Pre-trial Bashor and Nunn Agreements

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Use validated by Supreme Court with conditions

Contractual agreements between defendant insured's and injured plaintiffs to pursue claims against the insurer that include a covenant not to execute against the defendant's personal assets have long been an option following a trial on the merits in Colorado. Pursuant to Ross v. Old Republic Ins. Co., decided by the Colorado State Supreme Court in April 2008.

This article discusses why a blanket prohibition against the use of pre-judgment Bashor agreements would have been unwarranted, and the need to clear-up uncertainty about the use of pre-judgment Bashor agreements created by lower court rulings.

Since 1913, the public policy of this state has required that all persons having to do with insurance services to the public be at all times actuated by good faith in everything pertaining thereto, and abstain from deceptive or misleading practices . . . . Over the years, the Colorado Supreme Court has expounded on this duty on numerous occasions, beginning with its landmark decision in Farmers Group, Inc. v. Trimble, where the Court held that a liability insurers breach of the duty of good faith and fair dealing will give rise to a separate cause of action in tort, and continuing through its decision in Goodson v. American Standard Ins. Co. of Wisconsin, where the Court held that an insured need not establish a substantial economic loss in order to recover emotional distress and other non-economic damages caused by the insurers bad faith conduct.

While the tort of bad faith is predicated on intentional conduct, in the third-party context, the insurers liability is determined based on general principles of negligence. The tort is established upon proof that the insurer acted unreasonably under the circumstances. Because most liability insurance policies cede to the insurer the right to control the defense and settlement of third-party lawsuits, the Colorado Supreme Court has held that a liability insurer stands in a position of trust with regard to its insured and has characterized the relationship between insurer and insured as quasi-fiduciary in nature. A liability insurer may breach its duty of good faith and fair dealing in various ways, including, inter alia, by failing to defend its insured on a covered claim or by refusing to settle a claim within the insurance policy limits when it has the opportunity to do so.

Given that insureds enter into insurance contracts for the financial security obtained by protecting themselves from unforeseen calamities and for peace of mind, rather than to secure commercial advantage, and yet typically have no ability to control the defense or settlement of lawsuits arising out of such calamities, they may find themselves in dire straits when their insurers unreasonably fail to defend or settle lawsuits filed against them. The question may thus arise: What can an insured permissibly do, without voiding coverage under the insurance policy, to protect itself in the event its liability insurer unreasonably fails to defend or settle a third-party lawsuit?

One way that an insured may seek to protect itself in such a situation is through a contractual agreement whereby it assigns its claims against its insurer to the injured plaintiff in exchange for a covenant not to execute against the defendants personal assets. The Colorado Supreme Court has recognized the propriety of such an agreement when entered into following a trial on the merits, and now has addressed whether the same type of agreement is permissible when entered into prior to a trial on the merits. Having granted certiorari in Ross v. Old Republic Ins. Co., the court cleared up much of the uncertainty that had been created by the court of appeals decision in Ross, as well as two prior decisions, Serna v. Kingston Enterprises and American Manufacturers Mut. Ins. Co. v. Seco/Warwick Corp., which collectively raised questions as to the effectiveness and validity of so-called pre-judgment Bashor agreements.

This article will analyze the common features of pre-judgment agreements, discusses the treatment such agreements have received in the State of Colorado, and in the process explain why a blanket prohibition on their use was unwarranted.

The Pre-Judgment Agreement

Most pre-judgment agreements that attempt to resolve litigation without the consent of the liability insurance carrier involve three components: (1) an assignment of the insured's rights against its liability insurer to the injured party; (2) the injured party's agreement not to execute against the insured's assets; and (3) a judgment establishing the insured's liability and the injured party's damages. Insurers have attacked each of these components in challenging pre-judgment agreements, though the legal architecture of the agreements has been validated by the majority of courts.

A. The Assignment.

While pre-judgment agreements come in many different shapes and sizes, they share in common the assignment of the insured's rights to the injured party. In some instances, the insured may agree to prosecute a lawsuit against the insurer and to assign the proceeds, if any, collected in the action to the injured party. In other cases, the parties may agree that the injured party will prosecute the lawsuit in the insured's name pursuant to an assignment of rights.

