Charting a Course Through the Perils and Pitfalls of 537.065 Litigation – Part 2


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When insurance coverage is in dispute, an insurer has several options. Obviously, the insurer may elect to fully defend and indemnify the insured.  The insurer also may refuse to provide a defense.  The third option is that the insurer may “choose to undertake the defense of its insured and reserve its right to later disclaim coverage, provided it gives the insured notice of a reservation of rights.”[5]  “If the insurer makes this choice, the insured, in turn, may elect to allow the insurer to defend or it may elect to refuse to allow a defense under a reservation of rights.”[6]  If the insurer defends under a reservation of rights, it may forfeit its right to participate in the litigation and to control the lawsuit.[7]  An insurer cannot reserve its right to disclaim coverage and simultaneously “insist upon controlling the defense.”[8]

Consequently, an insurance company’s decision to refuse a defense or to do so only under a reservation of rights creates a situation with great risks for the insured and the tort victim.[9] Because the insurer denied coverage, the insured faces the possibility of a judgment without the security of indemnification or defense through the insurance policy.[10]  The plaintiff, on the other hand, runs the risk that even if damages are ultimately awarded against the insured tortfeasor, there will be no way of collecting as the tortfeasor may not have the assets to pay the judgment without the insurance indemnification.[11]

Section 537.065 established a system to balance these risks.[12]  At its essence, the statute allows the alleged tortfeasor “to buy his peace.”[13]  The section “authorizes a settlement between a plaintiff and defendant in a tort action by which the plaintiff will seek payment of a judgment only from specified assets which may include recovery solely from an insurance company insuring the legal liability of the tort-feasor.”[14]  For the plaintiff, this means that if a court determines subsequent to the 065 agreement that no coverage exists, then the plaintiff will not be able to recover.[15] On the other hand, if coverage is found, then the insurer is at risk because it “will have no opportunity to defend on the issue of liability of the tort-feasor.”[16]

With so many moving pieces, 537.065 agreements often lead to complicated litigation.  To work with the statute, attorneys need to understand the implications of a number of elements as interpreted by the Missouri courts.  These issues range from whether settlements and verdicts under these agreements may be attacked based on their objective reasonableness to the ramifications of an insurer’s reservation of rights defense.  The history of the statute helps present a backdrop before addressing these issues directly.


The Missouri General Assembly essentially drafted Section 537.065 in response to an accident that typified a growing problem.[17]  In 1957, Terry Gene Drane, a minor, fell from a truck that was transporting a load of hay on a rural road in Boone County, Missouri.[18]  Terry Gene fell out of the truck as it passed under a telephone line.[19]  Terry Gene’s accident occurred while he was working for Charles Durk.[20]  Another one of Durk’s employees, Larry Jensen, was driving the truck at the time of the accident.[21]

The Dranes filed suit against Terry Gene’s employer (Durk), the driver of the truck (Jensen), and the owners of the telephone line (the Beiks).[22]  Durk was insured under a public and employee liability policy by Farmers Mutual Automobile Insurance Co. and through a separate automobile policy issued by the MFA Mutual Insurance Co.[23]  MFA was willing to negotiate with the Dranes to settle its share of the claim, but Farmers Mutual claimed that “there were coverage defenses available to it under the terms of the policy which it had issued to Durk.”[24]

Thus, Terry Gene’s injury presented a situation where multiple defendants faced substantial liability, but the primary insurance carrier argued that its coverages did not apply.  The Dranes’ circumstances set up the prototypical situation where the 537.065 agreement comes into play: the insured tortfeasors are left exposed to substantial personal liability after the insurer or insurers refuse to defend and deny coverage.  An 065 agreement provides the tortfeasor and the injured parties the power to navigate the insurance coverage issues together while limiting the tortfeasor’s liability and offering the injured party a better chance at real recovery for his or her damages.  Consequently, some have argued that “Section 537.065 has the legal effect of authorizing collusion between claimants and insureds.”[25]

