Allstate Insur Co v. Tozer, John ( 2004 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 04-1220
ALLSTATE INSURANCE COMPANY,
Plaintiff-Appellant,
v.
JOHN TOZER, GEORGETTE TOZER,
LINDSAY TOZER, et al.,
Defendants-Appellees.
____________
Appeal from the United States District Court
for the Southern District of Indiana, Indianapolis Division.
No. 02 C 1189—Tim A. Baker, Magistrate Judge.
____________
ARGUED NOVEMBER 9, 2004—DECIDED DECEMBER 28, 2004
____________
Before FLAUM, Chief Judge, and CUDAHY and POSNER,
Circuit Judges.
FLAUM, Chief Judge. This is a declaratory judgment
action brought by Plaintiff-appellant Allstate Insurance
Company (“Allstate”). Allstate seeks a declaration that the
claims of Kristina and Nicholas Keltner for negligent inflic-
tion of emotional distress caused by witnessing their
brother’s death are subject to the same limit of liability ap-
plicable to the brother’s injuries. The district court granted
2 No. 04-1220
summary judgment in favor of the insureds, and Allstate
appealed. For the reasons stated herein, we reverse.
I. Background
On January 3, 2001, Lindsay Tozer was driving her par-
ents’ car when the automobile struck a telephone pole. Rid-
ing in the car with Lindsay were Kyle Keltner and his two
siblings, Nicholas and Kristina. Kyle was severely injured
in the accident and eventually died. Kristina and Nicholas
sustained relatively minor physical injuries in the crash,
but allege that they suffered severe emotional distress wit-
nessing their brother’s injuries and death.
Lindsay’s parents had insured the car (and therefore
Lindsay) through a policy issued by Allstate. That policy
limits Allstate’s liability for bodily injury claims to $100,000
for “each person” and $300,000 for “each accident.” After
Kyle’s estate sued (or threatened to sue)1 Lindsay for wrong-
ful death, Allstate settled the claim for $1.1 million. One
hundred thousand dollars of this sum was paid under the
Tozers’ automobile policy; the remaining one million was
paid under an umbrella policy that is not at issue in this
case.
On February 22, 2002, Nicholas and Kristina filed a com-
plaint against Lindsay in Hamilton County Superior Court.
The complaint sought, among other things, damages for the
“emotional distress as the result of seeing the injuries and
death of their brother Kyle Keltner.” Allstate hired Smith,
Maley & Douglas to defend Lindsay in the state-court ac-
tion, and the firm entered its appearance on March 21,
2002. The insurer did not issue a letter to Lindsay reserving
its right to deny coverage under the policy.
1
It is not clear from the record whether a lawsuit was actually
filed on this claim.
No. 04-1220 3
On July 31, 2002, Allstate filed the instant suit in the
Southern District of Indiana, seeking a declaration that
Nicholas’s and Kristina’s emotional distress claims were
subject to the $100,000 “each person” limit of liability ap-
plicable to their brother’s injuries, and that Allstate had ex-
hausted its liability for these claims by paying Kyle’s estate
$100,000 under the auto policy. At the close of discovery,
the parties filed cross-motions for summary judgment. The
district court ruled in favor of defendants, holding that the
siblings had asserted separate bodily injury claims under
the policy. The district court interpreted the policy’s
definition of bodily injury to include a claim for emotional
distress so long as the plaintiff sustained a physical impact
at the time of the event triggering the claim, even if that
impact did not cause the emotional distress. The court rea-
soned that this analysis would accord with the “modified
impact rule” applicable to negligent infliction of emotional
distress claims announced in Shuamber v. Henderson, 579
N.E.2d 452, 456 (Ind. 1991).2 Because Nicholas and Kristina
each sustained physical trauma in the crash, the court held
their claims to be separate bodily injuries under the policy
and granted summary judgment in favor of the insureds.
Allstate appeals.
II. Discussion
Summary judgment is appropriate “if the pleadings, depo-
sitions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no
genuine issue of material fact and that the moving party is
entitled to judgment as a matter of law.” Fed. R. Civ. P.