Most courts that have considered the issue have concluded that assignments of this nature are permissible, though some have held that the insured may only assign the right to collect the judgment, and not personal claims for emotional distress and punitive damages. In Colorado, it is permissible for an insured, following entry of an excess judgment in a contested trial, to agree to prosecute an action against its liability insurer and to assign to the injured party the proceeds, if any, recovered in the action in order to satisfy the judgment. Further, in Olmstead v. Allstate Ins. Co., the U.S. District Court for the District of Colorado concluded that a cause of action for failure to settle may be assigned directly to the injured party for prosecution following the entry of judgment.

Logically, if the proceeds collected in an action brought by the insured against its carrier may be assigned, it would also seem that the insured is allowed to assign its claim against the insurer directly to the injured party. Indeed, as noted in Olmstead, this is the prevailing majority rule. In a similar vein, because it is permissible for an insured to assign its rights against its insurer to the injured party, it should not matter whether the assignment technically takes place before or after the entry of judgment. It is axiomatic that principles of contract law, and, in particular, the law of assignments, apply equally to all contracts, regardless of when they are made. Moreover, pre-judgment agreements can, and usually do, provide for the assignment to take place after the judgment enters, which would seem to obviate any technical problem that a court might have with the timing of the assignment.

B. The Covenant Not To Execute.

Pre-judgment agreements also share in common a promise by the injured party not to execute against the insured's personal assets. Insurers challenging pre-judgment agreements have argued that the covenant not to execute relieves the insured of liability, with the result that the insurer has no obligation to indemnify the insured under the terms of the policy. In effect, this argument is an attempt by the insurer to benefit from the insured's bargain with the injured party, despite the fact that the agreement was negotiated not to confer a benefit on the insurer, but rather, to hold it responsible for allegedly unreasonable conduct. As a stranger to the agreement, the insurer should not be allowed to benefit from its terms.

Indeed, the overwhelming majority of jurisdictions, including Colorado in the post-judgment context, recognize that a covenant not to execute is not a release that extinguishes the insured's liability to the injured party; it is merely a promise, the breach of which may give rise to a claim for damages as between the parties to the agreement (i.e., the insured and the injured party). While the Colorado Supreme Court has not addressed the significance of a covenant not to execute in the pre-judgment context, there is no reason that it should have a different effect than in a post-judgment agreement, as principles of contract law should apply equally to all contracts regardless of when made. Because a covenant not to execute does not extinguish the insured's liability when entered into after a judgment, it follows that it should not be deemed to do so when made prior to the entry of judgment.

In addition to arguing that a covenant not to execute releases the insured of liability, insurers have also asserted that an insured who is protected by a covenant not to execute can suffer no damages, as a matter of law, because it will never be required to pay the judgment. As the argument goes, because the insured will never have to pay the judgment, the insurer should not be required to indemnify either the insured or the insured's assignee. In support of this no damages argument, insurers often cite the so-called payment rule, which dictates that an insurer may be held liable for a judgment in excess of policy limits only if the insured has paid part or all of the judgment. The rationale underlying this rule is that where an insured does not pay any money in satisfaction of an excess judgment, the insured is not harmed and thus may not collect damages.

While a few courts have adopted the payment rule, the overwhelming majority of jurisdictions have rejected it. Courts in these latter jurisdictions instead follow the judgment rule, which recognizes that the entry of judgment . . . alone is sufficient damages for an insured to sustain a recovery from an insurer for its breach of duty. They have found significant the fact that the insurance policies in question insured against liability, not reimbursement. Thus, these courts have concluded that the insured's actual payment of an excess judgment, and its ability to pay the excess judgment, are irrelevant considerations when examining whether the insurer may be held responsible to pay the judgment. Indeed, the Colorado Supreme Court embraced this principle in both the Bashor and Trimble decisions.