Amidst this clash in Drane, the plaintiffs’ attorney also happened to be a state senator at the time.[26]  He and two other senators introduced Senate Bill No. 259 even as the Dranes’ litigation was ongoing.[27]  In fact, Senator George Spencer — the Dranes’ attorney — stated in oral arguments before the Missouri Supreme Court “that the bill had been introduced because of the situation which had been presented by the injury to Terry Gene Drane.”[28]  The bill passed the legislature and became law on August 29, 1959.[29]

Twelve days after Senate Bill No. 259 became law, the Dranes made use of the law and entered into an agreement with Durk, Jensen and MFA.[30]  MFA agreed to pay the Dranes $11,000, and the Dranes agreed “they would not levy execution by garnishment or otherwise against Durk, Jensen or MFA, ‘provided, however, that execution by garnishment or as otherwise provided by law may be levied against said Farmers Mutual Automobile Insurance Company . . .”[31]  Further the Beiks (the telephone line owners), paid $5,600 to the Dranes, and the Dranes executed a covenant not to sue the Bieks.[32]

Consequently, the Dranes — along with Durk, Jensen and MFA — established the first 537.065 agreement.[33]  The Dranes’ agreement also gave the Missouri Supreme Court its first chance to examine some basic arguments against such agreements as raised by the insurer on appeal.[34]  The court rejected the insurer’s arguments that such agreements were unenforceable for three reasons: a) because of the principle that a settlement with one joint tortfeasor constituted a settlement for all tortfeasors; b) that the plaintiffs’ agreement not to levy on the property of the insured tortfeasors relieves the tortfeasors — and, consequently, their insurer — from any obligation to pay; and c) that the Dranes’ agreement did not properly list the assets of the tortfeasors that would be subject to execution upon judgment.[35]  The court rejected these contentions, stating generally that such arguments are “inconsistent with what appears to us to be the obvious purpose of the statute.”[36]

However, the Drane court left open a final argument by the insurer: that the insureds breached the cooperation clause of the insurance contract by entering into the 537.065 agreement.[37] The court did not rule out that these agreements might run afoul of the insured’s duty to cooperate depending on the language of the insurance contract.[38]  However, under the facts in Drane, the court said that “[i]n the view of the obligation (of the insureds) to cooperate with both [insurers], we cannot say the mere fact of entering into the agreement constituted a breach of the cooperation clause of . . . [the] policy.”[39]


After Drane, however, a line of cases looked closely at the question of an insured’s duty to cooperate.  These decisions also addressed the implications of an insurer’s refusal to defend or offer of a defense under a reservation of rights.  To understand the different parties’ duties at this point, the courts often begin their analysis at the parties’ basic roles.  First, “[a]n insurance company has a duty to defend an insured when the insured is exposed to potential liability to pay based on the facts known at the outset of the case, no matter how unlikely it is that the insured will be found liable and whether or not the insured is ultimately found liable.”[40]  “To extricate itself from a duty to defend the insured, the insurance company must prove that there is no possibility of coverage.”[41] Further, “[t]his duty to defend potentially insured claims arises ‘even though claims beyond coverage may also be present.’”[42]  Much of this analysis of an insurer’s duties to the insured is premised on the insurance company owing a fiduciary duty to the insured.[43]

If the insurer decides against offering a full defense of its insured, it has at least two other options.  The insurance company may refuse to defend or defend under a reservation of rights.  Both have significant consequences to the insurer and the insured. When an insurer refuses to offer any defense at all, the insured is relieved of its obligations under the contract of insurance.[44]  “The legal consequences to the insurer from the breach of contract for unjustified refusal to defend on the ground of noncoverage include the loss of its contractual right to demand that the insured comply with certain prohibitory as well as affirmative provisions.”[45]  However, “[w]here the claim is actually outside the policy coverage, the refusal of the insurer to defend is a justified refusal, the insurer is not guilty of a breach of contract and incurs no legal liability by its action.”[46]

