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Anatomy of Default Judgments

ANATOMY OF DEFAULT JUDGMENTS AND MAKING THE INSURER PAY


I.
INTRODUCTION

Obtaining a default judgment against a defendant who has an insurance policy may be easy enough but getting the Defendant’s insurer to pay the judgment is not as simple as asking the insurer to pay. One can anticipate with a great deal of certainty that the insurer will refuse to pay and raise any defense possible in order to avoid payment. Unless the claimant’s attorney has laid the proper foundation in order to overcome these legal roadblocks, the claimant may be holding an uncollectible judgment.

The purpose of this paper is to provide guidance in obtaining a judgment that can be enforced and collected from the third party’s insurer. The premise of this paper focuses on insurance in the third party context: that is where the Plaintiff sues a Defendant who is insured rather than a Plaintiff suing his own insurer. This paper primarily centers on no answer default judgments where there are no predefault agreements or post answer conduct of the insured resulting in sanctions such as default.

II.
NOTICE, NOTICE, NOTICE, AND MORE NOTICE

Central to enforcing collection of a default judgment from an insurance policy that insures a third party is notice. To reinforce this concept, think NOTICE, NOTICE, NOTICE, and more NOTICE. This means provide 1. notice of claim; 2. notice of suit; 3. notice of service; 4. notice of a default judgment hearing and intent to take default; and 5. notice of judgment in order to timely file a motion for new trial.

“An insured’s failure to notify the insurer of a suit against his/her does not relieve the insurer from liability for the underlying judgment unless the lack of notice prejudices the insurer”. Harwell v. State Farm Mut. Auto Ins. Co., 896 SW2d 170, 174 (Tex. 1995). Emphasis added. The insurer must show actual prejudice which it did not inflict on itself. Id; Chiles v. Chubb Lloyds Ins. Co ., 858 SW2d 633, 635 (Tex. App. – Houston [1st Dist.] 1993, writ denied) (noting Texas Department of Insurance order requiring insurer to show prejudice to avoid liability). However, there is no obligation on the insurer to defend unless and until it receives actual notice that the insured has not only been sued but served. Id. at 173-174; Members Mut.

Ins. Co. v. Branscum, 803 SW2d 462, 466-467 (Tex App. – Dallas 1991, no suit).

For reasons that will become apparent from this paper, notice should be provided to the insurer at every stage and opportunity. It will provide a paper trail to not only overcome defenses proffered by the insurer but obtain summary judgment in favor of the third party claimant on the policy.

III.
IN WHAT CAPACITY TO PROCEED

Once the judgment is obtained and becomes final, the claimant has two ways to proceed, neither of which is exclusive.

When the claimant obtains a judgment against the third party, he/she has a direct action against the insurer as judgment creditor or intended third party beneficiary. State Farm County Mut. Ins. Co v. Ollis, 768 SW2d 722, 723 (Tex. 1989); Great American Ins. Co. v. Murray, 437 SW2d 264, 265 (Tex. 1969). The judgment creditor/third party beneficiary seeks an action in contract. Ollis, 768 SW2d at 723. The good news for this contract action is that the judgment creditor is also entitled to attorney’s fees if he prevails on enforcement of the contract claim. Dairyland Ins. Co. v. Childress, 650 SW2d 770 (Tex. 1983). Regardless of the status in which the judgment creditor proceeds, he still must prove in contract causes of action that all contractual conditions prerequisite to performance have been satisfied. State Farm Fire and Casualty Co. v. S.S., 888 SW2d 374,385 (Tex. 1993).

The judgment creditor does not, by virtue of obtaining a judgment against the third party, automatically or by operation of law receive, own, or otherwise control the third party’s claims against his insurer such as the failure to defend or indemnify, Stowers rights, extracontractual claims such as those pursuant to Tex Ins. Code Ann. § 541.060 et. seq. (formally article 21.21) and 542.051 et. seq. (formally article 21.55), or legal malpractice. Except for legal malpractice claims which are nonassignable (with few exceptions), these causes of action must be acquired.

