ASSOCIATED INSURANCE SERVICE, INC., ET AL. V. DANIEL GARCIA, M.D., ET AL.
Annotate this Case
Download PDF
RENDERED: JANUARY 21, 2010
TO BE PUBLISHED
,*uyrrmr (~Vurf
of
2008-8C-000037-DG
2008-SC-000044-DG
ASSOCIATED INSURANCE SERVICE, INC .
AND AON RISK SERVICES, INC . OF OHIO
V.
ON REVIEW FROM COURT OF APPEALS
CASE NO . 2006-CA-001737-MR
JEFFERSON CIRCUIT COURT NO . 02-CI-009027
DANIEL GARCIA, M.D .
AND RITA GARCIA
APPELLEES
OPINION OF THE COURT BY JUSTICE CUNNINGHAM
AFFIRMING IN PART AND REVERSING IN PART
In this case, we are asked to consider two issues of first impression in
Kentucky : whether professional negligence claims against an insurance agent
and an insurance broker are assignable ; and, if so, whether such assignment,
when coupled with a settlement agreement as to damages and a covenant not
to execute, is illusory or void as against public policy.
The Star of Louisville ("the Star") is a pleasure craft operating on the
Ohio River by the City of Louisville . In 1997, it sought marine insurance
coverage through Associated Insurance Service, Inc. ("Associated"), an
insurance agency in Louisville. Given the specialized nature of the coverage,
Associated contacted an insurance brokerage firm, AON Risk Services, Inc. of
Ohio ("ARS") . Thereafter, ARS provided a quote to Associated from an
insurance company in Australia, HIH Casualty and General Insurance, Inc.
("HIH") . The Star ultimately purchased a policy from HIH in October 1997 . It
renewed the HIH policy in 1998 and 1999.
On April 18, 1998, Rita and Daniel Garcia were enjoying a dinner cruise
on the Star. As they prepared to disembark, they were grievously injured when
a wheelchair lift malfunctioned and crushed their legs. The Garcias filed suit
against the Star for personal injury. As its insurer, HIH provided a defense in
that action . The applicable policy had a $1,000,000 .00 limit of liability for
such sums that the Star "shall have become legally liable to pay and shall have
paid" to the Garcias.
In 2001, and while the personal injury action against the Star was
pending, HIH became insolvent. It is undisputed that HIH would be unable to
satisfy any potential judgment against the Star. Reacting to this circumstance,
the Garcias and the Star entered into an agreement to arbitrate on February
28, 2002 .
Pursuant to the arbitration agreement, the Star admitted its liability and
agreed to arbitrate the amount of damages within a stipulated range . The
Garcias agreed to forebear any attempts to collect judgment from the Star.
Furthermore, the agreement provided that the Star would assign to the Garcias
"its claims against Associated Insurance Services, Inc . [and] AON Risk
Services." Finally, the Garcias agreed to dismiss their personal injury suit
against the Star without prejudice, "but subject to this agreement ."
The Garcias and the Star did enter into arbitration. In June 2002, an
arbitrator issued an award in the amount of $742,193 .10 to the Garcias .
Neither ARS nor Associated participated in the arbitration proceedings
On November 27, 2002, the Star and the Garcias, in accordance with
their prior arbitration agreement, executed an "assignment of rights and
claims." The Star formally assigned to the Garcias "any and all claims and/or
possible claims that assignor has of the date of this assignment or may
hereafter have against . . . Associated Insurance Service, Inc. [and] AON Risk
Services." The same day, the Garcias filed a complaint in Jefferson Circuit
Court against Associated . Several weeks later, by amended complaint, the
Garcias filed suit against ARS .
By the amended complaint, the Garcias asserted the Star's assigned
claims against ARS and Associated. In five separate counts, the Garcias
alleged fraudulent misrepresentation, negligence in the procurement of
insurance, intentional infliction of emotional distress, breach of contract, and
loss of consortium. Eventually, both ARS and Associated moved for summary
judgment.
In its motion for summary judgment, ARS argued that the purported
assignment of the Star's claims is void as a matter of public policy because it
was the result of collusion between the Star and the Garcias . Further, ARS
contended that the Star had no claims to validly assign because the Garcias
agreed not to execute judgment against the Star before the arbitration award
was handed down . In other words, because no legal liability was ever imposed
on the Star, it had no claims to assign . Finally, ARS asserted that the
arbitration award could not be asserted against it because it was not a party to
the arbitration.
Associated, in its separate motion for summary judgment, also argued
that the arbitration award could not be enforced against non-parties .
Associated further averred that it owed no duty to the Garcias, so a claim for
professional malpractice or negligence could not be made . Associated then
asserted that the Garcias' claim of professional negligence sounds in tort and,
therefore, is unassignable under Kentucky law. Finally, Associated maintained
that the professional negligence claim fails as a matter of law because the Star
violated its insurance contract by admitting liability.
The Jefferson Circuit Court granted the motion as to both ARS and
Associated . Noting that tort actions are generally not assignable in Kentucky,
the trial court reasoned that the Garcias' claim of professional negligence
sounds in tort rather than contract. Relying on the opinion of the Arizona
Court of Appeals in Premium Cigars Int'l, Ltd . v. Farmer-Butler- Leavitt Ins.