Under an offer of a defense with a reservation of rights, the insurer “does not contend that the petition . . . [does] not state some grounds of liability covered by its policy of insurance.”[47] Therefore, the duty to defend still exists.[48]  However, through this reservation, the insurer maintains the “right to later disclaim coverage.”[49]

Once the insurer offers its insured a defense under a reservation of rights, the nature of the relationship changes somewhat.  At this point, “the insured is released from the policy prohibition against incurring expenses and negotiating and settling claims.”[50]  In fact, once the insurer states its intention to defend only under such a reservation, “[t]he law treats that decision as a refusal to defend.”[51]  However, the insured still has the option of accepting the insurer’s defense under reservation or refusing.[52]  “If the fully-notified insured accepts, the insurer’s defense under a reservation of rights will not be considered a denial of coverage.”[53]  Nonetheless, the “[i]nsurers cannot force insureds to accept a reservation of rights defense.”[54]  Consequently, “[a]n insurer who refuses to defend its insured on the basis that there is no coverage does so at its own risk, and therein loses the ability to control the defense on behalf of the insured, and the ability to assert defenses that the insured might have asserted on its own behalf.”[55]

The Butters decision illustrates the mechanics of an insurer’s offer of defense under a reservation of rights.  Kenneth Butters worked for the Consolidated Transfer Warehouse Company, which had a contract with the City of Independence to move and install heavy equipment for the city.[56]  While working, Butters “received a severe electrical shock which resulted in a very serious injury.”[57]  Butters filed suit against the city.[58]  The city’s insurer, Royal Indemnity Company, responded by offering a defense under a reservation of rights.[59]  The city said it was unwilling to accept the reservation of rights agreement and instead entered into a 537.065 agreement with Butters.[60]  As part of the 065 agreement, the city paid Butters $25,000, and Butters “agreed to limit execution on any judgment recovered by Butters against the city to claim against insurer.”[61]  At trial, Butters testified and presented medical testimony.  However, the city did not cross-examine medical witnesses, and counsel for the city questioned the plaintiffs only “to ascertain that they understood the settlement arrangement with the city.”[62]  Further, during the trial, the city did not point out any testimony “which would relieve the city of liability.”[63]  Royal fought its liability in the subsequent equitable garnishment action based on the city’s rejection of the insurer’s offer of a defense under a reservation of rights, but the trial court granted judgment in favor of Butters and declared coverage under Royal’s policy, thus holding Royal liable.

On appeal, the court framed the “basic question” as what effect the insured’s refusal of the insurer’s offer of a defense under reservation has upon the rights and obligations the parties have under the insurance contract.[64]  “The trial court treated the insurer’s position the same as if it had refused the defense of the claim, leaving the city free to manage the claim as it saw fit, so long as it acted in good faith and without collusion, with the only ultimate question in such event being whether the liability was covered by the policy.”[65]  The court noted that the duty to defend existed and Royal did not assert that the petition failed to assert “some grounds of liability covered by its policy of insurance.”[66]  When the insurer then offered a defense only under a reservation of rights, the “city was not obligated to accept on such terms.”[67]  “In view of its attempt to reserve the coverage question, the insurer had no right to insist upon controlling the defense.”[68]  Essentially, the insurer’s offer of a defense under reservation is the “equivalent to a refusal of a defense.”[69]  “The consequence of such conclusion, likewise, is that ‘the insured is released from the policy prohibition against incurring expenses and negotiating and settling claims.’”[70]

In essence, this line of legal precedents demonstrates that once the insurer refuses to defend or offers to do so only under a reservation of rights, the 065 agreement is an important tool for the insureds.  Some attorneys who typically represent insurers note that the “statute supplants the insured’s duty to cooperate with insurers[,]” and it “nullifies the policy prohibition against voluntary payments and the assumption of obligations by insureds without their insurers’ consent.”[71]

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[5] Safeco Ins. Co. v. Rogers, 968 S.W.2d 256, 258 (Mo. App. W.D. 1998) (citing Central Bank v. St. Paul Fire & Marine Ins., 929 F.2d 431, 433 (8th Cir. 1991).