ATTORNEYS FOR APPELLANT: ATTORNEYS FOR APPELLEE:
W. WILLIAM HODES KARL L. MULVANEY
The William Hodes Professional Corp. NANA QUAY-SMITH
Indianapolis, Indiana KANDI KILKELLY HIDDE
Bingham McHale, LLP
RAFAEL RAMIREZ Indianapolis, Indiana
Ramirez Law Office, P.C.
COURT OF APPEALS OF INDIANA
TONI E. WILSON, )
vs. ) No. 49A02-0206-CV-456
CONTINENTAL CASUALTY COMPANY, )
CIVIL DIVISION, COURT 3
APPEAL FROM THE MARION COUNTY SUPERIOR COURT
The Honorable Patrick L. McCarty, Judge
Cause No. 49D03-0202-PL-199
November 21, 2002
OPINION - FOR PUBLICATION
Toni E. Wilson (Wilson) appeals the Marion Superior Courts ruling granting Continental Casualty
Companys (Continental) motion to dismiss Wilsons complaint for failure to state a claim
upon which relief could be granted, pursuant to Indiana Trial Rule 12(b)(6).
On appeal, Wilson argues that her claim falls within a limited exception to
the direct action rule that prohibits tort victims from directly suing insurance carriers
for the torts of their insureds, and therefore, the trial court erred when
it dismissed her claim.
Facts and Procedural History
In January 1998, Wilson sued Michael C. Kendall (Kendall), an Indiana attorney who
previously represented Wilson, for failing to exercise ordinary care and skill expected of
Indiana attorneys licensed to practice law in Indiana.See footnote Continental was the legal
malpractice insurance carrier for Kendall at the time of the lawsuit, and represented
Kendall in the legal malpractice lawsuit under a reservation of rights. On
February 4, 2002, during the pendency of the legal malpractice lawsuit, Wilson filed
this declaratory action against Continental for the purpose of obtaining a declaration that
Continental was obligated to represent Kendall without a reservation of rights, and pay
any judgment or settlement Wilson might obtain against Kendall in the legal malpractice
On April 3, 2002, Continental filed a Motion to Dismiss Wilsons declaratory action,
arguing that Wilson failed to state a claim upon which relief could be
granted because Wilsons suit constituted a direct action by a third party against
a defendants insurance carrier, which is prohibited under Indiana law. On May
10, 2002, after a May 8, 2002 hearing, the Marion Superior Court granted
Continentals Motion to Dismiss. Wilson now appeals.
Standard of Review
A motion to dismiss pursuant to Indiana Trial Rule 12(b)(6) tests the legal
sufficiency of the claim, not the facts supporting the claim.
Caterpillar, Inc., 710 N.E.2d 193, 196 (Ind. Ct. App. 1999), trans. denied (citation
omitted). Upon review, we regard the pleadings in a light most favorable
to the nonmovant, and draw every reasonable inference in favor of that party.
Id. (citation omitted). We will not affirm a dismissal under Trial
Rule 12(b)(6) unless it appears to a certainty that the plaintiff would not
be entitled to relief under any set of facts. Menefee v. Schurr,
751 N.E.2d 757, 760 (Ind. Ct. App. 2001), trans. denied (citation omitted).
Discussion and Decision
Wilson argues that she has standing to seek a declaration of coverage from
Continental with respect to Kendalls legal malpractice insurance policy. Br. of Appellant
at 10. However, Continental argues that Wilsons claim is nothing more than
a direct action suit alleging negligent handling of her claim by Continental, which
is strictly prohibited in Indiana.
The prohibition of direct action suits against insurance companies in Indiana is well
settled. [A]n injured third party does not have the right to bring
a direct action against a wrongdoers liability insurer. Menefee, 751 N.E.2d at
761 (citing Rausch v. Reinhold, 716 N.E.2d 993, 1002 (Ind. Ct. App. 1999),
trans. denied). Nevertheless, as stated by a panel of this court in
Community Action of Greater Indianapolis, Inc. v. Indiana Farmers Mutual Insurance Co., 708
N.E.2d 882 (Ind. Ct. App. 1999), trans. denied, the injured victim of an
insureds tort has a legally protectable interest in the insurance policy before he
has reduced his tort claim to judgment. Such an interest will support
standing under the [Uniform Declaratory Judgments] Act. Id. at 885.
