Charting a Course Through the Perils and Pitfalls of 537.065 Litigation – Part 3


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Before 1997, no Missouri appellate court had applied a reasonableness requirement to the 065 agreements.  However, the Southern District Court of Appeals in 1990 brought up reasonableness when it explained in Cologna v. Farmers & Merchants Ins. Co. that the insured is free to make a “reasonable settlement.”[72]  Both the Southern and Western districts of the Missouri Court of Appeals then endorsed such agreements so long as the agreements were “free of collusion or fraud.”[73]

Building on these two decisions, the Missouri Supreme Court in 1997 declared that the enforceability of settlements through 065 agreements must be considered under “a reasonableness standard.”[74]  “Requiring a settlement to be reasonable strikes an appropriate balance between the interests of the insured and the interests of the insurer.”[75]  While the insurer in such situations has refused to defend and left the insured to fend for himself, the court noted that the ensured “may act in a self-interested way in an attempt to protect himself from personal liability.”[76]  These agreements, even absent any collusion or fraud, occur under unusual circumstances, as the Gulf Court noted.  The insured may agree to a large settlement in exchange for his release from liability because he has “nothing to lose” and “he will never be obligated to pay.”[77]  In these circumstances, the settlement “may have very little relationship to the strength of the plaintiff’s claim.”[78]

In Gulf, the Court continued on to define this reasonableness standard.  “The test of whether the settlement amount is reasonable is what a reasonably prudent person in the position of the defendant would have settled for on the merit of the plaintiff’s claim.”[79]  This analysis includes “a consideration of the facts bearing on the liability and damage aspects of the plaintiff’s claim, as well as the risks of going to trial.”[80]  The insurer bears the burden of proving the reasonableness — or the unreasonableness, depending on the perspective — of the 065 agreement.[81]

Finally, the Court in Gulf determined that a “reasonableness” ruling against the insured’s agreement does not release the insurer from all liability.  Instead, upon a finding that a 065 agreement is unreasonable, the trial court is tasked with determining a “reasonable settlement amount for which the insurer should be held liable.”[82] Consequently, the Missouri Supreme Court in Gulf established a reasonableness standard for the enforceability of 065 agreements and outlined the procedure for the analysis of these agreements.


The Gulf ruling set a reasonableness standard for settlements reached under 537.065, but the Missouri Supreme Court declined to extend this analysis of reasonableness to bench trial judgments in which the plaintiff and accused tortfeasor (the insured) cooperate.[83]  In Schmitz v. Great American Insurance Co., there was no settlement.  Rather, when two insurance companies refused to defend their insured (CPB), the insured entered into an 065 agreement with the plaintiffs in which the plaintiffs agreed that if a judgment was entered against the insured, the plaintiffs “would limit any recovery to the insurance policies.”[84]  The plaintiffs took the insured to a bench trial, where “the [plaintiffs] introduced evidence regarding their damages and [the insured’s] liability.  [The insured] neither objected to the entry of evidence nor offered any defense.”[85]  At the conclusion of the bench trial, the court declared the insured liable and awarded $4,580,076 in damages to the plaintiffs. None of the parties appealed.[86]

The plaintiffs then filed an equitable garnishment action under Mo. Rev. Stat. § 379.200 against the two insurance companies to recover the damage award under the insured’s policies.[87] The plaintiffs argued that the policy exclusions claimed by the insurance companies did not apply.[88]  While one of the two insurance companies settled, the remaining insurer, Great American Assurance Co., fought the equitable garnishment.[89]  The trial court held an evidentiary hearing on the equitable garnishment action, and it ruled that the underlying judgment was unreasonable and that reasonable damages were $2,200,000.[90]