Agency, 96 P.3d 555 (Ariz. Ct. App. 2004), the trial court concluded that the
duty to exercise reasonable care in procuring proper insurance coverage for the
Star arises from the agent-insured relationship, not from a contract . As such,
the trial court concluded that the Garcias' claim was based in tort and,
therefore, not assignable . Th e trial court further noted that public policy
disfavors the assignment of c laims for professional negligence .
In a later order denying the Garcias' motion to alter, amend or vacate,
the trial -court addressed the argument that ARS and Associated should not be
bound by arbitration proceed ngs to which they were not parties:
Even if the Court were convinced that vacating its
prior Order was roper in light of the Garcias' instant
motion, it would nevertheless find that the defendants
are correct in arguing that summary judgment is
proper on the rounds that, as non-parties to the
arbitration agreement at issue, they are not bound by
the arbitration's results . . . .
For this proposition, th trial court relied on Nationwide Mut. Ins . Co. v.
Home Ins . Co . , 330 F.3d 843, 'il 846 (6th Cir. 2003) ("An arbitration panel may
not determine the rights or ob ligations of non-parties to the arbitration .") . The
Garcias then appealed the sub lmary judgment .
The Court of Appeals re ersed and remanded. Rejecting the trial court's
conclusion that a claim for pr I fessional negligence is not assignable, the Court
of Appeals noted that tort claii -is which arise from a contractual relationship
between the parties may be as signed . The Court of Appeals also rejected the
conclusion that the assignme t of claims for professional negligence violates
public policy, believing instea that assignment of such a claim between an
insured and an agent or broke does not involve any "role reversal" of the
parties, as exists in the assign
ent of claims for legal malpractice . The Court
of Appeals then addressed the allegation that the Garcias' agreement to
forebear execution against the Star rendered the assignment illusory . Though
holding that the agreement to forebear execution was not illusory, the Court of
Appeals nonetheless doubted the reliability of the arbitration award and held
that it was not binding on ARS or Associated .
ARS and Associated then sought discretionary review from this Court,
which was granted.
Standard of Review
The standard of review on an appeal of a summary judgment is whether
the trial court properly determined that there were no genuine issues of
material fact and that the moving party was entitled to judgment as a matter of
law. CR 56 .03 . The trial court must view the evidence in a light most favorable
to the non-moving party and determine whether there exists any circumstances
under which the non-moving party could prevail. Steelvest, Inc . v. Scansteel
Serv. Ctr., Inc . , 807 S .W.2d 476, 480 (Ky. 1991) . If no such circumstances
exist, summary judgment is proper. Because summary judgments involve no
fact finding, this Court will review the circuit court's decision de novo . 3D
Enterprises Contracting Corp . v. Louisville and Jefferson County Metropolitan
Sewer Dist. , 174 S .W .3d 440, 445 (Ky. 2005) .
Assignability of Claims for Professional Malpractice against an
Insurance Agent and Broker
We turn first to the assignment of a claim for professional malpractice
against an insurance agent and broker. ARS and Associated attack the
assignment on two grounds : (1) that it is an invalid assignment of a tort claim;
and (2) that it violates public policy.
In arguing that tort-claims may not be assigned, Appellants misstate the
rule. As was the trend in the early twentieth century, the broad common law
prohibition against assignment of claims receded: "As courts became more
accessible and litigation a more accepted means for resolving disputes, the
prohibition on assignment gradually became the exception rather than the
rule." Webb v. Gittlen, 174 P.3d 275, 276-77 (Ariz. 2008) (permitting
assignment of negligence claim against insurance agent) . The reasoning often
rested on a comparison between assignment and survival of claims : "Many
courts concluded that whether a claim would survive the claimant's death
should also determine whether it could be assigned during the claimant's life
and applied this test to both personal injury and other claims." Id. at 277 .
Kentucky followed this trend, narrowing the class of unassignable claims
through. reference to the survival statute . "Any cause of action which would,
upon the death of the party injured, pass to his personal representative, will
pass under a deed of assignment ." Cleveland Coal Co. v . Sloan & Dick, 11 Ky.
L. Rptr. 306 (1889) . We continue to adhere to that principle today: "The proper
interpretation of [KRS 411 .140) is decisive of the question as to whether or not
this cause of action is assignable." Grundy v. Manchester Ins. 8v Indem. Co . ,
425 S.W.2d 735, 736 (Ky. 1968) .
Through interpretation of KRS 411 .140, 1 Kentucky's survival statute,
and its predecessor, Section 10, Ky. Stat., rules concerning the assignment of
claims have evolved and exceptions to the general rule of assignability have
emerged. For example, - torts arising from contractual relationships are
assignable: "[The survival statute does not] have any reference to actions for
torts which are founded upon contracts and grow out of the contractual
relations between the parties ." Gross' Adm'r v. Ledford , 190 Ky. 526, 228
S .W. 24, 25 (1921) (interpreting Section 10, Ky. Stat., which is identical to
today's KRS 411 .140) .
Other exceptions have been created due to public policy concerns .
Unliquidated tort claims for personal injury are not assignable :
"While, generally speaking, choses in action are
assignable, we have not been able to find a single case
holding that, in the absence of a statute, an
unliquidated claim for personal injuries may be
assigned. . . . The reasons for the rule are that a claim
for personal injuries is peculiarly a personal right that
the injured party may or may not assert as he pleases,
and that to permit one's pain and suffering to become
a matter of speculation is not looked upon with favor
by the law."
