In a much anticipated decision, the Texas Supreme Court has given direction to policyholders and third-party plaintiffs on the circumstances under which a judgment entered against the policyholder will be recoverable from the judgment debtor’s insurer. The case is important to insureds defending against third-party claims because it offers instruction on how to transfer liability appropriately to an insurer for an adverse judgment. The decision is equally important to plaintiffs seeking to maximize recovery of judgments against parties, whose greatest asset may be a liability policy.
In Great American Insurance Company v. Hamel, 2017 WL 2623067 (Tex. June 16, 2017), homeowners obtained a judgment against a builder for defective workmanship in a bench trial held after the homeowners agreed with the builder not to pursue the builder’s owner or the owner’s personal assets in satisfaction of a judgment entered against the builder. After trial, the builder assigned all claims against its liability carrier, who had previously denied coverage, to the homeowners. In the ensuing coverage litigation, the homeowner-assignees, the Hamels, and the builder’s liability insurer, Great American, fought over whether the judgment entered against the builder was binding on the non-defending insurer. The trial court entered judgment against Great American for the full amount of the underlying damages awarded against the builder. The Court of Appeals affirmed in all relevant respects, agreeing that the builder’s assignment was valid, and the judgment against the builder was the result of a fully adversarial trial.
The Texas Supreme Court considered both whether the Hamels’ judgment against the builder was enforceable against Great American, and if not, whether the conduct of the coverage litigation adequately compensated for any lack of a “fully adversarial trial” alleged by Great American. Here are six teaching points from the Court’s decision:
- An assignment of claims against an insurer is valid if (1) the assignment is made after adjudication of the underlying plaintiff’s claims against the defendant insured; and (2) the defendant’s insurer has not (a) tendered a defense against the plaintiff’s claims; or (b) either accepted coverage or made a good faith effort to adjudicate coverage issues prior to adjudication of the underlying plaintiff’s claim.
- A judgment entered in litigation between an insured and an underlying plaintiff will be binding on the defendant’s insurer and evidence of damages in an action against the insurer by the defendant’s assignee if rendered after “a fully adversarial trial.”
- The Hamel Court clarified that determining whether judgment was the result of a “fully adversarial trial” does not depend on a post hoc analysis of the parties’ conduct and motives during trial. Instead, a trial is “fully adversarial” if “the insured bore an actual risk of liability for the damages awarded or agreed upon, or had some other meaningful incentive to ensure that the judgment or settlement accurately reflects the plaintiff’s damages and thus the defendant-insured’s covered liability loss.”
- A formal, written pretrial agreement that eliminates the insured’s financial risk creates a strong presumption that an ensuing judgment did not result from an adversarial proceeding. The absence of such an agreement creates a strong presumption that a judgment against the insured did result from an adversarial trial.
- Either presumption may be overcome by evidence indicating that either (1) the insured had no meaningful stake in the outcome of the underlying litigation, despite the absence of any agreement removing the insured’s financial risk; or (2) the insured retained a meaningful incentive to contest liability regardless of the existence of an agreement removing the insured’s financial risk.
- In the event that an underlying liability suit was not “fully adversarial,” the insurer may challenge the insured’s liability and any damages assessed against it in a separate trial over coverage.
Applying these standards, the Court found that the pretrial agreements between the builder and the Hamels—agreeing not to enforce a judgment against the builder’s owner’s personal assets—“eliminated any meaningful incentive . . . to contest the judgment.” The Court further concluded that, while elements of the builder’s liability and the Hamels’ damages were addressed in the coverage litigation with Great American, these issues were not fully developed. The Court, accordingly, remanded the case for a new trial.
Importantly, the Court’s decision does not change the other circumstances under which an insurer may be legally precluded from challenging agreements entered into by their insureds. An insurer in breach of its duty to defend, for example, may not contest the reasonableness of defense costs incurred by the insured. The same non-defending insurer may not challenge the reasonableness of a settlement entered into by the insured with a third-party. But for those situations in which the insured’s assets are otherwise insufficient to address third-party liability, the direction in Hamel provides an effective means of transferring liability to the non-defending insurer.