The Missouri Supreme Court overruled the trial court and said that the Gulf reasonableness test only applies to settlements reached under 065.[91]  The insurer, Great American, argued that the trial “lacked any semblance of an adversarial proceeding because [the insured] did not present a defense.”[92]  However, the Supreme Court pointed out that the insurer had an opportunity to defend but refused.[93]  The insured turned to the 065 agreement to limit its exposure to liability, but that agreement “did not admit liability or damages; instead, it simply limited the collection of any judgment against [the insured] to insurance policies.”[94]  Further, the Supreme Court said that the plaintiffs, regardless of the 065 agreement, still had to prove liability and damages at the bench trial.  “Although the trial court found [the insured] liable . . . , it could have found that [the insured] was not liable or that no damages were suffered.”[95]

The Supreme Court explained that allowing insurers to attack bench judgments after the fact would “encourage insurers to refuse to defend on behalf of insureds.”[96]  The court explained that this policy was “inconsistent with the doctrine of collateral estoppel” because:

The insured, unwilling to expose itself to liability beyond the insurance policy, will enter into a section 537.065 agreement limiting any collection of damages. Once the trial court renders its judgment and the plaintiff files an equitable garnishment lawsuit against the insurer, the insurer will challenge the trial court’s finding of liability and damages.  Then, the plaintiff will be forced to re-litigate the entire case for the equitable garnishment court so that it can determine whether the judgment was reasonable.[97]

Thus, adopting a policy of questioning the reasonableness of a bench trial verdict would give insurers “two bites of the apple — once when the trial court determines liability and damages and once when the equitable garnishment court determines reasonableness.”[98] Consequently, the Supreme Court refused to extend the reasonableness test it had applied to 537.065 settlements to bench trial judgments where the plaintiff and insured cooperated under similar agreements.[99]


The concept of collateral estoppel also works to bind insurance companies to the results of 065 litigation.  This issue arises when insurers argue that in order to be bound by a 065 agreement and the litigation, the insurer must have unjustifiably refused to defend or provide coverage before the insured resorted to the 065 agreement.[100]  If the refusal to defend or provide coverage is not unjustified, then the insurer is not bound by the 065 agreement.

The courts, however, have articulated a clear standard defining when insurers are bound by the 065 judgments.  First, the courts note that once an insurance company unjustifiably refuses to defend or provide coverage, the insured is free to enter into a settlement that releases it from liability.[101]  The standard then becomes “whether the insurer had the opportunity to control and manage the litigation, not whether the insurer had the duty to control and manage the litigation.”[102]  Therefore, “[w]here one is bound to protect another from liability, he is bound by the result of the litigation to which such other is a party, provided he had an opportunity to control and manage it.”[103]  Based on this, when one party has secured a judgment against another and attempts to satisfy it through an action for equitable garnishment, “the underlying judgment may not be collaterally attacked as long as the court issuing the judgment had personal and subject[-]matter jurisdiction and the judgment is not void on its face.’”[104]

This result is true — the insurer remains bound — even if the insurer’s refusal to defend or provide coverage is an “honest mistake,” as it “nevertheless constitutes an unjustified refusal and renders the insurer liable to the insured for all resultant damages from that breach of contract.”[105]  Essentially, as the court in Rinehart v. Anderson stated, “[the insurer] cannot have its cake and eat it too by both refusing coverage and at the same time continuing to control the terms of the settlement in defense of an action it had refused to defend.”[106]

This doctrine also means that the insurer is “precluded from relitigating any facts that actually were determined in the underlying case and were necessary to the judgment.”[107]  Further, the facts decided in the underlying action will most often “determine whether there is a duty to indemnify.”[108]  Simply put, the facts as determined in the 065 litigation generally are used to determine the coverage issues in subsequent equitable garnishment actions.


When insurers unjustifiably refuse to defend, they potentially face significant consequences.  As noted above, the insurer may be liable for the full amount of coverage under an 065 agreement settlement or related trial.  Further, the insurer may face liability after surrendering any ability to control or influence a defense to the substantive action.

