St. Louis Dressed Beef & Provision Co. v. Maryland Casualty Co.

Background

An insured (the plaintiff) had a policy with a casualty insurance company that promised to indemnify against certain liabilities. The insurer refused to defend a suit brought against the insured. The insured paid a settlement to resolve that suit and then sued the insurance company, arguing it should be repaid under the policy. The policy contained a condition mentioning a judgment, and there was debate over whether the insured had to obtain a judgment before suing the insurer.

Reasoning

The Court addressed whether an insurer can escape liability by refusing to defend. It explained that when one party’s fault prevents the other from obtaining a contractual benefit, the at-fault party must pay the value of that benefit. Because the insured had nothing more to do after paying the settlement, the insured could recover the full amount prudently paid. The Court said a reasonable settlement paid under the compulsion of a suit is equivalent to a payment on execution. It also interpreted the policy’s judgment clause narrowly: that clause contemplates a judgment in a defended case or a later refusal to pay, not an initial repudiation that would force the insured to try the case itself.

Real world impact

Insurers who refuse to defend cannot simply avoid paying for reasonable settlements the insured makes. The Court assumed the settlement was reasonable and treated settlements paid to avoid greater loss as compensable. The Court answered most certified questions affirmatively, clarifying insureds’ rights when defense is denied.