Cornhusker Casualty Company v. Skaj, 786 F.3d 842

Background

R&R Roofing purchased a Cornhusker commercial liability policy (Nov. 27, 2007) listing R&R and Randy Rosty as named insureds; employee Vincent was not a named insured. Policy included business auto coverage for a 1974 Ford dump truck and a duty to defend any "insured."
On May 6, 2008 Vincent drove the company dump truck to his ex’s residence; the truck rolled and seriously injured Shari Skaj. A drug test that day detected marijuana and methamphetamine.
Cornhusker investigated, retained counsel, and communicated with the insureds, but did not explicitly notify Vincent that it reserved rights; at times Cornhusker’s defense counsel accepted representation of Vincent without a reservation of rights.
A default judgment was entered against Vincent in Wyoming state court (later largely affirmed on appeal) for approximately $897,344.24; after judgment Cornhusker denied coverage, citing lack of permissive use, intoxication, misappropriation, and lack of cooperation.
Cornhusker filed a federal declaratory-judgment action seeking a declaration of no coverage; Vincent counterclaimed for torts and bad faith; the Skajs sought a declaration that Cornhusker must pay the state-court judgment and statutory attorneys’ fees.
The district court granted summary judgment estopping Cornhusker from denying coverage (applying an estoppel exception), denied Vincent’s bad-faith and punitive-damages claims, and denied the Skajs’ attorneys’-fees claim. The Tenth Circuit affirmed.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether insurer is estopped from denying coverage after assuming defense without a reservation of rights	Vincent/Skajs: Cornhusker defended Vincent unconditionally, so it is estopped from later asserting noncoverage	Cornhusker: Only named insureds/privies can invoke estoppel; Vincent and Skajs lack standing and Cornhusker argues estoppel cannot expand coverage	Court: Apply Pendleton-type estoppel exception; insurer estopped because it assumed defense without reserving rights and lulled Vincent into relinquishing control
Whether district court erred in dismissing Vincent’s bad-faith claim and punitive damages	Vincent: Cornhusker promised defense then allowed default and later denied coverage — conduct showing bad faith and supporting punitive damages	Cornhusker: Denial was reasonably debatable (permissive use, unsettled estoppel law); its investigation and defense were not so deficient as to constitute bad faith	Court: No bad faith (substantive or procedural); denial was fairly debatable and investigative conduct did not meet Wyoming’s high threshold for bad faith or punitive damages
Whether Skajs are entitled to statutory attorneys’ fees under Wyo. Stat. §26-15-124(c)	Skajs: Cornhusker unreasonably refused to pay judgment; fees statutory	Cornhusker: Denial was reasonable/fairly debatable; no finding of unreasonableness in any action; procedural default for failing to present evidence	Court: Denied fees — Skajs failed to preserve/submit evidence and statute requires a finding that insurer’s refusal was unreasonable; district court’s exercise of discretion affirmed

Key Cases Cited

Pendleton v. Pan Am. Fire & Cas. Co., 317 F.2d 96 (10th Cir. 1963) (announcing estoppel exception where insurer defends without reserving rights)
Braun v. Annesley, 936 F.2d 1105 (10th Cir. 1991) (applying Pendleton logic to estop insurer that defended without reservation)
St. Paul Fire & Marine Ins. Co. v. Albany Cnty. Sch. Dist. No. 1, 763 P.2d 1255 (Wyo. 1988) (Wyoming rule that estoppel cannot be used to expand policy coverage where insurer expressly reserved rights)
Hatch v. State Farm Fire & Cas. Co., 842 P.2d 1089 (Wyo. 1992) (describing high evidentiary threshold for procedural bad-faith based on insurer’s claim handling)
Sonnett v. First Am. Title Ins. Co., 309 P.3d 799 (Wyo. 2013) (explaining substantive bad-faith standard: whether denial was "fairly debatable")