A mechanism for obtaining these legal remedies is a turnover order. Charles v. Tamez, 878 SW2d 201,208 (Tex. App. – Corpus Christi 1994, writ denied). A turnover order is not an assignment. It is a court order compelling a party to turn over claims it owns to the judgment creditor in order to satisfy the judgment. Id. at 205. The order may compel the third party to turn over all or part of the claims. In many situations, it will likely give the judgment creditor control over the ultimate disposition of these claims. Id. at 205-206.

Turnover orders can be agreed to or contested. Turnover orders have advantages and disadvantages. One advantage is that it blesses, in a legal sense, the acquisition of claims belonging to another and theoretically validates the acquisition, in contrast to assignment which is typically done without court approval. A turnover order requires court approval.

Turnover orders can be successfully challenged. In Tamez, Charles sought a turnover for Stowers and legal malpractice claims after obtaining a judgment against Tamez. At the hearing, Tamez’s attorneys filed an affidavit by Tamez stating she was not dissatisfied with her counsel’s legal representation and she would never approve of any policy limits payment by the insurer to Charles. Tamez, 878 SW2d at 203. In simple terms, Tamez argued there were no legal malpractice or Stowers claims to assert. Id. The trial court ultimately denied the turnover request after evidence was presented by both the parties. Id. at 204.

The Court of Appeals affirmed the denial of a turnover order finding that Tamez’s opposition to the existence of these claims was determinative and would violate public policy. Id. at 208. “The duty to settle lawsuits under Stowers is an essentially personal duty.” Id. “We hold that public policy bars turnover of unasserted, denied causes of action against insurers for failure to settle lawsuits.” Id. Public policy reasons will bar application of the turnover statute. Id. at 206.

The reality of Tamez is that it will not be widespread. Rarely will the judgment debtor permit a judgment to hang over his head if there is a source to pay the judgment such as insurance. Tamez, with the aid of his lawyers, decided that he was ok to have an unsatisfied judgment against him perhaps because he had few assets for the judgment creditor to seize. The lesson of Tamez is: 1. a turnover is discretionary; 2. it is subject to public policy considerations; and 3. a turnover will be not allowed on unasserted denied causes of action which are personal in nature (i.e. Stowers and legal malpractice).

Another mechanism for the judgment creditor is an assignment. For purposes of this paper, we only look at assignments following a default judgment, not those obtained prejudgment. The Texas Property Code recognizes assignments and provides a procedure to accomplish the result. See Tex. Prop. Code Ann. § 12.014 (Vernon 2004). It is not the exclusive method for assignments but provides notice to the public. Hunter v. B.E. Porter, Inc., 81 SW2d 774 (Tex. Civ. App. – Dallas 1935, no writ).

Assignments are voluntary in nature and frequently are the subject of fraud and/or collusion claims. See State Farm Fire and Casualty Co. v. Gandy, 925 SW2d 696 (Tex. 1996). The assignment, once obtained, can result in the claim be brought in the name of the assignor or assignee. River Consulting, Inc. v. Sullivan, 848 SW2d 165, 169 (Tex. App. Houston [1st Dist.] 1992, writ denied).

Insurers frequently invoke the Gandy rationale in order to invalidate assignments and underlying judgments, claiming that a default judgment does not constitute an actual trial and therefore is not binding on the insurer because there was no “fully adversarial trial”. This argument has been rejected as a default judgment is an actual trial. Struna v. Concord Ins. Services, Inc., 11 SW3d 355, 358-359 (Tex. App. – Houston [1st Dist.] 2000, no writ).

To summarize, a judgment creditor may proceed directly against the insurer with an action in contract. The main methods to seek to enforce a judgment against the insurer on claims owned by the insured are assignment and turnover. Each has its advantages and disadvantages and one may be more appropriate depending on the facts, the amount of judgment, and the cooperation of the judgment debtor.