The rationale behind allowing full recovery to an insured who has not paid the excess judgment is to prevent bad-faith practices in the insurance industry by eliminating the insurer's ability to hide behind the financial status of its insured. It has also been noted that the judgment rule prevents an insurer from benefiting from the poverty of an insured who has a meritorious claim but cannot first pay the judgment imposed upon him. If payment or demonstration of ability to pay a judgment were the rule, then an insurer would be encouraged to refuse to settle a claim merely because the insured is insolvent, which would impair the use of insurance by the poor. In adopting the judgment rule in a case involving an excess judgment entered against an insolvent estate, the Tenth Circuit explained:

Where, as here, the decedent tortfeasor had no funds, the insurer who failed to settle should not be allowed to successfully assert that it is not liable despite its breach of duty because the decedent tortfeasor was without funds. Such a rule would encourage the insurer to avoid its duty in many cases. It would balance the risk in every case knowing that it had an escape hatch. Refusal to settle within the policy limits would be the rule.

Such a course would impair the use of insurance for a poor man. The fullness or the emptiness of an insured's purse should be irrelevant. It is a poor measure of liability by the insurer under its contract.

The fact is that courts permitting pre-judgment agreements coupled with covenants not to execute do so because it is thought that an insured that has been placed at economic risk by its insurer's breach should be allowed to protect itself by shifting the risk to the breaching insurer without first subjecting itself to potential financial ruin. Given that the covenant not to execute is a centerpiece of any pre- or post-judgment agreement, allowing insurers to use the covenant to argue that the insured has sustained no damages would deprive the insured of the only means it may have to protect itself when its insurance carrier has acted improperly. A blanket prohibition on the use of pre-judgment agreements containing covenants not to execute would result in more cases going to trial with resulting economic hardship to insured's; an injured party would be loathe to enter into such an agreement if the covenant not to execute precluded its enforcement, while an insured would have little incentive to enter into the agreement if it did not contain a covenant protecting the insured's assets. Thus, assuming the judgment is not the product of fraud or collusion, discussed below, the use of a covenant not to execute in a pre-judgment agreement provides no basis on which to hold the agreement unenforceable.

C. The Judgment.

The linchpin of any pre-judgment agreement entered into without the insurers consent is a judgment establishing the insured's liability and the injured party's damages. Even where courts focus on the assignment or covenant not to execute, their real concern appears to be not the assignment or covenant standing alone, but the potential for fraud and collusion when the judgment to which they apply results from something less than a full, adversarial trial. Indeed, the division in Ross made specific reference to the fact that the judgment did not result from a contested proceeding in concluding that it was not binding on the insurer.

There are at least three ways in which a judgment creating liability on behalf of the insured can be obtained: (1) a stipulated or consent judgment; (2) an actual judgment by a judge or following an adversarial trial or the insured's default; or (3) a judgment entered by a court following a judicial or quasi-judicial proceeding (e.g., arbitration) confined to certain issues or otherwise limited in the manner or scope of presentation of evidence. The manner in which the judgment creating liability is obtained may be a significant factor in determining whether it should be binding on the insurer; it may lend credibility to the outcome of the process or, on the other hand, it may cause a court to question the result.

In some Colorado cases, a consent or stipulated judgment, when coupled with a covenant not to execute, has been viewed with a skeptical eye. By contrast, a judgment entered following a contested trial or a damages hearing held after the entry of a default judgment seems unassailable. Given the potential for abuse that exists when a judgment is entered following something less than a contested trial or a default damages hearing, many courts allow the insurer to attack the judgment on grounds that it was procured through fraud or collusion. It has been noted, however, that there is nothing inherently fraudulent or collusive about a pre-judgment agreement.

Nor is there is anything inherently fraudulent or collusive about a stipulated or consent judgment. For instance, a stipulated or consent judgment in the amount of $2.0 million may be quite reasonable if the insured's own expert witness or lawyer placed likely damages in this range, or even higher, and advised the insurer that its insured had a 90% chance of being found liable at trial. By contrast, a stipulated judgment in that same amount may not seem reasonable if the insured's lawyer or expert evaluated the case and gave the insured only a 10% chance of losing at trial and indicated that the damages would likely be in the range of $300,000.

