647 S.E.2d 765
I fully agree with the result reached in the majority opinion in this case. I have
chosen to write separately in order to clarify the majority opinion, and to address the
complexities of the issue of an assignment and a covenant not to execute. After a brief
review of the pertinent procedural facts of the instant case, I will discuss several distinct
factual circumstances under which the issue of an insured's assignment of his or her excess
verdict claim to a plaintiff, in exchange for the plaintiff's covenant not to execute, may arise.
Through this discussion, I will demonstrate that resolution of the issue of whether an
assignment and covenant not to execute is valid must be resolved on the particular facts
presented.
While I believe that the majority opinion reaches the correct result in this case, I am
somewhat concerned with the expansive reach of Syllabus point 9. Consequently, I will
discuss the current state of the law regarding an insured's assignment, to a plaintiff, of the
insured's excess verdict claim against his/her insurer in exchange for the plaintiff's covenant
not to execute a judgment against the insured.
There is a material difference between a covenant not to
sue and a release. A release immediately discharges an existing
claim or right. In contrast, a covenant not to sue is merely an
agreement not to sue on an existing claim. It does not
extinguish a claim or cause of action. The difference primarily
affects third parties, rather than the parties to the agreement.
As the circuit court concluded, the agreement in this case
is a covenant not to sue. Additionally, the covenant not to sue
is not absolute but, rather, is conditioned on the covenantee, [the
insured], performing certain duties in the litigation against [the
insurer]. Only if [the insured] performs these duties does [the
plaintiff's] covenant not to sue on the underlying excess
judgment become absolute and release [the insured] of all
liability to [the plaintiff].
J & J Farmer Leasing, 696 N.W.2d at 684 (citations omitted).
Additionally, in Glenn v. Fleming, 799 P.2d 79 (Kan. 1990), the plaintiff sued
the defendant for personal injuries. The defendant's insurer provided a defense. A jury
returned a verdict awarding the plaintiff $1,050,000. However, the defendant's policy limit
was $25,000. Judgment was affirmed on appeal. Subsequent to the appeal, the plaintiff
signed a covenant not to execute upon or impose liens on any other property of the defendant,
either real or personal. In the covenant, the defendant assigned all of his contractual rights
under his policy with the insurer to the plaintiff. The plaintiff thereafter filed an action
against the insurer. The insurer admitted to owing $25,000, its maximum coverage, but
denied liability for any judgment in excess of that amount. The trial court reasoned that the
insurer did not act in bad faith in failing to settle within the policy limits and granted
summary judgment to the insurer. The appellate court affirmed, but for different reasons.
The appellate court held that the existence of the covenant not to execute released the insured
from liability for the judgment, which nullified the basis for a claim against the insurer for
the excess judgment. The plaintiff appealed to the Kansas Supreme Court. The Kansas
Court agreed with the trial court and concluded that the plaintiff failed to prove that the
insurer acted in bad faith. Therefore, summary judgment on the excess verdict claim was
proper. However, the Kansas Court disapproved of the reasoning used by the appellate court.
It ruled that a valid covenant not to execute does not extinguish a claim against an insurer:
A majority of courts permit the use of covenants not to
execute. One line of reasoning concludes that a covenant is not
a release of liability.
Other courts reason that the insured is entitled to use
reasonable means to avoid personal liability.
The primary argument against permitting the use of
covenants not to execute rests upon the concern that their use
will impart a collusive character to a personal injury suit. . . .
It would be highly unusual for fraud or collusion to taint
the amount of the judgment when, as in the [case at bar], the
assignment/covenant is executed after a jury verdict. In the
situation where the case is litigated at trial before the entry of
judgment, the amount may be assumed to be realistic.
We do express concern over the reasonableness of
assignment/covenants in which the amount of the judgment
assigned has been determined by agreement of the parties.
In this type of consent judgment case the settlement
between the plaintiff and the insured may not represent an arm's
length determination of the value of the plaintiff's claim.
Glenn, 799 P.2d at 92 (citations omitted).
The last of these postjudgment cases referenced by Mr. Strahin is Pinto v. Allstate Insurance Co., 221 F.3d 394 (2d Cir. 2002), in which the plaintiff sued the defendant for a personal injury in a New York state court. The defendant's insurer provided a defense. The parties stipulated as to liability. The plaintiff offered to settle damages for the policy limits of $100,000. The insurer refused to settle. Therefore, the issue of damages was tried before a jury. Plaintiff obtained a verdict against the defendant for $350,000. Subsequent to the verdict, the defendant assigned to the plaintiff his rights against the insurer for failing to settle within the policy limits. In exchange, the plaintiff agreed to “release” the defendant from all liability for the judgment. The plaintiff thereafter filed an action against the insurer in federal court. The district court granted judgment to the plaintiff. One of the issues raised on appeal by the insurer was that the “release” extinguished the claim against the insured, and that, therefore, the plaintiff could not enforce the assignment. The appellate court, applying New York law, rejected the argument:
Although the parties may not have chosen the ideal form
to execute their intention, New York courts have ignored the
formal distinction between a release and a covenant not to sue
or execute in order to avoid an unjust result. Consequently,
exchange of a general release for an assignment of a bad faith
claim operates to preserve the bad faith claim, as if the parties
had executed a covenant not to sue, in the same fashion as the
exchanges approved in the cases cited above under New York
law. While conscious that more careful drafting would have
avoided this issue by using the more conventional form of
consideration for the assignment, we decline defendant's
invitation to exalt form over the spirit of the agreement and to
interpret New York law to establish a rule unknown in other
jurisdictions and contrary to the prevailing view of New York
courts and the intention of the parties in the underlying action.
Pinto, 221 F.3d at 404 (citations omitted).
The rulings in J & J Farmer, Glenn and Pinto specifically answered the issue
of whether an insured may assign to a plaintiff a bad faith claim against an insurer for an
excess verdict, in exchange for a covenant not to execute, after the trial on the merits of each
underlying case. The courts in those cases upheld such an assignment and covenant not to
execute. Had Mr. Strahin's case presented the specific fact pattern of J & J Farmer, Glenn and Pinto, I would have been inclined to follow the decisions of those courts. (See footnote 5) However, Mr.
Strahin's case did not involve execution of a post-judgment assignment and covenant not to
execute.
