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Kelly v. Iowa Mutual Insurance Co.11/16/2000
Appeal from the Iowa District Court for Pottawattamie County, G. C. Abel, Judge.
Assignee of insured tortfeasor appeals summary judgment dismissing its suit to collect stipulated judgment from tortfeasor's insurer.
REVERSED AND REMANDED.
Considered en banc.
This case requires the court to decide whether an insured being defended under a reservation of rights breaches his duty of cooperation by agreeing to a stipulated judgment with the claimant. We hold that if the insurance company has breached the contract by wrongfully rejecting a reasonable settlement offer, the insured may accept the settlement offer over the insurer's objection without breaching policy duties and losing his right to seek coverage. Because the record before the district court was insufficient to allow a resolution of this issue, we reverse the court's summary judgment ruling in favor of the insurer, and remand the case for further proceedings consistent with this opinion.
I. Background Facts and Proceedings.
On April 18, 1993, Leo Kelly was killed while making repairs to a farm implement owned by Philip McCarthy. The appellee, Iowa Mutual Insurance Company, insured McCarthy at the time under a farm liability policy. The policy specifically excluded coverage for bodily injury sustained by "any employee . . . as a result of his or her employment by the 'Insured.'"
The appellant, Donna Rae Kelly, individually and as the administrator of the Estate of Leo Kelly and as parent and next friend of Amy Kelly (hereinafter "the estate"), made a claim against McCarthy for damages arising from Leo Kelly's alleged wrongful death. In turn, McCarthy sought coverage for this claim from Iowa Mutual.
Iowa Mutual believed that Kelly was McCarthy's employee and that his fatal injuries occurred as a result of his employment by McCarthy. Based on this belief and the employee exclusion contained in the policy, Iowa Mutual disputed coverage. Accordingly, on September 29, 1993, Iowa Mutual instituted a declaratory judgment action against McCarthy and the estate, seeking a declaration that the employee exclusion precluded coverage for any claims of the estate against McCarthy. The estate, in addition to filing an answer, also filed a cross-claim against McCarthy seeking damages for Kelly's wrongful death. At this point, Iowa Mutual provided McCarthy with an attorney to defend him on the wrongful death claim. The insurer also requested, and the court granted, a severance of the wrongful death cross-claim from the coverage action.
The declaratory judgment action proceeded to trial. The sole issue was whether Kelly was McCarthy's employee at the time of the accident. The jury found against Iowa Mutual, but the trial court granted the insurer's motion for judgment notwithstanding the verdict, ruling that Kelly was McCarthy's employee as a matter of law. The trial court's judgment NOV was reversed on appeal. Iowa Mut. Ins. Co. v. McCarthy, 572 N.W.2d 537, 545 (Iowa 1997). This court reinstated the jury's verdict and remanded "for the entry of a declaratory judgment that Iowa Mutual's policy provides coverage for the estate's wrongful death claim." Id.
During the pendency of the appeal of the declaratory judgment action, McCarthy and the estate entered into settlement negotiations, the nature and extent of which are not clear from the summary judgment record. It does appear, however, that Iowa Mutual was notified of these discussions, but refused to agree to any kind of settlement because, it contended, its insured, McCarthy, had no liability to the estate and the tort claim could be successfully defended.
Despite Iowa Mutual
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