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The Takeaway

A recent Missouri Supreme Court ruling found that a defendant insurer has a right to intervene in an action to stay proceedings while an underlying determination of coverage case is pending. How courts choose to apply this ruling moving forward is still undetermined.

Background

For years, Missouri has been notorious for bad news from the appellate courts on coverage and bad faith issues. The General Assembly has made numerous attempts to curb bad faith set-ups that have given insurers almost no opportunity to challenge sometimes questionable excess judgments and arbitration awards. However, the courts and clever policyholders’ counsel have largely thwarted these efforts.

For instance, the latest and greatest version of RSMo § 537.065 (passed into law in 2021) permits an insurer to intervene in an action where the plaintiff and insured defendant have agreed to limit recovery to insurance proceeds (essentially a covenant not to execute against the insured’s personal assets) provided the insurer has denied coverage or refused to withdraw a reservation of rights. Unlike prior versions, the 2021 version of 537.065 grants insurers the right—and the time—to assert meaningful defenses and to demand a jury trial. To avoid this, policyholders have, in some circumstances, avoided executing a formal, written 537.065 agreement prior to judgment. They’ve claimed that absent a section 537.065 agreement, the insurer has no direct interest in the litigation and may not intervene in the underlying action. Missouri appellate courts have largely agreed with this position.

However, the Missouri Supreme Court gave insurers an early Christmas present with its December 23, 2024, decision in McCrackin v. Mullen, 701 S.W.3d 868 (Mo. banc 2024).

The McCrackin Ruling

In McCrackin, Plaintiff filed a wrongful death action in state court arising out of the shooting death of McCrackin’s son. At the time of the shooting, Defendant was insured under a homeowners policy issued by Safeco Insurance Company of America. Plaintiff notified Safeco that Defendant was an insured under the policy and offered to settle the wrongful death claim against Mullen for the policy limits. Safeco declined, stating the policy provided no coverage for the claim because the decedent’s injuries resulted from an intentional act.

Thereafter, Safeco filed a declaratory judgment action in federal court, seeking a declaration that the Safeco policy provided no coverage for Plaintiff’s claims against Defendant and that Safeco had no duty to defend or indemnify Defendant. Both Plaintiff and Defendant moved to stay the federal declaratory judgment action pending resolution of the state court wrongful death action, which the federal court granted.

Safeco then moved to intervene in the wrongful death action as a matter of right pursuant to Rule 52.12(a)(2) “for the limited purpose of staying proceedings in [the] action until final resolution of its declaratory judgment action.” The circuit court overruled Safeco’s motion to intervene on the basis that Safeco was not entitled to permissive intervention, nor was it entitled to a stay of proceedings in light of the federal court’s ruling. Safeco appealed.

The Missouri Supreme Court vacated the circuit court’s judgment, finding that Safeco did have a right to intervene in the wrongful death action for the purpose of staying the proceedings pending a determination of coverage in the declaratory judgment action. Specifically, the Court stated: “Insurers with good faith coverage questions should file a declaratory judgment action simultaneous with the underlying tort action and see a stay of the tort action until the declaratory judgment action is resolved.”

Significantly, however, the opinion’s author, Judge Mary Russell, noted in a footnote that

[i]n the future, it is advised that insurers file the declaratory judgment action in the same court as the tort action whenever possible. Such practice will ensure coverage questions can be determined in a consistent manner to prevent unnecessary delay of the underlying tort action.

While not stated as a requirement, this footnote is significant. Insurers typically file coverage declaratory judgment actions in federal court based on diversity of citizenship because Missouri federal courts—and particularly the Eighth Circuit Court of Appeals—are seen as preferable venues for insurers litigation coverage. Beyond any perceived ideological advantage, federal courts have more experience dealing with complex insurance coverage issues.

Early Application of the McCrackin Ruling in Federal Court

McCrackin marks a potential sea change, allowing insurers to litigate coverage prior to expending extensive defense costs in the underlying tort action any time there is a good faith coverage dispute. Federal courts may resist a significant increase in their caseload by exercising their discretion under the federal Declaratory Judgment Act, particularly considering the Missouri Supreme Court’s stated preference that such issues be litigated in the same court as the underlying tort action.

At least one federal judge has already signaled a willingness to kick a declaratory judgment action involving an insurance coverage dispute back to state court because the insurer did not follow the procedure outlined in McCrackin. In Addison Insurance Company v. Lou Budke’s Arrow Financial Company, Judge John Ross of the United States District Court for the Eastern District of Missouri granted a motion to abstain, finding that there was a parallel state court action. Addison had a unique procedural posture, and Judge Ross stopped well short of saying insurers must file their declaratory judgment actions on coverage in state court. Nevertheless, he admonished Addison Insurance Company that “[t]he Court finds no reason to credit McCrackin as blessing Addison’s actions here when Addison does not appear to have followed the advice on which it now relies.” This conclusion seemed to be based on Addison’s failure to seek a stay in state court, but it remains to be seen how federal courts will treat the potential influx of coverage cases on their dockets.