In determining issues of fraud or collusion, or deciding whether a given settlement is reasonable, courts in other jurisdictions have fashioned various procedures to address the competing interests of the insurer and the insured. In Arizona, for instance, the procedure employed to determine whether a judgment is binding on an insurer depends on the nature of the insurers misconduct. When the insurer denies its defense obligations, and is subsequently found to have done so wrongfully, it will not be permitted to question the reasonableness of the judgment amount, whether it was stipulated to or reached by any other mechanism. However, when the insurer refuses to settle a case while defending under a reservation of rights, and it is later determined that coverage exists, the insurer will be bound by a judgment when: (1) the insurer is fairly notified by the insured of its intent to enter into a pre-judgment agreement; (2) the agreement is created fairly; and (3) is not the result of fraud or collusion. Further, even when these factors are established, the insured will bear the burden of establishing that the settlement was reasonable and prudent.

The Iowa Supreme Court has adopted a similar test to be used when determining whether an insurer may be held liable for a stipulated judgment:

[I]n settlements like the one here, an insurer, relying on fraud or collusion, must plead and prove these defenses. If either defense is proven, the settlement is invalid and unenforceable against the insurer. The injured party, however, has the burden to prove by a preponderance of the evidence that (1) the underlying claim was covered by the policy, and (2) the settlement which resulted in the judgment was reasonable and prudent. The test the fact finder must apply on this issue is what a reasonable and prudent person in the position of the defendant . . . would have paid to settle the plaintiff's . . . claim. In applying this test, the fact finder must consider facts bearing on the liability and damage aspects of the claim as well as the risks of going to trial.

While judicial approaches vary, the majority of courts have recognized that the risk of collusion and fraud can be lessened . . . if not avoided altogether by placing a requirement upon the plaintiff to prove that the settlement it reached with the insured was reasonable before that settlement can have any binding effect upon the insurer. Despite the abundance of authorities approving of pre-judgment agreements in instances where an insurer wrongfully refuses to defend or settle a third-party lawsuit, Colorado's approval of these agreements remains uncertain, particularly considering the Serna, Seco/Warwick, and Ross decisions. The Colorado Supreme Court may or may not clear up the confusion when it renders its opinion in Ross.

Colorado Response to Pre-Judgment Agreements

Ironically, it was a non-insurance case, Serna v. Kingston Enterprises, which appears to have served as the catalyst for the insurance industry's attack on pre-judgment agreements in Colorado. Although no insurer misconduct was involved, language from the opinion has been repeatedly cited, at both the trial and intermediate appellate court levels, as a basis for refusing to enforce pre-judgment agreements in the insurance context.

Ms. Serna was fifteen years old when her employer, Kingston Enterprises (Kingston), instructed her to drive from one of its franchise locations to another. While performing this task, Serna's car collided with another automobile, resulting in serious bodily injuries to the passengers in the other car. The passengers sued Serna and Kingston for negligence and respondeat superior, respectively. The passengers settled with Kingston for $850,000 before electing to serve process on Serna.

The passengers then approached Serna with a settlement proposal that she promptly accepted. Pursuant to the terms of the settlement, Serna agreed to: (1) allow entry of a $1.5 million judgment against her; (2) employ the passengers attorney to sue Kingston in an indemnity action; (3) permit the passengers to make all decisions with respect to her lawsuit against Kingston; (4) refuse to settle with Kingston without the passengers prior approval; and (5) pay monies recovered from defendant to the passengers. In return, the passengers accepted $40,000 from Serna's personal liability insurance carrier, agreed not to execute on the remainder of the $1.5 million judgment, and promised to pay Serna half the monies recovered from Kingston in excess of $1.0 million.

Consistent with the agreement, Serna brought an indemnity action against Kingston. Prior to trial, the district court granted summary judgment against Serna, finding that her claim was barred by the exclusivity of the Workers Compensation Act (WCA) and by the Uniform Contribution Among Tortfeasors Act (UCATA). Serna appealed.

Despite the fact that the enforceability of the pre-judgment agreement did not form the basis for the trial courts grant of summary judgment, it became the centerpiece of the divisions opinion. After concluding that neither the WCA nor the UCATA barred Serna's claims, the division noted that Kingston could defend the judgment on any grounds and proceeded to address Kingston's argument that the indemnity claim failed because there was no realistic prospect of the passengers executing on the judgment entered against her. In accepting Kingston's argument, the division distinguished the assignment agreement from the one permitted in Bashor, remarking:

In the reported Colorado cases to date, Bashor agreements have been used only in cases involving allegations of a breach of an insurers contractual duty to indemnify an insured. Further, the shared recovery contemplated by Bashor encompasses only the return, on a full or pro rata basis, of the amount of money a Bashor defendant had already paid to the injured party.

