ASSIGNMENTS, CONSENT JUDGMENTS AND DOWSE SETTLEMENTS
Many lawsuits involving an insurer’s bad-faith failure to settle are brought by the claimant and not by the insured. Others are brought by both the claimant and the insured. Because a third-party claimant that lacks privity with the insurance company generally has no cause of action against the insurer for claims handling, a claimant who prosecutes a bad-faith claim generally does so by taking an assignment from the insured. Because liability policies have clauses forbidding the insured from assigning claims or settling claims without the insurer’s consent, such assignments can only be accomplished in certain situations.
Southern Guaranty Ins. Co. v. Dowse
The classic situation was presented in Southern Guaranty Ins. Co. v. Dowse. In that case, the claimant brought a lawsuit against a contractor who was insured under a commercial general liability policy. The insurer denied coverage and refused to defend. The claimant and insured entered into a settlement agreement, under which the insured withdrew its answer and allowed a default judgment to be rendered against it. The settlement agreement also provided that the claimant would not seek to enforce the judgment against the insured’s personal assets, but would limit its recovery to any amounts due under the insurance policy. The matter went to trial on damages.
Damages were awarded against the insured, and the claimant initiated a garnishment action directly against the contractor’s insurance company.The insurer argued that because the insured faced no liability under the settlement agreement, there was no indemnity obligation for the insurer to undertake. The insurer also argued that it was relieved of liability because the insured had breached policy provisions barring settlement without the insurer’s consent. The Supreme Court of Georgia rejected both defenses, holding that an insurer that refuses to defend based upon a belief that a claim against its insured is excluded from a policy’s scope of coverage “[does] so at its peril, and if the insurer guesses wrong, it must bear the consequences, legal or otherwise, of its breach of contract.” The Court continued as follows:
In Georgia, an insurer that denies coverage and refuses to defend an action against its insured, when it could have done so with a reservation of its rights as to coverage, waives the provisions of the policy against a settlement by the insured and becomes bound to pay the amount of any settlement within a policy’s limits made in good faith, plus expenses and attorneys’ fees.
Similarly, an insurer who denies coverage waives the provisions (common in most liability policies) barring coverage when the insured has made “voluntary payment” to the claimant. Furthermore, if an insurer refuses to defend a third-party action against its insured after timely notice, the insurer is bound to the issues adjudicated in the underlying suit against its insured.103 If the insurer is then sued for the refusal to defend or failure to pay a judgment entered against the insured, the insurer may not relitigate issues that form the basis for the judgment entered against its insured.
Trinity Outdoor, LLC. v. Central Mut. Ins. Co.
However, an insurer’s refusal to defend does not waive its right to contest whether the insurance policy provides coverage for the underlying claim. The insured may not unilaterally settle a lawsuit, however, if the insurer is defending the insured in the lawsuit but refuses to settle the lawsuit within policy limits. In Trinity Outdoor, LLC. v. Central Mut. Ins. Co., a billboard fell while it was being installed on Trinity’s property, killing two persons. Investigations ultimately determined that the manufacturer of the billboard was primarily at fault, though liability for Trinity could not be ruled out. A wrongful death action against Trinity and the manufacturer ensued, and Trinity’s insurer provided Trinity a defense. A mediation among all parties provided an opportunity to settle the liability against Trinity for less than its $2 million policy limits. The insurer attended the mediation and refused the opportunity to settle. Trinity, fearing a judgment in excess of policy limits, agreed to and paid the settlement. Trinity then sued its insurer, alleging, inter alia, negligent failure to settle and seeking indemnification for the settlement amount. The insurer defended itself by arguing that Trinity had breached the provision in the insurance policy barring insureds from making a “voluntary payment” without the insurer’s prior consent. The Supreme Court of Georgia agreed, holding that “an action for negligent or bad faith failure to settle a case requires that a judgment be entered against an insured in excess of the policy limits before the action can be asserted.” The court distinguished Dowse, in which the insured was “wholly abandon[ed]”, reasoning that Trinity’s insurer provided a defense and had not breached its duties so as to release Trinity from its duties as an insured. Accordingly, Trinity had no cause of action for bad faith as a matter of law.