In Community Action, the plaintiff contracted for the installation of a new roof
on its office building. The contractor in turn contracted with the defendant
to perform the roofing work. The defendant roofer carried a commercial liability
insurance policy at the time. Even though the defendant roofer attempted to
secure the building after only partially finishing the work, later that same evening,
the building was flooded by rain, causing approximately $170,000 in property damage.
The defendant roofers insurance carrier later advised the defendant roofer that it would
not indemnify him for the damage. Id. at 883.
Plaintiff then filed a complaint against the insurance carrier and the defendant roofer,
seeking a declaratory judgment stating that the defendant roofer was entitled to indemnity
from his insurance carrier in the action. Id. The insurance company
thereafter filed a motion to dismiss the complaint for failure to state a
claim upon which relief could be granted, arguing that the plaintiff filed a
prohibited direct action. The trial court granted the insurance companys motion to
dismiss. A panel of this court reversed. Id. at 884.
In addition to concluding that the plaintiff had not filed a prohibited direct
action against the insurance carrier, but rather, had permissibly filed a declaratory judgment
action to determine whether the insurance carrier could deny coverage, or whether the
insurance policy had remained in effect, our court also concluded that such a
determination was not against public policy. Id. at 885-86. Our court
concluded that its position was not inconsistent with Indianas prohibition of direct actions
against insurers where the injured party has no relationship with the insurer, because
such a declaratory action is used to establish whether the insurer can deny
coverage or whether the insurance policy remained in effect, [therefore] such suit is
not a direct action suit against an insurer. Id. at 886 (citing
Bankers Trust Co. v. Old Republic Ins. Co., 959 F.2d 677, 682 (7th
Continental argues that the Community Action conclusion is not applicable because in Community
Action, the insurance carrier denied coverage to the defendant roofer, while in this
case, Continental is merely defending Kendall under a reservation of rights. Continental
is correct in its assertion that Indiana law allows insurance carriers to defend
insureds under a reservation of rights. Indiana law also allows insurance carriers
to deny coverage, subject to the availability of the declaratory action sanctioned in
Allowing insurance companies to defend insureds under a reservation of rights protects the
insurance company from a bad faith action for breach of its duty to
defend because an insurance companys duty to defend is broader than its duty
to indemnify. Gallant Ins. Co. v. Oswalt, 762 N.E.2d 1254, 1260 (Ind.
Ct. App. 2002), trans. denied. An insurance company reserves its right to
deny coverage, in a subsequent declaratory action, while at the same time it
defends the insured. Such is the purpose of a reservation of rights:
to allow the insurer to fulfill the broad duty to defend while at
the same time investigating and pursuing the narrower issue of whether indemnification will
A plaintiff is at severe disadvantage when an insurance carrier chooses to defend
an insured under a reservation of rights because at any time during the
proceeding, even after the plaintiff has expended considerable time and resources, the insurance
carrier can bring a declaratory action to establish that it does not have
to indemnify the insured defendant. We conclude that under the Community Action
holding, whether an alleged tortfeasors insurance carrier has denied coverage or is defending
under a reservation of rights is a distinction without a difference. A
plaintiff should be entitled to bring a declaratory action to determine whether the
insurance carrier must indemnify its insured in either of these equally compelling circumstances.
Continental argues that allowing this case to go forward would force Indiana courts
to allow third party actions against insurers every time an insurance company opted
to defend under a reservation of rights. Br. of Appellee at 12.
We agree and see no great ill in the development. We
believe that allowing such declaratory actions will prevent the waste of parties and
judicial resources. All litigants will now be on the same footing in
cases where insurance companies either deny coverage or defend under a reservation of
rights. Equal ability to know whether a provable loss is subject to
insurance indemnification will be a positive step toward settlement and will make litigation
outcomes dispositive, collectible and credible. We believe Indianas civil litigants deserve no
Because Wilsons declaratory judgment action falls within the narrow exception to the rule
against direct actions filed by third parties against insurance companies established in
Action, we reverse the trial courts dismissal of Wilsons claim.
BAILEY, J., and SULLIVAN, J., concur.
Wilsons request for an oral argument is hereby denied.
Footnote: The legal malpractice suit is pending in Marion Superior Court and has
been assigned the following cause number, 49D04-0107-CT-1049.
Sans v. Monticello Ins. Co., 718 N.E.2d 814, 817 (Ind. Ct.
App. 1999), trans. denied, this court concluded that the underlying plaintiff in a
negligence action was a properly named defendant in a declaratory action brought by
the insurance company because the plaintiff clearly has an interest in the case.