Important Changes to Section 537.056 Affect Insurers’ Rights

Update on recent changes to Missouri's Section 537.065:

Important amendments to the Missouri statute, Section 537.065, R.S.Mo., were enacted effective August 28, 2021. The amendments are aimed at further reforming Missouri's notorious 537.065 statute which allows insured-defendants to enter into consent judgments whereby the insured admits to liability in exchange for the plaintiff’s agreement to limit his recovery to any liability insurance available to the insured.  This agreement is commonly referred to as an "065 Agreement". Specifically, the changes to the current statute include the following:

(1)       Curtailing the ability of plaintiffs' counsel to obtain consent judgments through arbitration, which has denied insurers the opportunity to intervene to protect their interests;

(2)       Clearly setting forth the rights available to an insurer upon intervening in order to allow the insurer to challenge the facts relied on before a consent-judgment is entered; and

(3)       Expressly providing that an agreement under Missouri's Section 537.065 (an "065 Agreement") can only be pursued after an insurer denies coverage or declines to provide a complete defense in response to a reservation of rights letter.

These changes aim to create a more level playing field for insurers by closing several loopholes in the current version of the statute which were discovered following the amendments enacted in 2017.

To understand why these amendments are so significant, it is important to understand how an 065 Agreement works. In the past, insured-defendants would typically agree to whatever allegations of liability and damage were alleged by a plaintiff under the terms of an 065 Agreement. Once an 065 Agreement was reached, plaintiffs would typically amend their pleadings to allege facts that have little to no basis in reality in an effort to circumvent whatever coverage defenses formed the basis for the insurer's coverage denial. The insured defendants would stipulate to the liability and damages alleged during an uncontested trial. Plaintiffs would subsequently obtain a consent judgment with findings of fact mirroring those stipulations, and then seek to recover the award through a garnishment action against the insurer. Under Missouri law, once a consent judgment is reached an insurer who declined to defend its insured is bound by the questions and issues determined in that underlying lawsuit and cannot relitigate them. Moreover, if the insurer's refusal to defend or provide coverage is later found to have been in bad faith, case law holds the insurer could also be liable for any extracontractual liability awarded.

Before 2017, insurers who declined to defend their insured could not intervene in an underlying tort action to prevent entry of a consent judgment reached under an 065 Agreement. In 2017, the law was amended to include the provision that required a defendant to notify its insurer of an 065 Agreement at least 30 days prior to the entry of a consent judgment.  The 2017 amendments also guaranteed an insurer the right to intervene in the underlying lawsuit to protect its interests.

After those 2017 reforms were enacted, plaintiffs' counsel began arbitrating their awards to prevent insurers from exercising their right to intervene. Through this practice, plaintiffs and insured defendants would enter into an 065 Agreement and agree to conduct a private arbitration that would not include the insurer. The plaintiffs would then dismiss their suit without prejudice and obtain an arbitration award that included the same stipulated findings. Plaintiffs would then re-file the suit, and seek to enforce the arbitration award. This practice effectively boxed insurers out of the proceedings that led to the consent judgment, and prevented them from intervening to challenge the validity of the findings that formed the basis of those judgments through arbitration.

In addition to the plaintiffs’ use of arbitration, several recent appellate decisions also limited the rights of insurers to intervene. Those decisions held that even though an insurer may now have the right to intervene within 30 days of any notice and before entry of a judgment, the courts refused to hold that right included anything more, and did not include the right to conduct discovery, defend or litigate the allegations relevant to coverage. Other decisions similarly held that the amended statute did not create a right for an insurer to be provided with notice and intervene more than thirty days later in a re-filed action.

Based on those developments, and additional potential loopholes presented by the language used in the 2017 reforms, the Missouri legislature has now enacted the following reforms.

