In California, most objections to assignment of claims are based upon allegations of collusion in the obtaining of a judgment. The carriers claim that the victim and the defendant entered into an agreement to allow an excessive judgment in exchange for the assignment. Judgments entered pursuant to stipulation are the most suspect, but even judgments following a court trial may be open to question.
The seminal California case involving the assignment of a claim from a defendant to a plaintiff is Samson v. Transamerica Insurance CoiiIn Samson,the defendant Transamerica Insurance

Company argued that the assignment was invalid and the entire procedure demonstrated bad faith and collusion by the insured, the plaintiffs, the co-insurer State Farm, and the attorneys for all the parties. The Court of Appeals characterized Transamerica’s claim as one that “boils down to a charge that the parties initially ‘set up’ the excess-of-policy judgment against it.”iii

The claim of collusion and bad faith in Samson was based on the fact that early in the lawsuit, the defendant/insured and the plaintiffs had entered into a settlement where the plaintiffs signed a covenant not to execute against the defendant/insured. In exchange, the insured agreed to assign his cause of action against Transamerica to the plaintiffs. The plaintiff also received payment from State Farm on a primary policy of $100,000. Transamerica argued that it was not informed of this settlement agreement.

The Samson court rejected the “collusion” argument by Transamerica because Transamerica had not shown that the parties breached any duty or acted improperly in the conduct of the lawsuit.iv Further, the Samson court noted that the California Supreme Court and the Court of Appeals:

Have frequently held that an insured breaches no duty to the insurance company when he assigns his rights against the company to the injured plaintiffs in return for a covenant not to execute. “Where the insurer has repudiated its obligation to defend a defendant in the absence of fraud may, without forfeiture of this right to indemnity, settle with the plaintiff upon the best terms possible, taking a covenant not to execute.” When the insurer “exposes its policyholder to the sharp thrust of personal liability’ by breaching its obligations, the insured ‘need not indulge in financial masochism….”v

The Samson court concluded that there was nothing fraudulent or collusive about the insured’s assignment of his cause of action to the plaintiffs.

As is in Critz, “by executing the assignment, he attempted only to shield himself from the danger to which the company …exposed him.” He acted in his own self-interest after Transamerica’s denial of coverage, as he had every right to do. Any resulting damage to Transamerica was caused not by [the defendant’s] supposed misconduct but by Transamerica’s own intransigence.”vi

In Samson, Transamerica also charged that the insured, the plaintiffs, and State Farm had acted in collusion to inflate the size of the judgment against the insured in an attempt to create an excess-of-policy action against Transamerica. In support of this argument, Transamerica pointed to the fact that insured had presented no defense during trial of the underlying action and did not cross examine any of the plaintiff’s witnesses.  In response, the Samson court stated that the insured “had no obligation to present what he may have thought was a useless defense.”vii

In State Farm Mutual Auto Insurance Co. v. Superior Court, the insurer State Farm argued that the mutual acquiescence in an arbitrator’s award by State Farm’s insured and the plaintiff made the resulting judgment a “stipulated judgment” and not a conclusive judicial determination.viii Therefore, State Farm argued that the plaintiff and the insured were precluded from bringing a subsequent bad faith action against the insurer pursuant to Moradi-Shalal v. Fireman’s Fund Insurance Companies.ix The Court of Appeals stated that “while Moradi-Shalal made it clear that a mere settlement and dismissal of the claimant’s action was not a sufficient judicial determination, the court did not resolve the issue of whether a judgment entered after something less then a fully litigated trial would be sufficient.”x

The Court of Appeals rejected State Farm’s argument that the only judgment which can satisfy the standard must flow from an actual adjudication of the issue of the insurance liability “in a court of law by a judge or jury.” A judicial determination is a final and conclusive resolution of the liability issue. Therefore, the determination of the insured’s liability by means of a judicial arbitration process, and the subsequent entry of a final judgment, was a sufficient judicial resolution of the insured’s liability to the plaintiff that satisfied the requirement of Moradi-Shalal.