2. Settlement Agreement, Assignment and Covenant Not to Execute. Another distinct type of case which forms a part of the fifteen string-cited cases in Mr.
Strahin's brief involves settlements not reduced to a judgment: Guillen ex rel. Guillen v.
Potomac Insurance Co. of Illinois, 785 N.E.2d 1 (Ill. 2003).
In Guillen ex rel. Guillen v. Potomac Insurance Co. of Illinois, 785 N.E.2d 1
(Ill. 2003), the plaintiff filed a personal injury action against the defendants. The defendants'
insurer denied coverage. The defendants and the plaintiff entered into a court-approved
settlement agreement for $600,000, which was within policy limits. However, the agreement
contained a covenant not to enforce the settlement against the defendants in exchange for the
defendants' assignment of their claim against the insurer to the plaintiff. “No other payment
obligation was imposed upon the [defendants] and no judgment was entered against them.” Guillen, 785 N.E.2d at 4.
The plaintiff thereafter filed an action against the insurer. The trial court
dismissed the action finding that the covenant not to execute voided any liability of the
insureds as they were no longer legally obligated to pay. Plaintiff appealed. The appellate
court reversed and remanded for a determination of whether the settlement was reasonable.
The insurer appealed to the Illinois Supreme Court. The Illinois Court affirmed the reversal.
In so doing, the Court made the following observations:
[The insurer] argues . . . that in this case, the [insureds]
were never “legally obligated” to pay damages under the terms
of their settlement agreement with [the plaintiff] because their
payment obligation was limited solely to an assignment of the
[insureds'] right to recover under their insurance policy. . . .
. . . .
Although this is a question of first impression in this
court, numerous courts in other jurisdiction[s] have considered
it, albeit in a somewhat different context from that presented
here. Most often, the interpretation of the “legally obligated to
pay” language has arisen when the insured and the injured
plaintiff enter into a settlement agreement consisting of a
stipulated judgment or consent judgment joined with a covenant
not to execute and an assignment of the insured's rights against
the insurer to the injured plaintiff.
When confronted by a settlement agreement consisting of
a stipulated judgment, an assignment and a covenant not to
execute, insurers have maintained, as Potomac does here, that
the covenant not to execute effectively extinguishes the
insured's legal obligation to pay since the insured has no
compelling obligation to pay any sum to the injured party. The
majority of courts, however, have rejected this argument.
The construction of the “legally obligated to pay”
language adopted by the majority of courts is a technical, rather
than practical, one. Courts accepting the conclusion that the
insured remains “legally obligated to pay” when the settlement
consists of a judgment, covenant not to execute, and an
assignment hold that a covenant not to execute is a contract and
not a release. The insured still remains liable in tort and a breach
of contract action lies if the injured party seeks to collect on the
judgment. Thus, under this construction, the insured is still
“legally obligated” to the injured plaintiff, and the insured
retains the right to indemnification from the insurer.
The rationale supporting this technical construction of the
“legally obligated to pay” language is that an insurer who has
abandoned the insured by refusing to defend a claim should not
be allowed to hide behind the policy language. Further, some
courts have observed that if the “legally obligated to pay”
language were construed in favor of the insurers, it would defeat
the very purpose of the settlement agreement entered into by the
insured. And, since the insured has the right to protect itself
after the insurer breaches its duty to defend, public policy
generally supports giving a technical construction to the “legally
obligated to pay” language. Thus, the prevailing view is that a
liberal construction of the words “legally obligated to pay” in
favor of the insured is appropriate, once the insurer has breached
its duty to defend.
We agree with the majority view regarding the construction given the “legally obligated to pay” language. Once the insurer has breached its duty to defend, it is in no position to demand that the insured be held to a strict accounting under the policy language. Fairness requires that the insured, having been wrongfully abandoned by the insurer, be afforded a liberal construction of the “legally obligated to pay” language.
Guillen, 785 N.E.2d at 12-13 (internal quotations and citations omitted).
It is quite clear that the decision in Guillen is factually distinguishable from the
facts underlying Mr. Strahin's cause of action. Guillen stands for the proposition that, when
an insurer denies coverage and fails to provide a defense, the parties may enter into a
settlement agreement within policy limits, (See footnote 6) which is not reduced to a judgment, that assigns
the defendant's cause of action against the insurer to the plaintiff in exchange for a covenant
not to execute. Our majority opinion simply does not address the issue of an assignment and
covenant not to execute in the context of a settlement agreement which is not reduced to a
judgment. Guillen presents an issue yet to be decided by this Court.
3. Agent Failure to Procure Coverage, Assignment and Covenant Not to
Execute. Six of the fifteen string-cited cases in Mr. Strahin's brief involve yet another
distinct fact pattern: the failure of an insurance agent to procure adequate coverage. The
cases involving such a scenario cited by Mr. Strahin are McLellan v. Atchison Insurance
Agency, Inc., 912 P.2d 559 (Haw. Ct. App. 1996); Campione v. Wilson, 661 N.E.2d 658
(Mass. 1996); Stateline Steel Erectors, Inc. v. Shields, 837 A.2d 285 (N.H. 2003); Wangler
v. Lerol, 670 N.W.2d 830 (N.D. 2003); Kobbeman v. Oleson, 574 N.W.2d 633 (S.D. 1998);
and Tip's Package Store, Inc. v. Commercial Insurance Managers, Inc., 86 S.W.3d 543
(Tenn. Ct. App. 2001).
In Kobbeman v. Oleson, 574 N.W.2d 633 (S.D. 1998), the plaintiff obtained
the policy limits from an insurer for an injury caused by the insured prior to the filing of a
lawsuit against the insured. The policy limits did not cover all of the plaintiff's damages.
The insured thought that he had procured an umbrella policy; but, his agent failed to include
umbrella coverage in the policy. Consequently, the insured assigned the plaintiff his cause
of action against the agent for failure to procure the umbrella policy in exchange for a
covenant not to execute any judgment that was obtained against him. The agreement also
purported to waive any statute of limitations involved in the case. The plaintiff subsequently
sued the agent. While the action was pending against the agent, but after the statute of
limitations had run, the plaintiff also filed an action against the insured in order to obtain a
judgment. (See footnote 7) The trial court dismissed the action against the agent concluding that the
covenant not to execute voided any liability against the agent. On appeal, the South Dakota
Supreme Court affirmed, but for different reasons. The South Dakota Court held that such
an assignment and covenant not to execute was permitted, but because no timely action had
ever been filed against the insured, the covenant barred any claim against him, and, thus, the
agent could not be sued:
In some forums, prejudgment assignments of an insured's
claims for bad faith have been disapproved. The rationale of the
cases requiring a judgment as a condition precedent to an
insured's cause of action against an insurer becomes manifest
when we deal with the issue of damages in this case. We are
concerned here not only with the fact of damages being clearly
established, but the certainty of the amount thereof as well.
