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Wangler v. Lerol11/13/2003
the Eighth Circuit, in a two-to-one decision resolving an open question under Iowa law, summarized the state of the law on whether an insurer may be liable to an injured party when the insured is protected by an agreement not to execute on the judgment:
First, under the typical liability insurance policy, an insurer must reimburse the insured only as to amounts which the insured "shall become legally obligated to pay as damages." A covenant not to execute, some courts hold, is merely a contract, and not a release, such that the underlying tort liability remains and a breach of contract action lies if the injured party seeks to collect his judgment. Thus, the tortfeasor is still "legally obligated" to the injured party, and the insurer still must make good on its contractual promise to pay. State Farm Mutual Automobile Insurance Co. v. Paynter, 122 Ariz. 198, 593 P.2d 948, 953 (Ct. App. 1979); Globe Indemnity Co. v. Blomfield, 115 Ariz. 5, 562 P.2d 1372, 1375 (Ct. App. 1977); cf. Critz v. Farmers Insurance Group, 230 Cal. App. 2d 788, 41 Cal Rptr. 401, 410 (1964) (agreement holding tortfeasor harmless as to judgment in excess of his insurance coverage doesn't foreclose suit against insurer for bad-faith failure to settle). An uninsured party would then be injured by the agent's negligence in failing to procure a policy because he would have the outstanding "liability" against which he sought to insure.
The policy rationale used by other states reaching the result urged by Freeman focuses primarily on the right of the insured to protect himself from bad faith conduct of his insurer. For example, the Nebraska Supreme Court has held that an insured, and thus the insurer, is "legally obligated to pay" within the meaning of the policy despite an agreement not to execute when the insured enters into such an agreement to protect himself from the insurer's denial of coverage and refusal to defend under the policy. Metcalf v. Hartford Accident & Indemnity Co., 176 Neb. 468, 126 N.W.2d 471 (1964). The Nebraska court stressed that the insurer had "repudiated its obligation" to the insured, id., 126 N.W.2d at 476, and some element of misconduct by the insurer generally has been present in the cases in which courts have followed Metcalf. E.g., American Family Mutual Insurance Co. v. Kivela, 408 N.E.2d 805, 813 (Ind. Ct. App. 1980) (insurer "abandoned" insured when it refused to defend on the ground that the policy had been revoked for false statements on the application); Griggs v. Bertram, 88 N.J. 347, 443 A.2d 163 (1982) (insurer failed to promptly notify insured that it was denying coverage). Even those courts which base their findings of liability on the distinction between a release and a covenant not to execute acknowledge the policy implications of an opposite conclusion-settlements such as the one here would no longer serve their intended purpose. E.g., Paynter, 593 P.2d at 953.
Cases reaching the result urged by the insurers here give the "legally obligated to pay" language the practical construction adopted by the magistrate: An insured protected by a covenant not to execute has no compelling obligation to pay any sum to the injured party; thus, the insurance policy imposes no obligation on the insurer. Stubblefield v. St. Paul Fire & Marine Insurance Co., 267 Or. 397, 517 P.2d 262, 264 (1973) (en banc); Bendall v. White, 511 F.Supp. 793, 795 (N.D. Ala. 1981); Huffman v. Peerless Insurance Co., 17 N.C.App. 292, 193 S.E.2d 773, 774, cert. denied, 283 N.C. 257, 195 S.E.2d 689 (1973). An individual who is uninsured due to an agent's negligence then will have suffered no damages, as he would have had no rights under the policy anyway. While this interpretation does prevent use of settl
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