|
|  |
|
|
This Week's Feature
Timing Is (Almost) Everything: Potential Exposure in Cases Involving Assignments and Covenants Not to Execute
By Louis C. Long
When a plaintiff grants a covenant not to execute against an insured’s personal assets in exchange for an assignment of the insured’s rights to proceed against the insurer, can the plaintiff recover from the insurer the entire amount of a subsequent judgment in excess of policy limits? The West Virginia Supreme Court of Appeals — customarily a court antagonistic to the interests of the insurance industry — surprisingly responded in the negative in Strahin v. Sullivan, 2006 W.Va. LEXIS 6 (W.Va. February 21, 2007).
Although the court significantly reduced the potential exposure of insurers under such pre-judgment assignments, the opinion implicitly instructs the plaintiffs’ bar how to avoid the impact of the limitation imposed by the case. Thus, when a post-judgment assignment is granted in exchange for a covenant not to execute, it appears that plaintiffs in that jurisdiction can still pursue liability insurers to recover for verdicts that exceed the policy limits.
Strahin was shot while he was a passenger in Sullivan’s automobile. The gun was fired by Cleavenger, who was jealous of the relationship between Sullivan and Strahin’s sister, another occupant of Sullivan’s vehicle. Strahin alleged Cleavenger’s actions were foreseeable by Sullivan due to prior physical confrontations between Cleavenger and Sullivan and, as such, Sullivan’s negligence proximately caused Strahin’s injuries. During the litigation, Strahin demanded the limits of Sullivan’s homeowner’s policy, but the insurer refused to settle. Before trial, Strahin and Sullivan entered into an assignment and covenant not to execute whereby Strahin received $25,000 from Sullivan’s automobile insurer and an assignment of his rights to proceed against the homeowner’s insurer in exchange for the covenant not to execute against Sullivan’s personal assets. The jury found Sullivan to be negligent and it awarded Strahin over a million dollars. After the judgment was affirmed, the homeowner’s insurer paid its limit of $100,000. However, Strahin proceeded against it to collect the remainder of his excess judgment. The trial court granted summary judgment in favor of the homeowner’s insurer, reasoning that, at the time of the assignment, the insured’s assets were no longer at risk due to the simultaneous covenant not to execute. The West Virginia Supreme Court agreed.
Strahin v. Sullivan endorsed the practice of allowing insureds to assign their rights to plaintiffs in order to escape their own liability. “However, the mere assignment of rights does not translate into automatic recovery,” the court said. Rather, the plaintiff-assignee must still satisfy all of the essential elements of the cause of action assigned.
In Strahin, the plaintiff-assignee was pursuing a claim under Shamblin v. Nationwide Mutual Insurance Co., 183 W.Va. 585, 396 S.E.2d 766 (1990). Shamblin held that an insurer acted in bad faith toward its insured and, thus, was required to pay the entire excess verdict when the insurer failed to discharge the insured’s liability through settlement within applicable policy limits. In Strahin, the court explained that “[b]y coupling the assignment . . . with a covenant not to execute prior to trial and thus prior to an excess verdict the Shamblin claim was extinguished.”
In Shamblin, the court adopted a hybrid negligence-strict liability standard of proof to be used in actions by an insured against an insurer that fails to settle third-party liability claims within policy limits. Under Shamblin, the insured has a prima facie case of bad faith against the insurer if the insurer fails to discharge the insured’s liability through settlement within policy limits and the eventual verdict exceeds the limits of the policy. The burden then shifts to the insurer to prove by clear and convincing evidence that it attempted in good faith to negotiate a settlement, that any failure to enter into a settlement was based on reasonable and substantial grounds and that it accorded the rights of the insured equal respect with its own rights. In Shamblin, the court articulated other factors, which are not germane here, that the trial court should consider in assessing whether the insurer’s efforts to settle were reasonable.
As in any other negligence action, an insured pursuing a Shamblin claim must prove that the negligence of the insurer was the proximate cause of harm. Such harm occurs, in a typical Shamblin case, because the insured’s personal assets are placed at risk through a verdict that exceeds the insurer’s policy limits. In Strahin, the court reiterated the proposition that the Shamblin doctrine was created to protect policyholders who purchase insurance to safeguard their hard-won personal estates and then find those estates needlessly at risk because of the intransigence of an insurance carrier.
In Strahin, the covenant not to execute protected the insured’s assets from the risk of an excess verdict. Not only did the plaintiff agree never to execute, but he also agreed not to record the judgment against the insured. Thus, the West Virginia Supreme Court of Appeals held the insured was not “injured” when the jury returned a verdict against him that exceeded his insurance coverage. In short, his assets were protected by the covenant. Accordingly, an essential element of the Shamblin claim — injury to the insured — was lacking.
In so holding, the Strahin court made it clear that its ruling was not limited to situations in which the insurer defends the insured, but neglects to settle the claim against him. The court favorably cited In re Tutu Water Wells Contamination Litigation, 78 F. Supp. 2d 423 (D.V.I. 1999), a case involving a consent judgment entered against an insured after the insurer refused to defend. The consent judgment, which exceeded policy limits, included an assignment of the insured’s rights to proceed against the insurer. The court in Tutu Water Wells recognized an important distinction in the case law relative to recoveries in excess of policy limits. According to Tutu Water Wells, the cases that permit recovery in excess of limits all involved post-judgment assignments; whereas, those that did not allow any such recovery involved assignments before the entry of the consent judgment. 78 F. Supp. 2d at 432. This distinction was important, the Tutu Water Wells court said, because the judgment creditor must assert the insured’s injury and no such injury exists if the judgment cannot be enforced against the insured. Id.
“Tutu supports our earlier conclusion that absent personal liability on the part of the insured for the excess verdict, there can be no Shamblin claim,” the Strahin court explained. Because the parties executed the covenant before the jury rendered its verdict, the resulting judgment was not enforceable against the insured.
The court in Strahin further opined “that holding an insurer liable for a judgment even when the insured is not legally liable for the same only encourages collusion between the insured and the plaintiff to raid the insurance proceeds.” The court added that an insured who is protected by a covenant not to execute obviously loses the incentive to contest liability. “While there was no allegation of collusion between [the parties] in this case, we believe that public policy as well as case law dictate that when an insured’s personal assets are not at stake at the time a verdict in excess of the applicable insurance policy limits is rendered, there is no cause of action pursuant to Shamblin,” the court concluded.
The court in Strahin adopted the rule that in order for an insured or his assignee to recover the entire amount of an excess verdict from the insurer pursuant to the decision in Shamblin, the insured must actually be exposed to personal liability in excess of policy limits at the time the excess verdict is rendered. Because this particular insured was protected by a pre-judgment covenant not to execute, the court affirmed the summary judgment entered in favor of the insurer.
The lesson to be learned from Strahin v. Sullivan is that any covenant not to execute against an insured’s personal assets should only be granted after the court enters an excess verdict. Otherwise, the assignment of the insured’s rights to sue the insurance company for bad faith in refusing to settle the case may be an empty promise. For example, insurers with low limits of liability will no longer be exposed to a potentially monstrous excess verdict if the assignment of rights and covenant not to execute came into existence before the entry of the huge judgment. Until the plaintiffs’ bar learns to postpone the creation of such arrangements until after the excess verdict is entered, insurers may enjoy a brief respite from one source of bad faith liability.
Louis C. Long
Pietragallo Bosick & Gordon, LLP
Pittsburgh, PA
lcl@pbandg.com
|
|
| |
|
|
|
