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Smith v. Keystone Mutual Insurance Co.

Court of Appeals of Missouri, Eastern District, First Division

June 25, 2019

HELEN Y. SMITH, Respondent,

          Appeal from the Circuit Court of the City of St. Louis Honorable Steven R. Ohmer


         Keystone Mutual Insurance Co. ("Keystone") appeals from the trial court's judgment, following a jury trial in which Keystone was the defendant insurance company in an action brought by Helen Y. Smith, the widow of a deceased patient of Dr. Wallace Berkowitz, who had been insured by Keystone for a time. We reverse the trial court's judgment and remand with instructions.

         I. Background

         Dr. Berkowitz, an ear, nose, and throat physician, applied for insurance with Keystone, which focuses its business on insuring physicians in a small number of low-risk specialties, such as ear, nose, and throat physicians. In 2009, Keystone agreed to insure him and his private practice for 2010, and the policy was renewed in 2011. A dispute later arose between the parties, which culminated in the parties entering into an agreement in March 2011, which, among other things, mutually rescinded the insurance policy and waived all of Dr. Berkowitz's and his private practice's claims against Keystone (the "Agreement"). The facts of this Agreement will be discussed in greater detail during the discussion of the points below.

         Helen Smith ("Smith"), widow of Johnnie Ray Smith, the deceased patient of Dr. Wallace Berkowitz, filed a wrongful death lawsuit against Dr. Berkowitz in 2010. A jury entered a verdict in favor of Smith in February 2013, awarding $1 million plus interest, which was reduced later to $680, 000 with taxable costs and interest. Dr. Berkowitz filed for bankruptcy and received discharge in August 2016, which freed him from the obligation to pay the wrongful death judgment and hindered Smith's ability to collect from him. While Dr. Berkowitz was still in bankruptcy, Smith filed a petition against Keystone on May 9, 2014. Smith asserted six claims, including equitable garnishment under Section 379.200, RSMo.[1], fraud, bad faith, civil conspiracy, vexatious refusal to pay, and punitive damages.

         On May 31, 2016, Dr. Berkowitz purported to assign all claims he had against Keystone to Smith. In return, Dr. Berkowitz received the right to 10 percent of Smith's recovery from Keystone.[2] On June 20, 2016, Smith moved for leave to file a First Amended Petition against Keystone, and Dr. Berkowitz and his practice joined in. The motion was granted and the First Amended Petition asserted five counts: Smith asserted equitable garnishment under Section 379.200, RSMo., and Smith and Dr. Berkowitz asserted the remaining claims of bad faith, fraud, vexatious refusal to pay, and punitive damages. Keystone answered and asserted a counterclaim with three counts: two counts requesting a declaratory judgment that Policy No. 09-056 was void ab initio and that the insurance policy was properly rescinded under the Agreement between Dr. Berkowitz and Keystone; and third, seeking a rescission to the extent that the policy was not already rescinded.

         The trial court entered partial summary judgment in favor of Keystone with respect to Counts I, III, IV, and V of the First Amended Petition. The court held on Count I that "plaintiff Smith may not maintain an equitable garnishment action" under Section 383.035.4. On Count II, the "bad faith refusal to pay" claim, the trial court explained:

[I]t is patent from the record herein that Keystone had reasonable grounds to believe that Berkowitz had breach[ed] the insurance contract by concealing material information in his Application. There is nothing in the record to suggest that Keystone's conduct in this matter was based on any motive other than the belief that Berkowitz had made material misrepresentations concerning his claims history. Until the rescission agreement was signed, Keystone had supplied counsel and was defending the Smith claim. Further, there is no evidence on this record that Smith ever made a [settlement] demand on Berkowitz prior to the rescission agreement. Under the circumstances, the tort claim of "bad faith refusal to settle" is not viable.

         On Count III, the trial court affirmed a prior ruling that Smith had failed to state a claim under Section 428.024 "because Keystone is not a debtor subject to the statute." The court also concluded that Section 375.144 "does not provide a private right of action for Plaintiffs' fraud claim."

         For the vexatious refusal to pay claim, the trial court agreed that the relevant statutes are "inapplicable to Keystone." The court held that "the record here shows beyond dispute that Keystone had a reasonable cause or excuse to refuse to pay the Berkowitz judgment." That "excuse is that Berkowitz had apparently concealed or misrepresented his claims history in the Application, and the uncertainty of the application of Section 379.195 to Keystone meant that Keystone had a legitimate basis to seek rescission of its policy." In dismissing Smith's request for punitive damages, the court noted that Keystone's conduct "was far from outrageous."

         The court, however, held that Count II of the First Amended Petition stated a claim for breach of an insurance contract, agreeing with Keystone that the breach of contract claim was governed by the five-year statute of limitations in Section 516.120. The court acknowledged that Dr. Berkowitz was "on notice that Keystone would refuse to perform its agreement when presented with the rescission agreement" in March 2011, while the First Amended Petition, reflecting the assignment, was filed on June 20, 2016, more than five years later. The court concluded, however, that the assigned claim related back to the original petition filed by only Smith on May 9, 2014.

         After this ruling, Smith sought leave to amend again and file a new three-count petition with new tort claims and alleging duress in connection with Dr. Berkowitz's execution of the settlement Agreement. The court granted this request as to Count I (breach of contract) only and denied Smith leave to assert additional claims, stating that the only viable claim is the breach of the duty to defend, which turns on the validity of the rescission Agreement, with no tort liability in this action.

         Keystone moved for summary judgment based on the settlement Agreement and challenged Dr. Berkowitz's alleged duress. On November 29, 2017, the trial court entered partial summary judgment in favor of Keystone, holding that "the defense of duress is not viable on this record." Immediately before trial, Smith filed her Third Amended Petition asserting a single count, based on Dr. Berkowitz's assigned claim, for breach of his insurance contract. Other than incorrectly re-alleging that Dr. Berkowitz signed the settlement Agreement under duress, Smith asserted no other reason as to why it was not enforceable.

         A five-day trial took place in January 2018, during which time Keystone moved for a directed verdict at both the close of Smith's evidence and at the close of all the evidence. Both were denied. Keystone proposed jury instructions and a verdict form with respect to its counterclaims, which were refused by the trial court and not submitted to the jury. The court submitted a single count to the jury for breach of the insurance policy contract, over Keystone's objection that the issue was whether Dr. Berkowitz, not the plaintiff, was damaged. The jury returned a verdict in favor of Smith in the amount of $870, 625.23, with post-judgment interest of 9 percent. Keystone filed post-trial motions for judgment notwithstanding the verdict, for a new trial, and to reduce the damage award, as well as a motion for judgment on Counts I, II, and III of its counterclaim, which had not been decided. All of Keystone's motions were denied.

         This appeal follows.

         II. ...

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