But an insurer who refuses to defend may face even greater exposure: a judgment for bad faith refusal to settle. The Truck Insurance Exchange v. Prairie Framing decision by the Western District Court of Appeals demonstrates this risk.[109]  In fact, the Truck Insurance Exchange decision “illustrates the risks to which an insurer may be exposed if the insurer elects to defend its insured under a reservation of rights.”[110]  Along with the risk of having to satisfy a judgment “that bears little relationship to the plaintiff’s actual damages, the liability issues, or the insurer’s policy limits,” the insurer may have to pay interest on that judgment “as well as possible liability for bad faith in the event the insurer is unsuccessful in litigating its coverage defenses.”[111]

Because of this risk, it is important to understand the Western District Court of Appeals’ holding in Truck Insurance Exchange.  Eugene Rolfe was killed when his vehicle was struck by a truck driven by Robert Winger.[112]  Rolfe’s family filed suit against Winger and his employer, Prairie Framing, which was insured by Truck Insurance Exchange (TIE).[113]  TIE refused to defend. Prairie Framing executed an 065 agreement with the Rolfes and stipulated to its liability for negligent supervision.[114]  The Rolfes tried the issue of damages, and the trial court entered a judgment of $4 million against Prairie Framing.[115]

The trial court also found that TIE violated its duty to settle in good faith.[116]  Based on this, it ordered TIE to pay the full $4 million judgment against Prairie Framing, even though the policy limit was $1 million.[117]  Further, the trial court ordered TIE to pay 9 percent interest per annum plus legal fees and expenses in defense of the underlying suit.[118]

On appeal, TIE argued against the bad faith refusal to settle ruling.  TIE claimed it was liable only for the amount Prairie Framing was “forced to pay, and Prairie Framing was only forced to pay a nominal amount.”[119]  In its decision, the Western District explained an insurer’s duty in settlement negotiations.  “Inherent in a policy of insurance is the insurer’s obligation to act in good faith regarding settlement of a claim.  This obligation is part of what the insured pays for.”[120]  The court further explained its reasoning for holding insurance companies to the standard of good faith in negotiations:

We find no attraction to a rule that rewards bad faith by relieving the insurer of excess liability if it forces harsh choices onto an insured facing a huge judgment.  When the insurer refuses to settle, the insured loses the benefit of an important obligation owed by the insurer. An insurer’s ‘mere payment’ of a judgment up to the policy limits does not make the insured whole or put the insured into the same position as if the company had performed its obligations under the policy.[121]

Requiring the insured to pay before the insurer is held to its obligations because of the insurer’s bad faith refusal to settle would impose “the very burden on the insured that the requirement of good faith seeks to avoid.”[122]  On the broader issue of an insurer’s bad faith, the court said that if an insurer has assumed control of its right to settle claims against the insured, it must exercise good faith in “considering offers to compromise the claim for an amount within policy limits.”[123]  If the insurer fails in this, it “may become liable in excess of its undertaking under the policy provisions.”[124]  The obligation of good faith in settlement negotiations continues even after an insurer denies coverage and refuses to defend.[125]  If the insurer refuses to consider settlement offers in good faith, the insured is free to reach a reasonable settlement that can be enforced against the insurer.[126]

The courts look to the facts of the case to determine whether the insurer acted in bad faith.  “Bad faith is, of course, a state of mind, indicated by acts and circumstances, and is provable by circumstantial as well as direct evidence.  Each case must stand and be determined upon its particular state of facts.”[127]  The court has found bad faith based on an insurer’s “intentional disregard of the financial interest of [its] insured in hope of escaping the responsibility imposed upon it by its policy.”[128]  “The law requires the insurer to ‘act honestly to effectually indemnify and save the insured harmless as it has contracted to do — to the extent, if necessary, that it must make whatever payment and settlement an honest judgment and discretion dictate, within the limits of the policy.’”[129]

The court in Truck Insurance Exchange remanded the case to the trial court because no trial on the merits had been held on the issue of bad faith and the record did not provide enough facts for it to make a clear determination on the issue on appeal.  Nonetheless, the Truck Insurance Exchange court laid out a clear standard where insurance companies may be held liable for attorneys fees and court costs, as well as damage amounts over the policy limits, when the insurers do not act in good faith regarding settlements.


