When the Insurer Denies Coverage, a Minnesota Defendant Can Confess Judgment for Twice the Policy and Pay Nothing. The Price Is Paid by the Plaintiff.

Getting told you have no coverage puts an insured in a strange spot. The lawsuit’s real, the exposure is personal, and the company that sold the policy has walked away from the part that matters. Minnesota’s answer, since 1982, is that the insured may cut a deal with the plaintiff: judgment for a stipulated sum, collectible only from the insurance, with no personal liability. The insured signs and walks out.

Here’s the part that surprises people: who pays for that. It isn’t the insured, and it isn’t automatically the insurer. It’s the plaintiff. She’s just traded a tort claim she could have tried to a jury for a contract-flavored claim she has to prove to a judge, under a burden that would have sat on the insurer if she’d done nothing.

What is a Miller-Shugart settlement?

The Minnesota Supreme Court described the device in a later case, and it didn’t waste words:

In a Miller-Shugart settlement, the insured, having been denied any coverage for a claim, agrees claimant may enter judgment against him for a sum collectible only from the insurance policy. To be binding on the insurer if policy coverage is found to exist, the settlement amount must be reasonable.

Alton M. Johnson Co. v. M.A.I. Co., 463 N.W.2d 277 (Minn. 1990) (footnote 1).

The case that started it, Miller v. Shugart, 316 N.W.2d 729 (Minn. 1982), involved a passenger hurt when a car left the road and hit a tree. Milbank Mutual insured the owner but claimed the driver wasn’t covered, and it brought a declaratory judgment action while providing separate defense counsel. While Milbank’s appeal on coverage was pending, the insureds stipulated to judgment for $100,000 — twice the $50,000 policy limit — satisfiable only from insurance. Milbank lost the coverage fight, and the plaintiff garnished.

The court held the judgment collectible to the extent of the policy limits.

Why isn’t settling behind the insurer’s back a breach of the cooperation clause?

Because the duty to cooperate doesn’t require the insured to sit there, personally exposed, while the insurer litigates coverage. The court framed it as a question of who should carry the risk of a contested coverage position:

While the defendant insureds have a duty to cooperate with the insurer, they also have a right to protect themselves against plaintiff’s claim. … If, as here, the insureds are offered a settlement that effectively relieves them of any personal liability, at a time when their insurance coverage is in doubt, surely it cannot be said that it is not in their best interest to accept the offer. Nor, do we think, can the insurer who is disputing coverage compel the insureds to forego a settlement which is in their best interests.

316 N.W.2d at 733–34. The court admitted this puts the insurer in a “no-win situation,” and it said plainly why that’s acceptable: “if a risk is to be borne, it is better to have the insurer who makes the decision to contest coverage bear the risk.”

When can an insured not do this?

This is where most Miller-Shugart settlements fail, and it has nothing to do with reasonableness. The predicate is a denial of coverage — not a disagreement about how much coverage there is.

In Buysse v. Baumann-Furrie & Co., 448 N.W.2d 865 (Minn. 1989), the insurer conceded $500,000 in coverage but disputed whether more applied. The insured stipulated to liability and to damages of more than $1 million, over the insurer’s objection. The court wouldn’t enforce it:

Only the insurer’s denial of the existence of any coverage for the claim and the resultant exposure of the insured to liability for the entire amount of any damage award provide a basis for requiring the insurer’s right to the insured’s cooperation to yield to the insured’s need to extricate himself or herself without the insurer’s agreement.

448 N.W.2d at 872. A limits dispute, the court explained, “more closely resembles a difference of opinion with respect to an evaluation of the probable outcome of the litigation.” Id. at 873. Letting the insured stipulate his way past that would force the carrier to pay its conceded limit before it ever got to test a policy defense.

Bob Useldinger & Sons, Inc. v. Hangsleben, 505 N.W.2d 323 (Minn. 1993), gave the flip side straight: where the insurer “does not deny that the policy in question covers some part of the claim and provides a defense,” an insured who settles without consent is deemed to have acted in bad faith and to have breached the policy’s covenants.

A reservation of rights is not the same as a denial, but it isn’t automatically fatal either. Useldinger upheld a Miller-Shugart settlement made while the carrier defended under a reservation of rights, because the reservation rested on an independent ground and the stipulation didn’t try to resolve it. The insureds “did not admit any liability, nor did they try to ‘hang’ the insurer in any unconscionable way.” Buysse saw the same feature in Miller itself: “a certain distance in the relationship between the facts on which the coverage question depended and those governing the issues of liability and damages in the main action.” 448 N.W.2d at 872. Whether the driver had permission had nothing to do with whether he drove negligently.

So don’t go by the label on the letter. Ask whether the stipulation quietly decides the coverage question.

Who has to prove the settlement was reasonable?

The claimant. That’s the single most consequential feature of the device, and it’s the reverse of the ordinary rule.