Other decisions look not to the timing, but to the
language of the covenant not to execute. [These decisions hold
that whether] the assignment was made of a judgment in
existence or a judgment to come into existence is not
determinative of whether or not the insured's assignee may
maintain an action against the insurance company. In bad faith
refusal to settle cases, a rule mandating postjudgment
assignment is more imperative because, in most instances, no
cause of action solidifies until judgment is rendered against an
insured. On the other hand, in failure to procure insurance
cases, claims may reasonably arise long before a judgment. We
conclude, with assignments of causes of action for failure to
procure insurance, a judgment establishing a loss is critical, but
its timing is not. . . . In any event, so long as one ultimately
obtains a judgment in the underlying action to establish the loss
before proceeding to trial on the assigned claim, it is not crucial
whether the judgment precedes or follows the assignment. Now
we come to the final problem: With the statute of limitations
having expired, can [the plaintiff] ever obtain a valid judgment
against [the insured]?
. . . .
After the statute of limitations had expired on his
underlying tort claim, [the plaintiff] nonetheless brought a
separate suit against [the insured], undoubtedly to seek a
judgment above the $100,000 policy limits [the insurer] had
already paid. That matter was still pending at the time this
appeal reached us. Because the limitations period expired on
[the plaintiff's] case against [the insured], [the agent] contend[s]
[the insured] is no longer liable to [the plaintiff] for any
damages in the future and thus the assignment is ineffective.
Though he does not dispute that he commenced the action after
the limitations period expired, [the plaintiff] insists his separate
case against [the insured] should be allowed to take its course
because the assignment waived the statute of limitations
defense. . . .
. . . .
We are sincerely concerned with the potential for abuse
if we uphold the supposed waiver of the statute of limitations in
these circumstances. . . . To sanction a tortfeasor's waiver of the
statute of limitations, which in effect extends only another's
exposure to liability, invites future mischief and collusion. Once
the statute of limitations expired, the basis for both the
assignment and covenant dissolved: [the insured] could no
longer suffer an excess judgment and thus he (and his assignee)
no longer had grounds to sue for failure to obtain an umbrella
policy. Validating his waiver would make [the insured's] need
to sue the agents a mere pretext. While this is an issue of first
impression in South Dakota, . . . we know of no legal authority
anywhere condoning such an arrangement. The waiver portion
of the assignment (if it can be deemed a waiver) is void as
against public policy because it prolonged an otherwise closed
controversy, solely to extend exposure to others by artificially
perpetuating a need for insurance coverage.
Kobbeman, 574 N.W.2d at 638-40.
The failure of an insurance agent to procure adequate coverage was also at
issue in Tip's Package Store, Inc. v. Commercial Insurance Managers, Inc., 86 S.W.3d 543
(Tenn. Ct. App. 2001), in which the insured was sued by two plaintiffs in a wrongful death
action. The insured had two insurers, both of whom denied coverage. As a result of the
denial of coverage, the insured filed a separate action against the insurance agents for failing
to procure coverage for the type of claim asserted against the defendant.
Prior to trial, which was brought by the plaintiffs against the insured, the parties
agreed that the insured would make the plaintiffs beneficiaries in the lawsuit the insured had
pending against the agents in exchange for a covenant not to enforce the ultimate judgment
in the case against the insured. In the plaintiffs' action against the insured, the fact finder
returned a verdict against the insured in the amount of $1.3 million, which was in excess of
the $1 million coverage the insured thought it had procured. After this verdict was returned,
the plaintiffs intervened in the case the insured had brought against the agents.
In the case brought by the insured against the agents, the trial court awarded the insured the $1 million that it should have obtained under the policy, but not the amount that exceeded the policy limits. All parties appealed. The appellate court affirmed the trial court's judgment. In doing so, the appellate court made clear that the two plaintiffs did not have a direct recovery, but were merely beneficiaries of the judgment received by the insured. The appellate court also held that the insured was not entitled to recover the excess verdict rendered in the cause of action brought by the two plaintiffs:
The award of $1,000,000 puts [the insured] in the exact situation it would have been in if [the agents] had not been negligent. At the same time, however, requiring [the agents] to pay more than that which naturally flowed from the negligent conduct would be improper and result in a windfall to [the insured]. For these reasons, we affirm the judgment of the Chancery Court in favor of [the insured] in its award of $1,000,000 for indemnification against the judgment awarded to the [two plaintiffs] in the Circuit Court action.
Tip's Package Store, 86 S.W.3d at 561.
Additionally, in Wangler v. Lerol, 670 N.W.2d 830 (N.D. 2003), the plaintiff
filed an action against the defendant for a personal injury. The defendant's insurer initially
provided a defense. After later learning that the defendant did not have coverage for the
claim, the insurer denied coverage and refused to provide a defense. The plaintiff and
defendant entered into an agreement consenting to judgment. Pursuant to the agreement, the
defendant assigned its rights against the insurance agent for failing to procure coverage in
exchange for a covenant not to execute the consent judgment against the defendant.
Thereafter, the plaintiff filed an action against the insurance agent and insurer under
principles of respondeat superior. The trial court dismissed the case on the grounds that
“[s]ince [the defendant] could not incur any damages for [plaintiff's] bodily injury based on
[the agent's] alleged errors and omissions in failing to procure coverage, it no longer had that
claim against [the agent]. Since [the agent] could not be liable, [the insurer] was no longer
responsible on a theory of respondeat superior for [the agent's] failure to procure coverage. Wangler, 670 N.W.2d at 835. The North Dakota Supreme Court reversed the dismissal. In
doing so, the North Dakota Court held that the covenant not to execute “did not extinguish
[the defendant's] damages and the district court erred in dismissing [the plaintiff's]
negligence action on this basis.” Wangler, 670 N.W.2d at 838. Wangler further stated that
a consent judgment “agreement between the injured plaintiff and an insured could not be
enforced against insurance agents. . . . Consequently, the settlement agreement is not
probative on the issues of [the agent's] fault or [the defendant's] damages. [The plaintiff],
as the assignee, will have to prove his negligence action against [the agent] in full.” Wangler, 670 N.W.2d at 838-39.
