HNRK Coverage Corner
On March 8, 2018, Judge Block of the EDNY issued a decision in Illinois Union Ins. Co. v. US Bus Charter & Limo Inc., Case No. 1:16-cv-06602-FB-RLM, holding that indemnification rights under a liability policy survived a class action settlement in which the insured consented to a $50 million judgment against it, subject to a covenant not to execute the judgment against the insured’s assets.
The insured in Illinois Union had sought defense and indemnity coverage under a liability policy for a putative class action in which it was accused of sending unsolicited text messages advertising bus charters. After the liability carrier denied coverage, the insured proceeded to settle the claim, consenting to the entry of a $50 million judgment against it, subject to a covenant that the judgment could not be “executed on any assets or property” of the insured. Instead, the insured assigned its indemnification rights under the policy to the plaintiff class, leaving it to the plaintiff to litigate the coverage issue and attempt to satisfy the judgment through the insured’s policy. Seeking to sidestep liability for the judgment, the insurer brought a declaratory judgment action, arguing, inter alia, that the plaintiff's covenant not to execute the judgment against the insured's assets vitiated any indemnification rights under the policy, since the insured was no longer “legally obligated to pay” the judgment. (Under a standard policy provision, coverage was limited to amounts the insured is “legally obligated to pay as Damages and Claim Expenses.”)
Judge Block disagreed, and granted partial summary judgment to the insured on the issue of coverage, explaining:
The New York Court of Appeals has not addressed whether an insured's legal obligation to pay survives an assignment to a third party in exchange for a covenant not to execute against the insured. This Court therefore must predict how the New York Court of Appeals would rule by considering the rulings of other state courts and those of intermediate New York courts.
. . .
As another judge in this court recently observed, intermediate New York courts have held that an insured remains "legally obligated to pay" despite an assignment of indemnification rights and a covenant not to execute a judgment, so long as the settlement agreement does not include a release of liability. See Intelligent Digital Sys., LLC v. Beazley Ins. Co., Inc., 207 F. Supp. 3d 242, 246 (E.D.N.Y. 2016) (citing Home Depot U.S.A., Inc. v. Nat'l Fire & Marine Ins. Co., 866 N.Y.S.2d 255, 258 (2d Dep't 2008); Westchester Fire Ins. Co. v. Utica First Ins. Co., 839 N.Y.S.2d 91, 94 (2d Dep't 2007)). Illinois Union cites no contrary New York state court authority.
Moreover, a majority of courts in other jurisdictions holds that coverage exists in such a scenario. See Intelligent Digital Sys., 207 F. Supp. 3d at 246 (collecting cases) (“New York courts and a majority of courts in other jurisdictions have held that an insurance company remains ‘legally obligated’ to pay a claim under a policy even where, as here, the claim was assigned to a third party, and the third party agreed not to execute a judgment against the insured's personal assets."); see also Justin A. Harris, Judicial Approaches to Stipulated Judgments, Assignments of Rights, and Covenants Not to Execute in Insurance Litigation, 47 Drake L. Rev. 853, 857-58 & n.22 (1999) (acknowledging majority rule). Given that New York intermediate courts are in agreement with the majority rule, the Court concludes that the New York Court of Appeals would find that an insured remains “legally obligated to pay” despite an assignment of indemnification rights to a third party and the third party’s covenant not to execute against the insured.
This decision illustrates one risk an insurance carrier takes in disclaiming its duty to defend – it loses control of the defense, and can find itself on the hook for a settlement to which it might not have consented had it been at the settlement table. The insurer can mitigate that risk somewhat by bringing a preemptive declaratory judgment action early on, so that the issue of defense coverage is resolved at an early stage of the underlying litigation. But that course of action has another downside for the insurer – fee-shifting. Ordinarily, an insured that prevails in a declaratory judgment action is not entitled to recover legal fees incurred in the lawsuit against the insurance carrier; rather, each side bears its own costs. However, the New York Court of Appeals has recognized an exception to the so-called "American Rule" on fee-shifting, permitting an insured to recover attorneys’ fees when it prevails in a declaratory judgment action commenced by the insurer. See Mighty Midgets v. Centennial Ins. Co., 47 N.Y.2d 12, 21 (1979).
- Partner
Bradley Nash represents policyholders in insurance disputes and other parties in complex commercial litigation in state and federal courts in New York and across the country. Brad focuses his practice on insurance recovery for ...
Search Blog
Recent Posts
- Delaware Bankruptcy Court Rules That Qui Tam Action Filed Under Seal—and Never Served—Triggers D&O Policy’s Prior and Pending Litigation Exclusion
- “Related Acts” and the Claims Made Policy—The Policy Provision that “Cannot Be Applied Literally”
- California Court Rules that FTC’s Civil Investigative Demand is Not a Covered Claim Under Technology Errors and Omissions Policy
- Delaware Court Dismisses D&O Coverage Action as Premature Under Policy’s “No Action” Clause
- Chubb Prepares to Pay $350 Million to State of Maryland for Baltimore Bridge Collapse
- Sixth Circuit Rules That Insurer is Entitled to Reimbursement of Defense Costs, Holding That Reservation of Rights Letter Created an Implied-In-Fact Contract
- Fifth Circuit Holds Contract Exclusion Does Not Bar Defense Coverage for Ticket Holders Lawsuit Arising From Festival Cancelled During Covid-19 Pandemic
- HNRK Secures Win for Syngenta in Insurance Coverage Appeal at Delaware Supreme Court
- New York Court Considers Evidence Regarding Insurers Handling of Prior Claims in Denying Insurer’s Motion for Summary Judgment
- HNRK Insurance Recovery Partners Author Article for Chambers 2024 Global Practice Guide
Popular Categories
- Insurance Coverage
- Policy Exclusions
- D&O Policies
- CGL Policies
- Duty to Defend
- Damages
- E&O Policies
- Related Claims
- Occurrence/Accident
- Rules of Interpretation
- Additional Insured Endorsement
- Business Interruption Coverage
- Cyber Coverage
- Construction
- Bad Faith Claims Handling
- Indemnification and Advancement
- COVID-19
- Pollution Exclusion
- Duty to Cooperate
- Advertising Injury
- Excess Insurance
- Personal and Advertising Injury
- Insurance Brokers
- Confict of Laws
- Discovery/Disclosure
- Appraisal
- Covered Loss
- Attorney Fees
- Assignment of Claims
- Disability discrimination
- Implied Covenant of Good Faith and Fair Dealing
- Notice
- Privilege/Work Product
- Priority of Coverage
- Intellectual Property
- Contracts
- Professional Malpractice
- Intervention/Joinder
- Rescission
- Subrogation
- Settlements
- General Business Law
- Unfair Claims Settlement Practices
Archives
- July 2024
- June 2024
- May 2024
- April 2024
- March 2024
- February 2024
- January 2024
- December 2023
- November 2023
- September 2023
- August 2023
- June 2023
- May 2023
- April 2023
- March 2023
- January 2023
- December 2022
- September 2022
- May 2022
- April 2022
- March 2022
- November 2021
- June 2021
- February 2021
- January 2021
- December 2020
- November 2020
- October 2020
- September 2020
- August 2020
- April 2020
- March 2020
- February 2020
- January 2020
- December 2019
- November 2019
- October 2019
- September 2019
- August 2019
- July 2019
- May 2019
- April 2019
- March 2019
- February 2019
- January 2019
- December 2018
- November 2018
- October 2018
- September 2018
- August 2018
- July 2018
- May 2018
- April 2018
- March 2018
- February 2018
- January 2018