Use validated by Supreme Court with conditions
Contractual agreements between defendant insured’s and injured plaintiffs to pursue claims against the insurer that include a covenant not to execute against the defendant’s personal assets have long been an option following a trial on the merits in Colorado. Pursuant to Ross v. Old Republic Ins. Co., decided by the Colorado State Supreme Court in April 2008.
This article discusses why a blanket prohibition against the use of pre-judgment Bashor agreements would have been unwarranted, and the need to clear-up uncertainty about the use of pre-judgment Bashor agreements created by lower court rulings.
Since 1913, the public policy of this state has required that all persons having to do with insurance services to the public be at all times actuated by good faith in everything pertaining thereto, and abstain from deceptive or misleading practices . . . . Over the years, the Colorado Supreme Court has expounded on this duty on numerous occasions, beginning with its landmark decision in Farmers Group, Inc. v. Trimble, where the Court held that a liability insurers breach of the duty of good faith and fair dealing will give rise to a separate cause of action in tort, and continuing through its decision in Goodson v. American Standard Ins. Co. of Wisconsin, where the Court held that an insured need not establish a substantial economic loss in order to recover emotional distress and other non-economic damages caused by the insurers bad faith conduct.
While the tort of bad faith is predicated on intentional conduct, in the third-party context, the insurers liability is determined based on general principles of negligence. The tort is established upon proof that the insurer acted unreasonably under the circumstances. Because most liability insurance policies cede to the insurer the right to control the defense and settlement of third-party lawsuits, the Colorado Supreme Court has held that a liability insurer stands in a position of trust with regard to its insured and has characterized the relationship between insurer and insured as quasi-fiduciary in nature. A liability insurer may breach its duty of good faith and fair dealing in various ways, including, inter alia, by failing to defend its insured on a covered claim or by refusing to settle a claim within the insurance policy limits when it has the opportunity to do so.
Given that insureds enter into insurance contracts for the financial security obtained by protecting themselves from unforeseen calamities and for peace of mind, rather than to secure commercial advantage, and yet typically have no ability to control the defense or settlement of lawsuits arising out of such calamities, they may find themselves in dire straits when their insurers unreasonably fail to defend or settle lawsuits filed against them. The question may thus arise: What can an insured permissibly do, without voiding coverage under the insurance policy, to protect itself in the event its liability insurer unreasonably fails to defend or settle a third-party lawsuit?
One way that an insured may seek to protect itself in such a situation is through a contractual agreement whereby it assigns its claims against its insurer to the injured plaintiff in exchange for a covenant not to execute against the defendants personal assets. The Colorado Supreme Court has recognized the propriety of such an agreement when entered into following a trial on the merits, and now has addressed whether the same type of agreement is permissible when entered into prior to a trial on the merits. Having granted certiorari in Ross v. Old Republic Ins. Co., the court cleared up much of the uncertainty that had been created by the court of appeals decision in Ross, as well as two prior decisions, Serna v. Kingston Enterprises and American Manufacturers Mut. Ins. Co. v. Seco/Warwick Corp., which collectively raised questions as to the effectiveness and validity of so-called pre-judgment Bashor agreements.
This article will analyze the common features of pre-judgment agreements, discusses the treatment such agreements have received in the State of Colorado, and in the process explain why a blanket prohibition on their use was unwarranted.