Here, any duty on defendants part to indemnify Serna arose not under contract but under common law. Further, Serna's agreement with the passengers was more akin to a profit-sharing agreement; her share of any recovery against defendant was not limited to recouping only the losses she or her insurance company sustained. . . .

Finally, and perhaps most important, unlike the Bashor situation, there has never been a judgment enforceable against Serna; indeed, the only judgment against her is one to which she stipulated, along with conditions virtually ensuring that it would never be enforced against her.

Because, under the particular circumstances of this case, we discern no danger that Serna will ever sustain a monetary loss or otherwise be subjected to an enforceable judgment against her, we affirm the trial courts dismissal of her indemnification claim against defendant.

Less than one year later, in American Manufacturers Mut. Ins. Co. v. Seco/Warwick Corp., a visiting Wyoming federal district court judge cited Serna with approval in refusing to enforce a pre-judgment agreement entered into following the failure of two different insurers to settle a liability claim against their insured. While defending their insured under a reservation of rights, the insurers, which had issued liability insurance policies containing $4.0 million in combined limits, rejected the plaintiffs $1,985,000 settlement demand and refused to offer more than $300,000. Confronted with the possibility of an excess or uncovered judgment, the insured entered into a pre-judgment agreement with the plaintiff. Pursuant to the terms of the settlement, the insured agreed to pay $5,000 to the plaintiff, admit its liability, and assign to the plaintiff all of its rights to seek indemnity against the insurer. The plaintiff, in turn, agreed that it would not seek further funds from the insured, and the parties submitted the issue of damages to arbitration. After the arbitrator awarded the plaintiff more than $3.6 million in damages, the plaintiff and the insured stipulated to the entry of a judgment in the amount of the award and the plaintiff served writs of garnishment on the insurers. The insurers responded by filing a declaratory judgment action, asserting that their insurance policies did not afford coverage for the losses on account of various policy exclusions, and further, that they should not be bound by the judgment because it was procured through improper means.

On these facts, the court held that the there was no coverage under the policies for the damages awarded. While the court could and should have stopped here, it continued on to address, in dicta, the enforceability of the pre-judgment agreement. Citing to Serna, without acknowledging its non-insurance origin, and with no mention of any of the numerous authorities upholding pre-judgment agreements in the insurance context, the court stated:

Where, as here, the party claiming a right to indemnity enters into a stipulated judgment with the claimant, and enters an agreement that absolves itself of further liability, the claimant has no right of action against the supposed indemnitor.

While the federal district courts statements were dicta, and the decision is not binding on Colorado trial courts in any event, the language is troubling because it applied Serna in the context of an insurers failure to settle one of the situations in which courts in other jurisdictions have found pre-judgment agreements enforceable. The Seco/Warwick Courts failure to acknowledge or address the numerous authorities validating pre-judgment agreements, however, coupled with the fact that the court did not need to reach the question of the agreements enforceability in the first place, renders the opinion of dubious precedential value.

Finally, in Ross v. Old Republic Ins. Co., the court of appeals purported to apply Colorado law to a pre-judgment agreement. As noted earlier, the Colorado Supreme Court has granted certiorari review of the case, and one of the issues under consideration is whether the agreement comported with the Bashor decision. Given the peculiar facts involved in Ross, however, the Court may end up resolving the case without deciding the enforceability question.

The Ross case arose out of an October 10, 1995 airplane crash in which the pilot and two passengers, Colt. H. Ross and John Dirk Ross, were killed. A wrongful death action was subsequently filed by the heirs of the two passengers against the pilots estate, the company that owned the airplane and employed the pilot, Durango Air Service, Inc. (DAS), and the president of DAS, Donley E. Watkins. At the time of the accident, DAS was listed as the named insured on two separate liability insurance policies issued by Old Republic Insurance Company (Old Republic): an aviation policy with limits of $700,000 and a commercial general liability (CGL) policy with limits of $1.0 million. Watkins and the pilots estate were also insured under the policies issued to DAS.

