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Case Bulletin – Supreme Court of West Virginia Issues Ruling on Assignment of Claims Against Insurer

On March 1, 2017, the Supreme Court of Appeals of West Virginia (the “Court”) issued its decision in Penn-American Insurance Co. v. Osborne, 2017 WL 878716 (W. Va. 2017), holding: (1) a consent judgment was not binding on an insurer that was not a party to the original suit; and (2) a pre-trial assignment of claims from defendants to plaintiff was void.


In this case, Beecher Osborne injured his leg on May 27, 2008, while working as a logger.  At the time of the injury, Mr. Osborne was working for H&H Logging Company (“H&H”) on land owned by Heartwood Fund, IV, LP (“Heartwood”) and leased by Allegheny Wood Products, Inc. (“Allegheny”).  Mr. Osborne filed suit against H&H, alleging deliberate intent, and Heartwood and Allegheny, alleging counts of negligence.  All three named defendants filed answers denying liability.


Allegheny and Heartwood requested a defense from their commercial general liability carrier, Liberty Mutual Insurance.  Liberty Mutual Insurance accepted coverage and provided both Allegheny and Heartwood a defense in Mr. Osborne’s lawsuit.  H&H requested a defense from its carrier, Penn-America Insurance Co. (“Penn-America”), however, Penn-America determined that the deliberate intent claim was excluded under its policy and did not provide a defense.  H&H retained counsel to defend this suit on its own expense.  Subsequently, Allegheny and Heartwood sent correspondence to H&H requesting that H&H provide them with indemnity and a defense as required under the contract they had with H&H.  H&H never forwarded this request to Penn-America, and Heartwood and Allegheny never directly notified Penn-America of their requests for indemnity and a defense in Mr. Osborne’s lawsuit.   Counsel for Allegheny and Heartwood filed a motion for leave to file a third-party complaint for declaratory relief against Penn-America, but no hearing was ever held, and the third-party complaint was never filed.


Mr. Osborne, Allegheny and Heartwood subsequently entered into a pre-trial settlement agreement, which included, inter alia, the following:  (1) a consent judgment of $1,000,000 against Allegheny and Heartwood; (2) a covenant not to execute, in which Mr. Osborne would not collect the $1,000,000 judgment from Allegheny or Heartwood; and (3) an assignment from Allegheny and Heartwood to Mr. Osborne of all the claims they may have had against Penn-America for failing to provide them a defense in Mr. Osborne’s lawsuit.  Additionally, the stipulated facts of the pre-trial settlement agreement allege that Penn-America breached its insurance contract by not providing Allegheny and Heartwood a defense, and Allegheny and Heartwood suffered damages because they were “compelled to expend funds and other resources in defense of this action.”


Mr. Osborne dismissed Allegheny and Heartwood from the suit and filed a second lawsuit against Penn-America and H&H (H&H subsequently settled with Mr. Osborne for approximately $8,000).  Penn-America denied liability in its answer, and further noted that it had no notice of the pre-trial settlement agreement since no party to the first lawsuit contacted it after Penn-America denied H&H coverage on the deliberate intent claim.  Additionally, when Penn-America attempted to challenge the reasonableness of the $1,000,000 consent judgment, the circuit court prohibited Penn-America from doing discovery on the extent and severity of Mr. Osborne’s injuries.  The parties exchanged competing summary judgment motions, and, on December 19, 2014, the circuit court of Wyoming County, entered summary judgment in favor of Mr. Osborne, finding Penn-America liable to him for the $1,000,000 consent judgment.


Penn-America appealed the circuit court’s decision.  In considering Penn-America’s appeal, the Court noted that the circuit court’s decision is reviewed de novo.  At issue in this appeal were the consent judgment and the assignment of claims; the covenant not to execute was not considered since it did not purport to bind Penn-America.  In considering the consent judgment, the Court notes that Penn-America was not a party to the first lawsuit and was never given notice of the pre-trial settlement agreement.  The Court also notes that Penn-America was denied the ability to perform discovery on the reasonableness of the $1,000,000 consent judgment amount in the second lawsuit against it.  Penn-America argued that under Horkulic v. Galloway, 665 S.E.2d 284 (W. Va. 2008), Syl. Pt. 7, West Virginia law clearly prohibits a party from being bound to a consent judgment where it was not a party to the lawsuit.  The Court noted that these facts illustrate the suspect nature of consent judgments since none of the parties to the pre-trial settlement agreement had any motive to contest liability or contest the $1,000,000 consent judgment amount.  Most importantly, the Court agreed with Penn-America and determined that since Penn-America was not a party to the lawsuit in which the consent judgment was entered, the consent judgment was not binding on Penn-America.


Next, the Court analyzed the pre-trial assignment of claims to Mr. Osborne from Allegheny and Heartwood.  Penn-America disputed the stipulated facts in the pre-trial settlement agreement, notably that Allegheny and Heartwood were without insurance coverage and their assets were exposed in Mr. Osborne’s lawsuit.  Penn-America argued that both Allegheny and Heartwood were being defended under their commercial general liability policies with Liberty Mutual Insurance.  Mr. Osborne argued that assignments of bad faith claims coupled with covenants not to execute are permissible under West Virginia law.  In considering this issue, the Court noted that the validity of an assignment and covenant not to execute is resolved based upon the particular facts at issue in the case.  The Court further noted that in its only case addressing this issue, Strahin v. Sullivan, 647 S.E.d2d 765 (W. Va. 2007), it held that the assignment in that case was invalid based on the Court’s concern for the fraud and collusion it may create in the future.  In Strahin, the Court stated that “holding an insurer liable for a judgment even when the insured is not legally liable for the same only encourages collusion between the insured and the plaintiff to raid the insurance proceeds.”  The Court determined that many symptoms of fraud and collusion are present in this case: the facts underlying the assigned claims were misrepresented; the $1,000,000 injury valuation and consent judgment amount are not supported by evidence in the record; and Penn-America had no notice of the pre-trial settlement negotiations.  The Court determined that the assignment of claims by Allegheny and Heartwood to Mr. Osborne was void.


In finding that the consent judgment was not binding on Penn-America, and that the assignment of claims from Allegheny and Heartwood to Mr. Obsborne was void, the Court reversed the December 19, 2014 circuit court’s order, and directed the circuit court to dismiss Penn-America from Mr. Osborne’s lawsuit with prejudice.