IV.
STOWERS’ CLAIMS IN THE DEFAULT CONTEXT

Simply because one obtains a default judgment in excess of the insured’s policy limits does not translate into a Stowers’ claim. All of the requirements of Stowers still apply: there must be coverage; liability must be reasonably clear; there must be an unconditional release offered to the insured (his/her insurer) with satisfaction of all liens and subrogation interests; the insurer must be given a reasonable time to respond; and the demand is such that a reasonably prudent insurer or businessman in the operation of his own business would accept the demand considering the likelihood of an excess judgment. Trinity Universal Ins. Co. v. Bleeker, 966 SW2d 489, 491 (Tex. 1998); Rocor Int’l Inc. v. National Union Fire Ins. Co., 77 SW3d 253 (Tex. 2002).

The groundwork for a Stowers claim must be established before the default judgment is taken. The potential judgment creditor should, well in advance of the default judgment, furnish the insurer information establishing coverage, liability, and medical information (bills and records) concerning the client’s injury, treatment, and prognosis including any future medical. A written demand for settlement with a time expiration reasonably before default should be made. The written demand letter should include all the Stowers elements and criteria.

Once these tasks have been accomplished, the opportunity to obtain a Stowers claim that belongs to the insured has been improved. However, no demand within policy limits almost certainly means no Stowers claim to prosecute. See Americans Physician Ins. Exchange v. Garcia, 876 SW2d 842, 848-849 (Tex. 1994) (holding there is no duty for an insurer to negotiate absent an offer within policy limits assuming there is coverage).

V.
WHAT YOU CAN ANTICIPATE FROM THE INSURER

You have your default judgment which is now final and has not been appealed. You believe you have provided more than necessary notice to the insurer. You file your lawsuit both as a judgment creditor and owner of the insured’s claims. While it is very unlikely the insurer will pay without at least some resistance, you can expect certain defenses to be raised and the filing of summary judgment motions to avoid payment. These barriers can be overcome, or at least get you a trial on the merits, if have adhered to some basic rules.

A. NO NOTICE OF SUIT

One of the first defenses that an insurer will raise is the failure of the insured to comply with a condition precedent. Specifically, the insurer will point to the traditional notice of suit clause which typically provides: “Promptly send us copies of any notices or legal papers received in connection with the accident or loss.” One of the purposes of this clause “is to notify the insurer that the insured has been served with process and that the insurer is expected to defend the suit.” Harwell, 896 SW2d at 173. Absent such notice, the insurer has no duty to “undertake” a defense. Id. at 174.

The exception to this notice clause is that unless the lack of notice prejudices the insurer, the insurer is not relieved from liability under policy. Id; Liberty Mut. Ins. Co. v. Cruz, 883 SW2d 164, 165-166 (Tex. 1993). Stated another way, actual knowledge of the suit prior to the entry of a judgment will usually, at the least, create a fact issue regarding prejudice. Struna, 11 SW3d at 359-360. The following cases support a lack of prejudice or defeat prejudice as a matter of law:

1. Struna, 11 SW3d at 360 – claimant notified insurer two weeks after the accident of the claim and claimant’s attorney notified the insurer of the suit; claimant’s attorney also notified insurer of intent to take a default judgment on a date certain and subsequently provided a copy of the default judgment at least seven (7) days before a motion for new trial was due; and the insurer notified the insured of the pending lawsuit seeking communication from insured and periodically checked the court file for confirmation of service;

2. Allstate Ins. Co. v. Pare, 688 SW2d 680, (Tex. App. – Beaumont 1985, writ ref’d n.r.e.) – holding auto insurer not prejudiced when the insurer actually knew that suit had been filed and a default had been rendered against another Defendant;

3. Coastal Refining and Marketing, Ins. v. United Stated Fidelity and Guaranty Co., 2006 WL 1459869 (Tex. App. – Houston [14th Dist.], no pet. history) – holding that CGL insurer was not prejudiced by an additional insured’s claim for indemnity made less than one month before trial when it claimed it had no time to investigate and defend;