Old Republic acknowledged coverage for the accident under the aviation policy and agreed to defend the insured's under a reservation of rights. Old Republic claimed that no coverage existed under the CGL policy, however, on account of a so-called Airport Exclusion. In addition, Old Republic asserted that the limits of coverage under the aviation policy were capped at $100,000 per passenger killed, for a total of $200,000.

Old Republic maintained throughout the litigation that its exposure under the policy was $200,000 and refused to offer more than that amount toward a settlement. Facing exposure to a judgment well in excess of their insurance policy limits, be they $200,000 or $1.7 million, the insured's attempted to protect themselves through a pre-judgment agreement with the decedents heirs. While not mentioned in any of the written opinions that have been generated in connection with this dispute, the heirs stated in their cross-petition for certiorari that the pre-judgment agreement was proposed approximately one month prior to the liability trial, by Watkins retained defense counsel, who was selected and paid for by Old Republic. The heirs claim that six days after the pre-judgment agreement was suggested, they offered to settle for $800,000, or, in the alternative, to enter into a pre-judgment agreement in which Watkins and DAS would confess judgment in the amount of $4.0 million and assign to the heirs their rights to pursue collection of the judgment from Old Republic. In exchange, the heirs would agree not to pursue collection of the judgment from Watkins or DAS.

According to the heirs, Watkins counsel faxed a letter to Old Republic ten days prior to trial requesting permission to allow Watkins and DAS to confess judgment in the amount of $2.0 million each. In response to this inquiry, counsel for Old Republic faxed a letter to Watkins counsel stating, in part:

On behalf of Old Republic, we can assure you and your clients that, if your clients wish to resolve the litigation as you suggested, Old Republic has no objection to that and will agree to indemnify your insured's, but only to the extent of the determined insurance coverage.

The trial was vacated and shortly thereafter Old Republic filed a declaratory judgment action in federal court seeking a determination that its coverage was limited to $200,000, and the heirs filed a counterclaim for bad faith breach of insurance contract. While the federal court action was pending, the pre-judgment agreement was finalized on the following terms: (1) Watkins and DAS agreed to confess judgment of $2.0 million each, plus interest; (2) Watkins agreed to sign a promissory note in the amount of $50,000, for which he would be reimbursed if the heirs recovered more than the amount of the consent judgment; (3) Watkins and DAS agreed to prosecute claims against Old Republic fully; (4) Watkins and DAS agreed to be represented by the heirs lawyers and to waive any potential conflicts of interest; (5) the heirs reserved the right to approve any settlement reached with Old Republic; (6) the parties agreed to share any compensatory or punitive damages recovered beyond the amount of the consent judgment; and (7) the heirs agreed not to execute on the judgment provided Watkins and DAS faithfully performed their obligations under the pre-judgment agreement. The trial court subsequently entered judgment against Watkins and DAS in the wrongful death case in the amount of $4.0 million, plus interest. Old Republic then paid $200,000 to the heirs in partial satisfaction of the judgment, and proceeded to litigate the coverage issues in the declaratory judgment action.

After being presented with cross-motions for summary judgment on the coverage issues, the federal district court concluded that the Old Republic insurance policies provided coverage for the accident in the total amount of $1.7 million. Old Republic appealed.

During oral argument, the Tenth Circuit panel questioned whether it had jurisdiction to resolve the controversy because the trial courts order had not disposed of the insurance bad faith counterclaims that were filed in the declaratory judgment action. Confronted with the possibility of further appellate delay, Watkins and DAS, at the heirs request, decided to dismiss the bad faith counterclaims and to look solely to the available insurance policy limits to satisfy the judgment. After the formality of dismissing the counterclaims was completed, the Tenth Circuit affirmed the trial courts order, concluding that Watkins and DAS were entitled to $700,000 in coverage under the aviation policy and $1.0 million under the CGL policy. Old Republic subsequently paid $1.5 million to the heirs, taking a credit for the $200,000 it had previously paid.

