Colorado Response to Pre-Judgment Agreements

Ironically, it was a non-insurance case, Serna v. Kingston Enterprises, which appears to have served as the catalyst for the insurance industry’s attack on pre-judgment agreements in Colorado. Although no insurer misconduct was involved, language from the opinion has been repeatedly cited, at both the trial and intermediate appellate court levels, as a basis for refusing to enforce pre-judgment agreements in the insurance context.

Ms. Serna was fifteen years old when her employer, Kingston Enterprises (Kingston), instructed her to drive from one of its franchise locations to another. While performing this task, Serna’s car collided with another automobile, resulting in serious bodily injuries to the passengers in the other car. The passengers sued Serna and Kingston for negligence and respondeat superior, respectively. They settled with Kingston for $850,000 before electing to serve process on Serna.

The passengers then approached Serna with a settlement proposal that she promptly accepted. Pursuant to the terms of the settlement, Serna agreed to: (1) allow entry of a $1.5 million judgment against her; (2) employ the passengers attorney to sue Kingston in an indemnity action; (3) permit the passengers to make all decisions with respect to her lawsuit against Kingston; (4) refuse to settle with Kingston without the passengers prior approval; and (5) pay monies recovered from defendant to the passengers. In return, the passengers accepted $40,000 from Serna’s personal liability insurance carrier, agreed not to execute on the remainder of the $1.5 million judgment, and promised to pay Serna half the monies recovered from Kingston in excess of $1.0 million.

Consistent with the agreement, Serna brought an indemnity action against Kingston. Prior to trial, the district court granted summary judgment against Serna, finding that her claim was barred by the exclusivity of the Workers Compensation Act (WCA) and by the Uniform Contribution Among Tortfeasors Act (UCATA). Serna appealed.

Despite the fact that the enforceability of the pre-judgment agreement did not form the basis for the trial courts grant of summary judgment, it became the centerpiece of the divisions opinion. After concluding that neither the WCA nor the UCATA barred Serna’s claims, the division noted that Kingston could defend the judgment on any grounds and proceeded to address Kingston’s argument that the indemnity claim failed because there was no realistic prospect of the passengers executing on the judgment entered against her. In accepting Kingston’s argument, the division distinguished the assignment agreement from the one permitted in Bashor, remarking:

In the reported Colorado cases to date, Bashor agreements have been used only in cases involving allegations of a breach of an insurers contractual duty to indemnify an insured. Further, the shared recovery contemplated by Bashor encompasses only the return, on a full or pro rata basis, of the amount of money a Bashor defendant had already paid to the injured party.

Here, any duty on defendants part to indemnify Serna arose not under contract but under common law. Further, Serna’s agreement with the passengers was more akin to a profit-sharing agreement; her share of any recovery against defendant was not limited to recouping only the losses she or her insurance company sustained. . . .

Finally, and perhaps most important, unlike the Bashor situation, there has never been a judgment enforceable against Serna; indeed, the only judgment against her is one to which she stipulated, along with conditions virtually ensuring that it would never be enforced against her.

Because, under the particular circumstances of this case, we discern no danger that Serna will ever sustain a monetary loss or otherwise be subjected to an enforceable judgment against her, we affirm the trial courts dismissal of her indemnification claim against defendant.

Less than one year later, in American Manufacturers Mut. Ins. Co. v. Seco/Warwick Corp., a visiting Wyoming federal district court judge cited Serna with approval in refusing to enforce a pre-judgment agreement entered into following the failure of two different insurers to settle a liability claim against their insured. While defending their insured under a reservation of rights, the insurers, which had issued liability insurance policies containing $4.0 million in combined limits, rejected the plaintiffs $1,985,000 settlement demand and refused to offer more than $300,000. Confronted with the possibility of an excess or uncovered judgment, the insured entered into a pre-judgment agreement with the plaintiff. Pursuant to the terms of the settlement, the insured agreed to pay $5,000 to the plaintiff, admit its liability, and assign to the plaintiff all of its rights to seek indemnity against the insurer.

The plaintiff, in turn, agreed that it would not seek further funds from the insured, and the parties submitted the issue of damages to arbitration. After the arbitrator awarded the plaintiff more than $3.6 million in damages, the plaintiff and the insured stipulated to the entry of a judgment in the amount of the award and the plaintiff served writs of garnishment on the insurers. The insurers responded by filing a declaratory judgment action, asserting that their insurance policies did not afford coverage for the losses on account of various policy exclusions, and further, that they should not be bound by the judgment because it was procured through improper means.

On these facts, the court held that the there was no coverage under the policies for the damages awarded. While the court could and should have stopped here, it continued on to address, in dicta, the enforceability of the pre-judgment agreement. Citing to Serna, without acknowledging its non-insurance origin, and with no mention of any of the numerous authorities upholding pre-judgment agreements in the insurance context, the court stated:

Where, as here, the party claiming a right to indemnity enters into a stipulated judgment with the claimant, and enters an agreement that absolves itself of further liability, the claimant has no right of action against the supposed indemnitor.

While the federal district courts statements were dicta, and the decision is not binding on Colorado trial courts in any event, the language is troubling because it applied Serna in the context of an insurers failure to settle one of the situations in which courts in other jurisdictions have found pre-judgment agreements enforceable. The Seco/Warwick Courts failure to acknowledge or address the numerous authorities validating pre-judgment agreements, however, coupled with the fact that the court did not need to reach the question of the agreements enforceability in the first place, renders the opinion of dubious precedential value.

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