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Indiana Supreme Court: A.D.R. Rules Allow Sanctions Against Government; Insurer Has No Duty To Defend Absent Notice
Posted in Litigation

On Tuesday, April 28, the Indiana Supreme Court issued two opinions.

In Lake County Trust Company v. Advisory Plan Commission of Lake County, the Court addressed two issues tied to settling a dispute with a governmental entity: (1) whether governmental entities are immune from sanction under Indiana’s Alternative Dispute Resolution Rules; and (2) when a settlement agreement that calls for the governmental entity to take action becomes final and binding.

This case began when the Plan Commission denied primary plat approval of a subdivision.  When the subdivision’s developers sought judicial review, the trial court ordered mediation.  The mediation produced a written settlement agreement that approved a “revised primary and sketch plan,” called for the developers to submit a “clean revised primary and sketch plan,” and then for the Plan Commission to approve the submission at its next meeting. However, the Plan Commission voted to reject the developers’ submission.

The developers sought relief from the trial court, including sanctions under A.D.R. Rules 2.7 (failure to perform the agreement) and 2.10 (failing to abide by the A.D.R. Rules).  The developers argued that the agreement was final and binding as of the settlement date and that the Plan Commission’s failure to approve it at its next meeting constituted bad faith.  The trial court issued an order enforcing the settlement and requiring the Plan Commission to approve the plat and issue any necessary permits; however, it concluded that governmental entities were immune from any sanctions under the A.D.R. Rules.

The Indiana Supreme Court addressed, first, the issue of governmental immunity from A.D.R. sanctions.  After noting that the A.D.R. Rules do not, themselves “exempt governmental entities,” the Court analogized the Rules’ sanction provisions as “analogous to the exercise of inherent judicial authority.”  “Mediation proceedings pursuant to our A.D.R. Rules,” the Court explained, “are deemed to be ‘in court,’ and ‘in a court sanctioned environment,’ irrespective of whether they actually occur inside a courtroom.”  Thus, the Court held, “government entities are subject to sanctions under the Indiana Alternative Dispute Resolution Rules.”

But, the Indiana Supreme Court concluded, the Plan Commission did not act in bad faith in this case because the settlement agreement, which was entered into by its attorneys, was not final and binding until after its approval at a public meeting.  Here, the Court explained that approval of a plat was, pursuant to statute, not a duty the Commission could delegate to its attorneys; therefore, the Commission did not act in bad faith.  As a result of these statutory requirements, the Court suggested that the “wise practice” would be to include language in a settlement agreement that “the agreement is contingent upon compliance with the Open Door Law and that it must be approved at an open meeting.”

In its second opinion Tuesday, Dreaded, Inc. v. St. Paul Guardian Insurance Co., the Indiana Supreme Court held that an insurer’s duty to defend an insured does not arise until the insurer “receives the foundational information designated in the [policy’s] notice requirement,” and that “[u]ntil an insurer receives such enabling information, it cannot be held accountable for breaching this duty.”  In Dreaded, the insured waited three years from the time it received notice of an environmental claim by IDEM before it demanded that its insurer defend against the claim.  The insurer then denied the insured’s claim for pre-notice defense costs. 

Rejecting the insured’s argument that the insurer was required to demonstrate prejudice from the lack of notice, the Indiana Supreme Court explained that “prejudice is an irrelevant” under these facts, because “[t]he issue is simply whether the insure[r] had any duty to defend at all.”  The Court held that no such duty arose “until Dreaded complied with the policy’s notice requirement.”

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