Assignment of claim against insurer with agreement not to execute: GARCIA, M.D. V. ASSOCIATED INS. SERVICE, INC. (COA 12/14/2007)


DATE RENDERED: 12/14/2007

This appeal arises from a personal injury claim by the Garcias against the Star of Louisville who was defended by its liability carrier, HIH Casualty and General Insurance, Ltd. (HIH).   While the litigation was pending, HIH declared bankruptcy, withdrew its defense of the Star and, in effect, repudiated coverage. Suddenly faced with the prospect of a large, uninsured liability, the Star negotiated a settlement with the Garcias in exchange for the Garcias’ promise to “forbear” seeking enforcement against the Star.  As part of this settlement, Star assigned its claims against Star’s insurance agent, Associated Insurance Service, Inc. (Associated), an insurance agency operating in Louisville.  Associated then filed a third-party complaint against AON Risk Services Inc. of Ohio (AON).

COA disagreed with the trial court, reversing the summary judgement, and held that the Star’s assignment of its claims against Associated and AON was valid, remanding the matter for further proceedings.

The trial court erred by disallowing as a matter of law the assignment of the Star’s claims against its insurance agent and broker. Although the trial court’s ruling focused on the assignment of the Star’s claims, Associated and AON attack other aspects of the Garcias’ settlement with the Star as well.  In light of these additional contentions, it is useful to begin by noting that the type of settlement at issue here, in a closely related context, has already received widespread judicial approval.

Where an insurer denies coverage of a claim against its insured, refuses to defend, or unreasonably refuses to settle, the insured, to protect itself against the threatened out-of-pocket loss, will frequently have a strong incentive to settle with the plaintiff. Such settlements often take the form of a stipulated judgment against the insured, the insured’s assignment to the plaintiff of its claims against the insurer, and the plaintiff’s agreement not to seek execution of the judgment against the insured. 

Although each of the elements of these agreements has been challenged, these agreements have been widely upheld. See Note, “Judicial Approaches to Stipulated Judgments, Assignments of Rights, and Covenants not to Execute in Insurance Litigation,” 47 Drake L. Rev. 853 (1999).  In Kentucky, although the law in this area is sparse, our highest Court has approved an insured’s assignment of his claims against his insurer. Terrell v. The Western Casualty & Surety Company, 427 S.W.2d 825 (Ky. 1968); Grundy v. Manchester Insurance & Indemnity Company, 425 S.W.2d 735 (Ky. 1968).

However, where an insured’s exposure is not attributable to the insurer, or where, as in this case, the insurer is insolvent, an obvious variation on the above agreement is for the insured to assign his claims against some other entity, such as an insurance agent allegedly responsible for the failure of coverage. In the context of such settlements, assignments of claims against allegedly negligent insurance agents have also been upheld. Stateline Steel Erectors, Inc. v. Shields, 837 A.2d 285, 288 (N.H. 2003).  Associated and AON challenge this settlement not only as an invalid assignment, but contend as well that the Garcias’ agreement not to execute against the Star undermined the purported assignment. They further contend that the judgment—the arbitrator’s ruling against the Star—may not be employed against them as a binding measure of the Star’s purported damages.

As the trial court correctly noted, the general rule in Kentucky is that tort claims for personal injuries may not be assigned. State Farm Mutual Automobile Insurance Company v. Roark, 517 S.W.2d 737 (Ky. 1974). The trial court believed that this rule extended to all tort-based claims. Further convinced that the Star’s malpractice like claims against its agent and broker sounded in tort, it concluded that those claims 
were not assignable. However, in Grundy v. Manchester Insurance & Indemnity Company, supra, however, our state’s highest Court indicated that tort claims could be assigned “for torts which are founded upon contracts and grow out of the contractual relations between the parties" and upheld an insured’s assignment of his bad-faith-settlement claim against his insurer on the ground that the duty of good faith the insurer allegedly breached arose from the insurance contract. Likewise, the duty of care Associated and AON allegedly breached arose from their contracts with the Star and the alleged breaches gave rise to purely economic injury. Thus, under Grundy, the Star’s claims are assignable.

In sum, notwithstanding the fact that the agent is providing a “personal” service, the insured-agent relationship is a simple, commercial transaction not genuinely comparable to the highly personal relationship between attorney and client and therefore not subject to the same bar against the assignment of malpractice claims and does not raise the public policy concerns courts have noted in the attorney-client context .

There was nothing improper in the Star’s seeking to protect its suddenly uninsured assets from a potentially ruinous judgment, or in the Garcias seeking to translate their claim against the Star into real rather than nominal but uncollectible relief.

The real problem is simply that, by insulating the Star from execution, the settlement left the parties not truly adverse. Strangers to the agreement, therefore, such as Associated and AON, have no assurance that the Garcias’ claims, particularly the amounts of their damages, have been scrutinized and tested. With all due respect for the arbitration in this case, an arbitrator’s opinion simply cannot substitute for the thorough adversarial vetting upon which our system was founded.  Tort victim-assignees of claims against insurance agents bear the burden of proof on the assigned claims and that the insurance agents, “who were not parties to the settlement agreement, cannot be bound by its terms.” Stateline Steel Erectors, Inc. v. Shields, 837 A.2d at 289; Campione v. Wilson, supra. To recover against the insurance agent/broker, furthermore, the assignee must prove the elements of its assigned malpractice claim, including the fact of the insured-assignor’s injury.

In conclusion, the Star’s malpractice claims against its insurance agent and insurance broker were assignable to the Garcias notwithstanding the tort-like elements of 
the claims, the personal-services nature of the Star’s relationships with its agent and broker, and the Garcias’ agreement not to seek execution against the Star. The trial court erred, therefore, by dismissing the Garcias’ assertion of those claims on the ground that they were not assignable.   

On remand, the Garcias will bear the burden of proving the damages from the assigned malpractice claims, including the fact that the Star was injured by the alleged malpractice. Neither the Garcias’ agreement not to seek execution against the Star nor the arbitrator’s ruling against the Star will be probative with respect to that injury.

Michael Stevens

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