Opinion ID: 1714942
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Heading Rank: 1

Heading: The Insurers' Challenge to the Consent Judgment

Text: The circuit court based its conclusion that the insurers were precluded from challenging the consent judgment upon the rule under Georgia law that [w]hen an insurer denies coverage and absolutely refuses to defend an action against an insured, when it could do so with reservation of its rights as to coverage, the legal consequence of such refusal is that it waives the provisions of the policy against a settlement by the insured and becomes bound to pay the amount of any settlement made in good faith plus expenses and attorneys' fees. Georgia Southern & Florida Ry. v. United States Cas. Co., 97 Ga.App. 242, 244, 102 S.E.2d 500, 502 (1958). See also Atlanta Milling Co. v. Norris Grain Co., 271 F.2d 453 (5th Cir.1959); McCraney v. Fire & Cas. Ins. Co., 182 Ga.App. 895, 357 S.E.2d 327 (1987); and LaSalle Nat'l Ins. Co. v. Popham, 125 Ga.App. 724, 188 S.E.2d 870 (1972). The rule in these Georgia cases has a counterpart in Alabama law in the case of Stone Building Co. v. Star Electrical Contractors, Inc., 796 So.2d 1076 (Ala.2000). In Stone Building, Stone, a contractor, cross-claimed against Star, its subcontractor, to recover expenses Stone had incurred in settling a lawsuit filed by an employee of Star who had been injured on the job site where Stone and Star were working. The Star employee had suffered serious physical injuries, and he asserted various claims against Stone and Star based on negligence and wantonness. Stone's cross-claims were based upon provisions in the subcontract that required Star to maintain insurance for the benefit of Stone and to indemnify Stone against liability claims arising out of the work. After protracted litigation, during which Stone presented various demands to Star for indemnification and finally filed its cross-claim, Stone settled with the employee for $495,000. Star eventually obtained a jury verdict in its favor on the employee's claims. The circuit court subsequently entered a partial summary judgment in favor of Star on Stone's cross-claims and dismissed those cross-claims. This Court reversed the summary judgment based on the following statement of the law: The general rule is that, `if indemnity is sought against an indemnitor without notice of either the original suit or of the settlement by the indemnitee,' then the indemnitee has the burden of establishing that it was actually liable to the plaintiff and that the settlement was a reasonable one. Watts v. Talladega Fed. Sav. & Loan Ass'n, 445 So.2d 316, 320 (Ala.Civ.App.1984). However, if the indemnitor has been given notice of the action against the indemnitee and has been given an opportunity to defend or to settle the action, then the indemnitor `is precluded from contesting the indemnitee's liability in a subsequent indemnity or third-party action.' Id. `Indemnity against losses does not cover losses for which the indemnitee is not liable to a third person, and which the indemnitee improperly pays. A person legally liable for damages who is entitled to indemnity may settle the claim and recover over against the indemnitor, even though he has not been compelled by judgment to pay the loss. In order to recover, the indemnitee settling the claim must show that the indemnitor was legally liable, and that the settlement was reasonable. In the event that an indemnitor is not afforded the alternative of participating in a settlement or conducting the defense against the original claim, an indemnitee settling the claim will have the burden of establishing actual liability to the original plaintiff rather than the lesser burden of showing potential liability. `However, when the indemnitor has notice of the claim and refuses to defend, the indemnitor is bound by any good faith reasonable settlement, and the indemnitee need only show potential liability. `Practice guide: A practical device by which an indemnitee can protect against the awkward possibility of having to prove the original plaintiff's case against himself, the original defendant, is to offer the indemnitor before any settlement is concluded the choice of (1) approving the settlement or (2) taking over the defense of the case and agreeing to hold the indemnitee harmless in any event for damages which may be assessed against him in excess of the amount of the proposed settlement. If the indemnitor approves the settlement or defends unsuccessfully against the original claim, the indemnitor cannot later question the indemnitee's liability to the original claimant. If the indemnitor declines to take either course, then the indemnitee will only be required to show potential liability to the original plaintiff in order to support his claim over against the indemnitor.' 41 Am.Jur.2d Indemnity § 46 (1995) (footnotes omitted). 796 So.2d at 1090 (emphasis added by the Court in Stone Building ). The analogy between Star's duty to provide insurance and to indemnify in Stone Building and the insurers' duty to provide a defense in the instant case makes the application in Alabama of the specific rule in Georgia Southern & Florida Ry., supra, logically compelling. However, although the insurers fail to present any comparably specific precedent challenging this authority, they all, including Liberty, argue that they are entitled to a jury determination of their liability, under the rationale of Atlanta Casualty Insurance Co. v. Gardenhire, 248 Ga.App. 42, 545 S.E.2d 182 (2001), and Driskell v. Empire Fire & Marine Insurance Co., 249 Ga.App. 56, 547 S.E.2d 360 (2001). In Gardenhire, the insurer, Atlanta Casualty, had refused to provide a defense to its insured, Westbrook, in an automobile-accident case on the ground that an excluded driver, Westbrook's roommate McKinney, was driving. When Gardenhire, the plaintiff and the victim in the accident, sued Westbrook and McKinney, the jury determined that Westbrook had been driving and returned a verdict of $45,000 against only her. Westbrook assigned her claims against Atlanta Casualty to Gardenhire, who immediately sued the insurer for the full amount of the verdict. [6] The trial court entered a summary judgment for Gardenhire, and the insurer appealed, arguing that it was entitled to litigate the question whether the insured had misrepresented herself as the driver in the accident. The Georgia Court of Appeals held that the insurer was collaterally estopped from challenging the jury's determination and was liable to Gardenhire. The court held that the insurer was liable to the extent of the limits of the Westbrook's coverage because the insurer had failed to offer a defense. Although the nature of the claims assigned by Westbrook to Gardenhire are not set out in the opinion, the court also held that the insurer was entitled to a jury determination on the extent of