56(c). “Where there are no genuine issues of material fact,
contract interpretation is particularly well-suited for sum-
2
As discussed below, Shuamber is no longer good law. See Groves
v. Taylor, 729 N.E.2d 569, 573 (Ind. 2000).
4 No. 04-1220
mary judgment.” Anstett v. Eagle-Picher Indus., Inc., 203
F.3d 501, 503 (7th Cir. 2000). We review a district court’s
grant of summary judgment de novo. Sullivan v. Ramirez,
360 F.3d 692, 696 (7th Cir. 2004).
This appeal raises two issues: (i) whether the siblings’
claims of emotional distress are subject to the “each person”
limit of liability applicable to their brother’s injuries; and
(ii) whether Allstate is estopped from raising the argument
because it assumed control over Lindsay’s legal defense in
state court. The parties agree that Indiana law governs both
issues. We look first to Indiana Supreme Court precedent.
Because we have located no case on point, “decisions of the
state appellate courts control, unless there are persuasive
indications that the state supreme court would decide the
issue differently.” Lexington Ins. Co. v. Rugg & Knopp, Inc.,
165 F.3d 1087, 1090 (7th Cir. 1999). “In the absence of
[Indiana] authority, we may consider decisions from other
jurisdictions.” Id.; see also Valerio v. Home Ins. Co., 80 F.3d
226, 228 (7th Cir. 1996); Foster v. Cont’l Can Corp., 783
F.2d 731, 733-34 n.3 (7th Cir. 1986).
A. The “Each Person” Limit of Liability
Allstate contends that Nicholas’s and Kristina’s emotional
distress claims are subject to the $100,000 “each person”
limit of liability applicable to their brother’s injuries and
death. Because it has already paid Kyle’s estate $100,000 to
settle his wrongful death claim, Allstate argues that it has
exhausted its liability for the siblings’ emotional distress
claims. Defendants assert that the emotional distress
claims constitute separate bodily injuries entitled to addi-
tional coverage under the policy.
Despite the absence of Indiana Supreme Court precedent
on this precise issue, settled principles of Indiana law guide
our analysis. Under that law, the question of whether the
siblings’ claims fall under the “each person” limit of liability
No. 04-1220 5
applicable to Kyle’s claim is an issue of contract interpreta-
tion. See Bowers v. Kushnick, 774 N.E.2d 884, 887 (Ind.
2002) (“Contracts of insurance are governed by the same
rules of construction as other contracts.”). “If the policy
language is clear and unambiguous, it should be given its
plain and ordinary meaning.” Id. (quoting Eli Lilly & Co. v.
Home Ins. Co., 482 N.E.2d 467, 470 (Ind. 1985)). Indiana
courts “will not find coverage under [an] insurance policy
unless the language of the contract admits liability.” Am.
Family Mut. Ins. Co. v. Hall, 764 N.E.2d 780, 784 (Ind. Ct.
App. 2002); see also, e.g., Ramirez v. Am. Family Mut. Ins.
Co., 652 N.E.2d 511, 515 (Ind. Ct. App. 1995); Allstate Ins.
Co. v. Kepchar, 592 N.E.2d 694, 697 (Ind. Ct. App. 1992);
City of Muncie v. United Nat’l Ins. Co., 564 N.E.2d 979, 982
(Ind. Ct. App. 1991). Accordingly, we look to the terms of
the policy to ascertain the scope of its coverage.
The policy provides that “Allstate will pay damages which
an insured person is legally obligated to pay because of . .
. bodily injury.” (R.1, Ex. A at 6.) The policy defines bodily
injury, subject to exceptions not relevant here, as “physical
harm to the body, sickness, disease, or death.” (Id., Ex. A at
3.) Allstate limits its liability to $100,000 for “each person,”
up to a maximum of $300,000 for “each accident.” (Id., Ex.
A at 1.) The policy defines these limits as follows:
The limits shown on the Policy Declarations are the
maximum we will pay for any single accident involving
an insured auto. The limit stated for each person for
bodily injury is our total limit of liability for all dam-
ages because of bodily injury sustained by one person,
including all damages sustained by anyone else as a re-
sult of that bodily injury. Subject to the limit for each
person, the limit stated for each accident is our total
limit of liability for all damages for bodily injury.
