Does the Superior Court’s decision in Great American Ins. Co. v. Glownia, 1997 WL 149675 (Superior Court, J.D. of New London, March 20, 1997) (O’Keefe, J.), open the door for an insurer to argue that it is not bound by a stipulated judgment entered into between its insured and an injured plaintiff where the insurer provided a defense to its insured in the underlying action?  We believe it does and, if given the opportunity, Connecticut courts should refuse to bind defending insurers to such stipulated judgments.

In Glownia, Great American provided a defense to its insured under a reservation of rights in response to claims that she intentionally engaged in sexual activity with and/or sexually molested a minor.  During the course of the underlying action, the plaintiff entered into an agreement with Great American’s insured whereby its insured agreed to stipulate to liability as well as to a monetary judgment.  In the subsequent declaratory judgment action commenced by Great American, the insured argued that “Connecticut law recognizes that when an insurer breaches an insurance contract by refusing to defend the insured, the insured is released from any covenant against settlement or interference contained in the contract and may pursue a reasonable settlement of the claim.”  Id. at *1. The insured relied upon Missionaries of Mary, Inc. v. Aetna Cas. & Surety Co., 155 Conn. 104 (1967) and Black v. Goodwin, Loomis & Britton, 239 Conn. 144 (1996), and argued that both cases support the proposition that an insurer waives its right to contest a stipulated judgment where it chooses not to perform its contractual duty to defend its insured.  Id. at * 4 (citing Missionaries of Mary, Inc., 155 Conn. at 113-114).

The Glownia court held, however, that the Connecticut Supreme Court’s decisions in Black and Missionaries of Mary, Inc., speak “only to the situation where the insurer makes an unqualified refusal to defend.  The case[s do] not speak to the situation where the insurer elects to defend the insured under a reservation of rights.”  Id.  As a consequence of this distinction, “an insurer’s election to defend under a reservation of rights leaves the insurer and the insured with a very different set of options than if the insurer refused to defend the insured from the outset.”  Id.  The court, therefore, denied the insured’s motion to strike the declaratory judgment action.  Id.; see also Bourget v. Gov’t Emp. Ins. Co., 456 F.2d 282, 286 (2d Cir. 1972) (applying Connecticut law and holding that where the insured was killed in the accident and his estate had no assets whatsoever, “there was no possible conflict of interest between the insurer and the insured, [therefore,] there is no basis of imposing a duty on the former as a matter of common law.”).

With this decision in mind, we turn to cases from other jurisdictions that have confronted this issue and concluded that a stipulated judgment cannot be relied upon to impose liability on an insurer for its alleged negligence in failing to settle, nor can it be relied upon to support a finding of bad faith.  In Wright v. Fireman’s Fund Ins., 11 Cal. App.4th 998, 1024 (4th Dist. CA 1992), the California Court of Appeals for the Fourth District held that “where an insurer provided a defense to its insured in the underlying litigation, and insured, without the participation or consent of insurer, stipulated to judgment without evidentiary support and with no potential for personal loss, such judgment is insufficient to impose liability on the insurer in a later action against the insurer…”  In Wright, the plaintiff was injured and his passenger killed in an automobile accident with Fireman Fund’s insured.  Id. at 1003.  The policy of insurance issued by Fireman’s Fund had bodily injury limits of $15,000 per person/$30,000 per accident.  Id.  Although Fireman’s Fund defended its insured in the underlying action, the plaintiff and the insured eventually stipulated to the entry of judgment and the insured assigned any causes of action he might have had arising out of the accident to the plaintiff.  Id.  The amount of the stipulated judgment was $1,000,000.  Id.  In exchange, the plaintiff agreed not to execute or levy against any of the insured’s personal assets, while reserving the right to collect on any insurance policies.  Id. at 1004.  The insured was represented by his personal counsel for the purposes of the stipulated judgment, while the insured’s insurance defense counsel stated that he could “neither oppose nor consent to the stipulated judgment.”  Id.

During the course of the direct action, Fireman’s Fund argued that the stipulated judgment “was not on the merits, was not a legal obligation against [its insured] and was not binding on Fireman’s Fund.”  Id. at 1009.  Fireman’s Fund “maintained that the purpose of the stipulated judgment was clearly to relieve [the insured] from any legal obligation and that there was no independent findings on the amount of [the plaintiff’s] damages.”  Id. at 1010.  Thus, “[f]or the court to base its decision on such judgment invited collusion and was against public policy.”  Id. at 1010.

