Opinion ID: 2292704
Heading Depth: 1
Heading Rank: 4

Heading: Applicability of the Gulf Insurance Test

Text: The parents argue that the equitable garnishment court erred in ruling that the $4,580,076 judgment was subject to the Gulf Insurance test. They claim that the test is inapplicable because, by its very terms, it only applies to determine the reasonableness of settlements. Great American, on the other hand, contends that applying the Gulf Insurance test to the $4,580,076 judgment was appropriate because it was the result of a settlement, not a trial on the merits. In Gulf Insurance, this Court held that a reasonableness standard is appropriate in determining the enforceability of section 537.065 settlements. 936 S.W.2d at 815. A settlement is reasonable if it is what a reasonably prudent person in the position of the defendant would have settled for on the merits of the plaintiff's claim. Id. at 816. The requirement of reasonableness strikes the appropriate balance between the interests of the insurer and the interests of the insured. Id. at 815-16. If the insurer refuses to defend, section 537.065 allows the insured to enter an agreement to limit its exposure to liability to the insurance policies. Id. at 816. The test of reasonableness ensures that the insurer will not have to pay a settlement that is unreasonable in proportion to the damages incurred. Id. The Gulf Insurance test only applies to section 537.065 settlements. The award of damages in this case was a judgment entered after a bench trial, yet Great American argues that this trial lacked any semblance of an adversarial proceeding because CPB did not present a defense. What Great American ignores is that it had an opportunity to present a defense but declined to do so. CPB entered into a section 537.065 agreement to limit its exposure to liability. The agreement did not admit liability or damages; instead, it simply limited the collection of any judgment against CPB to the insurance polices. The structure of the section 537.065 agreement actually gave Great American more protection than a settlement that admitted liability and determined damages. The parents still had the burden to prove liability and damages in a bench trial. Although the trial court found CPB liable and awarded the parents $4,580,076 in damages, it could have found that CPB was not liable or that no damages were suffered. The judgment here is not a settlement and is not subject to the Gulf Insurance reasonableness test. Further, Great American's proposed application of the Gulf Insurance test is inconsistent with the doctrine of collateral estoppel. If Great American's proposed application of the Gulf Insurance test is accepted, it will encourage insurers to refuse to defend on behalf of insureds. The insured, unwilling to expose itself to liability beyond the insurance policy, will enter into a section 537.065 agreement limiting any collection of damages. Once the trial court renders its judgment and the plaintiff files an equitable garnishment lawsuit against the insurer, the insurer will challenge the trial court's finding of liability and damages. Then, the plaintiff will be forced to re-litigate the entire case for the equitable garnishment court so that it can determine whether the judgment was reasonable. The result of Great American's proposed application of the Gulf Insurance test is that all insurers would receive two bites of the appleonce when the trial court determines liability and damages and once when the equitable garnishment court determines reasonableness. The court erred in applying the Gulf Insurance test and determining reasonableness of the judgment.