(Id., Ex. A at 8.) (emphasis added and deleted).
Under the plain language of the policy, Allstate’s liability
for bodily injuries suffered by Kyle and “damages sustained
6 No. 04-1220
by anyone else as a result of” his injuries is limited to a
total of $100,000. It is clear that Nicholas’s and Kristina’s
emotional distress claims are for “damages sustained . . . as
a result of” Kyle’s injuries: their state-court complaint
alleges that they suffered emotional distress “as a result of
seeing the injuries and death of their brother Kyle Keltner.”
Accordingly, these claims are subject to the $100,000 cap
applicable to Kyle’s injuries.
Stated otherwise, the siblings’ claims do not amount to
separate “bodily injuries” under the policy. A reasonable
interpretation of the policy’s definition of bodily injury—
“physical harm to the body, sickness, disease, or death”—
does not include emotional distress, at least where, as here,
the distress is not caused by physical trauma.
Indiana caselaw confirms this reading. In Wayne
Township Board of School Commissioners v. Indiana
Insurance Co., 650 N.E.2d 1205, 1210 (Ind. Ct. App. 1995),
the Court of Appeals of Indiana held that a policy defining
bodily injury to include “sickness or disease” was broad
enough to encompass a child’s claim that she suffered emo-
tional distress after being sexually molested. Id. at 1210-11.
The court reasoned that the emotional harm “results from
a physical intrusion upon the child’s body and therefore is
bodily injury.” Id. at 1211. It carefully limited its holding,
however: “[T]he term ‘bodily injury’ does not include emo-
tional damage that does not arise from a bodily touching.”
Id. at 1210. See also Armstrong v. Federated Mut. Ins. Co.,
785 N.E.2d 284, 293 (Ind. Ct. App. 2003) (“ ‘bodily injury’, as
used in certain insurance policies, might include . . .
emotional harm . . . but only if said injury was the result of
a direct physical impact upon the [party seeking] recovery”).
Although Nicholas and Kristina suffered minor physical
injuries in the crash, they do not allege that these injuries
caused their emotional distress. As stated above, the
siblings’ emotional distress claims arise out of witnessing
No. 04-1220 7
their brother’s death. Thus, even under Wayne Township’s
broad reading, the siblings’ claims are not separate bodily
injuries.
Seeking to avoid this result, defendants point to cases
from other jurisdictions holding that emotional distress qua-
lifies as a separate bodily injury under policies similar to
the one at issue in this case. See, e.g., Pekin Ins. Co. v. Hugh,
501 N.W.2d 508, 511-12 (Iowa 1993); Anthem Cas. Ins. Co.
v. Miller, 729 A.2d 1227, 1228 (Pa. Super. Ct. 1999); State
Farm Mut. Auto Ins. Co. v. Ramsey, 368 S.E.2d 477, 478
(S.C. Ct. App. 1988). These cases frame the issue as whether
the underlying tort—negligent infliction of emotional dis-
tress—is an independent or derivative cause of action.3
Because negligent infliction of emotional distress is an in-
dependent tort in those jurisdictions, that line of authority
reasons that a claim of emotional distress also constitutes
a separate “bodily injury” under the terms of an insurance
policy. As long as the party suing the insured has stated a
claim for negligent infliction of emotional distress, those
courts obligate the insurer to defend and indemnify.
Defendants assert that the Indiana Supreme Court would
follow this line of reasoning and, given that negligent in-
fliction of emotional distress is an independent tort in
Indiana, Weatherford, 714 N.E.2d at 185, hold that the sib-
lings’ claims are separate bodily injuries under the policy.
Defendants rely on a footnote from Wayne Township as
support for this prediction. The footnote mentioned that the
court’s reading of the insurance policy was “in harmony
3
A cause of action is “derivative” if it may be brought only where
a separate, related claim is actionable. Durham v. U-Haul Int’l,
745 N.E.2d 755, 764 (Ind. 2001). An “independent” cause of action
may be brought irrespective of the merits of an accompanying tort.