The burden of proof is on the claimant, the plaintiff judgment creditor, to show that the settlement is reasonable and prudent. The test as to whether the settlement is reasonable and prudent is what a reasonably prudent person in the position of the defendant would have settled for on the merits of plaintiff’s claim. This involves a consideration of the facts bearing on the liability and damage aspects of plaintiff’s claim, as well as the risks of going to trial.

316 N.W.2d at 735.

Miller got there by distinguishing Butler Brothers v. American Fidelity Co., 120 Minn. 157, 139 N.W. 355 (1913), where a stipulated judgment was presumptively binding and the insurer had the burden of showing it unreasonable. The difference: in Butler the insured settled mid-trial after its insurer abandoned it. An insurer that provides a defense while litigating coverage hasn’t abandoned anyone, and the bona fides aren’t the same.

So what the insurer did matters twice. Once for whether the settlement’s allowed at all, and again for who carries the burden on reasonableness.

Is reasonableness a jury question?

No. That surprises people who figure that moving a tort claim into a garnishment action keeps the right to a jury.

Alton M. Johnson held that reasonableness is a question of fact to be decided by the court as the factfinder. The action is “more like an action in equity,” being “an action to enforce an agreement against an indemnifier who was not a party to the agreement.” The court also gave a practical reason. The evidence includes expert opinion from trial lawyers, comparable verdicts, and the likely outcome of legal and evidentiary rulings in a trial that never happened — “best understood and weighed by a trial judge.”

What happens if the judge finds the settlement unreasonable?

It’s not dismissal, and it’s not a number the judge cuts down. Alton M. Johnson looked at three options and picked the third, which it called the middle ground: the stipulated settlement is unenforceable, and the plaintiff’s tort claim against the insured is reinstated for trial on the merits. The court said the prospect of that trial — “with its attendant delay, expense and risk” — is itself a deterrent to overreaching, while avoiding “the harsh overkill of a forfeiture of the main action.” And if the case is tried, there’s a jury.

The allocation trap

Useldinger voided settlements that were otherwise allowed, for a reason that has nothing to do with coverage. Multiple defendants stipulated to a single lump sum without splitting it among themselves.

Except in the most unusual case, we believe it is unreasonable for a defendant to settle a case for an unspecified sum. … Without knowing what each defendant has agreed to pay as its share, there is no way of judging the reasonableness or prudence of the agreement from the standpoint of each defendant.

505 N.W.2d 323 (part V). Reasonableness is judged defendant by defendant — what this defendant would prudently have paid — so an unallocated multi-defendant stipulation can’t be reviewed, and that makes it unreasonable as a matter of law. That’s a drafting failure, not a valuation failure, and it’s entirely avoidable.

If more than one defendant is signing, the stipulation has to say who owes what. Allocation also runs into Minnesota’s several-liability default, which makes apportionment a live question in the underlying case anyway.

How is the judgment actually collected?

By garnishment, which Minnesota authorizes “at any time after entry of a money judgment in the civil action.” Minn. Stat. § 571.71(3). Miller rejected the insurer’s argument that a non-recourse judgment liquidates nothing: “as between plaintiff and the defendants the tort claim has been liquidated and reduced to a judgment,” and “the judgment effectively liquidates defendants’ personal liability.” 316 N.W.2d 729 (part I).

When the garnishee denies liability, and it will, the creditor moves for leave to file a supplemental complaint:

In this and all other cases where the garnishee denies liability, the creditor may move the court at any time before the garnishee is discharged, on notice to both the debtor and the garnishee for an order making the garnishee a party to the civil action and granting the creditor leave to file a supplemental complaint against the garnishee and the debtor. … If probable cause is shown, the motion shall be granted.

Minn. Stat. § 571.75, subd. 4.

The interest problem nobody budgets for

Miller reversed the trial court’s award of post-judgment interest on the full $100,000. The insurer’s obligation wasn’t fixed until a court decided it was bound: “Plaintiff’s stipulated judgment was not conclusive on the insurer until the insurer had an opportunity to litigate the issues of whether it was bound by the judgment. … Milbank does not have to pay interest on a sum neither it nor its insureds owe.” 316 N.W.2d 729 (part III).

Alton M. Johnson filled in the rest. Because the stipulated judgment “is only inchoate” until reasonableness is proven, interest on it isn’t post-judgment interest at all. It’s prejudgment interest under Minn. Stat. § 549.09, subd. 1(b), running from commencement of the garnishment action to entry of the garnishment judgment. That’s one more reason the pricing of written settlement offers matters in these cases as much as in any other.

What the insured gives up by signing

Clients rarely get told this part.

The excess bad-faith claim goes away. Miller dealt with it in a footnote: the insureds have no “claim for a bad-faith excess claim against Milbank, since the insureds are not personally harmed by Milbank’s failure to pay the amount of the judgment in excess of the policy limits.” 316 N.W.2d 729 (footnote 5). A non-recourse judgment does the insured no harm above the limits. That’s the whole point, and it’s also the whole cost.

