What Obligations And Rights Does A Policyholder Have After An Insurer Denies The Duty To Defend?

Stipulated judgments after an insurer’s denial of the duty to defend were frowned upon by courts not all that long ago, and some jurisdictions still give them the skunk eye.  It used to be that most courts would say that, when an insurer refuses to defend, an insured’s stipulated judgment with the underlying plaintiff was not binding on the insurer.  Courts were especially prone to look unfavorably on the usual arrangement: in addition to a stipulated judgment, the insured also obtains from the plaintiff a covenant not to enforce the judgment, except against the insurer through an assignment of the insured’s policy rights.  Patrons Oxford Ins. Co. v. Harris, 2006 WL 1652525 (Maine June 16, 2006) highlights the modern trend that enforces the validity of stipulated judgments to the extent coverage exists and the amount of the judgment is reasonable.

The case explains that this was Maine’s first crack at deciding this issue, and the court accepted the majority position on every point related to stipulated judgments.  The court said that an insurer who breaches the duty to defend and repudiates control of the litigation is not entitled to second-guess the insured’s strategy for getting out of hot water.  It also, in a footnote, repudiated the view that a covenant not to execute means the stipulated judgment is fake because the insured has no real obligation.  Most courts now hold that a covenant not to execute is not a release of the insured’s obligation to pay but rather merely a contract not to enforce.

Some years ago, a California coverage lawyer gave me his view on why the modern trend makes sense: when an insurer breaches the insurance contract, the policyholder is relieved from the duty of further performance.  To me, that’s on the right track but perhaps a little simplistic, because it’s obvious that an insurer’s breach does not relieve the insured of all duties under the policy.  Instead, I think a better justification is that the primary feature and the essence of liability policies is not indemnity but defense.  The duty to defend is incredibly broader than the duty to indemnify, and the basic consumer expectation when purchasing a liability policy is a defense.  Therefore, when wrongly denying the basic assumption of the policy, an insurer in fairness cannot enforce the anti-assignment and no-settlement clauses of the policy that stem from the policy’s basic assumption. 

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