City of Anderson v. Weatherford, 714 N.E.2d 181, 185 (Ind. Ct.
App. 1999).
8 No. 04-1220
with Indiana law governing causes of action for infliction of
emotional injury . . . . [requiring that] one must sustain a
physical impact but need not suffer a physical injury.”
Wayne Township, 650 N.E.2d at 1211 n.3 (citing Shuamber
v. Henderson, 579 N.E.2d 452, 456 (Ind. 1991)). Defendants
argue that this language signaled the court’s approval of
the analysis articulated in the Hugh-Miller-Ramsey line of
cases.
We disagree. First, Wayne Township’s analysis focused on
the language of the policy, and the court was willing to
conclude that certain types of mental anguish would con-
stitute bodily injury only because the policy was broadly
worded. The court’s reference to Indiana tort jurisprudence
was mere dictum, and its statement of that law is no longer
correct. See Groves v. Taylor, 729 N.E.2d 569, 573 (Ind. 2000)
(overruling Shuamber). Second, and more fundamentally,
accepting the approach advocated by defendants would re-
quire us to ignore the settled principle of Indiana law that
the construction of an insurance policy is a matter of con-
tract interpretation. E.g., Bowers, 774 N.E.2d at 887; Hall,
764 N.E.2d at 784; Ramirez, 652 N.E.2d at 515; Kepchar,
592 N.E.2d at 697; City of Muncie, 564 N.E.2d at 982.
Other cases from the court of appeals reveal that the
characterization of a claim as derivative or independent is
irrelevant to whether the claim qualifies as a separate
bodily injury under an insurance policy. In Medley v. Frey,
660 N.E.2d 1079, 1080-81 (Ind. Ct. App. 1996) the court
held that a claim for loss of consortium did not amount to
a separate bodily injury, where bodily injury was defined in
the policy as “bodily harm, sickness or disease, including
death that results.” Id. at 1080. Even though consortium is
a derivative tort under Indiana law, Durham, 745 N.E.2d at
764, the court made clear that its conclusion was governed
only by the language of the policy:
Where the automobile liability policy includes loss of
consortium or loss of services in the definition of “bodily
No. 04-1220 9
injury,” courts have logically concluded that the de-
prived-spouse’s loss of consortium claim is a distinct
“bodily injury” and is not subject to the per person lia-
bility limit applicable to the injured-spouse, but is a
separate “bodily injury” within the meaning of the policy.
Medley, 660 N.E.2d at 1081 n.1.
Similarly, in Armstrong, the court found that a claim of
loss of love and companionship did not constitute a separate
“bodily injury,” defined in the policy at issue as “bodily
harm, sickness or disease, including death that results.”
Armstrong, 785 N.E.2d at 292. It is clear that the result in
Armstrong did not turn on underlying tort jurisprudence.
The insureds in that case presented an argument, similar
to the one advanced by the defendants here, that the court
“should look beyond the four corners of this particular
insurance policy to ascertain whether ‘bodily injury’ carries
a broader meaning under Indiana case law.” Id. The court
disagreed: “[W]e may not look beyond the contract itself to
ascertain the meaning of a term unless that term is ambigu-
ous.” Id.
Medley and Armstrong merely reiterate in this specific
context what is generally true throughout Indiana insur-
ance law: the extent of an insurer’s liability is a matter of
contract interpretation governed by the terms of the policy.
The policy issued to the Tozers does not define “bodily
injury” or the “each person” limit of liability with reference
to whether the underlying claim is an independent or deriv-
ative tort action, or on whether the Keltner siblings state a
valid claim of negligent infliction of emotional distress.