When facing litigation about 065 agreements, courts must also consider the issues of fraud and collusion between the plaintiffs and insureds.  “Collusion is a secret concert of action between two or more people for the promotion of a fraudulent purpose.”[130] “[A] key element of collusion is promoting a fraudulent purpose.”[131]  “Missouri courts recognize two types of fraud: extrinsic and intrinsic.”[132]  “Fraud is extrinsic when it induces a party to default or to consent to a judgment.”[133]  “It is intrinsic when a party knowingly uses perjured testimony or otherwise fabricates evidence.”[134]  When contesting 065 agreements, insurers are “talking about a fraud upon the court or extrinsic fraud.”[135]  “Extrinsic fraud has been defined as a fraud that induced a party to default or consent to judgment against him.”[136]  “[F]raud is a positive act resulting from a willful intent to deceive.”[137]  However, “[a]n insured, ‘although not engaging in collusive conduct for fraudulent or deceitful purpose, may act in a self-interested way in an attempt to protect himself from personal liability.’”[138]

In Cologna v. Farmers and Merchants Insurance Co, the Southern District Court of Appeals addressed the issues of fraud and collusion in 065 agreements, and ultimately resulted in a benchmark ruling on the question of fraud in these agreements.[139]  The case arose when Eugene Cologna died after a shotgun, held by his ex-wife Rita Cologna, discharged while he was at her residence.[140]  Paulette, Gene’s wife at the time of the incident, sued Rita.[141]  Rita’s insurer, with whom she had a homeowner’s policy, offered a defense under a reservation of rights.[142]  Rita refused her insurer’s qualified defense and entered into an 065 agreement with Paulette.[143]

Farmers responded with a declaratory action that alleged, among other things, fraud and collusion by Rita and Paulette.  Farmers’ collusion argument was that “Rita had ‘failed to cooperate’ with Farmers in the defense of the civil action as required by the policy [and] had ‘colluded’ with Paulette” in a manner that would “expose Farmers to a substantial loss.”[144]  Farmers said Rita had “colluded and conspired” with Paulette by writing a letter to Farmers counsel demanding that he either withdraw or defend without a reservation of rights, by stipulating “to the effect that Rita carelessly and negligently caused the death of Gene Cologna and that his death was not an intentional act,” and other unnamed collusive acts.[145]  The Southern District noted that Farmers, in offering the defense under a reservation of rights, never admitted liability on its policy, but “[a]t the same time it was never willing to let the insured manage her defense as she saw fit.”[146]  The court emphasized that once Farmers offered to defend only under a reservation of rights, Rita was not obligated to accept the defense.  Further, the court discounted the insurer’s arguments of collusion and fraud based on the insured’s failure to cooperate “by waiving a jury trial, failing to contest liability, failing to contest damages and by failing to offer evidence at the trial of the wrongful death action.”[147]

On these accusations of collusion, the Cologna court examined both the 065 agreement and the trial proceedings, concluding that no fraud existed. The court stated:

It could not fairly be said that the judgment in the wrongful death action was collusive or fraudulent; the trial court made extensive findings of fact in connection with Paulette’s claim for damages because of Gene’s death... Farmers’ characterization of the proceeding as a species of confession of judgment is unwarranted.[148]

Consequently, the court declared that the argument that the insured breached the duty to cooperate or acted collusively was without merit.[149]

