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.

An insured who is told there is no coverage is in a strange position. The lawsuit is 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 make 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.

The counterintuitive part is who pays for that. It is not the insured, and it is not — automatically — the insurer. It is the plaintiff, who has just traded a tort claim she could have tried to a jury for a contract-flavored claim she must prove to a judge, under a burden that would have sat on the insurer if she had done nothing.

What is a Miller-Shugart settlement?

The Minnesota Supreme Court described the device in a later case with unusual economy:

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 underlying case, Miller v. Shugart, 316 N.W.2d 729 (Minn. 1982), involved a passenger injured when a car left the road and struck a tree. Milbank Mutual insured the owner but contended the driver was not covered, and 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 insured’s duty to cooperate does not require the insured to wait out the insurer’s coverage litigation while personally exposed. The court framed it as a question of who should bear 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 was candid that this puts the insurer in a “no-win situation,” and equally candid about why that is 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 is not about reasonableness at all. 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 exceeding $1 million over the insurer’s objection. The court refused to 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 it would force the carrier to pay its conceded limit before it could ever test a policy defense.

Bob Useldinger & Sons, Inc. v. Hangsleben, 505 N.W.2d 323 (Minn. 1993), stated the flip side directly: 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 is not 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 did not attempt to resolve it — the insureds “did not admit any liability, nor did they try to ‘hang’ the insurer in any unconscionable way.” That is the same feature Buysse identified 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.

The practical test is not the label on the letter. It is whether the stipulation quietly decides the coverage question.

Who has to prove the settlement was reasonable?

The claimant. This is the single most consequential feature of the device, and it is the opposite 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 reached that allocation 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 bore the burden of showing it unreasonable. The difference: in Butler the insured settled mid-trial after being abandoned by its insurer. An insurer that provides a defense while litigating coverage has not abandoned anyone, and the bona fides are not the same.

So the identity of the insurer’s conduct matters twice — once for whether the settlement is permitted at all, and again for who carries the burden on reasonableness.

Is reasonableness a jury question?

No, and this surprises people who assume that shifting a tort claim into a garnishment action preserves 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 noted 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?

Not dismissal, and not a judicially reduced number. Alton M. Johnson considered three options and adopted 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 possibility 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 is a jury.

The allocation trap

Useldinger voided otherwise-permissible settlements for a reason that has nothing to do with coverage: multiple defendants stipulated to a single lump sum without apportioning 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). Because the reasonableness inquiry is defendant-specific — what this defendant would prudently have paid — an unallocated multi-defendant stipulation is unreviewable, and therefore unreasonable as a matter of law. This is a drafting failure, not a valuation failure, and it is entirely avoidable.

If more than one defendant is signing, the stipulation has to say who owes what. Allocation also interacts with Minnesota’s several-liability default, which makes the apportionment question live 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 — which 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 was not fixed until a court determined 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 completed the picture. Because the stipulated judgment “is only inchoate” until reasonableness is proven, interest on it is not post-judgment interest at all — it is prejudgment interest under Minn. Stat. § 549.09, subd. 1(b), running from commencement of the garnishment action to entry of the garnishment judgment. Which is another reason the pricing of written settlement offers matters in these cases as much as in any other.

What the insured gives up by signing

This is the part clients are rarely told.

The excess bad-faith claim disappears. Miller addressed 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 causes the insured no injury above the limits — which is the whole point, and also the whole cost.

Minnesota’s bad-faith statute does not fill the gap. Section 604.18 looks like the answer and is not. 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 is third-party liability coverage, described precisely. And subdivision 4(e) closes 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 does not carry a § 604.18 claim, because there was none 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, and Minnesota courts have adjudicated it in the hands of assignees rather than 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 the 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 is not a shortcut around a coverage fight. It relocates the fight, converts a jury question into a bench question, and moves the burden onto the plaintiff. For a plaintiff facing a defendant with no assets and a carrier that has denied coverage outright, that is usually a trade worth making. For a plaintiff whose defendant is solvent, or whose insurer is defending and merely 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 presents 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, negotiation and drafting of stipulated judgments where a carrier has denied coverage, and the reasonableness hearings that follow. Drafting matters here more than argument does — the allocation requirement, the scope of the release, and whether the stipulation touches the coverage question decide most of these cases before anyone 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). Case text verified against the Caselaw Access Project archive at static.case.law; statutory text verified against revisor.mn.gov.

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.