1 KRS 411 .140 states : "No right of action for personal injury or for injury to real or
personal property shall cease or die with the person injuring or injured, except
actions for slander, libel, criminal conversation, and so much of the action for
malicious prosecution as is intended to recover for the personal injury. For any other
injury an action may be brought or revived by the personal representative, or against
the personal representative, heir or devisee, in the same manner as causes of action
founded on contract."
Wittenauer v. Kaelin, 228 Ky. 679, 15 S.W .2d 461, 462 (1929) . See also State
Farm Mut. Auto. Ins. v . Roark, 517 S.W .2d 737, 739 (Ky. 1974) (recognizing
continuing adherence to the principle that unliquidated claims for personal
injury may not be assigned, though tort claims for damages to personal
property may be) .
Likewise, an exception to the general rule that a claim may be assigned
has been created for legal malpractice claims . In Coffey v. Jefferson County
Bd . of Educ . , a defendant in a negligence action attempted to assign a claim of
legal malpractice against his former attorney to the plaintiff, after entering into
an agreed judgment for damages . The Court of Appeals held that a claim for
damages arising from legal malpractice may not be assigned, citing "the
uniquely personal nature of legal services and the contract out of which a
highly personal and confidential attorney-client relationship arises[ .]" 756
S .W.2d 155, 157 (Ky.App . 1988) (citing Goodley v. Wank 8v Wank, Inc . , 133
Cal. Rptr . 83, 86 (Cal. Ct. App. 1976)) .
Applying these principles, we find no authority to conclude that a
professional malpractice claim against an insurance agent or broker is
unassignable . The Star's claim against ARS and Associated is essentially a
negligence claim resulting in pecuniary loss. KRS 411 .140 does not prohibit
the assignment of a negligence claim resulting in injury to property or
pecuniary loss, and no judicially-created exception exists. In fact, Kentucky
courts have long recognized the assignability of negligence claims for damage to
property. See New York Underwriters Ins. Co. v. Louisville 8v N .R. Co. , 285 Ky .
561, 148 S.W.2d 710 (1941) (recognizing as valid an assignment of negligence
claim resulting in property damage) ; Roark, 517 S .W.2d at 739 .
Nonetheless, ARS and Associated insist that the professional negligence
claim against them should not be assignable for public policy reasons. They
liken a professional negligence claim against an insurance agent or broker to a
claim for legal malpractice, which has been deemed unassignable for public
policy reasons in Coffey.
Professional negligence claims against insurance agents are not
sufficiently analogous to legal malpractice claims to justify extending a
prohibition on assignment . While insurance brokers and agents owe a
standard duty of reasonable care to their clients, attorneys are fiduciaries
owing the utmost duty of undivided loyalty. Further, the attorney's duty flows
solely to the client, while the insurance agent operates under a co-existing duty
of fidelity to his principal, the insurance company . See Forgione v. Dennis
Pirtle Agency, Inc. , 701 So .2d 557, 560 (Fla . 1997) (abrogated on other grounds
by Cowan Liebowitz 8, Latman, P.C . v. Kaplan , 902 So .2d 755, 757 (Fla. 2005)) .
In Coffev, we noted the "uniquely personal nature" of the attorney-client
relationship. The agent/ broker-insured relationship, by contrast, arises simply
from a commercial transaction for the sale of insurance . See Troost v. Estate of
DeBoer, 202 Cal .Rptr . 47, 52 (Cal. Ct. App. 1984) (In deeming professional
negligence claim against insurance agent assignable, it was noted that "[t]he
procurement of insurance through a broker or agent is a commercial
transaction with intended beneficiaries beyond the client alone.") . An attorney
cannot substitute himself without the client's permission, while insurance
agents are often substituted and replaced without such limitations. Though
the insured certainly discloses personal information to his or her agent, it is
simply not comparable to the personal relationship that exists between
attorney and client.
Finally, the confidentiality that encompasses the attorney-client
relationship is much different than the confidentiality owed by an insurance
broker or agent to the client. Attorney-client confidentiality is certainly much
broader and seeks to protect not only the client's personal interests, but also
the public interest in accessible legal advice without fear of adverse
ramifications . This interest is reflected in the severe penalties faced by an
attorney who makes an unauthorized disclosure and the highly limited
circumstances in which disclosures are permitted. See Daugherty v. Blaase,
548 N . E.2d 130, 132 (111. App. Ct . 1989) (discussing difference between
attorney-client relationship and broker-client relationship in upholding
assignment of malpractice claim against insurance broker) .
The majority of courts considering this issue have concluded that a
cause of action against an insurance agent or broker for professional
malpractice may be assigned . See Stateline Steel Erectors, Inc . v. Shields , 837
A.2d 285, 288 (N .H. 2003) (collecting authority from Hawaii, Florida,
Massachusetts, Iowa, South Dakota, Tennessee, and Washington, all of which
involved claims against insurance agents) . See also Esposito v. CPM Ins .