In Cologna, Farmers essentially asked the court to reconsider what constitutes collusion in such agreements, arguing that the insured — even those who execute 065 agreements — must meet certain standards of the insurer in defending the suit (even though the insurer refused to defend).  This argument basically asked for a reconsideration of precedent on 065 agreements, the Cologna court noted.[150]  Rather, the Missouri courts have held consistently that once the insurer refuses to defend, the insured is released from its obligations to the insurer. In an early answer to insurers’ claims of collusion in such agreements, the Missouri Supreme Court said that insureds may agree to dispense “with the necessity of defendant making a defense to plaintiffs’ claims.”[151]  This is not fraud or collusion “[s]ince the parties were authorized by law to enter into the contract, we hold that their conduct in doing so was not wrongful.”[152]  Even if the insured does not contest plaintiff’s claims, this does not “indicate that the judgments were obtained by fraud or collusion.”[153]

The standard for fraud and collusion in the setting of 537.065 agreements has not been well defined,[154] but it is a high bar for insurers to reach.  The analysis for such a fraud defense turns on the pleading requirements explained in Missouri Rule of Civil Procedure 55.15.  The rule states that “[in] all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity.”[155]  The party alleging fraud “must plead every essential element of fraud, and failure to plead any element renders the claim defective and subject to dismissal,” and those allegations of fraud must rest on statements of fact and not mere conclusions.[156]  The elements of fraud are: 1. a representation; 2. its falsity; 3. its materiality; 4. the speaker’s knowledge of its falsity; 5. the speaker’s intent [that] the representation be acted upon by the other party; 6. the other party’s ignorance of its falsity and right to rely on its truth; and 7. proximately caused injury.[157] If the insurer fails to plead even one of these seven elements, then the fraud defense to an 065 agreement fails.  This creates such a high burden on the insurer that each and every court that has addressed the fraud defense has entirely rejected it in the context of 065 agreements.[158]

One of the first cases on the issue of fraud and collusion as a defense to 065 agreements, U.S. Fidelity & Guaranty Co. v. Safeco Insurance  Company of America, illustrated the difficulty for the insurers to successfully plead the fraud argument.[159]  In U.S. Fidelity, the insured, Roy Chapman, entered into an 065 agreement with the plaintiffs, the Alonzos.  As part of the agreement, Chapman made an admission of liability.[160]  Safeco, the insurer, on appeal argued that “under the agreement the proceedings were not adversary in nature and since [the insured’s attorney] sat silent while the attorney for the Alonzos made improper statements in argument, the verdicts and judgments obtained were ‘tainted with collusion and fraud’ and should not be permitted to stand.”[161]  The plaintiffs’ lawyer even told the jury not to consider where the money was going to come from because “there were ‘substantial sources’ from which the money will come,” and the insured’s attorney raised no objection to the allusion to insurance coverage made in front of the jury.[162]  As to “sitting in silence” during the plaintiffs’  attorney’s statement about “substantial sources” of money to cover the verdict, the Missouri Supreme Court noted there “was no claim or evidence that he agreed in advance as to the improper closing argument or that he knew it was coming.[163]  Moreover, the court ruled there was no collusion or fraud as the agreement was executed as the statute intended.[164]  The court explained that “[t]here is no question but that an insurer which has elected for what it considers valid reasons not to defend a pending damage suit can be placed in a difficult position by those acting under the statute, but infirmities of this sort in the statute, if so, can be corrected by the general assembly.”[165]

Consequently, the insurer’s options to challenge 065 agreements are limited.  In fact, “[a]bsent fraud or collusion between the claimant and the insured, a Section 537.065 agreement does not provide the insurer with a defense to liability on the policy.”[166]  And, as the above cases show, the courts routinely have rejected insurers’ defenses based on fraud or collusion.


While Mo. Rev. Stat. § 065 largely is structured to benefit the insured parties, the courts have carved out limitations to protect insurers, too.  For one, 065 agreement settlements may not create greater liability for the insurer than what is covered under the policy.  “[A]n insurer’s liability when the insured has settled the underlying action may not exceed the policy coverages.”[167] Consequently, where a tortfeasor and insured settle under an 065 agreement and the settlement encompasses both covered and noncovered claims, the “settlement must be fairly apportioned between the two.”[168]  The insurer is then only liable for the portion of the settlement apportioned to covered claims.

