Hepler Broom, LLC

Missouri Legislature Passes Reform to RSMo § 537.065

May 18, 2021

by Michael L. Young

UPDATE: The Governor signed the bill into law on June 29, 2021. It becomes effective August 28, 2021.

On May 14, 2021, the Missouri House of Representatives passed a bill (SS HB 345) to reform the notorious RSMo § 537.065. The Missouri Senate approved the bill earlier on April 13, 2021. If signed by the Governor, the bill would become law effective August 28, 2021The bill can be read here.

From the insurance industry perspective, the current version of RSMo § 537.065 (2017) often has allowed plaintiffs and insureds in certain cases to pursue “consent judgments” whenever certain liability suits present coverage issues. In a claim for damages against a tortfeasor seeking damages for “personal injuries, bodily injuries, or death,” the current version of the statute allows a plaintiff and an insured tortfeasor to agree that the plaintiff will collect on a judgment entered against the insured from the insured’s liability insurer only. The current statute provides that the parties may enter such an agreement only when the insurer “has the opportunity to defend the tort-feasor without reservation but refuses to do so.” After an agreement is entered, the current statute requires the parties to provide the insurer “with written notice of the execution of the contract” “[b]efore a judgment may be entered against any tort-feasor.” It further provides that the insurer has “thirty days after receipt of such notice to intervene as a matter of right in any pending lawsuit involving the claim for damages.”

The reform bill now passed by the Missouri legislature (SS HB 345) attempts to close up several perceived loopholes in the current version of section 537.065:

Private Arbitrations. Plaintiffs and insureds often have attempted to avoid the insurer’s right to intervene in pending lawsuits under the current 537.065 through the use of private arbitrations. SS HB 345 tries to stop this practice by adding several provisions to section 435.415 of Missouri’s Uniform Arbitration Act (RSMo § 435.350 et seq.) that make clear that any arbitration entered without the insurer’s consent is not binding on the carrier:

  1. “Any arbitration award for personal injury, bodily injury, or death or any judgment or decree entered on an arbitration award for personal injury, bodily injury, or death shall not be binding on any insurer, shall not be admissible in evidence in any lawsuit against any insurer for any party to an arbitration award, and shall not provide the basis for any judgment or decree, including any garnishment, against any insurer, unless the insurer has agreed in writing to the arbitration proceeding.”
  1. “Any arbitration award for personal injury, bodily injury, or death or any judgment or decree confirming, modifying, or correcting any arbitration award for personal injury, bodily injury, or death shall not be subject to garnishment, enforcement, or collection from any insurer unless the insurer has agreed in writing to the written arbitration agreement.”
  1. “Unless otherwise required by the insurance contract, an insurer’s election not to participate in an arbitration proceeding shall not constitute, nor be construed to be, bad faith.”

SS HB 345 clarifies that these new provisions do not apply to any arbitration “required by statute or arising out of an arbitration agreement preceding the date of the injury or loss which is the subject of the arbitration.”

Timing of Insurer Intervention. Plaintiffs and insureds also have attempted to avoid the insurer’s right to intervene under the current version of 537.065 through various, carefully-timed procedural maneuverings. The current version of the statute provides that the parties must provide the insurer “with written notice of the execution of the [537.065] contract” “[b]efore a judgment may be entered against any tort-feasor” and that the insurer has “thirty days after receipt of such notice to intervene as a matter of right in any pending lawsuit involving the claim for damages” (emphasis added). Parties have attempted to navigate around these provisions and avoid the insurer’s ability to intervene and meaningfully participate in any “pending” lawsuit in a variety of ways, such as not filing suit against the insured tortfeasor until after the 30-day notice period has expired (Britt), dismissing the suit against the insured without prejudice and re-filing it after the notice period has expired (Aguilar, Loveland), or not providing notice of the 537.065 agreement at all until after an arbitration award has been entered (Knight, Loveland)].