(1) Changes Curtailing Arbitration of Bodily Injury Claims 

The amendments include language which restricts plaintiffs from obtaining consent judgments under an 065 Agreement for personal injury claims through arbitration. Missouri's Uniform Arbitration Act, section 435.415 has been amended. It now provides that any arbitration award for personal injury, bodily injury, or death or any judgment or decree entered on an arbitration award for those damages "shall not be binding on any insurer … unless the insurer has agreed in writing to the arbitration proceeding." In addition, Section 537.065 has been supplemented with additional provisions which clarify that before an 065 judgment can be obtained, an insurer must be provided with a copy of the 065 Agreement within 30 days of any action filed against the insured, and this notice must be provided anytime an action is re-filed, regardless of whether the action is pending at the time the 065 Agreement is reached.

The purpose of these amendments is to curtail the recent practice by many plaintiffs' counsel of obtaining consent judgments through arbitration in order to prevent insurers from intervening and blocking those judgments.

 (2) Changes Clarifying An Insurer's Right to Intervene.

The amendments to section 537.065 also clarify the notice requirements and rights included with intervention.

Sub-part 2 amends the requirements for notice to an insurer,  and states that an insured-defendant ("tort-feasor") must provide its insurer with a copy of the 065 Agreement and notice of the lawsuit in any action pending "within thirty days after such execution" of the 065 Agreement, and if the lawsuit is dismissed and then re-filed, then within thirty days "after the refiling of that action or the filing of any subsequent action …" Furthermore, if there is no lawsuit pending when the agreement is executed, then notice must be provided "within thirty days after the tort-feasor receives notice of any subsequent action …" The amended statute now also includes a sub-part four which elaborates further on the right to intervene, stating any insurer who receives notice of an 065 Agreement "shall have the unconditional right to intervene in any pending civil action" within thirty days and that this right includes "all rights afforded to defendants under the Missouri rules of civil procedure and reasonable and sufficient time to meaningfully assert its position including, but not limited to the right and time to conduct discovery, … engage in motion practice, and the right to a trial by jury and sufficient time to prepare for trial."

The purpose of these amendments is to allow insurers to challenge and litigate the facts upon which the plaintiffs seek to obtain consent judgments under an 065 Agreement.

(3) Additional Changes Clarifying an Insurer May Offer to Defend Under a Reservation of Rights Without Risk of an 065 Agreement Being Pursued

In the 2017 amendments to Section 537.065, the statute provided the insured with the right to pursue an 065 Agreement if it afforded its insurer "an opportunity to defend" the insured "without reservation," and the insurer refused to do so. As a result of this language, the defense bar in Missouri recognized a court could construe this language to mean a plaintiff could enter into an 065 Agreement after an insured tenders a defense to its liability insurer, and if that insurer responds by issuing a reservation of rights letter. The rationale for this construction was that the moment the insurer receives the tender it has been afforded "an opportunity" to provide a defense to its insured with a defense "without reservation" and if the insurer declines that opportunity and offers to provide a reservation of rights defense it has technically "refused" to defend its insured "without reservation." To avoid that potential pitfall, the Missouri legislature  revised the operative sentence so as to allow an 065 Agreement to be executed only "if the insurer has refused to withdraw a reservation of rights or declined coverage for such unliquidated claim."

The purpose of this change, again, is to avoid any strained interpretation, and to allow insurers to continue to offer reservation of rights defenses, without the risk of the insured pursuing an 065 Agreement based solely on that offer.

Conclusions:

It is clear the Legislature's recent amendments to Missouri's section 537.065 are intended to provide insurers with better tools to challenge the abusive practices of the plaintiffs' bar and to reign in the latter group's ability to obtain overvalued awards and collect against insurance proceeds through consent judgments which rely on frivolous allegations lacking any evidentiary basis. Nonetheless, it remains to be seen how these amendments will be implemented by Missouri courts, which have historically construed this type of legislation heavily in favor of plaintiffs and against insurance companies.

            For questions about how the new version of § 537.065 may impact an insurer’s ability to assert coverage defenses and avoid or defend against § 536.065 agreements and bad faith claims, please contact us:  Susan Dimond, sdimond@robertsperryman.com; Adina Johnson, ajohnson@robertsperryman.com; and Joseph Morris, jmorris@robertsperryman.com

 

 

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