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November 25, 2008

This is one of a series of articles originally published in Mealey’s Litigation Report: Insurance Bad Faith, Vol. 22, #14, page 28 (November 25, 2008). © 2008

[Editor’s Note: Julius F. “Rick” Parker III is a senior associate with the law firm of Butler Weihmuller Katz Craig LLP with offices in Tampa, Tallahassee, Miami, Mobile, and Charlotte. He is an experienced trial lawyer in the firm’s Third-Party Coverage and Extra-Contractual Departments. This commentary, other than the quoted material, is the author’s opinion; not his law firm’s, and not Mealey’s Publications’. Copyright © 2008 by the author. Responses are welcome.]

The scene is all too familiar: an insured, disenchanted with its insurer’s refusal to defend an action the insured believes is within coverage, decides to enter into a “consent judgment” with the plaintiff, in return for which, the plaintiff agrees only to pursue satisfaction of the “judgment” against the insurer. Some form of this type of judgment is recognized in almost every jurisdiction in the United States,1 and generally referred to by any number of monikers, generally based upon the “seminal” case in that jurisdiction. See, e.g., Coblentz v. Am. Surety Co. of New York, 416 F.2d 1059 (5th Cir. 1969). While the names may change, the agreements are unwaveringly uniform. The critical aspects of these judgments are: 1) entry into a judgment purporting to represent a reasonable settlement of the claim; 2) an agreement not to execute on the judgment against the insured; 3) an assignment of any and all claims the insured may have against the insurer under the insurance policy; and 4) an agreement to satisfy the judgment upon conclusion of the contemplated litigation against the insurer. In addition, every jurisdiction recognizes the inherent potential for fraud and/or collusion in such judgments and, accordingly requires that they be reasonable in amount and entered into in good faith.2 The question which seems to be left open in virtually every jurisdiction, however, is what happens if the judgment is found either to be unreasonable in amount or entered into in bad faith.

One of the best examples of how consent judgments are treated emanates from a Florida intermediate court. See Steil v. Fla. Physicians Ins. Reciprocal, 448 So. 2d 589 (Fla. 2d DCA 1984). Steil involved a medical malpractice case in which the insured physician entered into a consent judgment following a denial of defense by the insurer. The insurer defended the judgment on the ground that entering into the settlement violated the “no action” clause of the policy, prohibiting the insured from entering into settlements without the insurer’s consent. The court held that, because the insurer wrongfully refused to defend, it could not rely on that provision of the policy. However, the court also held that the judgment was only enforceable against the insurer in the event it was entered into in good faith and was reasonable in amount.3

From that situation, the court crafted the procedure followed by virtually ever state in the nation:

… [I]n the instant case or one involving a consent judgment with a covenant not to execute, the settlement figure is more suspect. The conduct of an insured can hardly be characterized as fraudulent simply because he stipulates to a large settlement figure in order to obtain his release from liability. He has little or nothing to lose because he will never be obligated to pay. As a consequence, the settlement of liability and damages may have very little relationship to the strength of the plaintiff’s claim. Due to this problem, the ordinary standard of collusion or fraud is inappropriate…. Thus, we hold that in a case such as this, a settlement may not be enforced against the carrier if it is unreasonable in amount or tainted by bad faith. Moreover, because the circumstances surrounding the settlement will be better known to the party seeking to enforce it, he should assume the burden of initially going forward with the production of evidence sufficient to make a prima facie showing of reasonableness and lack of bad faith, even though the ultimate burden of proof will rest upon the carrier.

Steil, 448 So. 2d at 592 (emphasis added). See also, Griggs v. Bertram, 443 A.2d 163 (N.J. 1982).

This procedure makes logical sense. Proving coverage is uniformly the burden of the insured. Thus, requiring the insured to come forward with evidence that the consent judgment was reasonable in amount and entered into in good faith properly belongs to the insured. However, since the insurer is usally seen to have abandoned its insured, shifting the ultimate burden of persuasion to the insurer to prove that the judgment was unreasonable in amount or entered into in bad faith also makes logical sense. This is, after all, an affirmative defense. But the opinions which address this question all simply state that such judgments can only be enforced against the insurer if they are reasonable in amount and entered into in good faith. Does this mean that the converse is also true, i.e., that consent judgments which are found to be unreasonable in amount or entered into in bad faith leave the plaintiff with no recovery whatsoever? It appears the answer to that question, at least in every state other than Iowa or Missouri, is, “Yes.”