Services, Inc . , 922 A.2d 343, 352 (Conn . Super . Ct . 2006) ("[I]t is unsurprising
that the majority of courts that have considered the issue have concluded that
a cause of action against an allegedly negligent insurance agent is
assignable.") . In fact, the primary case relied upon by the trial court in this
matter to support the conclusion that the claims were unassignable, Premium
Cigars Int'l, Ltd. v. Farmer-Butler- Leavitt Ins . Agency, has since been
overruled . In Webb, 174 P .3d 275, the Arizona Supreme Court rejected the
Premium Cigars rationale and concluded that public policy considerations do
not prevent the assignment of a professional negligence claim against an
insurance agent. We likewise hold that a claim for professional malpractice
against an insurance agent or broker may be assigned.
Validity of the Star's Assignment
ARS and Associated argue that, even if the Star's claims for professional
malpractice were assignable, the purported assignment was invalid. They
assert that the type of assignment that occurred in this case - an assignment
of claims accompanied by a stipulated judgment and an agreement to forebear
execution - is collusive and against public policy. They also argue that the
purported assignment had no legal effect, as the Star suffered no damages
because it was insulated from judgment by virtue of the agreement. Therefore,
it had no valid claim to assign.
This case presents an issue of first impression in Kentucky . We look to
other jurisdictions for guidance . "There is a split of authority as to whether an
insured who has been released from the legal obligation to pay an excess
judgment has any right against an allegedly negligent insurance agent, which
could be assigned to others ." Stateline Steel, 837 A.2d at 288. Courts
considering this precise issue have analogized it to "circumstances of an
assignment, coupled with an agreement, releasing a tortfeasor from liability,
when an insurer has failed to settle a claim within policy limits and judgment
enters against the insured in excess of those limits." Campione v. Wilson , 661
N .E.2d 658, 661-62 (Mass . 1996) . Different results have been reached, though
a clear majority trend has emerged . A majority of courts have upheld the
assignment and covenant not to execute as valid . However, they differ as to
their acceptance of an accompanying stipulated judgment or prejudgment
settlement that purports to fix liability.
We turn first to the legal effect of the Star's assignment of its claims to
the Garcias, which was effectuated in exchange for a covenant to "forebear
execution ."
A minority ofjurisdictions has concluded that insured tortfeasors, who
are protected by a covenant not to execute and a stipulated judgment, have no
obligation to pay anything to the injured party and, thus, the insurer would
have no duty to pay under the policy. In these jurisdictions, the insurance
agent cannot be held liable for any alleged negligence, as the insured has
suffered no actual damage . These courts focus on language in the insurance
policy regarding sums which the insurer has become legally obligated to pay .
Had defendants' insurance agents procured the
coverage alleged to be deficient, that coverage would
not have become implicated, unless the- ~ insured
became legally obligated to pay more than what was
already paid on his behalf by his insurer. Under the
covenant, however, he can never be required to pay
any more than the coverage under the existing
insurance .
Oregon Mut. Ins. Co. v. Gibson , 746 P.2d 245, 247 (Or. Ct. App . 1987) (holding
tortfeasor who was unconditionally insulated from liability had no assignable
cause of action against allegedly negligent insurance agent for failure to
procure adequate insurance coverage) . See also Freeman v . Schmidt Real
Estate 8s Ins., Inc. , 755 F .2d 135, 138 (8th Cir. 1985) ("An insured protected by
a covenant not to execute has no compelling obligation to pay any sum to the
injured party; thus, the insurance policy imposes no obligation on the insurer.
An individual who is uninsured due to an agent's negligence then will have
suffered no damages, as he would have had no rights under the policy
anyway." (internal citations omitted)) . 2 Relying on this reasoning, ARS and
Associated argue that the assignment was illusory because the Garcias, having
simultaneously extinguished the Star's liability to them, assumed no valid
cause of action.
The Eighth Circuit, in Freeman , construed Iowa law. Later, the Iowa Supreme Court
disagreed with the holding in Freeman and determined that such an assignment is
valid under Iowa law and policy, even though the assignment of claims was
accompanied by a covenant not to execute . This Iowa case, Red Giant Oil Co. v.
Lawlor , 528 N. W .2d 524 (Iowa 1995) is discussed further, infra.
However, the majority of courts considering this issue have concluded
that such assignments are valid . The focus of their analysis is on the nature of
the agreement, drawing a distinction between a covenant not to execute and a
release . "In these jurisdictions, an assignment is valid if .i t is coupled with a
covenant not to execute because the insured remains liable for the excess
judgment; an assignment coupled with a release is void because the release
extinguishes the insured's liability." Stateline Steel, 837 A.2d at 288. See also
Kobbeman v . Oleson, 574 N.W .2d 633, 637 (S .D. 1998) ("Here, the covenant
not to execute was `merely an agreement . . . and not a release."') ; Gray v. Grain
Dealers Mut. Ins. Co. , 871 F.2d 1128, 1133 (D .C . Cir. 1989) ("Covenants not to
execute are different than releases, as the legal liability remains in force
against those who have covenants, whereas a release represents total freedom
from liability.") ; Lageman v. Frank H. Furman, Inc, 697 So .2d 981, 983 (Fla.