The reform bill now passed by the Missouri legislature maintains the insurer’s right to intervene upon notice of a 537.065 agreement. SS HB 345 states: “Any insurer or insurers who receive notice pursuant to this section shall have the unconditional right to intervene in any pending civil action involving the claim for damages within thirty days after receipt of such notice.” However, the bill attempts to close the perceived timing loopholes in current statute. Instead of requiring the parties to provide notice of the 537.065 agreement only “[b]efore a judgment may be entered against any tort-feasor,” SS HB 345 now requires the insured tortfeasor to provide notice according to the status of the tort lawsuit against the insured, if any:

  1. Lawsuit Pending: “If any action seeking a judgment on the claim against the tort-feasor is pending at the time of the execution of any contract entered into under this section, then, within thirty days after such execution, the tort-feasor shall provide his or her insurer or insurers with a copy of the executed contract and a copy of any such action.”
  1. Lawsuit Dismissed and Re-Filed: “If any action seeking a judgment on the claim against the tort-feasor is pending at the time of the execution of any contract entered into under this section but is thereafter dismissed, then, within thirty days after the refiling of that action or the filing of any subsequent action arising out of the claim for damages against the tort-feasor, the tort-feasor shall provide his or her insurer or insurers with a copy of the executed contract and a copy of the refiled or subsequently filed action seeking a judgment on the claim against the tort-feasor.”
  1. No Lawsuit Pending: “If no action seeking a judgment on the claim against the tort-feasor is pending at the time of the execution of any contract entered into under this section, then, within thirty days after the tort-feasor receives notice of any subsequent action, by service of process or otherwise, the tort-feasor shall provide his or her insurer or insurers with a copy of the executed contract and a copy of any action seeking a judgment on the claim against the tort-feasor.

SS HB 345 further clarifies that a judgment may not be entered against any insured tortfeasor who has entered into a 537.065 agreement “for at least thirty days after the insurer” has “received written notice” of the agreement. These differing notice requirements show the Missouri legislature’s intent to allow the insurance company to intervene and participate in an actual pending lawsuit whenever the plaintiff and insured enter into an agreement under the statute.

Participation. Another common “loophole” argument raised by plaintiffs and insureds under the current statute concerns the issues that the liability insurer may litigate once it intervenes in a tort lawsuit against its insured. These arguments vary, but in many instances the parties argue that the insurer can do very little.

SS HB 345 addresses this concern by providing: “Upon intervention pursuant to this section, the intervenor shall have all rights afforded to defendants under the Missouri rules of civil procedure and reasonable and sufficient time to meaningfully assert its position including, but not limited to, the right and time to conduct discovery, the right and time to engage in motion practice, and the right to a trial by jury and sufficient time to prepare for trial.” The reform bill further provides: “No stipulations, scheduling orders, or other orders affecting the rights of an intervenor and entered prior to intervention shall be binding upon the intervenor.” The bill clarifies that these provisions do not “alter or reduce the intervening insurer’s obligations to any insureds other than the tort-feasor, including any co-insureds of the defendant tort-feasor.”

In addition to closing these loopholes, the new reform bill passed by the legislature also clarifies several key issues with respect to section 537.065:

  • It states that plaintiffs and insureds may enter into an agreement under the statute “if the insurer has refused to withdraw a reservation of rights or declined coverage for such unliquidated claim” (explicitly stating what was intended by the legislature in the current version of the statute).
  • It requires all terms of any “covenant not to execute or of any contract to limit recovery to specified assets” (e. a 537.065 agreement, whether called that or not) to be in writing and states that all unwritten terms are not “enforceable against any party to the covenant or contract, the insurer of any party to the covenant or contract, or any other person or entity.”
  • It states that “[i]n any … action for bad faith, any agreement between the tort-feasor … and the claimant, including any contract under this section, shall be admissible in evidence.”
  • And, it clarifies that the insurer’s “exercise of any rights under this section [537.065] shall not constitute, nor be construed to be, bad faith.”

If the Governor signs SS HB 345, these new provisions will affect insurance coverage for liability suits significantly in the years to come.

We will provide a further update once the Governor acts upon this passed legislation.

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