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Gainsco Insurance Co. v. Amoco Production Co.8/19/2002
unt within policy limits, and the claimant covenanted not to execute against the insured. The insurer then amended its complaint in the declaratory judgment action to raise the issue of the enforceability against it of the stipulated judgment. Id. at 541-42. The specific issue addressed in Spangler is similar to the issue now before this Court:
Is the assignee of the insured barred from recovery from the insurer for a stipulated liability to which the insurer did not consent and the insured is not personally liable? Id. at 543.
Because this question had not previously been answered by this Court, the federal court made its "best estimate" as to how this Court would rule on the question. Id. at 544. In answering the question in the negative, the federal court emphasized two facts: (1) an insurer defending under a reservation of rights "loses the right to control the litigation;" and (2) a covenant not to execute is not a complete release of all liability. Id.
[ ] Other courts have also concluded that a covenant not to execute is not the equivalent of a release in that it does not totally extinguish the effects of the judgment. For example, the judgment may affect the insured's credit in the future. For that reason, these courts find that, despite the existence in the settlement of a covenant not to execute, the insured retains a cause of action for third-party bad faith that may be assigned to the claimant. See Consolidated American Ins. Co. v. Mike Soper Marine Services, 951 F.2d 186, 191 (9 th Cir. 1991); McLaughlin v. National Union Fire Ins. Co., 23 Cal.App.4 th 1132, 29 Cal.Rptr.2d 559, 572 (1994); McLellan v. Atchison Ins. Agency, Inc., 81 Hawaii 62, 912 P.2d 559, 563-65 (1996); Red Giant Oil Co. v. Lawlor, 528 N.W.2d 524, 532-33 (Iowa 1995); and Glenn E. Smith, Understanding the Tort of Third-Party Bad Faith in Wyoming: Western Casualty & Surety Company v. Fowler Revisited, XXVI Land and Water L. Rev. 635, 688-90 (1991). See also Lopez v. Arryo, 489 P.2d 626, 627-29 (Wyo. 1971).
[ ] In support of its argument on this issue, Gainsco points to the specific policy language that limits its obligation to pay only "those sums that the insured becomes legally obligated to pay as damages . . .." The contention is that the covenant not to execute, combined with the agreement to look only to Gainsco for recovery, leads to the inescapable conclusion that Andrews was not "legally obligated to pay" anything.
[ ] The phrase "legally obligated to pay" is not defined in the policy. Some courts have concluded that the term is ambiguous and have, therefore, construed it in favor of the insured. Red Giant Oil Co., 528 N.W.2d at 533. This strict construction, coupled with the holding that a covenant not to execute is merely an agreement and not a release from liability, means that the insured should still be considered legally obligated to pay the stipulated judgment. Id. The rationale of this approach is that an insurer who has abandoned the insured by refusing to defend a claim should not be allowed to "hide behind" the policy language. Coblentz v. American Sur. Co. of New York, 416 F.2d 1059, 1062-63 (5 th Cir. 1969); Losser v. Atlanta Intern. Ins. Co., 615 F.Supp. 58, 61 (D.Utah 1985); American Family Mut. Ins. Co. v. Kivela, 408 N.E.2d 805, 813 (Ind.App. 1980); Metcalf v. Hartford Acc. & Indem. Co. , 176 Neb. 468, 126 N.W.2d 471, 475-76 (1964).
[ ] Not all courts agree with this view. Some courts hold that an insured protected by a covenant not to execute "has no compelling obligation to pay any sum to the injured party," so neither does the insurer. Freeman v. Schmidt Real Estate & Ins., Inc., 755 F.2d 135, 138 (8 th Cir. 1985); Roach v.
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