In addition, Mr. Carpenter testified that, a couple of months prior to the incident at the lounge, Johnson threatened to hurt him because Johnson was upset that Mr. Carpenter was dating Johnson's ex-girlfriend.

A jury found Johnson guilty as charged, and an appellate court affirmed his conviction.

Mr. Carpenter sued the lounge and Johnson, alleging that Johnson was an employee of and/or performed services for the lounge and asserting claims for civil assault and battery, negligence based on premises liability, negligence, and violation of Indiana's Dram Shop Act.

The lounge sought coverage under the commercial general liability insurance policy it had obtained from The Cincinnati Specialty Underwriters Insurance Company (“CSU”).

CSU denied coverage on several grounds, including that the policy contained an exclusion for assault and battery.

Mr. Carpenter and the lounge subsequently submitted a consent judgment to the trial court, which the trial court approved and entered. The consent judgment provided:

2. Upon entering Lovell's Lounge, [Johnson] negligently came into physical contact with Carpenter, accidently causing him serious bodily injury. The harm was neither intended nor expected from the standpoint of Johnson or Lovell's Lounge.

….

6. Carpenter was a business invitee, and as such, Lovell's Lounge owed a duty of reasonable care, including the duty to warn Carpenter of foreseeable negligent conduct that could cause harm.

7. The negligent conduct engaged in by Johnson which caused the harm to Carpenter was foreseeable to Lovell's Lounge, however, while foreseeable to Lovell's Lounge, it was neither intended nor expected from the standpoint of Lovell's Lounge or its employees, including Carpenter.

8. Lovell's Lounge breached its duty to warn Carpenter of the foreseeable danger, which breach was also a proximate cause of the harms of Carpenter.

9. Not only did Lovell's Lounge breach its duty to warn, [Johnson] performed services for and was an agent of Lovell's Lounge, and he was within the scope of his agency at the time of the negligent conduct which was the harm to Carpenter.

10. Based on the foregoing, and to avoid the costs and expense of litigation Defendant Lovell's Lounge agrees that [Carpenter] has incurred injuries and damages, including pain and suffering, totaling $1,125,000.

In addition, Mr. Carpenter and the lounge entered into a postjudgment agreement not to execute.

CSU then went to court, asserting that it had no obligation under the policy to make payment to Mr. Carpenter for the consent judgment because Mr. Carpenter's injuries were caused by an assault and battery and the policy contained an exclusion for assault or battery. CSU also asserted that the consent judgment had been obtained by fraud, bad faith, or collusion.

The trial court found that the consent judgment had been procured by bad faith, or collusion and, therefore, that the doctrine of collateral estoppel did not apply to bind CSU to the consent judgment.

The dispute reached an appellate court in Indiana.

The Appellate Court's Decision

The appellate court affirmed.

In its decision, the appellate court first found that even though CSU had not defended the lounge under a reservation of rights and had not filed a declaratory judgment action before the consent judgment had been approved, if the consent judgment was the product of bad faith or collusion, it did not bind CSU.

Recognizing that Indiana courts had not previously addressed what constituted bad faith or collusion in the context of an insured's procurement of a consent judgment, the appellate court then decided that CSU, which was claiming that the consent judgment was the product of bad faith or collusion, had the burden to prove by clear and convincing evidence that the consent judgment had been procured by bad faith or collusion.

The appellate court then said that among the indicators of bad faith and collusion in connection with a settlement agreement were “unreasonableness, misrepresentation, concealment, secretiveness, lack of serious negotiations on damages, attempts to affect the insurance coverage, profit to the insured, and attempts to harm the interest of the insurer.” The appellate court added that not all of these considerations had to be found in every case of bad faith or collusion, and that there might be other considerations, but that the list was a “good starting point” for determining whether the consent judgment in this case had been procured by bad faith or collusion.

The appellate court decided that there was “clear and convincing evidence” that the consent judgment had been obtained in bad faith or collusion.

First, it noted that the consent judgment stipulated that Johnson “negligently came into physical contact with Carpenter, accidently causing him serious bodily injury.” It found that this was “patently unreasonable in light of all the available evidence and the allegations in the verified amended complaint” that Johnson had “brutally attacked” Mr. Carpenter “with numerous punches and kicks” and that Mr. Carpenter had testified repeatedly that Johnson had punched him and kicked him.

Second, the appellate court pointed out, the consent judgment stipulated that Johnson “performed services for and was an agent of Lovell's Lounge” and “was within the scope of his agency at the time of the negligent conduct which was the harm to Carpenter.” This stipulation, in the appellate court's opinion, was “particularly troubling” because Mr. Carpenter's complaint had not included any allegations regarding an agency relationship between the lounge and Johnson.

It ruled that there was no evidence that Johnson had an agreement with the lounge to perform services or to represent the lounge in any respect, no evidence that he was performing any services for the lounge at the time of the incident, and no basis from which one could reasonably infer that Johnson was an agent of the lounge or that he was acting within the scope of his agency at the time of the incident.

The appellate court concluded that the short length of the negotiations that led to the consent judgment also supported CSU's contention that the lounge had not been not seriously negotiating with Mr. Carpenter but “that they were trying to affect coverage by purposely remaking the [i]ncident so that it would not fall under the [p]olicy's assault and battery exclusion.”

Accordingly, the appellate court affirmed the trial court's grant of CSU's summary judgment motion and judgment in favor of CSU on its declaratory judgment action.

The case is Carpenter v. Lovell's Lounge and Grill, LLC, No. 33A01–1602–CT–265 (Ind. Ct.App. Sept. 8, 2016). Attorneys involved include: Mark A. Matthes, Yoder Ainlay Ulmer & Buckingham, LLP, Goshen, IN, Attorney for Appellants; David S. Wirth, Fairfield, OH, Kristine Lindley, Richard R. Skiles, Skiles DeTrude, Indianapolis, IN, Attorneys for Appellee.