In issuing a decision in favor of Fireman’s Fund, the Wright court stated:

Here, Fireman’s Fund provided [its insured] with a defense and there is no evidence it rejected a reasonable settlement offer.  Rather, while Fireman’s Fund was providing a defense, [its insured] without Fireman’s Fund’s participation or consent, negotiated a settlement with the Wrights through personal counsel.  The settlement protected [the insured] from any liability and was without evidentiary basis.  We perceive of no basis on which [the insured] would have any interest in protecting the interests of Fireman’s Fund by vigorously contesting liability or the extent of damages.  To the contrary, [the insured’s] interest would appear to be to the contrary.  We are frankly disturbed by the potential for abuse apparent in a situation where an insurer, in the absence of a breach of its duty to its insured, could be bound by a consent judgment of this nature.

Id.  Based upon the potential for abuse and collusion in situations where the insured faces no personal liability, the Wright court refused to bind Fireman’s Fund by the terms of the stipulated judgment.  Id. at 1023; see also Doser v. Middlesex Mut. Ins. Co., 101 Cal. App. 3d 883 (1980); State Farm Fire & Cas. Co. v. Byrd, 729 F. Supp. 1265 (N.D. Cal. 1990); Smith v. State Farm Mut. Auto. Ins. Co., 5 Cal. App. 4th 1104 (1992).

In Romstadt v. Allstate Ins. Co., 844 F. Supp. 361 (N.D. Ohio 1994), the plaintiff, who was injured in an automobile accident with Allstate’s insured, brought a bad faith action against Allstate for failure to settle the underlying case within its policy limits.   Allstate defended its insured throughout the underlying case and, in fact, offered its $25,000 policy limits to the plaintiff after finally receiving a medical report from the plaintiff’s physician which related the plaintiff’s injuries to the subject motor vehicle accident.  Id. at 362-363.  The plaintiff did not accept this offer and, instead, entered into a stipulated judgment with Allstate’s insured, which included an assignment of the insured’s rights to sue Allstate for breach of contract and bad faith.  Id. at 363.  Allstate’s insured’s personal counsel represented her for the purpose of entering this stipulated judgment and, although Allstate did not participate in the entry of this judgment, it did nonetheless pay its $25,000 policy limits to the plaintiff.  Id.  Allstate’s insured received a release which “completely insulated [her] and her assets from any judgment against her.”  Id.

The Romstadt court granted Allstate’s motion for summary judgment stating that:

To allow this claim for bad faith to proceed to the merits would be to allow Romstadt to bootstrap his damages without ever having a judge or jury determine the amount of those damages.  The settlement amount of $125,000 [contained in the stipulated judgment] was arrived at by Romstadt’s counsel, and proposed as a settlement to [Allstate’s insured].  Clearly, [the insured’s] incentive in this case was to protect herself and her assets; therefore, as [her counsel recommended] it was most advantageous for her to agree to the agreed judgment entry of $125,000 against her and assign her bad faith claim against Allstate to Romstadt in exchange for release and satisfaction of any amount of such agreed judgment that remains unpaid by Allstate…The settlement allowed her to walk away with her assets insulated from liability.  As a matter of law, therefore, she was not exposed to excess liability, and plaintiff, as [her] assignee, cannot maintain a bad faith claim against Allstate.

Id. at 366.  The court also highlighted the fact that Allstate was not a party to the stipulated judgment and neither accepted nor rejected the offer.  Id.  To allow the plaintiff’s bad faith claim would, according to the Romstadt court, “thwart” the policy behind bad faith claims and “allow injured parties and insured parties to engage in collusion, and to leave the insurance companies to suffer the consequences of the avoidance on the part of the injured party and the insured of a determination by a jury, judge, arbitrator or mediator of the amount of damages the injured party’s claim is worth.”  Id.

In another California decision, the court in Messersmith v. Mid-Century Ins. Co., 43 Cal. Rptr. 2d 871 (4th Dist. CA 1995), held that a third-party claimant could not recover for failure to settle within the policy limits where the insured was never exposed to a binding, arm’s length excess judgment.  Messersmith arose out of an automobile accident in which the plaintiff sustained personal injuries.  Id. at 872.  At the time of the accident, Mid-Century’s insured had a policy of insurance with limits of $15,000.  Id. at 873.  One month after the accident, the plaintiff made a demand for the policy limits and Mid-Century responded by requesting copies of the plaintiff’s medical records.  Id.  Mid-Century did not receive these medical records until three months after the demand was made.  Id.  However, once the records were received and evaluated, Mid-Century offered its policy limits to the plaintiff, but the offer was rejected.  Id.  The plaintiff ultimately entered into a stipulated judgment with the insured for the amount previously awarded in a non-binding arbitration.  Id.  In exchange, the plaintiff agreed not to execute the judgment on the insured’s personal assets.  Id.