Dist. Ct. App . 1997) (In approving assignment of tortfeasor's negligence claim
against insurance agent, it was noted that "the injured party [must] have
completely released the tortfeasor from liability from the underlying judgment
or obtained a satisfaction of judgment in order to preclude a subsequent
action .") . Where liability is not completely extinguished, the assignment is
valid because the tortfeasor is still subject to some amount of liability.
Having considered the varied approaches to this issue, we are persuaded
that the assignment and agreement between the Garcias and the Star is valid .
First, we note that the Garcias did not fully "release" the Star in any manner.
Rather, the agreement was to "forebear execution against defendant on any
and all claims and awards." On this basis, we reject Appellants' assertion that
the Star was relieved of any liability to the Garcias and -suffered no damages
and, therefore, had no valid claim to assign . On the contrary, the Star was not
fully released, nor did the Garcias fully surrender their right to sue. The
express terms of the agreement state that the Garcias "shall dismiss this
lawsuit against the [Star] without prejudice but subject to this agreement." See
Stateline Steel, 837 A.2d at 289 (Court rejected argument that tortfeasor had
no valid claim to assign following execution of covenant not to sue : "That
[tortfeasor] never had to pay the stipulated judgment out of its own pocket is
immaterial. But for the defendants' alleged negligence, [tortfeasor] would not
have had to enter into the settlement agreement.") .
Moreover, we cannot ignore the practical value of these types of
arrangements . They provide a remedy to the injured party as well as the
tortfeasor who has been negligently denied adequate insurance coverage. See
Kobbeman , 574 N.W.2d at 637. They promote the timely resolution of claims .
"It is appropriate to give effect to agreements which have led to a carefully
negotiated and detailed settlement, in which the plaintiffs have voluntarily
3
Though we have discussed other jurisdictions' emphases on the differing effects of a
covenant not to execute and a release, we acknowledge that Kentucky courts have
drawn little distinction between the two . "[H]ow can we possibly say that the
surrender of the right to sue does not release the person to whom it is given."
O'Bryan v. Peterson , 563 S .W.2d 732, 735 (Ky .App. 1977). Because the agreement
between the Star and the Garcias was neither a covenant not to sue nor a release,
we have instead focused on the legal effect of the agreement.
assumed the burden of proving any claims that [the tortfeasor] might have
against the defendants . . . ." Campione, 661 N .E.2d at 663. It has also been
noted that the alleged negligence of the agent or broker, if true, brings about
the circumstances necessitating the settlement agreement and the tortfeasor's
attempts to protect itself. Invalidation of the assignment would only inure to
the benefit of the negligent parties, certainly an unjust result . See Esposito ,
922 A.2d at 352 .
Furthermore, we reject the claim by Appellants that a covenant not to
execute, accompanied by an assignment of claims, is inherently collusive or
otherwise against public policy, as the assignee will still be required to prove
the agent's or broker's negligence at a trial of the assigned claim. "[W]e fail to
see why legally it should make any difference who sues the insurer - the
insured or the insured's assignee ." Red Giant Oil Co. v. Lawlor, 528 N.W .2d
524, 533 (Iowa 1995) (permitting tortfeasor's assignment of claims against
insurer for refusal to defend and insurance agent for negligent failure to
procure adequate coverage) . Thus, we conclude that a settlement which
includes a covenant to forebear execution in exchange for an assignment of a
claim against the tortfeasor's agent or broker is neither intrinsically collusive
nor illusory for lack of damages .
However, a final layer of analysis is necessary because, in this case, the
assignment of the Star's claims and the agreement to forebear execution also
included an agreement to arbitrate the extent of the Garcias' damages. ARS
and Associated vehemently protest the validity of the arbitrator's award in this
case, as they were not parties to the arbitration proceedings. In its order
denying the Garcias' motion to alter or amend, the trial court agreed that ARS
and Associated could not be bound by an arbitration award in which they did
not participate.
The risk of collusion in these types of arrangements is certainly
heightened when the tortfeasor not only assigns claims, but also stipulates the
extent of damages. While the Garcias and the Star did not independently fix
the award, the arbitration proceedings in this case cannot fairly be
characterized as fully adversarial. Having already accepted the Garcias'
agreement to forebear execution of any judgment or award, the Star was left
with no tangible incentive to vigorously contest the extent of its liability .
While the aforementioned jurisdictions have approved of settlement
agreements accompanied by a covenant not to execute, nearly all have
expressed concern when such an arrangement also includes a stipulated
judgment or prejudgment settlement purporting to fix the amount of the
tortfeasor's liability.4 "[W]e are mindful of the risk of collusion when an insured
4
In Coffee v. Jefferson County Bd. of Educ. , the Court of Appeals expressed the same
concern : "[T]he entire transaction involving the confession and acceptance of
judgment, covenant not to execute and to indemnify, and assignment are not any
indication of the actual damage, if any there was, as a result of legal malpractice."