Furthermore, Campione v. Wilson, 661 N.E.2d 658 (Mass. 1996), the plaintiffs
filed a wrongful death claim against the defendant. At the time of the accident, the defendant
thought that it had policy limits of $ 1 million. The defendant actually had a policy that
provided maximum coverage of $500,000. The case was settled for an amount that exceeded
the actual policy limits. Under the settlement agreement, the plaintiffs agreed not to execute
a stipulated judgment against the defendant in exchange for an assignment of the defendant's
cause of action against the insurance brokers for failing to procure adequate insurance
coverage. The plaintiffs then filed an action against the brokers. The trial court dismissed
the case because the plaintiffs had released the defendant from liability and because the
defendant was never liable for damages in excess of the available coverage. Consequently,
the plaintiffs did not have an assignable claim. The Massachusetts Supreme Judicial Court
reversed and held as follows:
It is clear that, had the underlying tort claim been tried,
and a judgment entered in excess of the $500,000 coverage
afforded by the [insurance] policy, [the insured's] resulting
claim against the defendant insurance brokers could have been
assigned. . . . Nonetheless, we are reluctant to foreclose the
possibility of settlement like the one entered into by [the
insured] and the plaintiffs. The settlement provides [the
insured] with the benefit of being free from personal liability for
amounts beyond its certain insurance limits in exchange for [the
insured's] cooperation in assisting the plaintiffs in their efforts
to assert [the insured's] claims against the defendants. There is
an obvious advantage to the plaintiffs in having a cooperative
[insured] in the litigation against the defendants, rather than
forcing [the insured] to cooperate in the plaintiffs' attempt to
reach and apply, or pursue in other ways, the defendants'
liabilities to [the insured] in satisfaction of the deficiency
judgment that is probable against [the insured]. It is appropriate
to give effect to agreements which have led to a carefully
negotiated and detailed settlement, in which the plaintiffs have
voluntarily assumed the burden of proving any claims that [the
insured] might have against the defendants, in a situation where
[the insured's] liability for the accident is reasonably clear, the
primary insurer has paid the full limits of its policy, and
damages are substantial.
Campione, 661 N.E.2d at 662-63 (internal citations omitted).
In Stateline Steel Erectors, Inc. v. Shields, 837 A.2d 285 (N.H. 2003), the
plaintiffs sued the insured in order to be indemnified for monies they paid in settling another
lawsuit. The plaintiffs and the insured entered into a stipulated judgment that was in excess
of the policy limits. The parties agreed that the insured would assign its rights to sue the
insurance agent for the excess judgment, theorizing that the agent negligently failed to
provide the type of coverage the insured thought it had purchased. In exchange for the
assignment, the plaintiffs agreed not to execute the judgment against the insured or its
insurer. The plaintiffs subsequently filed an action against the agent. The trial court
dismissed the case stating that the insured was not at risk because of the covenant not to
execute. The New Hampshire Supreme Court disagreed:
In our view, the benefits of such settlement agreements outweigh the risks. We believe it preferable to uphold assignments under these circumstances than to allow a negligent party to escape liability. That [the insured] never had to pay the stipulated judgment out of its own pocket is immaterial. But for the defendants' alleged negligence, [the insured] would not have had to enter into the settlement agreement.
Stateline Steel, 837 A.2d at 289.
Finally, the case of McLellan v. Atchison Insurance Agency, Inc., 912 P.2d 559
(Haw. Ct. App. 1996), involved three separate accidents that the plaintiff had while riding
as a passenger in vehicles owned by the defendant. The defendant's insurer denied coverage
as to one of the accidents. However, the defendant's insurer provided a defense for all three
claims without a reservation of rights. Two claims were settled. Prior to the trial of the third
claim, in which coverage was denied, the plaintiff and the defendant married. Thereafter,
the defendant fired counsel retained for him by the insurer. Then he entered into a stipulated
judgment. The defendant also assigned to the plaintiff any causes of action he had against
the insurer and the insurance agent, for failing to procure adequate coverage, in exchange for
a covenant not to execute. The plaintiff then filed suit against the agent and the insurer. The
trial court dismissed the case against the agent because of the covenant not to execute. The
plaintiff appealed. The appellate court reversed and held that:
[R]ather than allowing a negligent party to escape liability
because of a covenant not to execute, we believe that the better
choice is to hold that a covenant not to execute does not per se
eliminate the fact of damages. . . .
In its order granting [the agent's] motion, the trial court ruled
that no damages can arise from [the insured's] assigned claims,
as a matter of law, because [the insured] benefited from [the
plaintiff's] covenant not to execute.
However, because a covenant not to execute upon the
Stipulated Judgment, by itself, did not eliminate the fact of
damages, we hold that the trial court erred in its ruling. In
addition, because the trial court presumed erroneously that the
covenant, by itself, eliminated the fact of damages, we believe
that the material fact issue of damages remains disputed and
unresolved and, therefore, hold that the trial court erred in
granting [the agent's] motion[.]McLellan, 912 P.2d at 565.
Clearly the decisions in Kobbeman, Tip's Package Store, Wangler, Campione, Stateline Steel and McLellan are factually distinguishable from the facts underlying Mr.
Strahin's cause of action. Kobbeman, Campione, Stateline Steel and McLellan opine that
parties may enter into an agreement that is timely reduced to a judgment, which assigns the
defendant's cause of action against an insurance agent for failing to procure adequate
coverage, in exchange for a covenant not to execute. Tip's Package Store stands for the
proposition that, prior to a judgment, the parties may enter an agreement assigning to the
plaintiff the defendant's cause of action against an insurance agent for failing to procure
coverage in exchange for a covenant not to execute; however, the plaintiff can only recover
the limits of the policy the insured should have obtained. The decision in Wangler stands for
the proposition that an assignment and covenant not to execute are valid against an insurance
agent for failing to procure coverage, but a prior judgment cannot be used as a basis for
determining damages recoverable against the agent.
