While 2020 was a year with more bad news than good, the Minnesota Court of Appeals offered something to celebrate when it released its decision in Else v. Auto-Owners Insurance Company in late-December. The Court’s decision, agreeing with Attorneys Tim Tobin and Marissa Linden of Arthur Chapman, holds that first-party insurance policy limits operate as a cap on pre-judgment (or pre-award) interest. While unreported, Else is a favorable outcome for insurers and is anticipated to have persuasive value in other first-party coverage matters as we head into the brighter days of 2021.
In the case, Auto-Owners issued a homeowners policy to Kyle Else, which covered property loss due to fire, including for personal property and additional living expenses (“ALE”). The policy had limits of $173,411 for personal property and $49,420 for ALE.
Else’s home was damaged in two separate fires on February 11, 2015, and February 18, 2015. Evidence heavily suggested that the fires were intentionally started, enough so that the State charged Else with arson. Ultimately, he was acquitted of those charges in November 2016. Both before and after that acquittal, however, Auto-Owners denied coverage for most policy benefits on the basis that Else intentionally started the fires.
Thus, Else brought a first-party action against Auto-Owners and the case went to trial. Like the criminal jury before it, the civil jury found that Auto-Owners did not prove that Else was involved in starting any of the fires. It then awarded him $153,667.70 for his personal property loss and $10,988.32 for ALE. Although Else sought benefits due to the damage to his Dwelling in both fires, the Court refused to submit that question to the jury, holding that he had failed to produce the necessary evidence.
After applying the appropriate offsets, the District Court entered judgment for Else in the amount of $138,417.92 for personal property and $1,450.25 for ALE.
The parties then argued about the amount of pre-judgment interest owed. In applying Minnesota’s interest statute, Minn. Stat. §549.09, the District Court determined that pre-judgment interest of $55,632.32 accrued on the personal property portion of the judgment, and $582.90 accrued on the ALE portion.
The District Court agreed with Auto-Owners, however, that the sum of pre-judgment interest and the total damages could not exceed the policy limit. Thus, the District Court reduced the interest on the personal property portion of the judgment to $19,743.30.
In doing so, the District Court agreed with Auto-Owners that a 1994 Minnesota Supreme Court decision, Lessard v. Milwaukee Ins. Co., was precedential. Lessard held, in the context of an Under Insured Motorist (“UIM”) claim, that an insurer is not liable for pre-judgment interest, “which, when added to total damages, would exceed the policy limits.”
Else appealed the District Court’s decision on pre-judgment interest. The issue before the Court of Appeals was whether the policy limit operates as a cap on pre-judgment interest. In other words, whether an insurer owes the full amount of pre-judgment interest when the covered damages plus interest exceed the policy limit.
Like the District Court, the Court of Appeals agreed with Auto-Owners that covered damages plus pre-judgment interest cannot exceed applicable policy limits, again applying the Lessard decision and its reasoning. More specifically, the Court of Appeals agreed that pre-judgment interest is “an element of compensatory damages,” and, as such, is subject to any applicable limitation on liability for such damages. Thus, under the facts in Else, the Court of Appeals agreed that the policy limit operates as the “applicable limitation on liability for such damages.”
Importantly, the Court of Appeals explicitly rejected Else’s argument (among others) that Lessard did not apply to this case because it involved a UIM claim. Instead, the Court of Appeals recognized that the rule in Lessard is not limited to UIM coverage, and concluded that the District Court properly followed binding precedent when it applied the homeowners’ policy limit to Else’s recovery of pre-judgment interest.
Overall, the Court of Appeals held that the District Court correctly determined that Else was not entitled to pre-judgment interest in excess of the applicable policy limit, and therefore correctly reduced pre-judgment interest on the personal property portion of the judgment, which otherwise exceeded the limit for personal property.
Ultimately, the Court of Appeals applied the same principles in Lessard, which had not previously been explicitly adopted outside the UIM context, to apply more broadly to any first-party claim. While this situation may not arise frequently, it does come up.
Indeed, this issue may arise whenever the amount of damages is agreed to be close to the policy limit, but coverage is denied based on other coverage defenses, giving rise to an “all or nothing” situation. There has also been a trend toward very large awards in appraisal, especially those involving multi-unit condominium projects, where the added interest pushes the total owed to an amount in excess of the limit.
Although unpublished, this decision can be cited in other proceedings as “persuasive authority” given recent amendments to the Appellate rules. Therefore, although not binding precedent, this decision should be helpful in such cases, and is anticipated to be very persuasive in the right situation.
Else has now petitioned the Minnesota Supreme Court for review of the Court of Appeals decision. That Petition will be opposed and most such Petitions are denied. The attorneys of Arthur Chapman’s Insurance Coverage Group are following this issue closely and will provide an update when the Supreme Court rules on the Petition. In the meantime, we are ready to answer any questions you may have.