to a jury finding of intent in all cases. But the Court did state that where the evidence and sole legal theory enabling the grant of a punitive award was that the defendant engaged in a pattern of intentionally fraudulent misconduct, the imposition of liability established the insured’s actions were intentional.

The Court’s decision reinforces an insurer’s ability to define coverage in a manner that excludes intentional misfeasance by its insured.