The majority opinion in the instant case simply does not address the issue of
an assignment and covenant not to execute in the context of an action against an insurance
agent's failure to procure coverage. Kobbeman, Tip's Package Store, Wangler, Campione, Stateline Steel and McLellan present issues that have yet to be decided by this Court.
4. Stipulated Judgment, Assignment and Covenant Not to Execute. In Mr.
Strahin's brief, he argues that the cases cited by Farmers are distinguishable from his case.
He suggests that the cases cited by Farmers involved an assignment and covenant not to
execute in the context of a stipulated or consent judgment. Although Mr. Strahin was
absolutely correct in noting that the issue of a stipulated judgment, assignment and covenant
not to execute is plainly distinguishable from his case, three of his fifteen string-cited cases
were, in fact, cases that involved the issue of a stipulated judgment, assignment and covenant
not to execute: (See footnote 8) Ayers v. C & D General Contractors, 269 F. Supp. 2d 911 (W.D. Ky. 2003); Red Giant Oil Co. v. Lawlor, 528 N.W.2d 524 (Iowa 1995); and Gainsco Insurance Co. v.
Amoco Production Co., 53 P.3d 1051 (Wyo. 2002).
In the first of these cases, Red Giant Oil Co. v. Lawlor, 528 N.W.2d 524 (Iowa
1995), the plaintiff sued the defendant for negligent work on the plaintiff's property. The
defendant had insurance, but the insurer denied coverage. The defendant eventually agreed
to stipulate to judgment for the full amount sought by the plaintiff. The defendant also
agreed to assign his cause of action against the insurer and its agent for failure to procure the
correct coverage in exchange for a covenant not to execute the judgment against the
defendant. The plaintiff thereafter filed an action against the insurer and its agent. The trial
court dismissed the action. The trial court found that the stipulated judgment was collusive.
The Iowa Supreme Court reversed and held:
[A] claim by an insured against the insurer for failure of the insurer to defend may be assigned to the injured party. Prejudgment assignments_like the one here_in return for covenants not to execute are not inherently collusive or fraudulent. Such agreements are consistent with the general rule of indemnity that permits insureds to protect themselves against insurers who wrongfully refuse to defend.
Red Giant, 528 N.W.2d at 533 (citations omitted).
This issue was also examined in Gainsco Insurance Co. v. Amoco Production
Co., 53 P.3d 1051 (Wyo. 2002), wherein the plaintiff sued the defendant in order to obtain
indemnification for a payment made by the plaintiff to settle a prior case. (See footnote 9) The defendant's
insurer denied coverage, but provided a defense under a reservation of rights. After the
insurer rejected an offer by the plaintiff to settle the case, the defendant agreed to stipulate
judgment for an amount that was greater than the policy limits in exchange for a covenant
not to execute. The defendant also assigned the plaintiff its bad faith claims against the
insurer. The plaintiff thereafter filed an action against the insurer. The trial court granted
summary judgment to the plaintiff, and the insurer appealed. The Wyoming Supreme Court
reversed and ordered that summary judgment be granted to the insurer. The Wyoming Court
did so because it found that the claim against the defendant was within the policy limits.
Therefore, the defendant breached its duty to the insurer by agreeing to a judgment that was
in excess of the amount the plaintiff could actually receive. Even though the Wyoming Court
reversed the lower court's ruling, it rejected the insurer's argument that the covenant not to
execute extinguished any claim the insured may have had:
We agree with [those courts] that find that the inclusion
of a covenant not to execute in the settlement agreement
between an insured and a claimant, under the circumstances of
the case now before us, does not act to negate the fact that a
judgment has been entered against the insured and, therefore,
does not bar the claimant, as assignee of the insured, from
pursuing a claim against the insurer for third-party bad faith.
The existence of the judgment, with or without a covenant not
to execute, is a detriment to the insured sufficient to support an
assignable tort claim. Public policy favors this result in that it
allows an insured to reach a reasonable settlement of a case
being defended under a reservation of rights and it discourages
an insurer from rejecting a reasonable settlement offer. The
insurer is adequately protected by the requirement that such
settlements be reasonable and by its ability to raise the issues of
fraud and collusion.
Gainsco, 53 P.3d at 1061.
Finally, in Ayers v. C & D General Contractors, 269 F. Supp. 2d 911 (W.D.
Ky. 2003), the plaintiff filed a wrongful death claim against the defendant. The insurer
denied coverage. While the case was pending, the defendant and plaintiff entered into an
agreement stipulating judgment in exchange for a covenant not to execute against the
defendant and an assignment of the defendant's bad faith claim against the insurer. The
plaintiff thereafter filed a motion with the court to enter the stipulated judgment. The insurer
filed a motion opposing entry of the stipulated judgment. The district court, in a published
opinion, denied the motion to enter the stipulated judgment until a hearing was held to
determine the reasonableness of the judgment. The court reasoned as follows:
Although courts agree that consent judgments coupled
with covenants not to execute are enforceable, they have taken
diverse approaches to determining reasonableness or collusion.
Essentially, the issue is who should bear the primary burden of
proof.
Under one approach which is advanced now by Plaintiff,
the Ninth Circuit held that courts need not look behind consent
judgments to determine if they are reasonable. . . .
Under the second approach, courts hold that an insured
only has the initial burden of producing evidence that the
settlement is prima facie reasonable in amount and untainted by
bad faith. Once the insured satisfies this burden, the burden
shifts to the insurer to show, by a preponderance of the
evidence, that it is not liable because the settlement is neither
reasonable nor reached in good faith.
Last, under a third approach, courts require that the
Plaintiff has the burden of showing by a preponderance of the
evidence that the judgment amount was reasonable and prudent.
Based on this standard, if a plaintiff fails to come forward with
sufficient evidence, the consent judgment is presumptively
invalid.
After considering the relevant Kentucky decisions and
those in other jurisdictions, this Court predicts that Kentucky's
highest court would follow the second approach.
Ayers, 269 F. Supp. 2d at 916 (internal quotations and citations omitted).
