Insurer's 'Duty to Defend' Reexamined in 10th Circuit's Ruling on Late Night Bar Brawl

The 10th Circuit Court of Appeals' ruling in a recent case involving a late night bar brawl at the Okmulgee Inn forced one insurer to reexamine the standard for duty to defend in light of unusual extrinsic evidence.

In Mount Vernon Fire Ins. Co. v. Okmulgee Inn Venture, LLC, the Tenth Circuit Court of Appeals recently demonstrated how an "extrinsic evidence" duty to defend standard can create a duty that unquestionably did not exist based on a "four corners" standard. Not to mention that the court did not exactly search high and low to locate the extrinsic evidence that it used to create the duty to defend.

In Okmulgee Inn Venture, the court addressed coverage under the following scenario:

Okmulgee Inn Venture leased space to a nightclub-bar and was a named insured on a liquor liability insurance policy. Okmulgee was insured against injuries caused by "the selling, serving or furnishing of any alcoholic beverage." Okmulgee Inn Venture at 2.

"In 2006, three bar patrons sustained gunshot wounds during a fight at the nightclub and sued Okmulgee, alleging, among other things, that Okmulgee failed to ensure the safety of the bar's patrons, properly train the bar's staff, or investigate the bar's operator. The only specific allegations pertaining to alcohol were that two of the three victims were under-age but were admitted to the bar and served alcohol. Mt. Vernon refused to defend Okmulgee in these suits. Mt. Vernon asserted there was no coverage under the policy, and thus no duty to defend or indemnify, because the allegations did not indicate the injuries were caused by the selling, serving, or furnishing of alcoholic beverages. Mt. Vernon then initiated this declaratory judgment action to determine its obligations." Id. at 3.


In other words, Mt. Vernon refused to defend Okmulgee because there was no allegation that the shooter was drunk or that the shooter was served alcohol. Rather, it was only alleged that the victims were served alcohol. Thus, Mt. Vernon asserted that there were no indications that alcohol caused the injuries. Id. at 4. The District Court agreed that no duty to defend was owed because the "precise facts alleged against the insured did not demonstrate there was coverage under the policy." Id. at 2. The Tenth Circuit reversed: "We agree the facts fail to conclusively demonstrate coverage, but we think there is still a potential for coverage as permitted by Oklahoma law." Id.


At the heart of the Tenth Circuit's decision was Oklahoma's duty to defend standard: "[T]he insurer's duty to defend its insured arises whenever the allegations in a complaint state a cause of action that gives rise to the possibility of a recovery under the policy; there need not be a probability of recovery." Id. at 5 (citations and internal quotes omitted; emphasis in original). However, this "analysis is not restricted to the four-corners of the complaint; rather, an insurer's defense duty is determined on the basis of information gleaned from the petition (and other pleadings), from the insured and from other sources available to the insurer at the time the defense is demanded." Id. (citations and internal quotes omitted). Moreover, "[t]he insurer has a duty to look behind the third party's allegations to analyze whether coverage is possible." Id. at 6 (citations and internal quotes omitted).


Applying this standard, the Tenth Circuit concluded that a defense was owed:


The parties dispute whether the facts demonstrate that alcohol caused the injuries, but the issue is whether the facts establish a potential for coverage, that is, whether the circumstances alleged give rise to the possibility that the injuries were suffered by reason of the selling, serving, or furnishing of alcoholic beverages. And on this score, we have little difficulty concluding that they do. The victims entered the bar and were served alcohol; a bar-fight ensued and witnesses recalled beer bottles shattering; then gunshots were fired by a shooter who had been previously arrested at the same bar for being drunk in public. These known and undisputed facts establish the possibility that alcohol contributed to the injuries. We do not mean to suggest, of course, that the potential for coverage exists because "later-revealed facts" may show coverage[.] . . . But the known and undisputed facts in this case, standing alone, establish a credible possibility that the injuries sustained were caused by the selling, serving or furnishing of alcoholic beverages.

Id. at 5-6 (emphasis in original).


While there is nothing unusual about a court looking to extrinsic evidence to determine a duty to defend, Okmulgee Inn Venture seemed to take it a step further - considering extrinsic evidence that might exist. The court seemed to be saying: "Come on, look at these facts, how could alcohol not have played a part in this." The court didn't explicitly say that, but that was its clear message nonetheless.


The Okmulgee Inn Venture court was quick to add that, by its decision, Mt. Vernon's duty to indemnify was not yet ripe. But having found a duty to defend - that admittedly did not exist based on the four corners of the complaint - the underlying plaintiff is now in a position to use the insurers' exposure for defense costs as leverage to secure a settlement than may otherwise be subject to coverage or liability defenses. Read the full story here