756 S.W.2d 155, 156-57 (Ky.App . 1988) . While we do accept Coffee as a valid
expression of concern over the possibility of collusion in these circumstances, we do
not consider this statement to be determinative of Kentucky's position towards
assignments coupled with covenants not to execute and stipulated judgments . The
case was ultimately decided on the ground that claims for legal malpractice are not
assignable and, therefore, the actual validity and/or reasonableness of the
stipulated judgment were not squarely determined. Also, this Court of Appeals
opinion is not binding as precedent on this Court, and we note that it has not been
18
agrees both to a judgment in excess of its policy and to be protected from
liability for that judgment[.]" Stateline Steel, 837 A.2d at 290 . See also
Esposito, 922 A.2d at 351 ("[O]nce [the tortfeasor] has assigned its claim
against the agents and agreed to a judgment that will never be executed
against it, [the tortfeasor] is unlikely to be concerned with such matters .") ;
Glenn v. Fleming, 799 P.2d 79, 92 (Kan. 1990) (expressing "concern over the
reasonableness of assignment/ covenants in which the amount of the judgment
assigned has been determined by agreement of the parties," though ultimately
permitting limited use of such assignments) ; Freeman , 755 F.2d at 139 ("Such
collusion . . . would be possible anytime the insured were protected by an
agreement not to execute prior to entry of judgment; the insured . . . loses the
incentive to contest his liability or the extent of the injured party's damages
either in negotiations or at trial .") . The risk is particularly heightened when the
agent or broker had no opportunity to contest the judgment or award.
Some jurisdictions refuse to bind parties who were not parties to the
stipulated judgment: "[W]e do not perceive . . . any basis for concluding that
insurance agents would be bound by stipulated judgments to which they were
not parties." Webb, 174 P . 3d at 281 . "[U]nlike an insurance company which
has failed to defend its insured, these [defendant insurance brokers], who were
not parties to the settlement agreement, cannot be bound by its terms insofar
as it purports to fix their liability." Campione, 661 N .E .2d 663 . These
cited in any opinion -favorably or otherwise - of this Court. See Phelps v . Louisville
Water Co. , 103 S.W.3d 46, 50 (Ky . 2003) .
jurisdictions do not consider the settlement agreement probative as to the issue
of damages and require the plaintiffs to prove the extent of damages at a trial
on the assigned claims, regardless of any terms in the settlement agreement.
Id . See also , Stateline Steel, 837 A .2d at 289 (noting that the settlement
agreement is not "conclusive" on the issue of damages) ; McLellan v. Atchison
Ins . Agency, Inc . 912 P.2d 559, 564-65 (Haw. Ct. App . 1996) (allowing
assignment of tortfeasor's claim against insurance agent for negligence, but
holding that agent was not bound by amount set forth in stipulated judgment) .
Placement of the full burden of proof of the assigned claims, including the
extent of damages, on the plaintiff "reduces the risk of collusion and justifies
giving effect to the assignment of the negligence claims ." Campione , 661
N .E.2d at 663 .
Another approach, however, is to allow the negotiated settlement, but to
also require some evidence of the reasonableness of the stipulated judgment
before it can be entered against the defendants . Some jurisdictions accomplish
this by allowing the defendant to challenge the judgment : "[T]he appropriate
method by which to address the possibility that the settlement was obtained by
fraud or collusion is to allow the agents to contest the stipulated judgment on
the ground that it was improperly obtained." Esposito, 922 A.2d at 351
(internal citation omitted) . Others place the burden of proof fully on the
plaintiff to establish the propriety of the settlement : "The injured party . . . has
the burden to prove by a preponderance of the evidence that . . . the settlement
which resulted in the judgment was reasonable and prudent ." Red Giant, 528
N .W .2d at 535. See also Chaussee v. Maryland Cas. Co. , 803 P.2d 1339, 134243 (Wash. Ct. App. 1991) (placing burden of proof on plaintiff to prove
reasonableness of a stipulated judgment) .
Kentucky has addressed the propriety of settlement agreements fixing
damages only in the context of insurers who refuse to defend . In O'Bannon v.
Aetna Cas . & Sur. Co . , 678 S.W.2d 390 (Ky. 1984), this Court affirmed the
insured's right to settle a claim after the insurer refused to defend, and an
assignment of the insured's claims against the insurer in exchange for a
release of liability on the judgment . However, we noted that if "the plaintiff and
the insured are cooperating together to create an inflated collusive judgment
. . . the insurer would obviously have a remedy against any obligation to pay
such a judgment[.]" O'Bannon , 678 S .W.2d at 393 . See also State Farm Mut.
Auto. Ins. Co . v. Shelton, 368 S .W.2d 734, 737 (Ky. 1963) (recognizing that
fraud and collusion are a valid defense which may be raised by an insurer
when sued on a judgment obtained against its insured) . The case at bar
admittedly is not entirely analogous, as neither ARS nor Associated are
insurers and, therefore, did not owe the Star a duty to defend. Nonetheless, we
do believe O'Bannon and Shelton evidence a favorable regard for claim
assignments coupled with a consent judgment or other settlement arrangement
and a covenant not to execute, subject to some assessment that the settlement
reflects a reasonable calculation of damages.
We are persuaded that a stipulated judgment or prejudgment settlement
should not be summarily upheld or rejected when reached in conjunction with
an assignment of claims and agreement to forebear execution. While the risk
of collusion exists, we do note perceive the risk to be so great as to--automatically
invalidate an otherwise valid assignment of claims . We trust that our
adversarial system is capable of assessing reasonableness and vetting
instances of fraud and collusion.