These underlying questions of tort law are, therefore, irrele-
vant. See, e.g., Galgano v. Metro. Prop. & Cas. Ins. Co., 838
A.2d 993, 997 (Conn. 2004) (“How the law defines particular
claims does not control. Rather, we must look to the
relevant policy language and apply the limits of liability as
provided in the policy.”); see also Estate of Gocha v. Shimon,
10 No. 04-1220
573 N.W.2d 218, 220 (Wis. Ct. App. 1997); Mullen v.
Walczak, 653 N.W.2d 529, 532 (Wis. Ct. App. 2002). Be-
cause the policy caps Allstate’s liability for all damages
“resulting from” Kyle’s injuries at $100,000, and Nicholas’s
and Christina’s emotional distress result from his injuries,
the insurer’s liability for these claims is exhausted.
B. Estoppel
Defendants contend that Allstate is estopped from argu-
ing that the limits of the policy have been exhausted because
the insurer assumed Lindsay’s defense in the Hamilton
County action without issuing a letter to her reserving its
right to deny coverage. The general rule in Indiana is that
“the doctrines of estoppel and implied waiver are not avail-
able to create or extend the scope of coverage of an insur-
ance contract.” Transcon. Ins. Co. v. J.L. Manta, Inc., 714
N.E.2d 1277, 1280 (Ind. Ct. App. 1999). One exception to
this rule applies, however, “where ‘an insurer defends an
action on behalf of an insured, with knowledge that would
provide a defense to coverage, but without a reservation of
rights.’ ” Id. at 1281 (quoting Nationwide Mut. Ins. Co. v.
Filos, 673 N.E.2d 1099, 1104 (Ill. App. 1st Dist. 1996)).
Defendants assert that because Allstate recognized the
nature of the siblings’ claims by the time it entered its ap-
pearance on Lindsay’s behalf in the state-court action, it is
estopped from arguing that the siblings’ claims are not
“bodily injuries.”
Allstate rejoins that the doctrine of estoppel bars only
claims of non-coverage. It argues that estoppel does not pre-
vent it from asserting that its liability for an admittedly
covered claim has been exhausted. Although Indiana has
not addressed the question, several jurisdictions have ac-
cepted Allstate’s position. See Faber v. Roelofs, 250 N.W.2d
817, 825 (Minn. 1977) (holding that by assuming the defense
of its insured, insurance company was estopped from as-
No. 04-1220 11
serting non-coverage, but was free to argue that the policy’s
limits had been exhausted); see also Martin v. United States
Fid. & Guar. Co., 996 S.W.2d 506, 511 (Mo. 1999) (estoppel
does not bar argument that liability has been exhausted);
Gambino v. Lamulle, 715 So. 2d 574, 576 (La. Ct. App. 1998)
(same).
We need not resolve the exact contours of Indiana’s es-
toppel doctrine, however, because defendants’ argument
fails for an independent reason. An insurer seeking to avoid
a claim of estoppel by its insured has two options: “(1) file
a declaratory judgment action for a judicial determination
of its obligations under the policy; or (2) hire independent
counsel and defend its insured under a reservation of
rights.” Gallant Ins. Co. v. Wilkerson, 720 N.E.2d 1223,
1227 (Ind. Ct. App. 1999). Allstate chose the first option by
filing this lawsuit. Its failure to exercise the second option
does not, therefore, estop it from arguing that the policy
limit has been exhausted. Stated alternatively, Allstate
prevented any prejudice to the insureds by filing this suit
and clarifying its legal obligations. See Terre Haute First
Nat’l Bank v. Pac. Employers Ins. Co., 634 N.E.2d 1336,
1338 (Ind. Ct. App. 1993) (insured asserting estoppel must
establish prejudice). Moreover, this is not a case in which
prejudice may be presumed from the lengthy period of time
between the insurer’s realization that it has a defense to
coverage and its communication of that defense to the in-
sured. Cf. Manta, 714 N.E.2d at 1282. Allstate is therefore
free to argue that its policy limits have been exhausted.
III. Conclusion
The doctrine of estoppel does not prevent Allstate from
asserting that Nicholas’s and Kristina’s emotional distress
claims are subject to the “each person” limit of liability
applicable to their brother’s bodily injuries. Since we con-
clude that Indiana law would accept plaintiff’s position, we
12 No. 04-1220
REVERSE and REMAND with instructions to enter summary
judgment in favor of Allstate.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—12-28-04