Opinion ID: 174629
Heading Depth: 3
Heading Rank: 1

Heading: Priority According to the Travelers Policy and Missouri Law

Text: Our starting point is to determine what issues have been resolved by the final judgment from the Coverage Litigation involving Travelers, KCPL, and National Union and to look at the impact of our conclusions regarding waiver. The district court in the Coverage Litigation determined KCPL was entitled to determine the character of proceeds obtained from third parties because KCPL suffered uninsured losses as well as insured losses. The district court further determined that KCPL effected an apportionment of recoveries as between insured and uninsured losses by executing the Allocation Agreement. National Union subsequently exhausted its policy limits and was released from the Coverage Litigation, and KCPL and Travelers sought and obtained the entry of a final judgment. No party appealed. Given these facts, it is appropriate to consider the apportionment of recoveries as representing insured or uninsured losses as the established law of the case. See Little Earth of the United Tribes, Inc. v. U.S. Dep't of Hous. & Urban Dev., 807 F.2d 1433, 1440-41 (8th Cir.1986) (noting that because no party had appealed from an earlier order in the case and because the parties had expended considerable sums in reliance on the order, it would not be appropriate to revisit the issues expressly and implicitly decided in the order). In Little Earth, the court characterized the law-of-the-case doctrine as discretionary and noted the purpose of the doctrine was to protect[ ] the settled expectations of parties, ensuring uniformity of decisions, and promoting judicial efficiency. Id. at 1441. The court examined these purposes as well as the absence of any changed conditions after the initial order in deciding to apply the doctrine. Subsequently, we have stated that the doctrine is not applicable to interlocutory orders. See Gander Mountain Co. v. Cabela's Inc., 540 F.3d 827, 830-31 (8th Cir.2008) (refusing to apply the law-of-the-case doctrine based on a determination implicit in an interlocutory order). Here, however, we view the district court's 2004 order regarding the allocation as between insured and uninsured losses as a final order  the parties sought and obtained the ruling as to the impact of the Allocation Agreement for the purpose of defining total insured loss, and subsequently, in reliance on that ruling, resolved the case and obtained the final entry of judgment. Even if we were to view the dispositive order from Coverage Litigation as interlocutory, however, we would reach the same result. As concluded above, Travelers waived any right to contest KCPL's designation of its own recovery as representing uninsured losses. Travelers refused to participate, permitted KCPL and National Union to incur expenses in pursuit of recoveries, and knew the purpose of the Allocation Agreement was to designate recoveries as representing insured or uninsured losses. As such, Travelers cannot now deny that the funds KCPL retained as per the Allocation Agreement represent uninsured losses. Given this state of affairs, the question we must address is whether, under Missouri law and according to the terms of the Travelers policy, an excess insurer may assert a subrogation claim against funds that an insured received from third-party tortfeasors and that represent uninsured losses. A plain language interpretation of the subrogation provision in the Travelers policy demonstrates KCPL is not bound by any contract language to remit to Travelers any such specifically designated proceeds. The relevant subrogation provision contains two sentences pertinent to our analysis: The Travelers may require from the Insured an assignment of all right of recovery against any party for loss to the extent that payment therefor is made by the Travelers. The Travelers shall be entitled to priority of recovery against such third party (including interest) to the extent payment has been made to the Insured, plus attorney's fees, expenses or costs incurred by The Travelers. (Emphasis added). Because the only recovery obtained and retained by KCPL represents uninsured losses  losses for which, by definition, Travelers made no payment  we find within the quoted language no contractual obligation for KCPL to pay Travelers these retained funds. See generally, 16 Lee R. Russ, Couch on Insurance §§ 226:36-40 (3d ed.2010) (discussing generally the requirement that recoveries correspond to losses for which the insurer made payment before the insurer may assert a subrogation right as against those recoveries). Regarding Missouri law, we find an older case to be directly on point and a more recent case to be consistent and instructive. In Union Trust Co. v. Wyatt, 58 S.W.2d 708 (Mo.1933), the Missouri Supreme Court held that where a bank suffered total losses of $18,300 due to an employee's malfeasance and was insured on a fidelity bond for $10,000, the bank was entitled to credit sums obtained from the wrongdoer against the $8,300 of uninsured loss. See id. at 713 ([C]ertainly the bank would have the right in the absence of any specific designation otherwise to credit same upon either his notes, cash items, or that part of his defalcations in excess of the amount covered by the contract of indemnity insurance ....) (emphasis added). In so holding, the court looked at intent as to the manner of crediting the payment: As we have