A dispute then arose between Old Republic and the heirs as to whether Old Republic was required to pay interest over and above the $1.5 million. Under the heading Supplementary Payments, the CGL policy provided that Old Republic would pay, in addition to the applicable limit of liability: . . . all interest on the entire amount of any judgment therein which accrues after entry of judgment and before the company has paid or tendered or deposited in court that part of the judgment which does not exceed the limits of the company's liability thereon. Thus, the heirs argued that Old Republic was contractually obligated to pay post-judgment interest on the amount of the consent judgment from the date it was entered until Old Republic, years later, paid the remaining $1.5 million owing under the policy. When Old Republic refused to pay the interest, the heirs filed writs of garnishment in state court to collect the unpaid interest.

In the garnishment action, the trial court concluded that Old Republic was indeed required to pay interest because Old Republic had agreed to the consent judgment and was barred by the doctrine of res judicata from challenging the judgment. In fact, the trial court awarded attorneys fees to the heirs based on its conclusion that Old Republics challenge to the enforceability of the judgment was groundless. Against this backdrop, the case made its way to the Colorado Court of Appeals.

On appeal, the heirs argued that Old Republic had consented to the underlying judgment, and that it was barred under the doctrines of waiver, estoppel, res judicata, and collateral estoppel from attacking the judgment. After rejecting each of these arguments, the division proceeded to analyze whether Old Republic could be bound by the judgment. Citing to Serna, the division concluded that the agreement in question was not a true Bashor agreement, noting that: (1) it was entered into prior to the entry of judgment; (2) it was more akin to a profit-sharing agreement; and (3) the heirs were seeking to utilize it to collect in a garnishment proceeding, as opposed to a tort claim for bad faith. Then, after stating than an enforceable judgment against the insured's never existed apart from the confessed judgment to which they stipulated, the division cited Miller v. Byrne and concluded that the judgment was not binding on Old Republic because it was entered without an evidentiary hearing and without Old Republics participation. The division went on to hold, however, that the plaintiffs were entitled to statutory interest pursuant to C.R.S. 5-12-102, and remanded the case to the trial court to determine the amount of interest owing under the statute.

From review of the opinions that have been generated in connection with this now 12 year-old dispute, as well as the briefs of the parties, the Colorado Supreme Court may well decide that it need not reach the Bashor issue, included among the questions accepted for review. The underlying settlement agreement was entered into as a consequence of Old Republics failure and refusal to settle the Rosses claims against its insured's within policy limits, and specifically contemplated the prosecution of a bad faith action against Old Republic to recover damages arising from the insurance carriers conduct, including the amount of the judgment against the insured's, other compensatory damages, punitive damages, interest, and costs. Subsequently, however, the Rosses abandoned their bad faith claims against Old Republic, and instead sought only interest on their judgment in a garnishment proceeding.

The cogency of the pre-judgment agreement in this context is uncertain. For instance, if the supreme court were to decide that, consistent with the court of appeals ruling, Old Republic agreed to indemnify its insured's to the extent of the determined insurance coverage and that Old Republic must pay interest on the $1.5 million amount from the date that this agreement was made until the date when the limits were paid, there may be no need to consider whether the agreement was valid. That is, the court could find, irrespective of the judgment, that Old Republic bound itself in November 1998 to indemnify its insured's to the extent of the determined insurance coverage, and that it therefore owes interest on that amount until payment was ultimately made in May 2002. Alternatively, the court could hold that, by payment of insurance proceeds totaling $1.7 million, Old Republic acknowledged the validity and propriety of the judgment to the extent of its payment, such that Old Republic remains liable for post-judgment interest due under the comprehensive general liability policy's Supplementary Payments provision. Again, the court could reach this conclusion based solely on its evaluation of Old Republics actions, without ruling on the enforceability question.

In sum, it is concerning that Sernas sweeping language has been extended into the insurance arena with no discussion or analysis of the numerous, contrary authorities from other jurisdictions that have approved the use pre-judgment agreements. Even more alarming is the fact that the extension has taken place without any discussion of the legitimate interest that an insured has in protecting itself from insurer misconduct. While the question may not get decided by the supreme court in Ross, when finally resolved, the authors expect that Colorado will join the majority of jurisdictions that recognize the validity of pre-judgment agreements in appropriate cases involving insurer misconduct.

Bradley A. Levin and Michael J. Rosenberg are shareholders in the Denver-based law firm  Levin Rosenberg PC, where they dedicate the majority of their time practice to insurance coverage and insurance bad faith litigation.

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