Further, 065 agreements apply to contracts of insurance but not to contracts of indemnification.  For instance, in Holiday Inns, Inc. v. Thirteen-Fifty Investment Co. a hotel franchisee — Thirteen-Fifty Investment Co. — attempted to execute an 065 agreement with a hotel occupant injured on the property.[169]  The occupant was injured when diving into the hotel pool, and he sued Thirteen-Fifty.[170]  Thirteen-Fifty and the plaintiff structured the 065 agreement so that the plaintiff could execute against an indemnity clause in Thirteen-Fifty’s contract with Holiday Inns. However, the Western District Court of Appeals ruled that “[c]ontracts of indemnity are not synonymous with contracts of insurance.”[171]  The court continued on to say:

A claimant under the statute looks only to the insurer of the tort-feasor.  Had the legislature meant to include a contract of indemnification it would have so stated.  The   legislature is not so careless in its choice of words.[172]

Thus, a claimant under a 537.065 agreement “looks only to the insurer of the tortfeasor.”[173]

An insurer also has rights it can assert after a judgment is ordered in conjunction with an 065 agreement.  While the insurer is collaterally estopped from challenging the reasonableness of a judgment following a trial, the insurer may attack facts not actually litigated in the first action.[174]  As such, the insurer also retains the right to be heard on the question of coverage and can raise the defense that no coverage existed even after an 065 agreement and verdict or settlement in the plaintiffs’ favor.[175]  “The insurer should have the right to dispute the questions which make it liable on its [insurance] contract.”[176]  In a subsequent action to determine liability, the insurer may raise any available defense or assert a breach of an essential condition of the contract for insurance.[177] In sum, the trial between the insured and the injured party fixes the liability and damages of the insured and those issues become final with the judgment, “but the liability of the insurer on its contract presents an entirely different issue, and one which must be decided by the provisions of the contract of insurance.”[178]


Both attorneys representing the parties to 065 agreements and those representing insurance companies need to be aware of the practical implications of these issues.  When entering into such agreements, the attorneys for plaintiffs and insureds must be careful to avoid fraud or collusion.  While the attorneys for the insured are not required to raise defenses or objections during trials conducted pursuant to 065 agreements, the parties should carefully consider in advance if they should agree to an amount of damages.  And even though the reasonableness of a bench verdict is not subject to attack post-judgment, the plaintiff must present enough evidence to establish his or her case and provide support for the award of damages.  Most importantly, the attorney for the injured party must also understand the consequences of such an agreement and be prepared to fight the insurer on the coverage issues.  If the injured party agrees not to execute against any of the tortfeasor’s assets and the insurer wins on the coverage issue, then victim is left entirely without recourse.  The plaintiff’s attorney must also understand the final judgment will be heavily dissected on appeal.

For insurance companies, these agreements make the decisions on whether to defend or attempt to deny coverage fraught with risk.  To avoid these risks, “[c]laims adjusters first need to be aware that these agreements exist and the extent to which they can result in damages far greater than expected.”[179]  Insurance companies also should be certain of their decisions, the legal basis behind them, and the supporting facts before rejecting a claim, even for “a seemingly obvious reason.”[180]  And to minimize risk even further, insurance companies “should ensure that [their] claims personnel are trained not only to investigate the facts relevant to defending a claim on the merits, but also the facts upon which a coverage determination can be made.”[181]


If executed properly, Section 537.065 agreements create an avenue for a tort victim to recoup his or her losses, even when the tortfeasor’s insurance companies denies that coverage exists.  By agreeing not to execute against the tortfeasor’s assets, the tort victim runs the risk of losing out entirely if the insurer wins the argument on the coverage dispute.  On the other side, insurers who refuse to defend or do so only under a reservation of rights need to be aware of the dangers presented by these decision, such as losing the ability to contribute or control a defense against legitimate claims until after a settlement or verdict.  Therefore, all parties to these insurance disputes in Missouri need to be aware of and understand the issues created by Section 537.065.