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Respondent, Beecher Osborne, suffered an on-the-job injury while engaged in timbering operations for H&H Logging Company. Respondent sued H&H for deliberate intent. Respondent also sued two related companies for negligence–i.e., the landowner, Allegheny, and the company leasing the timber, Heartwood.
H&H requested a defense from its insurer, Penn-America, which is Petitioner herein. Penn-America refused, finding that deliberate intent claims were excluded from coverage under its policy. As part of its contractual obligations, H&H was also required to indemnify Allegheny and Heartwood. However, through oversight, a formal request for a defense on their behalf was never made. Instead, Allegheny’s insurer provided a defense for both.
Before trial, Respondent reached a settlement with Allegheny and Heartwood. The parties stipulated that Penn-America breached its duty to defend, and that Allegheny and Heartwood suffered damages as a result of that breach. Allegheny and Heartwood entered into a $1,000,000 consent judgment and assigned to Respondent any and all bad faith claims they possessed. For his part, Respondent covenanted that he would not execute on the judgment. Penn-America, however, was not notified of the settlement.
Thereafter, Respondent sued Penn-America directly. Penn-America denied liability, citing its lack of notice and challenging the reasonableness of the $1,000,000 consent judgment. The trial court prevented Penn-America from engaging in discovery relating to Respondent’s injury and, instead, granted summary judgment in Respondent’s favor. Penn-America appealed.
The Supreme Court addressed two issues: (1) whether the $1,000,000 consent judgment was binding against Petitioner, Penn-America; and (2) whether the assignment of the bad faith claims was valid.
To begin with, the Supreme Court stressed the “suspect nature of consent judgments.” The Court observed that none of the parties to the settlement had any real motive to contest liability or the amount of Respondent’s damages. Furthermore, there was no proof in the record supporting the $1,000,000 figure, and the trial court’s rulings prevented Penn-America from conducting any discovery to determine the nature and scope of Respondent’s injuries. Finally, the Court noted that Penn-America was not a party to the underlying litigation and had no knowledge of the settlement. In light of these facts, the court applied syllabus point 7 of Horkulic v. Galloway, 222 W.Va. 450, 665 S.E.2d 284 (2008):
“A consent or confessed judgment against an insured party is not binding on that party’s insurer in subsequent litigation against the insurer where the insurer was not a party to the proceeding in which the consent or confessed judgment was entered, unless the insurer expressly agreed to be bound by the judgment. Therefore, an attack on the consent or confessed judgment in the subsequent litigation by an insurer who did not expressly agree to such judgment is a permissible direct, not collateral, attack on the consent or confessed judgment.”
Next, the Supreme Court addressed the validity of the assignment. Pretrial assignments, especially when coupled with a covenant not to execute, entail “a great risk of fraud and confinement.” This issue was dealt with previously in Strahin v. Sullivan, 220 W.Va. 329, 647 S.E.2d 765 (2007), where the Court held in syllabus point 9:
“In order for an insured or an assignee of an insured to recover the amount of a verdict in excess of the applicable insurance policy limits from an insurer pursuant to this Court’s decision in Shamblin v. Nationwide Mutual Ins. Co., 183 W.Va. 585, 396 S.E.2d 766 (1990), the insured must actually be exposed to personal liability in excess of the policy limits at the time the excess verdict is rendered.”
The Court, of course, recognized that Strahin was limited to situations involving excess verdicts. However, the Court extracted a general principle from Strahin which, it said, was “simply this: recovery of an assigned insurance bad faith claim may not be made upon an untrue factual basis.”
In reviewing the surrounding facts, the Court found that there were multiple falsehoods. First, it was alleged that Allegheny and Heartwood entered into the assignment to protect their assets when, in fact, another insurer was providing coverage. Second, it was falsely alleged that the insurance coverage issue had been raised by means of a third party complaint in the underlying case. The Court also questioned the legitimacy of the $1,000,000 damage figure and criticized Respondent for concealing the ongoing negotiations and settlement from Penn-America. Accordingly, the trial court erred in enforcing the assignment.
In light of its disposition of these two issues, the summary judgment order was reversed the case was remanded to the trial court with directions to enter judgment for Petitioner, Penn-America.
This case stands as a warning to plaintiffs: don’t be over anxious to resolve cases with underlying coverage issues by means of a consent judgment and/or an assignment. The Supreme Court has sent a clear message: it will carefully scrutinize these kinds of settlement arrangements and any kind of “falsehood” could be enough to render the entire settlement void.