4. Ohio Casualty Group v. Risinger, 960 SW2d 708, 711 (Tex. App.-Tyler 1997), finding no prejudice and actual knowledge of suit and service on insured regarding a default judgment entered against insured. Even though the insurer repeatedly checked to determine if process had been obtained on the insured and mistakenly believed not, there was no actual prejudice. Id. at 712; and

5. Crocker v. National Union Fire Ins. Co., 2005 WL 1168429 (W.D. Tex. 2005) -enforcing a third party creditor’s suit and $1,000,000.00 default judgment against insured when the insurer urged it was unaware that the insured had been served; however, Plaintiff’s counsel advised the insurer of service on the insured and the insurer’s own file reflected notice of service. (see discussion on this case infra);

In contrast, other authorities have determined that actual prejudice is established:

6. Liberty Mutual Ins. Co. v. Cruz, 883 at 165-166 – prejudice established as a matter of law where notice not provided until after the default judgment was final although the insurer knew of the accident via a newspaper article and reviewed a letter of representation from the claimants’ attorney;

7. Members Ins. Co. v. Branscum, 803 SW2d at 466-467-finding prejudice where the insured did not notify the insurer of being served although the insurer’s independent adjuster was aware of suit being filed and the insured being served. The crucial fact was neither the claimant’s attorney nor the insured advised the insurer or its independent adjuster where the suit was filed including county and court. The insurer was notified of the default judgment several months after it became final;

8. Ratcliff v. National County Mut. Fire Ins. Co., 735 SW2d 955, 957-958 (Tex. App. – Dallas 1987), writ dism’d w.o.j.) – holding prejudice established as a matter of law where no notice of suit was provided to insurer by the insured or claimant’s attorney and a default judgment was obtained while settlement discussions were ongoing. The insurer was not notified of the default judgment until after it became final. Id.;

9. Wheeler v. Allstate Ins. Co., 592 SW2d 2, 3 (Tex. Civ. App. – Beaumont 1979, no writ) – holding prejudice established where insurer knew of claim but not suit and default was entered. The insurer learned of the judgment after it was too late to appeal;

10. Kimble v. Aetna Casualty and Surety Co., 767 SW2d 846, (Tex. App.-Amarillo 1989, writ denied) - upholding summary judgment finding prejudice where the insurer had notice of the claim but no notice of suit until after a default judgment was entered but not final; and

11. Filley v. Ohio Casualty Ins. Co., 805 SW2d 844 (Tex. App-Corpus Christi 1991, writ denied) - upholding prejudice finding where the insured was sued, served by publication, failed to answer, and default entered. The insurer did not have notice of the claim. Id. at 847.

On a more complex level, the recent case of PAJ, Inc. v. The Hanover Ins. Co., 170 SW3d 258, 259 (Tex. App. – Dallas 2005, pet. granted) indicates a willingness to find prejudice when advertising coverage is involved. The Dallas Court of Appeals found that no prejudice need be shown when bodily and property damage were not involved, i.e. in this case advertising coverage. Id. at 862-863. See also Prodigy Communications v. Agricultural Excess and Surplus Ins. Co., 195 SW3d 764 (Tex. App. – Dallas 2006, pet. filed). Please note that the Texas Supreme Court has accepted review in PAJ certainly suggesting some doubt in its validity.

On the other hand, prejudice requirements for the insurer seem to be alive and well in the federal courts. See Travelers Indem. Co. v. Presbyterian Healthcare Resources, 2004 WL 389090 (N.D. Tex. 2004) and St. Paul Guardian Ins. v. Centrum L.S. Ltd., 383 F.Supp.2d 891 (N.D. Tex. 2003).

One thing is clear from these cases: lack of notice will increase your chances that you will have trouble collecting your judgment.

B. POTENTIAL NEW ANSWERS

The Texas Supreme Court has accepted on certified questions on the Crocker case from the Fifth Circuit. The Fifth Circuit certified three (3) questions to be answered:

1. Where an additional insured does not and cannot be presumed to know of coverage under an insurer’s liability policy, does an insurer that has knowledge that a suit implicating policy coverage has been filed against its additional insured have a duty to inform the additional insured of the coverage available?

