The West Virginia Supreme Court of Appeals determined that a pre-trial settlement, including a consent judgment against a non-party insurer and an assignment of rights under the policy, was invalid. Penn-America Ins. Co. v. Osborne, 2017 W. Va. LEXIS 119 (W.Va. March 1, 2017).
Beecher Osborne injured his leg in a timbering accident while working for H&H Logging Company on land owned by Heartwood Forestland Fund and leased by Allegheny Wood Products, Inc. Osborne sued H&H, Allegheny, and Heartwood, all of whom denied liability. H&H tendered its defense to Penn America for Mr. Osborne's deliberate intent claim. Penn-America denied the request, determining that the deliberate intent claim was excluded under its policy. H&H then retained defense counsel at its own expense. Liberty Mutual Insurance defended Allegheny and Heartwood.
Allegheny and Heartwood filed a motion for leave to file a third-party complaint for declaratory relief against Penn-America for failing to provide them a defense. By contract, H&H had agreed to defend and indemnify Allegheny and Heartwood for suits arising form the contract. The motion was never heard and the third-party complaint was never filed. Further, neither Allegheny, Heartwood, nor Osborne actually tendered to Penn-America on behalf of Allegheny and Heartwood.
Without notice to Penn-America, Osborne, Allegheny and Heartwood stipulated to a settlement with the following facts: (1) Penn-America breached its policy by failing to provide a defense to Allegheny or Heartwood related to Osborne's claims; (2) due to the breach, Allegheny and Heartwood suffered damages because they were compelled to pay for their own defense; (3) Allegheny and Heartwood had to mitigate the claims asserted by Osborne by entering a pre-trial settlement agreement to preserve and protect their assets; and (4) Allegheny and Heartwood tried to resolve coverage issues by filing a third-party complaint for declaratory relief against Penn-America. Further, Allegheny and Heartwood consented to a $1,000,000 judgment for Mr. Osborne's injury, and they agreed to assign to Mr. Osborne any claims they had against Penn-America for failing to provide them a defense. In return, Osborne agreed not to execute on the $1,000,000 judgment against Allegheny and Heartwood. Instead, Osborne would collect the judgment from Penn-America by asserting his assigned claims.
Osborne then sued Penn-America. Penn-America answered by noting it had not been contacted about the lawsuit or settlement after denying a defense to H&H. Penn-America sought to challenge the reasonableness of the $1,000,,000 consent judgment, but the trial court prevented any review of the medical records or other evidence that would demonstrate the severity of Osborne's injury. The trial court entered summary judgment in Osborne's favor, finding that Penn-America was liable for the $1,000,000 consent judgment.
The West Virginia Supreme Court of Appeals found the pre-trial settlement agreement unenforceable against Penn-America and the assignment of claims was void. Penn-America was not a party to the Osborne lawsuit against Allegheny and Heartwood, and was never given notice of the parties' negotiations for the pre-trial agreement. Further, the record was bare of any facts supporting $1,000,000 settlement as a fair and reasonable valuation of Osborne's lawsuit against Allegheny and Heartwood. To make matters worse, the trial court prohibited Penn-America from conducting discovery on the extent of Osborne's injury or his medical expenses. Therefore, Penn-America was not bound by the consent judgment.
The settlement agreement made no mention of the fact that Allegheny and Heartwood were being defended and were provided with coverage by Liberty Mutual in Osborne's suit. Recovery on an assigned insurance bad faith claim could not be made upon an untrue factual basis. Osborne's recovery on the assigned claims would be based on a falsehood, i.e., that due to Penn-America's breach, Allegheny and Heartwood were without coverage and the $1,000,000 consent judgment was necessary to protect their assets.
Finally, evidence of fraud and collusion were present. A $1,000,000 valuation of a lawsuit for Osborne's injury leg, without any cited evidence regarding permanency of the injury, permanent disability, severity, medical expenses, etc., did not reflect serious negotiation on damages. Therefore, the assignment was void and the trial court erred in failing to grant summary judgment to Penn-America.