pointed out, the ... payment was applied on that part of the defalcations in excess of, and not covered by, [the insurer's] contract of insurance. [The insurer] now claims it is entitled to be credited with this ... payment. There is not a scintilla of evidence to indicate that the payment was so intended, and we are unable to discover any tenable theory supporting appellant's claim. Id. at 712. Union Trust, then, stands for the proposition that an insured may designate a recovery as representing insured or uninsured losses and may retain sums designated as uninsured without crediting the same towards the insurer. Much more recently the Missouri Supreme Court faced a situation where an insured had suffered several categories of loss, including business-interruption losses, in excess of policy limits. See Keisker v. Farmer, 90 S.W.3d 71, 73-74 (Mo.2002) (En banc). There, the insurer paid approximately $127,000 for damage to a building and personal property and $15,000 for lost income and profits. The policy provided only $15,000 in coverage for business-interruption losses, so the insurer had paid the coverage limit on that category of loss. Subsequently, the insured, in asserting a claim against a third-party tortfeasor, sought only damages in the form of lost income and profits. Id. The third-party tortfeasor deposited funds with the court, and the insurer intervened asserting a right to the deposited funds. Id. The insured concede[d] that it would be unjustly enriched if it recovered its first $15,000 in lost profits from both [the insurer] and the [tortfeasor]. Id. at 75. In addition, the insured obtained $6,000 from a separate tortfeasor. The court, recognizing that the insured was entitled to designate the losses at issue, held, Assuming the [insured] can prove lost profits of at least $106,000 [the total obtained from third parties], the [insured] is not unjustly enriched in receiving the remaining $85,000 of the interpled funds. Id. The insurer complained that the insured should not be allowed to limit its request for damages against the third party only to lost profits and income, but the court rejected this argument. Ultimately, the Missouri Supreme Court remanded the case for trial regarding proof of the alleged lost income and profits in excess of $15,000. The remand, however, in no manner impacts the holding: the Missouri Supreme Court recognized that an insured is entitled to designate the nature of a recovery from a third-party as representing uninsured loss. This is precisely the position KCPL adopted in entering into the Allocation Agreement. Travelers spends the majority of its brief on appeal discussing the applicability of the made-whole doctrine and the question of whether the Missouri Supreme Court, if faced with the question, would adopt this doctrine. In general terms, the made-whole doctrine provides that an insurer who has paid a claim is not entitled to recover proceeds in subrogation until the insurer's payment to the insured, plus the insured's recovery from third parties, has completely compensated the insured for all losses  insured and uninsured. See, e.g., 16 Lee R. Russ, Couch on Insurance § 223.133 (3d ed.2010) (describing the traditional equity principle that the insured is entitled to be made whole before the insurer recovers on its subrogation claim). As such, the made-whole doctrine is a default rule of sorts that characterizes all recoveries from third parties as representing uninsured losses until such time that the insured is made whole. Only after the insured party achieves this level of compensation would the made-whole doctrine permit the characterization of additional recovered proceeds as representing insured losses and make such losses available for subrogation claims from insurers. See generally, John D. Ingram, Priority Between Insurer and Insured in Subrogation Recoveries, 3 Conn. Ins. L.J. 105, 112-15 (1996). We find questions regarding the made-whole doctrine to be somewhat immaterial in the context of the present case. The procedural history of the present matter has already resulted in the clear and settled identification of KCPL's portion of the recovery as representing uninsured proceeds. It has also resulted in the clear identification of proceeds held by National Union as representing insured losses. Where the characterization of the proceeds is accomplished by agreement, as in this case, or by other means (such as through some form of waiver or by a separate final judgment), or where the nature of the losses and recoveries are such that certain recoveries match certain losses, there simply is no need to resort to the application of a potential default rule such as the made-whole doctrine. Here, for whatever reasons  uncertainty as to how Missouri might treat the rule, uncertainty as to likely expenses and the likelihood of success in actions against third parties, and uncertainty as to KCPL's own ability to prove its damages  KCPL already elected to declare a substantial portion of the recovered funds as representing insured losses. Given the scale of the total loss incurred, the made-whole doctrine seemingly would not have required KCPL to designate any of the recovered funds towards insured losses. Regardless, it has done so. We should not now attempt to predict how a state court might deal with the default rule of the made-whole doctrine when the events in the present case have obviated the need to resort to any such default rule.