Consent Judgments, Insurance Coverage and Bad Faith: How a $25,000 Policy Becomes a $20 Million Verdict

This opening session examines the impact of a consent judgment against an insured on third-party liability coverage, using the facts of a real California case as the running fact pattern: an insurer issues a 15/30 liability insurance policy, the insured causes a fatal collision, and the decedent’s heirs offer to settle for policy limits, which is rejected. Before the ensuing lawsuit goes to trial, the heirs offer to settle by entering into a $6 million stipulated judgment, a covenant not to execute against the insured personally, and an assignment of the insured’s “bad faith” rights against the insurer and the insurer refuses to consent. The session then takes up the default rule: no, absent participation or an assumption of the risk. In California, a liability insurer that defends its insured and does not otherwise commit to be bound is not automatically bound by a settlement it did not participate in (Hamilton v. Maryland Casualty Co. (2002) 27 Cal.4th 718), while a liability insurer that refuses to defend its insured is bound to a consent judgment entered without its consent, so long as the judgment is not collusive.

In other jurisdictions, a consent judgment entered without the insurer’s consent can be binding on the insurer — but only under defined circumstances. This session works through the three recurring prerequisites in most jurisdictions: coverage exists (or is later established) for the claim reduced to judgment; the stipulated amount is reasonable under the circumstances — not simply the number the parties agreed to; and there is no fraud or collusion between the insured and the claimant in reaching the stipulated amount.

In California, the answer is no: a liability insurer that defends its insured and does not otherwise commit to be bound is not automatically bound by a settlement it did not participate in, under Hamilton v. Maryland Casualty Co. (2002) 27 Cal.4th 718, 730, where the court held that “A defending insurer cannot be bound by a settlement made without its participation and without any actual commitment on its insured’s part to pay the judgment…”. The session then surveys how other jurisdictions answer the question: Arizona in Safeway Ins. Co., Inc. v. Guerrero (2005) 210 Ariz. 5; Washington in Bird v. Best Plumbing Group, LLC (2012) 175 Wash.2d 756; Missouri in Johnson v. Allstate Ins. Co. (Mo. Ct. App. 2008) 262 S.W.3d 655; Alaska in Great Divide Ins. Co. v. Carpenter ex rel. Reed (Alaska 2003) 79 P.3d 599; Iowa in Kelly v. Iowa Mut. Ins. Co. (Iowa 2000) 620 N.W.2d 637; Kansas in Glenn v. Fleming (1990) 247 Kan. 296; and Nevada in Allstate Ins. Co. v. Miller (2009) 125 Nev. 300.

The closing session returns to the running fact pattern’s final act: after the insurer refuses to consent, the lawsuit goes to trial, a judgment in excess of $12 million is entered, and the insured, personally liable for the excess judgment, can no longer obtain a covenant not to execute from the heirs. In California, the issue is being litigated; federal courts have touched, but not decided, the issue, Spradlin v. GEICO contains good analysis but does not reach it, and Dorroh v. Deerbrook says no, but with no analysis. In Nevada, the answer appears to be no. In other jurisdictions, it depends.