Minnesota’s bad-faith statute doesn’t fill the gap. Section 604.18 looks like the answer, and it isn’t. Its definition of “insurance policy” expressly excludes “provisions of a written agreement obligating an insurer to defend an insured, reimburse an insured’s defense expenses, provide for any other type of defense obligation, or provide indemnification for judgments or settlements.” Minn. Stat. § 604.18, subd. 1(a). That’s third-party liability coverage, described to a tee. And subdivision 4(e) shuts the other door: “A claim for taxable costs under this section may not be assigned. This paragraph does not affect the assignment of rights not established in this section.” The assignment that carries the insured’s rights to the claimant doesn’t carry a § 604.18 claim, because there wasn’t one to carry. (What § 604.18 does reach is covered separately in Minnesota’s first-party bad-faith formula.)

The common-law claim for an insurer’s bad-faith refusal to settle within limits, recognized in Short v. Dairyland Insurance Co., 334 N.W.2d 384 (Minn. 1983), is a different animal. Minnesota courts have adjudicated it in the hands of assignees instead of the insured: in Kissoondath v. United States Fire Insurance Co., 620 N.W.2d 909 (Minn. Ct. App. 2001), the insured assigned that claim and the assignees litigated it on the merits. But that claim belongs to an insured the carrier defended and exposed to an excess verdict, not to one it cut loose.

Choosing between the two roads

A Miller-Shugart settlement isn’t a shortcut around a coverage fight. It moves the fight, turns a jury question into a bench question, and puts the burden on the plaintiff. For a plaintiff facing a defendant with no assets and a carrier that’s denied coverage outright, that’s usually a trade worth making. For a plaintiff whose defendant is solvent, or whose insurer is defending and just reserving, it can be a way to lose a case that was winnable.

Every UM/UIM analysis runs alongside this one, because the same crash often brings both a denied liability policy and a first-party claim. See uninsured and underinsured motorist coverage in Minnesota.

Madgett Law, LLC

Madgett Law, LLC handles insurance-coverage disputes and personal-injury claims in Minnesota, including garnishment actions against liability insurers, negotiating and drafting stipulated judgments where a carrier has denied coverage, and the reasonableness hearings that follow. In these cases the drafting matters more than the argument. The allocation requirement, the scope of the release, and whether the stipulation touches the coverage question decide most of them before anybody gets to the merits. Call 612-470-6529 or Send us a message.

Sources: Miller v. Shugart, 316 N.W.2d 729 (Minn. 1982) — part I (garnishment lies on a judgment collectible only from insurance); at 733–34 (no breach of the cooperation clause where the insurer contests coverage); at 735 (claimant bears the burden; reasonable-and-prudent test; distinguishing Butler Brothers v. American Fidelity Co., 120 Minn. 157, 139 N.W. 355 (1913)); footnote 5 (no insured bad-faith excess claim); part III (interest). Alton M. Johnson Co. v. M.A.I. Co., 463 N.W.2d 277 (Minn. 1990) — footnote 1 (definition); part I (reasonableness tried to the court, not a jury; unreasonable settlement is unenforceable and the tort claim is reinstated); part II (prejudgment interest under Minn. Stat. § 549.09, subd. 1(b) from commencement of the garnishment action). Buysse v. Baumann-Furrie & Co., 448 N.W.2d 865, 872–73 (Minn. 1989) (at 872, denial of all coverage is the predicate and the “certain distance” between coverage facts and merits facts; at 873, a limits dispute is not a denial). Bob Useldinger & Sons, Inc. v. Hangsleben, 505 N.W.2d 323 (Minn. 1993) — part IV (settlement without consent where the insurer defends and does not deny coverage; reservation-of-rights analysis); part V (unallocated multi-defendant stipulations unreasonable as a matter of law). Short v. Dairyland Insurance Co., 334 N.W.2d 384 (Minn. 1983) (common-law duty to settle within limits). Kissoondath v. United States Fire Insurance Co., 620 N.W.2d 909 (Minn. Ct. App. 2001) (bad-faith failure-to-settle claim litigated by the insured’s assignees; cited for that posture, not for a holding on assignability). Minn. Stat. § 571.71(3) (garnishment after entry of money judgment); § 571.75, subd. 4 (supplemental complaint on probable cause where the garnishee denies liability). Minn. Stat. § 604.18, subd. 1(a) (definition of “insurance policy” excludes defense and indemnification obligations); subd. 4(e) (claim for taxable costs may not be assigned).

This article is general information about Minnesota law. It is not legal advice, it does not create an attorney–client relationship, and it does not promise or imply any particular outcome. Coverage disputes turn on the specific policy language and the specific conduct of the carrier; consult a lawyer about your own situation.