2. If the above question is answered in the affirmative, what is the extent or proper measure of the insurer’s duty to inform the additional insured, and what is the extent or measure of any duty on the part of the additional insured to cooperate with the insurer up to the point he is informed of the policy provisions?

3. Does proof of an insurer’s actual knowledge of service of process in a suit against its additional insured, when such knowledge is obtained in sufficient time to provide a defense for the insured, establish as a matter of law the absence of prejudice to the insurer from the additional insured’s failure to comply with the notice-of-suit provisions of the policy?

National Union Fire Ins. Co. v. Crocker, 466 F3d 347, 359 (5th Cir. 2006).

The Fifth Circuit in Crocker wrestled with Weaver and its alleged implicit holding that ignorance of coverage or policy conditions will not preclude or waive the notice of suit provision. The Fifth Circuit discussed the changes since Weaver including the requirement of actual prejudice being necessary and subsequent cases indicating knowledge of suit and service by the insurer prior to entry of judgment will defeating the notice of suit clause. Id at 351-353.

In Crocker, like so many other cases, the employer, the named insured, was sued and served regarding an injury received by a claimant as a result of a swinging door at a nursing home. Id. at 348-349. The named insured (employer) forwarded the suit papers and National Union defended. Id. at 349. Richard Morris, the employee and additional insured, was also sued; he, however, did not forward the suit papers to National Union or formally notify it of his being sued and served. Id.

The evidence revealed that National Union was aware that Morris had been sued and served. Id. at 349-350. Moreover, there was no evidence that Morris was notified that he was an additional insured under the National Union policy and entitled to a defense. Id. at 350. Instead, after a jury trial finding the named insured employer not negligent, a default was entered against Morris. Id. at 349. The third party claimant, Beatrice Crocker, then filed a suit against National Union to obtain payment. Id. The district court found in favor of Crocker on the policy and National Union appealed.

Setting aside the dubious decision by the insurer to permit a default to occur when liability was questionable at best, the Texas Supreme Court accepted the Fifth Circuit’s certification and the case has been argued. See National Union Fire Ins. Co. v. Crocker, No. 06-0868. This case provides a ripe opportunity for the Texas Supreme Court to clarify the notice of suit provision versus the actual prejudice requirement. The decision certainly should answer the question as to whether an insurer can stick its head in the sand, insist on compliance on a contractual provision, and complain about a notice.

C. NO COOPERATION

If you see a lack of notice defense, you can bet a failure of cooperation defense will follow. Any liability policy will require cooperation of the insured by express policy language. “you and any other involved insured must: …cooperate with us in the investigation or settlement of the claim or defense against the suit…” See generally Struna, 11 SW3d at 359.

Predictably, the insurers read this language broadly. However, as the Wizard of Oz said – not so fast…not so fast. “The abstract loss of the rights to investigate, defend, participate in negotiations, and control settlement are not sufficient to show prejudice.” Coastal Refining, 2006 WL 1459869 at p. 4. Lack of cooperation are scary insurance words but the practical effect is that the insurer often cannot meet its burden.

A lack of cooperation is usually limited to when the insurer can show it was actually deprived or prejudiced of a valid defense or the insured makes an agreement which imposes liability on the insurer. McGuire v. Commercial Union Ins. Co., 431 SW2d 347, 352-353 (Tex. 1968). Prejudice is not presumed. Comsys Info. Tech. Services, Inc. v. Twin City Fire Ins. Co., 130 SW3d 181, 192 (Tex. App. – Houston [14th Dist.] 2003, pet. denied).

By way of example, the failure of the insured to appear at trial, give a statement, provide testimony or information is not by itself sufficient to establish a lack of cooperation absent actual demonstrable loss of defenses or agreement to impose liability. This is especially true when the insurer has other sources of evidence or paid property damage. Struna, 11 SW3d at 360; Coastal Refining, 2006 WL 1459869 at pp. 6-7; and Risinger, 960 SW2d at 709-711. As with notice of suit, the prejudice requirement must be satisfied. Struna, 11 SW3d at 359-360.