Rather, the best approach is to allow the prejudgment settlement, but to
require some assessment of the reasonableness of the award. The plaintiff has
the burden of presenting prima facie evidence of the settlement's
reasonableness insofar as it purports to establish liability . The defendant
retains a fully panoply of defenses with which to rebut this presumption : fraud,
collusion, unreasonableness, etc.
Conclusion
Summary judgment was not proper in this case. The trial court erred in
holding that the Star could not assign its claims against ARS and Associated to
the Garcias. Such claims are assignable under Kentucky law. To this extent,
we affirm the Court of Appeals. Further, the trial court and the Court of
Appeals incorrectly determined that ARS and Associated could not be bound by
the arbitrator's award in this case. Even when coupled with an assignment of
claims and an agreement to forebear execution, a stipulated judgment or other
prejudgment award may be imposed upon the defendants, subject to a showing
of reasonableness .
Accordingly, this case must be remanded for further proceedings . Upon
remand, the Garcias may proceed in their action against ARS and Associated .
In addition to proving the elements of the Star's claims against ARS and
Associated, the Garcias also bear the burden of providing prima facie evidence
that the arbitration award was reasonable . ARS and Associated may challenge
the validity and reasonableness of the award .
ARS and Associated raise a number of additional issues that are not
properly addressed on appeal and should be pursued on remand . ARS argues
that, as an insurance broker, it is not liable to the Star for HIH's insolvency .
ARS also asserts that that it cannot be placed in the same position as
Associated, as an insurance broker is not held to the same standard of care as
an insurance agent . The extent of ARS's duty to the Star and the
reasonableness of its actions in procuring the Star's coverage with HIH are
issues of fact to be considered on remand . In proving its assigned claims, the
Garcias must establish that ARS owed a duty to the Star and that such duty
was violated .
Both ARS and Associated argue that the Court of Appeals erred by
invalidating the arbitration award, but upholding the validity of the
assignment. Pursuant to the terms of the arbitration agreement, they point out
the award cannot be severed without invalidating the entire agreement. As
explained above, we have not invalidated the arbitration award; rather, we have
remanded this case for further proceedings, which may include an assertion
that the arbitration award was unreasonable . Should it be determined that the
arbitration award is unreasonable, only then would it be appropriate to argue
that the entire agreement has been voided .
For the foregoing reasons, the opinion of the Court of Appeals is affirmed
in part and reversed in part. The summary judgment of the Jefferson Circuit
Court is reversed, and this matter is remanded for further proceedings
consistent with this opinion.
Minton, C .J. ; Scott and Venters, JJ ., concur. Noble, J., concurs by
separate opinion. Schroder, J ., concurs in part and dissents in part and would
affirm the Court of Appeals . Abramson, J., not sitting.
NOBLE, J ., CONCURRING: I concur with Justice Cunningham's well
written opinion, but write separately to hopefully add further clarity. I do agree
that tort claims arising out of a breach of contract are assignable, and that the
assignment in this action was a valid assignment .
However, my first question was whether there was anything to assign to
the Appellees, the Garcias. The bankruptcy of HIH left Star on its own for the
Appellee's liability claim for their injuries . However, Star avoided payment to
Appellees, after admitting liability and arbitrating damages, by assigning its
negligence claim against the brokers who sold Star the HIH policy. If the
tortfeasor, Star, was not going to have to pay damages in exchange for its
contract of assignment with the Appellees which included a covenant not to
execute against Star "on any and all claims and awards," then was there
anything of value to assign to the Appellees that could lead to the satisfaction
of their damage claims against Star? It appeared that their very agreement had
removed- the one thing which would require any insurance company to pay on
behalf of its insured if covered-an actual loss . If Appellees agreed never to
execute against Star for the damage award obtained when the two parties
arbitrated, then why would Star's insurance company have to pay if Star did
not? Arguably, the underlying legal rationale requiring payment under Star's
contract of insurance with its carrier-an actual loss by Star-did not, and
would not occur. By relieving the tortfeasor of the obligation to pay through
the agreement not to execute, its privies would also appear to be relieved. Thus
if Star's insurance company was off the hook, what difference did it make if the
Appellants (AON/Associated) had negligently obtained that insurance for Star?
Indeed, as the majority opinion points out, some jurisdictions do follow
that reasoning.
However, Star's claim against AON/Associated that the companies had
negligently performed their professional duties to find a competent, appropriate
insurance company to underwrite Star's liability coverage needs is premised on
the fact that the company that was engaged, HIH, failed . Thus, the relevant
fact is not that Star, and thereby its carrier, did not pay, but that HIH could
not cover Star's loss . After admitting liability and arbitrating damages, Star did
in fact have a loss that it was liable for (in the form of an arbitration award). In
a manner of speaking, it paid that loss with the assignment to Appellees of its
negligence claim against AON/Associated, which allows the Appellees to stand
in the shoes of Star to prosecute that negligence claim . The damages in the
negligence action would encompass the amount Star owes -to the Appellees.
Essentially, Star has allowed the Appellees to collect the money Star owes them
through the negligence suit, and the Appellees have agreed to be paid by
whatever they get from the assigned cause of action . This in no way means
that Star does not owe these damages, but just that the Appellees hope they
can collect them from the parties Star claims actually caused the loss .