its liability in excess of its coverage, presumably referring to a claim of bad-faith failure to offer a defense. In Driskell, the plaintiffs sued a motor carrier, Metro Carrier, for damages they sustained in an automobile accident with one of its vehicles. Empire Fire and Marine Insurance Company, Metro's insurer, refused to provide a defense on the ground that Metro's vehicle was not being operated by its employee at the time of the accident. Empire brought a declaratory-judgment action seeking to determine its coverage, but did not obtain in that action a stay of the plaintiffs' action. The plaintiffs subsequently obtained a judgment against Metro for $3,150,000 in an arbitration procedure. The limit of Empire's coverage for Metro was $1,000,000. The judgment entered on the arbitration award stated that Metro was consenting to the award as a result of Empire's refusal to provide it with a defense and stipulated that Metro would be liable only to the extent of its insurance coverage. Empire's declaratory-judgment action was dismissed without prejudice. The plaintiffs then brought an action to enforce the judgment, claiming that Empire should be compelled to pay the entire judgment because of its alleged bad-faith refusal to settle or to defend the liability suit. The trial court determined that Empire's policy did not require it to provide coverage for its full $1,000,000 limit, but that the plaintiffs were entitled to enforce their judgment to the extent of the coverage required by state law, $200,000. [7] The trial court also held that the insurer was entitled to a jury determination of any additional liability with respect to the plaintiffs' claim of bad-faith refusal to settle or to defend the liability action. Empire appealed, arguing that it was not liable in any respect. The plaintiffs cross-appealed, arguing that Empire was liable to the full extent of their judgment against Metro. The Georgia Court of Appeals affirmed the trial court's determination that Empire was liable to the plaintiffs to the extent of the state-required coverage, and that court also affirmed the trial court's finding that Empire was entitled to a jury determination of its liability in excess of coverage limits on the plaintiffs' bad-faith claims. However, the court also reversed the trial court's judgment insofar as it refused to allow the insurer to depose the arbitrator in an attempt to show collusion between the plaintiffs and the defendant. We conclude that both Gardenhire and Driskell are distinguishable from the instant case in that they address orders denying an insurer's right to a jury determination of damages that exceed the limits of its policy as a result of a claim of bad-faith failure to defend or to provide coverage. Wheelwright's consent judgment in this case is applicable only to the extent that the insurance policies at issue provide coverage; Wheelwright does not seek to impose liability upon the insurers beyond the coverage of their policies based upon a claim of bad faith. Moreover, we note that both Gardenhire and Driskell imply that an insurer who has the right and opportunity to offer a defense and who declines to offer that defense may not relitigate the amount of a judgment its insured agreed to in good faith and within the limit of the insurer's coverage. The insurers in this case had both the right and the opportunity to provide Dorsey with a defense; they declined to do so. [8] We conclude that under the circumstances of this case, the insurers are bound by Dorsey's consent judgment settling Wheelwright's claims to the extent that the consent judgment was reasonable and entered into in good faith. Stone Building and Georgia Southern & Florida Ry., supra . However, the insurers assert that the consent judgment was per se collusive because Dorsey agreed to the consent judgment only to the extent that the judgment would be paid by the insurers. They argue that because Dorsey agreed to be liable only to the extent of its insurance coverage, Wheelwright, the beneficiary of the consent judgment, should have the burden of showing that the consent judgment was not collusive. The insurers cite Steil v. Florida Physicians' Insurance Reciprocal, 448 So.2d 589 (Fla.Dist.Ct.App. 1984), and Griggs v. Bertram, 88 N.J. 347, 443 A.2d 163 (1982), in support of this contention. In Steil, a medical-malpractice action, the plaintiff and the physician agreed to a settlement after the physician's insurer refused to defend the plaintiff's claim. The settlement provided that the physician was liable to the plaintiff in the amount of $35,000, and it assigned the physician's rights against his insurer to the plaintiff; in return, the plaintiff dismissed her claims against the physician and released him from all other liability. The plaintiff then filed an action against the insurer seeking coverage for the settlement amount. The trial court in that action granted the insurer's motion to dismiss, and the plaintiff appealed. The Florida District Court of Appeal reversed the dismissal and held that the insurer would be liable to the extent of the settlement in the event that the trial court determined that the insurer had wrongfully refused to provide the physician with a defense. However, the court also determined that the fact that the settlement by the insured contained a covenant not to execute made the good faith of the settlement suspect and warranted imposition of the requirement that the party seeking to enforce the settlement have the initial burden of showing that it was reached in good faith. The court in Steil also discussed Griggs, supra, which had adopted a similar requirement under similar circumstances. We decline to adopt the rule in Steil under the facts of this case for a number of reasons. First, the insurers in this case, unlike the insurer in Steil, were informed of the consent settlement and its terms, and they had ample opportunity to contest those terms before the settlement was approved by the bankruptcy court. Second, the circuit court's finding that the settlement was not collusive or made in bad faith is supported by the record, which shows that Wheelwright was claiming approximately $10,000,000 in damages and was prepared to present evidence showing damages in excess of $3,000,000. [9] Further, the facts permit an inference that the insurers expressly consented to the terms of the consent judgment by the phrasing of their objections to Wheelwright's motion for relief from the bankruptcy stay and approval of the settlement with Dorsey, in which they stated that they did not object to the entry of a proper order at the proper time ... for the purpose of the entry of a consent judgment as announced by the litigating parties. Accordingly, we find no error in the circuit court's determination that the insurers are precluded from challenging the validity or the amount of the consent judgment.