Opinion ID: 852525
Heading Depth: 2
Heading Rank: 3

Heading: Insured's Chose in Action Against Insurer

Text: To be sure, an insured may directly assert a claim against an insurer for breach of the duty of good faith. Erie Ins. Co. v. Smith ex rel. Hickman, 622 N.E.2d 515, 519 (Ind.1993) (recognition of a cause of action for the tortious breach of an insurer's duty to deal with its insured in good faith is appropriate). This duty and resulting cause of action arise out of the insurance contract between the insured and the insurer. Menefee v. Schurr, 751 N.E.2d 757, 760 (Ind.Ct.App.2001) (tort arises from special relationship between insured and insurer). On the other hand, like virtually every other American jurisdiction, Indiana follows the Direct Action Rule, prohibiting a third party or judgment creditor from directly suing a judgment debtor's insurance carrier to recover an excess judgment. See, e.g., City of South Bend v. Century Indem. Co., 821 N.E.2d 5, 9-10 (Ind.Ct.App.2005) (The `direct action rule' bars a party from pursuing a claim based on the actions of an insured directly against the insurer.); [10] Menefee, 751 N.E.2d at 761 (any excess liability of insurance carriers arises out of relationship between insurer and insured, and insurance carrier owes no duty to third party); Bennett v. Slater, 154 Ind.App. 67, 289 N.E.2d 144 (1972) (possible tort action available for insured to sue insurer directly, not available to third party). The direct action rule is so widely embraced as the result of shared conclusions about the adverse consequences flowing from third parties suing carriers directly. Menefee, 751 N.E.2d at 761 n. 2 (noting, in 2001, all but four states followed the direct action rule). The California Supreme Court once abandoned the direct action rule, then reversed itself after a decade of adverse social and economic consequences. Moradi-Shalal v. Fireman's Fund Ins. Co., 46 Cal.3d 287, 250 Cal.Rptr. 116, 758 P.2d 58, 66-68 (Cal.1988) (overruling Royal Globe Ins. Co. v. Superior Court, 23 Cal.3d 880, 153 Cal.Rptr. 842, 592 P.2d 329 (1979)). The California court concluded that permitting third-party direct actions against insurance companies promoted multiple-litigation, unwarranted settlement demands, escalating insurance costs, and serious conflicts of interest between the insureds and their insurers: [Allowing direct suits by third parties] promotes multiple litigation, because . . . [it] encourages . . . two lawsuits by the injured claimant: an initial suit against the insured, followed by a second suit against the insurer for bad faith refusal to settle. . . . [It also] encourage[s] unwarranted settlement demands by claimants, and . . . coerce[s] inflated settlements by insurers seeking to avoid the cost of a second lawsuit and exposure to a bad faith action. . . . [It may also lead to] escalating insurance costs to the general public resulting from insurers' increased expenditures to fund coerced settlements. . . . [Finally it] create[s] a serious conflict of interest for the insurer, who must not only protect the interests of its insured, but also must safeguard its own interests from the adverse claims of the third party claimant. This conflict disrupts the settlement process and may disadvantage the insured. Id. at 66-67 (citations omitted). Our Court of Appeals correctly recognized that involuntary assignment of claims against carriers whose insureds do not believe they have been wronged by their insurance companies was inconsistent with the direct action rule. And it would produce roughly the same results. First, permitting these forced assignments would certainly result in multiple litigation, as it would understandably become ordinary practice for judgment creditors to pursue insureds' insurance carriers where insureds cannot themselves fulfill the judgment. Second, these assignments would change adversely the dynamic in settlement negotiations. A new consideration in the bargaining  and one that would affect whether people choose to exercise their right to trial  would be the possibility of an excess coverage claim and the cost of litigating it, even successfully. This realistic concern would exacerbate potential conflicts of interest between the insured and the insurer, as the insurer would be forced to greater vigilance in the course of simultaneously protecting both its interest and the insured's interest. Third, the increased risk and cost would be borne by insureds who never make a claim and found their insurance service satisfactory. Allowing judgment creditors to force assignments in an attempt to recover judgments above the insured amount would render meaningless the bargains made in the marketplace between millions of insureds and hundreds of insurers about the amounts of policy coverage and the premiums necessary under standard underwriting principles to cover those policy amounts. This case illustrates sharply how consumer agreements between insureds and their insurers would be disregarded as judgment creditors attempt to recover amounts not insured for. Perkins and State Farm agreed to a $50,000 policy, and Perkins  and other consumers  paid premiums based on State Farm's calculation of risk. State Farm repeatedly offered to pay full policy limits to the Estate, and indeed, paid policy limits the day after judgment. Nonetheless, the Estate forced an assignment of Perkins' alleged cause of action against State Farm in an attempt to recover an additional $615,000. The $615,000 excess judgment was clearly not part of State Farm's bargained-for risk based on a $50,000 consumer agreement. More importantly, however, State Farm's increased risk would affect more than just Perkins' premiums. It would affect all the drivers who never experience a collision, drivers who think they are paying for a stated amount of coverage. Their real coverage would extend to some higher number that is sufficient to cover excess payouts and, of course, additional legal costs associated with litigating the proper amount of the payout above the stated limits. In effect, drivers who never have an accident would have to pay additional premiums to cover the requests of claimants who think the insureds' carriers did not do as good a job for the insureds as the insureds themselves think they did. The trial court's order requiring Perkins' forced assignment of his chose in action against State Farm was error. This does not in any way prohibit Perkins from directly suing State Farm or from voluntarily assigning his chose in action. [11]