In American Family Mutual Ins. v. Donaldson, American Family insured Todd Patton with an auto policy and an umbrella policy. Todd’s son Jacob was driving the family car when he was in an accident which hurt his passenger, Donaldson. Jacob was apparently inebriated at the time. American Family agreed to pay the policy limits of the auto policy to Donaldson, while allowing Donaldson to litigate whether there were other policies out there to cover the claim. Donaldson agreed to limit his recovery to insurance proceeds. Then, when American Family filed a declaratory judgment action against its insureds and the Donaldsons, seeking a declaration the umbrella policy did not apply, the insureds and the Donaldsons entered into an agreement where the insureds admitted liability (amount to be determined by arbitration) and the Donaldsons agreed to seek recovery only against insurance, not against the insureds personal assets. Summary judgment to American Family was affirmed on the grounds of the breach of the cooperation clause.
Rather than discuss the exclusions the parties argued, the 8th Circuit ruled that the admission of liability by the insureds was a violation of the cooperation clause which precluded coverage. The insureds were already protected from personal liability by the agreement between American Family and the Donaldsons. American Family admitted the existence of coverage as the primary carrier on the automobile policy, but denied coverage as the excess carrier under the umbrella policy. It didn’t matter, though, because the insureds had no personal liability because of the settlement between American Family and Donaldson. The breach of the cooperation clause was material and prejudicial, allowing American Family to avoid coverage, and allowing the 8th Circuit to avoid analyzing the intentional acts and the violation of law exclusions.