It is quite evident, then, that the cases of Red Giant, Gainsco and Ayers present
legal issues that are distinct from Mr. Strahin's case. Each of those cases involved a denial
of coverage and a stipulated judgment. Like the cases cited by Mr. Strahin, my research has
revealed that many courts permit stipulated judgments, assignments and covenants not to
execute when an insurer denies coverage. See, e.g., American Family Mut. Ins. Co. v. Kivela,
408 N.E.2d 805 (Ind. Ct. App. 1980); Associated Wholesale Grocers, Inc. v. Americold
Corp., 934 P.2d 65 (Kan. 1997); Metcalf v. Hartford Accident & Indem. Co., 126 N.W.2d
471 (Neb. 1964); Lancaster v. Royal Ins. Co. of America, 726 P.2d 371 (Or. 1986); Besel v.
Viking Ins. Co. of Wisconsin, 49 P.3d 887 (Wash. 2002). However, as the following cases
will illustrate, this issue is not well-settled.
The case of Hamilton v. Maryland Casualty Co., 117 Cal. Rptr. 2d 318 (2002),
involved a class action against the defendant for an invasion of privacy. The defendant's
insurer provided a defense. However, the insurer refused to settle the case for the policy
limits. Consequently, the insured entered into an agreement with the plaintiffs that stipulated
a judgment in excess of the policy limits in exchange for the plaintiffs agreeing not to
execute the judgment against the insured. The agreement also assigned the plaintiffs all
rights the insured had against the insurer for its breach of its duty to accept a reasonable
settlement demand. The plaintiffs thereafter filed an action against the insurer. The trial
court entered judgment for the plaintiffs. The California Supreme Court reversed and held
that judgment should have been granted to the insurer:
[W]here the insurer has accepted defense of the action, no trial has been held to determine the insured's liability, and a covenant not to execute excuses the insured from bearing any actual liability from the stipulated judgment, the entry of a stipulated judgment is insufficient to show . . . that the insured has been injured to any extent by the failure to settle, much less in the amount of the stipulated judgment. In these circumstances, the judgment provides no reliable basis to establish damages resulting from a refusal to settle, an essential element of plaintiffs' cause of action.
Hamilton, 117 Cal. Rptr. 2d at 323-24.
Additionally, in Stubblefield v. St. Paul Fire & Marine Insurance Co., 517 P.2d
262 (Or. 1973), the plaintiff sued the defendant for alienation of affections. The parties
entered into a stipulated judgment after the insurer refused to defend. Under the terms of the
agreement, the plaintiff covenanted not to execute against the insured for any amount greater
than $5,000 in exchange for the insured's assignment of his rights for all claims greater than
$5,000 against the insurer arising from the insurance policy. Judgment was stipulated to and
entered against the insured for $50,000. The plaintiff, as assignee, sued the insurer. The
Oregon Supreme Court, in affirming the trial court's judgment for the insurer, stated:
[T]he result of the separate “Covenant Not to Execute” was that
the amount which the insured in this case was “legally
obligated” to pay to plaintiff as damages for such personal
injuries was the sum of $5,000. The insured agreed, however,
to pay that amount to plaintiff himself and that amount was
expressly excluded from the assignment and was reserved to the
insured. It follows that by the terms of the assignment in this
case plaintiff acquired no rights which are enforceable by it
against defendant.
Stubblefield, 517 P.2d at 264.
Moreover, in Lida Manufacturing Co., Inc. v. U.S. Fire Insurance Co., 448
S.E.2d 854 (N.C. Ct. App. 1994), the insurer refused a defense for the insured in a claim
involving property damage. Consequently, the insured agreed to a stipulated judgment, in
excess of the policy limits (the insured additionally had in effect an umbrella policy of
insurance), in exchange for a covenant not to execute. The insured also assigned his claim
against the insurer to the plaintiff. Thereafter, the plaintiff sued the insurer. The trial court
granted summary judgment to the insurer. The appellate court affirmed and stated:
In this case, [the insured] confessed judgment in [the
plaintiff's] lawsuit against [the insured] for negligence and
breach of contract in the amount of $1,000,000.00; however,
[the plaintiff] agreed that it could not execute this $1,000,000.00
judgment against [the insured]. [The plaintiff] cannot reduce
[its] right to damage to judgment because of the covenant not to
execute, and [the insured] is therefore not legally obligated to
pay [the plaintiff] for any damages resulting from the fire based
on negligence or breach of contract. As a result, [the insurer's]
obligations under the general policy and under the umbrella
policy, if any, were extinguished.
Lida Mfg., 448 S.E.2d at 857 (internal quotations and citation omitted).
The courts in Hamilton, Stubblefield and Lida Manufacturing clearly illustrate
that there are limitations placed on a stipulated judgment, assignment and covenant not to
execute. The limitations addressed by these courts and the general rule followed by the
courts in Red Giant, Gainsco and Ayers confirm a point conceded by Mr. Strahin, i.e., his
case simply is not on point with those cases involving a stipulated judgment, assignment and
covenant not to execute.
5. Default, Assignment and Covenant Not to Execute. Two of the fifteen
string-cited cases set out in Mr. Strahin's brief involved the issue of a default, assignment
and covenant not to execute: Franco v. Selective Insurance Co., 184 F.3d 4 (1st Cir. 1999),
and Gray v. Grain Dealers Mutual Insurance Co., 871 F.2d 1128 (D.C. Cir. 1989).
In Gray v. Grain Dealers Mutual Insurance Co., 871 F.2d 1128 (D.C. Cir.
1989), the plaintiff filed a personal injury claim against the defendant. The defendant's
insurer denied coverage. After the defendant failed to file an answer to the complaint, a
default was entered. A hearing was held on the issue of damages. The defendant failed to
appear at that hearing. After damages were determined in excess of policy limits and
judgment was entered against the defendant, the defendant assigned to the plaintiff his rights
against the insurer for denying coverage in exchange for a covenant not to execute. The
plaintiff thereafter filed an action against the insurer. The trial court granted judgment for
the plaintiff on the entire amount of the default judgment award. The insurer appealed
arguing, among other things, that it could only be held liable up to the policy limits. The
appellate court, applying North Carolina state law, believed that North Carolina would allow
recovery of the excess verdict, although no state court decision was on point. (See footnote 10)
Similarly, in Franco v. Selective Insurance Co., 184 F.3d 4 (1st Cir. 1999), the
plaintiff filed an action against the defendants for a work-related injury. The defendants'
insurer denied coverage. A default was entered against the defendants after they failed to
timely file an answer to the complaint. After entry of default, the parties entered into a
consent judgment. The defendants also assigned to the plaintiff their cause of action against
the insurer for failure to defend in exchange for a covenant not to execute the judgment
against them. The plaintiff thereafter filed an action in federal court against the insurer. The
district court entered judgment in favor of the plaintiff. On appeal, the appellate court
affirmed. In doing so, the appellate court noted in passing that the assignment was not void
because of the covenant not to execute. The decision stated that “[a]lthough there may be
some backlash developing in certain states against 'sweetheart' or 'sham' deals, the majority
of courts still accept these arrangements, at least where the insurer has wrongfully failed to
provide a defense and the settlement was reasonable and made in good faith.” Franco, 184
F.3d at 10.