It is frankly surprising that the plaintiffs’ bar has not mounted a better attack on the insurance industry in this area of the law. Considering the fact that an absolute prerequisite to prevailing on a consent judgment is that the claimant prove both that the policy covers the underlying claim and that the insurer wrongfully refused to defend its insured, a procedure which leaves a claimant with no recovery at all despite the existence of coverage seems harsh. But, as the courts have routinely recognized, the potential for collusion and fraud in such situations is so high that requiring good faith and reasonableness is the only way to keep such conduct at bay. However, courts in Iowa and Missouri have both created a third alternative, namely that the finder of fact can determine what a reasonable amount would have been and impose that figure on the non-defending insurer. A close examination of those opinions reveals the fallacy of allowing such an ex post determination to be made.

The first court to allow the fact finder to determine what amount should be enforced against the insurer was the Missouri supreme court. See Gulf Ins. Co. v. Noble Broadcast, 936 S.W.2d 810 (Mo. 1997). In Noble Broadcast, the insured, a radio station, was sued by a parade bystander who was injured when the station’s van ran over her foot. After the station’s insurer declined to defend the suit, the claimant and the station entered into a consent judgment in the amount of $1,000,000, complete with a covenant not to execute and an assignment of the station’s rights as against the insurer. In a preemptive declaratory judgment action filed by the insurer, the trial court found the agreement unreasonable in amount and therefore refused to enforce it. On review by the supreme court, the court adopted the same test of reasonableness as the Florida court in Steil. However, for the first time, it addressed what effect a finding of unreasonableness should have:

Finally, this Court must determine an appropriate process for disposition of a case in which the settlement agreement is judged to be unreasonable. There are two possibilities. First, the court, after holding an agreement unenforceable, could release the insurer from any liability. Alternatively, the trial court, acting as the finder of fact, could determine a reasonable settlement amount for which the insurer should be held liable. This Court concludes that the second of the possibilities is the more fair. This requires that the case be remanded. The question of what constitutes a reasonable settlement in this case would have been necessarily addressed, at least in part, by implication in the determination that the settlement amount was unreasonable. The question may, however, require further argument by the parties. Whether such argument is helpful in this case is left to the sound discretion of the trial court to determine on remand before making a finding of a reasonable settlement amount for which the insurer should be held liable.

Noble Broadcast, 936 S.W.2d at 816—17.

The following day, the supreme court of Iowa addressed the same question, apparently without any knowledge that the Missouri supreme court had just addressed it. See Six v. American Family Mut. Ins. Co., 558 N.W.2d 205 (Iowa 1997). Six involved a claimant, injured in a motor vehicle accident, who took an assignment of the insured’s rights as against its insurer in a typical consent judgment. The trial court submitted the issue of reasonableness to the jury, which found the judgment to be unreasonable in amount. On appeal, the claimant argued that the insurer should still be held liable for the amount of a reasonable settlement. The court sympathized with that position, explaining simply:

American Family suggests in its argument that the insurance company’s liability is extinguished when a negative finding is made concerning whether a settlement is reasonable and prudent. We disagree with that contention. We are convinced that, if coverage exists, an insurer that declines to defend a claim continues to be liable to hold its insured harmless for that portion of the stipulated judgment that represents a reasonable and prudent settlement.

Six, 558 N.W.2d at 207. Thus, in the Six case, the appellate court remanded for the court to determine a reasonable settlement and enforce that amount against the insurer.

Noble Broadcast has been followed in Missouri. See, e.g., Auto Owners Ins. Co. v. Ennulat, 231 S.W.3d 297 (Ct. App. Mo. 2007). However, the Six opinion appears to be an island unto itself, which has not been followed by any subsequent court and has only been mentioned by one other reported decision. See B.M. Co. v. Avery, 2001 WL 1658197 (Guam. Terr. 2001). Due to the fact that the decisions were released within twenty-four hours of each other, their silence each as to the other is no mystery. Given the eleven years which have passed since the decisions were released, the likelihood that they might open the floodgates to collusive settlements, at least outside Missouri or Iowa, is low.

Perhaps the best explanation for why these decisions represent such a minority approach comes from the enigmatic logic on which they appear to be based. When an insurer denies coverage and refuses to defend its insured (whether based on a valid or invalid reason), the alignment of the parties changes. No longer is the defendant adversarial to the claimant. Rather, both the claimant and the defendant become adversarial to the insurer. Even the most honorable insured will be tempted to consent to a much larger number than he would if he were to remain responsible for satisfying the judgment. As the recent financial debacle has amply demonstrated, when one takes risks with other people’s money, the level of care exercised tends to decrease. Just ask any shareholder in Enron, Worldcom, Tyco, Lehman Brothers or Washington Mutual.

