This past week the Texas Supreme Court issued 6 opinions and 8 grants. In one of these opinions the Court examined whether a judgment against an insured defendant was fully adversarial and thus enforceable against the defendant’s insurer.
In Great American Insurance Co. et al. v. Glen Hamel and Marsha Hamel, a breach of contract case arising out of the improper installment of exterior stucco in a home, the defendant’s insurance provider refused to defend due to a policy coverage dispute. Before trial, the plaintiffs and the defendant entered into a Rule 11 agreement stating that the plaintiffs would not attempt to pierce the corporate veil. Instead, enforcement of the judgment would be limited to assets in the corporate name. Judgment was rendered in plaintiff’s favor, and defendant assigned its rights against its insurer to the plaintiffs. As a result, the plaintiffs brought suit against Great American as assignees in order to recover the damage judgment. Following a bench trial, the Court found for the plaintiffs and awarded the damages determined in the initial suit against the builder. Great American then appealed, arguing that the underlying judgment was not the result of a fully adversarial trial. The Court of Appeals upheld most of the trial court’s judgment but reversed the partial awarding mental anguish damages.
The Supreme Court granted Great American’s petition for review and discussed the scope of State Farm Fire & Casualty Co. v. Gandy case. In Gandy, the Court concluded that, “In no event, …, is a judgment for plaintiff against defendant, rendered without a fully adversarial trial, binding on defendant’s insurer or admissible as evidence of damages in an action against defendant’s insurer by plaintiff as defendant’s assignee.”
Great American argued that the pre-trial Rule 11 agreement “resulted in a sham trial … designed to aid in the prosecution of the subsequent insurance litigation.” Addressing this argument, the Court clarified that (1) the validity of the builder’s assignment of its claims against Great American to the plaintiffs is not an issue here as the assignment was valid and (2) the controlling factor is whether the insured bore an actual risk of liability for damages that were awarded or had some other “meaningful incentive” to oppose the plaintiff’s damages.
In this case, the Court concluded that (1) an agreement, such as the Rule 11 agreement in this case, “creates a strong presumption that the judgement did not result from an adversarial proceeding, while the absence of such an agreement creates a strong presumption that it did,” (2) the Rule 11 agreement deprived the builder of any incentive to oppose the Plaintiffs, (3) the damage judgment in the case was not enforceable, and (4) the subsequent insurance suit in this case gave the parties an opportunity to litigate disputed issues with the “benefit of full adversity,” but neither party invoked this right. Therefore, the Court reversed the Court of Appeals’ judgment and remanded the trial court for a new trial.