The decisions in Gray and Franco stand for the proposition that, when an
insurer denies coverage and default is obtained against the insured, the insured may assign
his/her claim against the insurer to the plaintiff in exchange for a covenant not to execute.
Obviously, Gray and Franco are distinguishable from Mr. Strahin's case. Again, those
opinions address issues that have not been resolved by this Court.
6. Denial of Coverage, Pretrial Assignment and Covenant Not to Execute. In Mr. Strahin's reply brief he cited, without discussion, Egger v. Gulf Insurance Co., 903 A.2d 1219 (Pa. 2006), as support for his position. This case, however, is factually distinguishable from the case sub judice in that it involves a denial of coverage, pretrial assignment and covenant not to execute. In Egger, the plaintiff sued the defendant for wrongful death. The defendant had a general policy and an umbrella, or excess, policy. The insurer under the general policy believed that coverage existed and therefore provided a defense. However, the insurer for the excess policy denied coverage. Prior to trial, the defendant and general policy insurer entered into a settlement, whereby the plaintiff agreed not to enforce an award greater than the policy limits against the defendant in exchange for an assignment of the defendant's claim against the excess policy insurer. The jury returned a verdict in excess of the general policy limits. The plaintiff therefore filed an action against the excess policy insurer. The trial court granted judgment for the plaintiff. On appeal, the excess insurer argued that the assignment was void because of the covenant not to execute. The appellate court disagreed:
[The] primary insurer had tendered its full policy limit of
$1,000,000.00 on the day the jury was selected. [The plaintiff]
rejected that offer and demanded $1,600,000.00, thus
implicating Gulf's excess policy. Because Gulf opted to deny
coverage and not participate in the proceedings, any adverse
consequences arising from that decision, real or purported, do
not constitute increased risk arising from the assignment of the
policy.
Gulf's risk remained the same, regardless of whether [the
defendant below] or [the plaintiff] held the policy. That risk was
that a jury . . . would assess damages in an amount greater than
$1,000,000.00 for the fatal injuries. . . . Once . . . the original
insured[] acted negligently in causing the death . . ., the
bargained-for risk was realized and was not changed by the
assignment of rights. . . . The loss had occurred, and it remained
only for that loss to be liquidated through legal proceedings.
The Superior Court correctly rejected Gulf's argument
that the “loss” did not occur until the jury reached its excess
verdict. . . .
Accordingly, we determine that whether or not the
assignment was made prior to the jury verdict is irrelevant, as
the obligation of Gulf to provide excess coverage, in the event
of damages exceeding the limits of the primary policy, arose on
the date of the occurrence in 1997.
Egger, 903 A.2d at 1228-29.
Obviously, Egger contains facts unlike those in Mr. Strahin's case. In the Strahin case, Farmers provided a defense without a reservation of rights. Although the
majority opinion would appear to preclude an assignment under the facts of Egger, I do not
subscribe to this implicit holding by the majority opinion. That is, in the instant case, if
Farmers had denied coverage and failed to provide a defense, I would have been inclined to
follow the reasoning of Egger. (See footnote 11)
7. Coverage Affirmed, Pretrial Assignment and Covenant Not to Execute. As I have attempted to show throughout this concurrence, Mr. Strahin failed to cite any case
that squarely addressed the issue of a party seeking an excess verdict from an insurer when
there has been an assignment and covenant not to execute prior to a jury's determination of
liability and damages, and the insurer provided a defense without a reservation of rights. My
research uncovered only one case that is even close to the facts of Mr. Strahin's action.
In Critz v. Farmers Insurance Group, 41 Cal. Rptr. 401 (Dist. Ct. App. 1964), disapproved of on other grounds by Crisci v. Security Insurance Co., 58 Cal. Rptr. 13 (1967),
the plaintiff was injured by the insured in an automobile accident. Prior to filing a lawsuit
against the insured, the plaintiff attempted to settle the case with the insurer for the policy
limits of $10,000. The insurer, without informing the insured, rejected the offer and tendered
a counteroffer of $8,250. The plaintiff rejected the counteroffer and contacted the insured
directly. The plaintiff informed the insured of the rejection of the offer to settle for the policy
limits and that the insured would be at risk of an excess verdict. After this discussion, the
plaintiff and the insured entered into a “pre-suit” agreement, wherein the insured assigned
his rights against his insurer for bad faith failure to tender the policy limits in exchange for
the plaintiff agreeing not to execute the judgment against him. The plaintiff thereafter sued
the insured. After the suit was filed, the insurer learned of the agreement between the
plaintiff and the insured and offered to settle for the policy limits. The plaintiff rejected the
offer. A jury returned a verdict in favor of the plaintiff for $48,000. The plaintiff
subsequently sued the insurer to recover the excess verdict. The trial court rendered
judgment for the insurer on the grounds that the pre-suit assignment was invalid. A
California court of appeals reversed. In doing so, the following was tersely said regarding
the covenant not to execute:
One more contention should be noted. Defendant argues that the hold harmless clause, in effect a covenant not to execute against [the insured], prevented the latter from suffering any damage by reason of the personal judgment against him. If, as a trier of fact may find, the carrier violated its duty of good faith, the damage, however potential, occurred at that time. . . . [A] covenant not to execute is not a release. It did not blot out the personal judgment against [the insured] or extinguish his claim for breach of contract against the carrier.
Critz, 41 Cal. Rptr. at 410 (citations omitted).
Although the decision in Critz has been cited by a number of courts in other
jurisdictions, the decision does not appear to have ever been applied to a case that involved
seeking an excess verdict from an insurer, when there has been an assignment and covenant
not to execute prior to a jury verdict, in which the insurer provided a defense without a
reservation of rights. See Liberty Mut. Ins. Co. v. Davis, 412 F.2d 475 (5th Cir. 1969) (citing
to Critz in case involving post-default judgment assignment and covenant not to execute), abrogation recognized by Venn v. St. Paul Fire & Marine Ins. Co., 99 F.3d 1058 (11th Cir.
