Assignments of Bad Faith Claims, Stipulated Judgments and Covenants not to Execute

Posted by: on Thu, Nov 05, 2015

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There are numerous cases involving an assignment of
the insured’s bad faith claim against the insurer to the plaintiff, which include a
stipulated judgment and covenant not to execute. Some insureds justifiably ask if they could potentially be liable for some type of collusion by the carrier.

The following quotation from the California Supreme Court summarizes the general principles of law involved in analyzing these issues.  In the case of Samson v. Transamerica, quoted below, Transamerica claimed the entire procedure leading up to the stipulated settlement plan and covenant not to execute constituted a bad faith conspiracy by the insured and
the plaintiff.  The Supreme Court of California disagreed, and explained
that:

 

“The problem with this contention is that Transamerica has
not shown that any of the parties (except Transamerica itself) breached any
duty or in any way acted improperly in the conduct of this lawsuit.  It is
true that the insurance contract imposes a duty of good faith and fair dealing
on the insured as well as the insurer (citations omitted) .  However, as
discussed above, Bagle’s duty to notify Transamerica of the lawsuit ceased when
the insurer denied coverage. (citations omitted).

In addition, this court and the Court of Appeal have
frequently held than an insured breaches no duty to the insurance company when
he assigns his rights against the company to the injured plaintiffs in return
for a covenant not to execute.  “Where the insurer has repudiated its
obligation to defend, a defendant in the absence of fraud may, without
forfeiture of his right to indemnity, settle with the plaintiff upon the best
terms possible, taking a covenant not to execute.”  (citations omitted).

When the insurer “exposes its policyholder to the sharp
thrust of personal liability” by breachings its obligations, the insured “need
not indulge in financial masochism….” (Citations omitted).  See Samson
v. Transamerican Insurance Company
30 Cal. 3d 220 (1981).

These and other California cases illustrate that the conduct necessary
to permit an insurer to avoid liability for alleged fraud and collusion is very
extreme.  For example, in Lipson v. Jordache Enterprises, Inc. , 9
Cal. App. 4th 151 (1991), the parties amended the complaint just
four days before trial to include a cause of action for defamation in order to
bring the action within the insurer’s policy overage.  By the time the
insurer was given notice of the amended complaint and attempted to provide a
defense, judgment had already been rendered against its insured.

Insureds should remember that until a written denial letter
arrives from the Insurance Carrier denying a particular claim, the insureds still have a duty to
provide the insurer with pertinent information about the status of the case,
including settlement offers.  Your attorneys will also have the carefully analyze the particular facts of your specific situation, and also consider the various applicable factors to weight the strength of the bad faith claim against the insurer.

About the Authors: The law firm of Albright, Stoddard, Warnick & Albright is an A-V Rated Nevada-based full-service law firm having attorneys licensed in Nevada, California and Utah.  Our firm’s practice includes a strong emphasis on construction law, contracts and litigation in the jurisdictions where we are licensed.

Note: This article, and any other information you obtain at this website, is not offered as legal advice, nor should it be relied upon as such, nor is it a solicitation for legal services.  Only a licensed attorney can advise you with respect to your specific legal needs. We welcome your contacting our firm to discuss such representation.  Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.

 

About the Authors: The law firm of Albright, Stoddard, Warnick & Albright is an A-V Rated Nevada-based full-service law firm having attorneys licensed in Nevada, California and Utah. Our firm’s practice includes a strong emphasis on personal injury accidents. Call us at 702-384-7111.

Note: This article, and any other information you obtain at this website, is not offered as legal advice, nor should it be relied upon as such, nor is it a solicitation for legal services. Only a licensed attorney can advise you with respect to your specific legal needs. We welcome your contacting our firm to discuss such representation. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.