Based upon these facts, the Messersmith court held that Mid-Century did not breach the implied covenant of good faith and fair dealing “because the insured was never exposed to a binding excess judgment.”  Id. (emphasis in original).  “Because the insured had suffered no damages, her assignee (plaintiff) was never entitled to an award of damages.”  Id.; see also Hamilton v. Maryland Cas. Co., 27 Cal. 4th 718 (2002) (holding that the stipulated judgment entered into between the plaintiff and Maryland Casualty’s insured was not a presumptive measure of the insured’s damages where the insured entered into a stipulated judgment with the plaintiff, which contained a covenant not to execute against the insured’s personal assets, without Maryland Casualty’s participation,.); Kelly v. CSE Safeguard Co., 2011 WL 4526769 (D. Nev. 2011)(holding that “the agreed judgment cannot be fairly attributed to the insurer’s conduct, even if the insurer’s refusal to settle within the policy limits was unreasonable.”); Craig v. Northwestern Pacific Indem. Co., 2006 WL 2789239 (2d Dist. CA, Sept. 29, 2006) (holding that “when the insured stipulates to a judgment without the insurer’s agreement and couples the settlement with a covenant not to execute on the insured, ‘the agreed judgment cannot fairly be attributed to the insurer’s conduct, even if the insurer’s refusal to settle within the policy limits was unreasonable.’”); Burbach v. Armstrong Rigging and Erecting, 560 N.W.2d 107 (Minn. Ct. App. 1997) (stipulated judgment was not enforceable against the insurer where one of two potentially responsible insurers defended the insured without a reservation of rights and offered to contribute to the settlement); State Farm Fire and Cas. Co. v. Gandy, 925 S.W.2d 696 (Tex. 1996) (Pretrial assignments should generally be unenforceable against a defending insurer); Clement v. Prudential Prop. & Cas. Ins. Co., 790 F.2d 1545 (11th Cir. 1986) (holding that, under Florida law, “[i]f an insured is no longer exposed to any loss in excess of the limits of his liability insurance policy, he no longer has any claim he might previously have had against his insurance company for bad faith failure to settle within the policy limits.  Thus, if an injured third party releases the insured from liability, any bad faith claim then retained by the insured arising out of his liability to the injured third party ceases to exist because the insured is no longer exposed to any damages.); Note, Judicial Approaches to Stipulated Judgments, Assignments of Rights, and Covenants Not to Execute in Insurance Litigation, 47 Drake L. Rev. 853, 874 (1997) (stipulated judgment with assignment and covenant should be enforceable “only when the insured is truly abandoned by the provider.”); Amount of damage caused by breach of duty, 1 Insurance Claims and Disputes 5th § 5:20 (citing case law from numerous jurisdictions and opining that the “better rule” is that “when the insured has obtained a covenant not to execute…the insurer is not obligated to pay the portion of the judgment in excess of its limit because, under those circumstances, the insurer’s wrongful failure to settle did not end up causing the insured injury in the amount of the excess judgment.”).  But see Nunn v. Mid-Century Ins. Co., 244 P.3d 116 (Colo. 2010) (holding that an insured driver suffered actual damages when he entered into a stipulated judgment in excess of policy limits; therefore, injured plaintiff was entitled to pursue her bad faith refusal to settle claim against the insurer even though insurer defended the insured in the underlying case; however, the insurer could contest the reasonableness of the stipulated judgment and raise fraud or collusion by way of special defense); United Service Auto Ass’n v. Morris, 154 Ariz. 113 (1987) (stipulated judgment within policy limits binding on insurer that defended under reservation of rights if, and only if, claimant can prove the settlement was reasonable and prudent); Miller v. Shugart, 316 N.W.2d 729 (Minn. 1982) (insurer that defended while contesting coverage in a declaratory judgment action may be bound by stipulated judgment, up to the policy limits, to the extent claimant proves it was reasonable and prudent); Chaussee v. Maryland Cas. Co., 60 Wash. App. 504 (1991) (insurer that defended under reservation of rights but misrepresented policy limits may be liable for stipulated judgment in excess of limits, but claimant bears the burden of showing reasonableness of the settlement).

The rationale behind the decisions that refuse to enforce a stipulated judgment absent a trial on the merits is threefold:  First, if the insurer declines to settle a claim and decides to go to trial and then obtains a judgment that is below the settlement offer or obtains a defense verdict, then the insured would have no cause to complain and the insurer would have no liability.  Second, where an insured obtains an agreement from the plaintiff not to execute the judgment against his or her personal assets, the insured has not sustained any damages; therefore, a plaintiff “standing in the shoes” of the insured, similarly has no viable claim for damages.  Lastly, where the insured’s personal assets are protected, the insured has no motivation to contest the amount of the judgment.  This not only places the insurer, who was not involved in the entry of the stipulated judgment, at a marked disadvantage, but it also invites fraud and collusion.  It is for these reasons that we believe that an insurer, who does not breach its duty to defend its insured, should not be bound by a stipulated judgment entered into by the insured and an injured plaintiff.