Covenant Not To Execute Does NOT Preclude Damages

Following a coverage denial, many jurisdictions permit insureds and claimants to enter into covenants not to execute and to enforce a resulting judgment against the insurer if coverage is shown to exist. Insurers often argue that the insured has suffered no damages as the insured is protected from being required to pay the judgment. Absent fraud or collusion in obtaining the judgment, these arguments often fall on deaf ears.

What is less settled is whether claimants and insureds can pursue claims against others, including their agents, who bear some responsibility for denial or for the failure to place the appropriate coverage for the insured. The Michigan Court of Appeals was the latest court to address whether claims against an agent for failing to place appropriate coverages were viable after an insured received a covenant not to execute.

Background

Pure Transportation is a smaller trucking line. In 2014, Pure Transportation began working with Dimensions Insurance Group, LLC (Dimensions), an independent agent, to secure insurance for the trucking business. Initially, Dimensions helped Pure Transportation secure a $1 Million primary liability policy with Insurance Company of the State of Pennsylvania (Penn Insurance).

Roughly 3 years later, Pure Transportation contacted Dimensions to secure an excess policy. Eventually an excess policy issued by Hallmark Insurance Company (Hallmark) and providing $2 Million in coverage above the Penn Policy was placed by Dimensions. Unlike the Penn Insurance Policy, the Hallmark Policy contained a Designated Shipper Limitation Endorsement that excluded coverage unless Pure Transportation providing a bill of lading to the designated shipper. Dimensions did not inform Pure Transportation of this limitation and did not provide Pure Transportation with a copy of the Hallmark Policy. Additionally, Pure Transportation did not request the excess policy be limited to a client or project and expected that the Hallmark Policy would provide coverage for the use of any vehicle.

In March 2018, Maged Abdelmaguid was a passenger in a semi owned by Pure Transportation. Unfortunately, the driver of the semi lost control and crashed into a concrete wall. Abdelmaguid was crushed in the cab and died. Abdelmaguid’s wife was later appointed as the personal representative of his estate.

Underlying Lawsuit

Following the collision and Abdelmaguid’s death, his Estate sued Pure Transportation. Pure Transportation notified Dimensions of the Lawsuit and notice was provided to Pure Transportation’s insurance carriers. Coverage was acknowledged under the Penn Insurance Policy but coverage was denied under the Hallmark Policy based on the Designated Shipper Limitation Endorsement.

Following this denial, the Estate, Penn Insurance and Pure Transportation agreed to settle the lawsuit. The basic terms of the settlement included:

• A consent judgment would be entered against Pure Transportation in the amount of $5 Million;
• Pure Transportation would assign all of its rights against Hallmark and Dimensions to the Estate;
• Penn Insurance would pay the remaining limits of the Penn Policy to the Estate; and
• The Estate would not attempt to collect the unsatisfied portion of the consent judgment from Pure Transportation.

Lawsuit Against Dimensions

After the entry of the consent judgment, the Estate filed a lawsuit against Dimensions pursuant to the assignment from Pure Transportation. The Estate brought claims for negligence, breach of fiduciary duty and misrepresentation against Dimensions. The negligence claim and breach of fiduciary duty claims generally alleged Dimensions breached its obligations to Pure Transportation by failing to obtain the coverage requested, failing to explain the coverage limitation in the Hallmark Policy and failing to deliver a copy of the Hallmark Policy to Pure Transportation. The misrepresentation claim focused on Dimensions allegedly making representations concerning the scope of the coverage afforded under the Hallmark Policy. For each claim, the Estate relied on the consent judgment for damages.

Dimensions soon moved for summary disposition of the Estate’s claims. The primary basis for doing so was that the Estate could not prove Pure Transportation sustained damages from Dimensions’ alleged failures. In particular, Dimensions relied on the covenant not to execute which provided that the Estate would not attempt to collect the consent judgment from Pure Transportation. Since Pure Transportation would never be required to pay the consent judgment, Dimension argued that Pure Transportation could not have suffered damages.

The Estate disagreed and so did the trial court. The trial court denied Dimensions’ request and Dimensions appealed the denial.

Court of Appeals Decision

The Court of Appeals affirmed the trial court and found that the existence of a covenant not to execute did not preclude the Estate from proving that Pure Transportation had been damaged by Dimensions actions. The court viewed this as in line with a majority of courts to have addressed the issue.

However, the Court of Appeals determined that the consent judgment entered after the covenant not to execute would not be binding on Dimensions. The Court determined this was necessary as Dimensions was not a party to the Underlying Lawsuit or the settlement agreement that led to the consent judgment and did not have the chance to litigate damages in the Underlying Lawsuit. Instead, the Estate would need to litigate and prove its damages exceeded the limits of the Penn Policy and that Hallmark would not have paid any of the excess in order to prove that Pure Transportation had been damaged.

Abdelmaguid is another reminder that different damage rules may apply when parties other than the insurance carrier are being pursued in order to satisfy an excess judgment. This certainly appears to be the case when the party being pursued is not in privity with or the general agent of the carrier.

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