1996); Freeman v. Schmidt Real Estate & Ins., Inc., 755 F.2d 135 (8th Cir. 1985) (citing to
Critz in failure to procure coverage case against agent); Continental Cas. Co. v. Hempel, 4
Fed. Appx. 703 (10th Cir. 2001) (citing to Critz in context of consent judgment); Gray v.
Grain Dealers Mut. Ins. Co., 871 F.2d 1128 (D.C. Cir. 1989) (citing to Critz in case
involving post-default judgment assignment and covenant not to execute); Safeway Ins. Co.,
Inc. v. Botma, No. CIV00-553-PHX RCB, 2003 WL 24100783 (D. Ariz. Mar. 7, 2003)
(citing to Critz in context of stipulated judgment); Whitehead v. Van Leuven, 347 F. Supp.
505 (D. Idaho 1972) (citing to Critz in context of post-verdict assignment and covenant not
to execute); Shaw v. Botens, 278 F. Supp. 226 (D. Pa. 1967) (citing to Critz in context of
nonassigned direct action against insurer), rev'd, 403 F.2d 150 (3d Cir. 1968); National
Union Fire Ins. Co. of Pittsburgh v. Seafirst Corp., No. C85-396R, 0087 WL 959598 (W.D.
Wash. Mar. 25, 1987) (citing to Critz in context of stipulated judgment); Arizona Prop. &
Cas. Ins. Guar. Fund v. Helme, 735 P.2d 451 (Ariz. 1987) (citing to Critz in context of
consent judgment); Damron v. Sledge, 460 P.2d 997 (Ariz. 1969) (citing to Critz in context
of refusal to defend case); Cunningham v. Goettl Air Conditioning, Inc., 980 P.2d 495 (Ariz.
Ct. App. 1997) (citing to Critz in context of post-verdict assignment and covenant not to
execute), rev'd, 980 P.2d 489 (Ariz. 1999); State Farm Mut. Auto. Ins. Co. v. Peaton, 812
P.2d 1002 (Ariz. Ct. App. 1990) (rejecting Critz in context of stipulated default); State Farm
Mut. Auto. Ins. Co. v. Paynter, 593 P.2d 948 (Ariz. Ct. App. 1979) (citing to Critz in context
of refusal to defend case); Kelly v. Williams, 411 So. 2d 902 (Fla. Dist. Ct. App. 1982)
(rejecting Critz in context of stipulated judgment); U.S. Fid. & Guar. Co. v. Evans, 156
S.E.2d 809 (Ga. Ct. App. 1967) (citing Critz in suit by insured against insurer); Ledingham
v. Blue Cross Plan for Hosp. Care of Hosp. Serv. Corp., 330 N.E.2d 540 (Ill. App. Ct. 1975)
(citing Critz in suit by insured against insurer), rev'd, 356 N.E.2d 75 (Ill. 1976); Red Giant
Oil Co. v. Lawlor, 528 N.W.2d 524 (Iowa 1995) (citing to Critz in context of consent
judgment); Glenn v. Fleming, 799 P.2d 79 (Kan. 1990) (citing to Critz in context of post-
verdict assignment and covenant not to execute); Eyler v. Nationwide Mut. Fire Ins. Co., 824
S.W.2d 855 (Ky. 1992) (citing to Critz in context of refusal to defend case); State Farm Mut.
Auto. Ins. Co. v. Marcum, 420 S.W.2d 113 (Ky. Ct. App. 1967) (citing to Critz in context of
nonassigned direct action against insurer), overruled by Manchester Ins. & Indem. Co. v.
Grundy, 531 S.W.2d 493 (Ky. 1975); Rummel v. Lexington Ins. Co., 945 P.2d 970 (N.M.
1997) (citing to Critz in context of post-verdict assignment and covenant not to execute); Wangler v. Lerol, 670 N.W.2d 830 (N.D. 2003) (citing to Critz in failure to procure coverage
case against agent); Smith v. American Family Mut. Ins. Co., 294 N.W.2d 751 (N.D. 1980)
(citing to Critz in context of action by insured against insurer); Thornton v. Personal Serv.
Ins. Co., No. 2256, 1975 WL 180668 (Ohio Ct. App. July 30, 1975) (citing to Critz in context
of post-verdict assignment and covenant not to execute), rev'd, 358 N.E.2d 579 (Ohio 1976); Collins v. Fitzwater, 560 P.2d 1074 (Or. 1977) (citing to Critz in context of post-verdict
assignment and covenant not to execute), overruled by Lancaster v. Royal Ins. Co. of
America, 726 P.2d 371 (Or. 1986); Groce v. Fidelity Gen. Ins. Co., 448 P.2d 554 (Or. 1968)
(citing to Critz in context of post-verdict assignment and covenant not to execute); Brown
v. Candelora, 708 A.2d 104 (Pa. 1998) (citing to Critz in context of nonassigned direct action
against insurer); In re Loose Estate, No. 5115, 1968 WL 6866 (Pa. Orphan's Ct. Jan. 29,
1968) (citing to Critz in context of nonassigned direct action against insurer); Tip's Package
Store, Inc. v. Commercial Ins. Managers, Inc., 86 S.W.3d 543 (Tenn. Ct. App. 2001) (citing
to Critz in failure to procure coverage case against agent); State Farm Fire & Cas. Co. v.
Gandy, 925 S.W.2d 696 (Tex. 1996) (rejecting Critz in context of stipulated judgment); Garcia v. American Physicians Ins. Exch., 812 S.W.2d 25 (Tex. App. 1991) (citing Critz in
suit by insured against insurer for excess verdict), rev'd, American Physicians Ins. Exch. v.
Garcia, 876 S.W.2d 842 (Tex. 1994); Kobbeman v. Oleson, 574 N.W.2d 633 (S.D. 1998)
(citing to Critz in failure to procure coverage case against agent); Kagele v. Aetna Life &
Cas. Co., 698 P.2d 90 (Wash. Ct. App. 1985) (citing to Critz in context of refusal to defend
case).
In view of the foregoing, I respectfully concur with the majority's opinion in this case.