The only other approach taken by courts to this problem is that adopted by the Court of Appeals of California in Pruyn v. Agricultural Ins. Co., 42 Cal. Reptr. 2d 295 (Ct. App. Cal. 1995). Pruyn crafted an elaborate procedure by which the claimant seeking to impose the consent judgment on the insurer must prove the amount of a settlement which the insured would have agreed to had he remained personally liable for the judgment. While that procedure is superficially appealing, it suffers from the same lack of true adversarial conflict which any consent judgment lacks. As the Texas supreme court explained when it critized the Pruyn decision:

The procedure required by Pruyn to enforce an agreed judgment against an insurer is, to be generous, complicated. Its goal is to determine what judgment would have been rendered against an insured, or what settlement he would have agreed to, had he remained personally liable to plaintiff. Put another way, the inquiry is what result would plaintiff and defendant have reached had they remained fully adversarial to the end. The validity of the holdings in Griggs, 443 A.2d at 163 (New Jersey), Red Giant, 528 N.W.2d at 524 (Iowa)4, and other cases that uphold prejudgment assignments of claims against insurers is based on the premise that this inquiry is answerable. We think it is not, and that Pruyn shows why. It is one thing to say that a defendant’s liability must be determined as if he had not settled with the plaintiff; it is quite another thing to do it. We think Pruyn’s listing of factors to be considered in the process of assessing a defendant’s liability after he has settled shows that the undertaking is virtually impossible. Once the parties have changed positions, their views are altered, and it is very difficult to determine what might have been.

State Farm Fire & Cas. Co. v. Gandy, 925 S.W.2d 696 (Tex. 1996)(footnote added)(emphasis in original). Thus, in Texas, even if the insurer wrongfully refuses to defend its insured, the only liability which can be imposed on the insurer is that which is reached after a truly adversarial adjudication of liability. Given the recognition of the parties’ altered motives after a denial of defense, this may be the only approach that makes true logical sense.

The Texas approach recognizes that, even if the parties litigate the case, in the event there is any agreement by the claimant not to seek satisfaction of the judgment from the insured, the insured is insulated from further liability and therefore has no incentive to defend the case vigorously. Thus, the possibility of a sham trial is as real as the possibility of a sham settlement. In short, it is not the fact that the parties have resolved the claim between themselves which raises the spectre of fraud and collusion; rather it is the fact that once the claimant agrees to pursue only the insurer, the insured loses all incentive to defend. In the event the liability proves to be catastrophic and the insurer has indeed wrongfully refused to defend, in most cases the judgment will be recoverable in full from the insurer under bad faith principles.

It is therefore clear that the Iowa and Missouri approaches to consent judgments cannot be justified logically. If the insured and the claimant know that the only consequence for colluding to create an inflated judgment to be recovered from the insurer is the possibility of a remittitur of the judgment to a “reasonable” sum, there will be no limit on the amount to which insureds will confess judgment. The risk of agreeing to too little would be far more costly than the risk of agreeing to too much. Thus, in every case, “settlement” of the case accomplishes nothing. It is merely one more step to recovering from the insurer, something which will require presentation of all the evidence necessary to prove the case in the first instance against the defendant. If the courts’ goals were to encourage settlement (and they are notably silent as to the true rationale of their decisions), they failed miserably. As the old adage goes, the road to Hell is paved with good intentions.

The final logical misstep taken by those courts is the failure to recognize that a trial in which the insurer is the defendant rather than the insured runs afoul of the rule applicable in most states that the fact finder may not be apprised of the existence of insurance available to satisfy a judgment against the defendant. The logic behind that rule is obvious: it encourages the fact finder to increase the award to the plaintiff because it is not the defendant’s assets which are at risk. True, an insurer which actually abandons its insured in the face of a clear duty to defend should arguably lose that protection, but the potential for an inflated recovery remains. If the fact-finder is purporting to decide what a reasonable judgment should have been, its knowledge that the insurer is paying the judgment will unquestionably affect its judgment whether consciously or sub-consciously.

The conclusion is clear: where a jury finds that the insured and a claimant conspired to enter into an inflated or unreasonable judgment to recover from the insurer, the judgment should not be enforced, period. Insurers have long been forced to exercise the utmost “good faith” toward their insureds. Imposing that reciprocal obligation upon insureds makes perfect sense. As Benjamin Franklin said over two hundred years ago, “There is no kind of dishonesty into which otherwise good people more easily and frequently fall than that of defrauding the government.” Had he lived to see the proliferation of insurance, surely he would have said the same of that institution.


    1. A small minority of jurisdictions refuse to recognize such agreements, instead requiring that the claimant and insured actually litigate the claim to judgment. See, e.g., State Farm Fire & Cas. Co. v. Gandy, 925 S.W.2d 696 (Tex. 1996), and cases cited therein.
    2. This article does not address the issue of whether consent judgments which exceed the limits of the insurance policy may be enforced against the insurer as a consequence of its failure to defend. The approaches to that question are as varied as the number of jurisdictions considering it.
    3. Many of the opinions use the phrases “without fraud or collusion” and “reasonable in amount and entered into in good faith” interchangeably. There does not appear to be any meaningful distinction made between the two in the decisions.
    4. The Red Giant decision formed the basis for the Noble Broadcast opinion.