A recent case from the San Antonio Court of Appeals establishes that a lack of cooperation defense still can be successful. The case involves a post answer and failure to appear at trial conduct. In Progressive County Mutual Ins. Co. v. Trevino, 2006 WL 1751147 (Tex. App. – San Antonio 2006), a two-vehicle motor vehicle accident resulted in a lawsuit by Hector Trevino and Mario Moyeda against Progressive’s insured, Alejandro Alvarado. Id at 1. Alvarado timely notified Progressive of the suit and being served. Id. However, because Alvarado allegedly refused to cooperate, the lawyers representing Alvarado withdrew. Id. Alvarado did not appear at trial and the trial court after hearing evidence entered judgment against Alvarado. Id.

Following suit by Trevino and Moyeda against Progressive under a third party beneficiary theory, the trial court entered judgment for Trevino and Moyeda and entered findings of fact that “Alvarado did not unreasonably refuse to cooperate in the investigation, settlement, or defense of the underlying litigation”. Id. The trial court also found that Progressive was not prejudiced by any failure of Alvarado to cooperate. Id. Progressive appealed. Id.

While there is discussion in the opinion on whether the cooperation clause is a covenant versus a condition precedent, the Court focused on several facts that it claimed demonstrated prejudice contrary to the trial court’s determination of the evidence:

1. A phone call from the insured’s wife and guardian pointing out that he was incapacitated, that they had no assets, it was ok for the insurer to deny coverage, and that they had no phone;

2. The insured filed a pro se answer contending the accident was the fault of a third party and a counterclaim that the judgment creditors asserted was frivolous; and

  1. The insured was adamant about Progressive not paying the claim.

Id.at p. 5.

These facts along with the inability of the insurer to file a motion for new trial, according to the appellate court, substantiated a lack of cooperation resulting in prejudice.

One judge dissented finding that the majority had reversed the burden; according to the Justice Marion, it was Progressive’s burden to establish prejudice. Id. at p. 7. Justice Marion asserted that the evidence was that the insured’s guardian simply wanted the claim denied and this was consistent with many defendants. Id. Moreover, Progressive withdrew its defense just a few days before trial so there was no prejudice up until that time. Id.

Lack of cooperation will almost always be coupled with a claim of no notice of suit. The defense is quite viable and can be extremely potent to a recovery.

VI.
VIRTUALITY HELP FOR THE INSURER

Although rarely seen, the doctrine of virtual representation permits an insurer to intervene in its own name to protect its own interests or rights which are important. In re Lumbermens’ Mutual Casualty Co., 184 SW3d 718, 724 (Tex. 2006). It is an equitable doctrine subject to an abuse of discretion standard. Id. at 725.

This doctrine seems to be available to the insurer in only limited circumstances. Id.; Continental Casualty Co. v. Huizar, 740 SW2d 429, 433-434 (Tex. 1987) (Gonzalez, J. dissenting). For example, after Lumbermens posted a $29 million dollar appeal bond on behalf of an insured following an adverse judgment, the insured in the appellate brief abandoned an important legal argument which would have likely resulted in the judgment being affirmed and Lumbermens paying out the $29 million bond. In re Lumbermens, 184 SW2d at 725. Only after reviewing the appellate brief did Lumbermens realize (about ten (10) weeks later) that it needed to intervene. Id. at 727.

The gist of this remedy is that the Texas Supreme Court has revised what some believed was a dead argument for an insurer to protect its interest. Thus, virtual representation may be used to block enforcement of a default judgment. While the facts of Lumbermens are novel, the case is worth a read to anticipate an insurer’s tactics.

VII.
CONCLUSION

Notice is the key word to obtaining payment of a default judgment from an insurer. Certain defenses will certainly be raised by the insurer to defeat collection. However, case law supports recovery when proper notice has been provided and no prejudice is shown. Tactics which deprive the insurer of notice may mean an uncollectible judgment.