In California State Automobile Association Inter-Insurance Bureau v. Superior Court, the California Supreme Court held that a stipulation of an insured’s liability which was signed by the insurer, the insured, and the third party claimant, and which was entered as a judgment, satisfied the requirement of a final and conclusive resolution of the underlying action and enabled the third party claimant to bring an action for bad faith against the insurer under Moradi-Shalal.xi

The California Supreme Court thus held that the insurer’s motion for judgment on the pleadings, which was based on a contention that there was no final determination in the underlying action, was properly denied. Thus, even a stipulated judgment under proper circumstances may be deemed to be a final judicial determination.

The Court of Appeals in Span, attempted to distinguish Samson by reasoning that in Samson the insured had no defense to the claim and he need not present a useless defense. The court noted that “[h]ere, on the other hand, there is nothing in the record which indicates a defense of the [underlying] action would have been useless or futile.xii This analysis of Samson misses the point entirely. Even if liability was uncontested, damages certainly could have been argued. Even though the Supreme Court specifically held that the insured is not required to indulge in “financial masochism,” the Court of Appeals apparently disagreed.

The practical result of Span is not to remove the ability of the plaintiff to assign a claim. Rather, it creates some uncertainty which gives the insurance carrier greater bargaining leverage. Ultimately a judgment which would stand up against a defendant should be able to stand up against an insurance carrier.

The Arkansas Supreme Court reviewed California insurance bad faith law in Findley v. Time Insurance Co.xiii The court noted

Within the past ten years a few court decisions, primarily in California, have recognized what may be referred to as the tort of bad faith. Under those decisions an insurance company, in addition to its liability on the contract, may also be liable to its insured in tort for breach of an implied duty to deal fairly and in good faith with the insured in the settlement of a claim under the policy.xiv

The court continued, explaining that “[t]he tort of bad faith is actually an extension of the well-established rule by which a liability insurance company may be accountable in tort for its failure to settle a claim within the policy limits.”xv After a brief review of existing case law, the court concluded that

We do not agree with the view that whenever an insurance company denies a claim, it exposes itself to an action in tort. … “Mere refusal to pay insurance cannot constitute wanton or malicious conduct when, as here, an actual controversy exists with respect to liability on the policy. If this were not the rule punitive or exemplary damages could be recovered in every action involving a refusal to pay an insurance policy.”xvi

The District Court for the Eastern District, Arkansas analyzed the current requirements of Arkansas’s bad faith law in Hall v. Modern Woodmen of America.xvii The court noted

The plaintiff must prevail on his bad faith claim, for which he might be awarded punitive damages, or not at all. … In order to be successful a claim based on the tort of bad faith must include affirmative misconduct by the insurance company, without a good faith defense, and that the misconduct must be dishonest, malicious, or oppressive in an attempt to avoid its liability under an insurance policy. Such a claim cannot be based upon good faith denial, offers to compromise a claim or for other honest errors of judgment by the insurer. Neither can this type claim be based upon negligence or bad judgment so long as the insurer is acting in good faith. … Actual malice is that state of mind under which a person’s conduct is characterized by hatred, ill will or a spirit of revenge.xviii

i See Span, Inc. v. Associated Int’l Ins. Co., 227 Cal. App. 3d 463 (Cal. Ct. App. 1991).
ii 30 Cal. 3d 220 (Cal. 1981).
iii Id. at 240.
iv Id.
v Id. at 240-41 (internal citations omitted).
vi Id. at 241(internal citations omitted).
vii 242.
viii 259 Cal. Rptr. 50 (Cal. Ct. App. 1989).
ix 758 P.2d 58 (Cal. 1988).
x State Farm Mutual Insurance Co., 250 Cal. Rptr. at 52.
xi 268 Cal. Rptr. 284 (1990).
xii Span, Inc., 227 Cal. App. 3d at 485.
xiii 573 S.W.2d 908 (Ark 1978).
xiv Id. at 648.
xv Id. at 649.
xvi Id. at 650-51, quoting Moffet v. Kansas City Fire & Marine Ins. Co., 244 P.2d 228 (Kan. 1952).
xvii 882 F. Supp. 830 (E.D. Ark. 1994).
xviiiId. at 833.

Lee S. Harris is a partner at Goldstein, Gellman, Melbostad, Harris & McSparran based in San Francisco including the North and South Bay Areas. He has represented injury and insurance clients in numerous disaster claims. He has also served as chair of the American Association for Justice, Insurance and Bad Faith Litigation groups and serves on the board of Consumer Attorneys of California.