Star is no less liable after the assignment than it would have been if its
insurance company was solvent. Star is liable whether the Appellees collect
from it or not. Absent the assignment, if the Appellees chose, they could sit on
the judgment up until limitations ran and execute at any time if Star became
adequately solvent. Thus, Star has not been released, but has traded its cause
of action against Appellants in lieu of paying the judgment itself, in exchange
for Appellees' promise not to execute on the judgment Star would otherwise
have to pay. The relevant fact is that Star is liable and must secure the
payment of judgment damages in some way. And even though the Appellees
have agreed to pursue Star's negligence claim against AON/Associated in lieu
of collecting directly from Star, the judgment against Star remains actionable.
The Appellees could still seek to execute the judgment against Star, even after
the agreement ; but because of the agreement, Star would have an equal and
opposite breach of contract claim that would cancel out any execution of the
judgment. A judgment against a party is not released until it has been
satisfied, which will not happen in this case until after the Appellees pursue
the claim against the.Appellants .
--
-
Appellees may well not be able to obtain a judgment against
AON/Associated, or may receive a judgment less than the arbitrated damages.
Generally, this would leave Star liable for any excess amount. But here, the
language of the agreement is broad, and appears to foreclose the Appellees
from going back against Star if the claim against AON/Associated fails or falls
short. Nonetheless, Star remains legally liable for the judgment amount
because it was dismissed without prejudice, as a term of the assignment
contract. Not until that suit is final will the case against Star be dismissed with
prejudice.
This does result in Star never having to pay on the judgment, but Star
will not be released from the judgment until the negligence suit is concluded,
and the Appellees then dismiss their suit against Star with prejudice.
It is the legal liability of a party that triggers that party's right to coverage
under a contract of insurance it might have, not the amount of damages or
whether they are ever paid. If the negligent acts of middlemen brokers caused
a failure of the liable party's coverage, then the liable party has a cause of
action against the brokers, and can treat that cause of action as valid
assignable property.
Otherwise, Star, if able, would have to pay the judgment, then sue the
brokers to recover its loss caused by their negligent acts . But when a party is
not able to satisfy the judgment, this approach doesn't work. While creative,
the assignment in this case was neither fraudulent nor- collusive . Star had
every right to evaluate and admit liability, and in fact for at least part of the
suit, was represented by counsel hired by HIH . The damages were arbitrated
according to the terms of Star's insurance contract, and were fully presented to
a neutral arbitrator . Appellees, as the injured parties, cannot be faulted for
choosing a route that appeared to them most likely to result in payment of
their damages. Under these unusual facts, the approach taken seems the most
direct route to final resolution of the case .
COUNSEL FOR APPELLANT
ASSOCIATED INSURANCE SERVICE, INC. :
Frank P. Doheny, Jr.
Michael C . Merrick
Dinsmore 8s Shohl, LLP
1400 PNC Plaza
500 W. Jefferson St.
Louisville, KY 40202
COUNSEL FOR APPELLANT
AON RISK SERVICES, INC. OF OHIO :
Brent Robert Baughman
Mark Scott Riddle
P. Blaine Grant
Greenebaum, Doll 8v McDonald, PLLC
3500 National City Tower
101 South 5th Street
Louisville, KY 40202-3197
COUNSEL FOR APPELLEES :
Larry B . Franklin
Franklin, Gray 8v White
505 West Ormsby Avenue
Louisville, KY 40203
Leroy E. Sitlinger, Jr.
Sitlinger, McGlincy, Steiner, Theiler 8s Karem
370 Starks Building
455 South Fourth Avenue
Louisville, KY 40202
,,Suyrrntr Caurf -of ~ftrufurkV
2008-SC-000037-DG
2008-SC-000044-DG
ASSOCIATED INSURANCE SERVICE, INC.
AND AON RISK SERVICES, INC . OF OHIO
V.
APPELLANTS
ON REVIEW FROM COURT OF APPEALS
CASE NO . 2006-CA-001737-MR
JEFFERSON CIRCUIT COURT NO . 02-CI-009027
DANIEL GARCIA, M.D .
AND RITA GARCIA
APPELLEES
ORDER OF CORRECTION
On the Court's own motion, the Opinion of the Court rendered January
21, 2010, is hereby modified by substituting page 7 of the opinion as attached
hereto, in lieu of page 7 of the opinion as originally rendered . Said modification
changes the word Appellees to Appellants on line 4 of page 7, and does not
affect the holding.
ENTERED : February 3, 2010 .
,.vuynrttr Courf of ~RrufurkV
2008-SC-000037-DG
2008-SC-000044-DG
ASSOCIATED INSURANCE SERVICE, INC .
AND AON RISK SERVICES, INC. OF OHIO
V.
APPELLANTS
ON REVIEW FROM COURT OF APPEALS
CASE NO. 2006-CA-001737-MR
JEFFERSON CIRCUIT COURT NO . 02-CI-009027
DANIEL GARCIA, M.D .
AND RITA GARCIA
APPELANES
ORDER OF CORRECTION
On the Court's own motion, the Opinion of the Court rendered January
21, 2010, is hereby modified by substituting page 21 of the opinion as attached
hereto, in lieu of page 21 of the opinion as originally rendered . Said
modification changes the word insured to insurer on line 8 of page 21, and
does not affect the holding.
ENTERED : March 19, 2010.
Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You should read the full case before relying on it for legal research purposes.
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.