Supreme Court Says Pretrial Agreed Judgment May Bind Driver's Insurance Company in Later Bad Faith Litigation (Part II)

In an earlier post (Part I – 11/30/2010), I introduced the background of this case. It involves a nonresident passenger severely injured in an auto accident who was omitted in the settlement by the driver’s insurance company. Claiming that the insurance company refused in bad faith to settle with her for the $100,000 in remaining insurance coverage, the nonresident passenger then sued the driver. The insurance company undertook defense of the case.
While the case was pending, the plaintiff and the driver entered into an agreement whereby an agreed judgment in the amount of $4 million was entered against the driver and the driver assigned (transferred) to the passenger any bad faith claim he had against his insurance company. The agreement provided that the passenger would not attempt to enforce the judgment against the driver. The insurance company, which had internally evaluated the passenger’s damages at between $2 million and $5 million, authorized its insured driver to enter into the agreement.
The passenger then sued the driver’s insurance company for an alleged bad faith refusal to settle her claim within the insurance policy limits. One of the insurance company’s defenses was that even assuming there was any bad faith on its part, the passenger could not prove that the insured driver suffered any monetary damage– a fundamental requirement for a successful bad faith claim– since the passenger had agreed that she would not enforce the $4 million judgment against the driver. On that basis, the trial court dismissed the passenger’s claim and the Colorado Court of Appeals affirmed the judgment.
The Colorado Supreme Court overturned the court of appeals decision by a 4-3 vote, saying that the pretrial assignment of the alleged bad faith insurance claim and the entry of the agreed judgment, with an agreement not to enforce the judgment, were recognized as valid in Colorado, assuming the judgment amount was reasonable and not collusive. The mere entry of the agreed judgment was sufficient to satisfy the requirement of proof that the driver was damaged, assuming that the other elements of bad faith refusal to settle within policy limits can be proved. And even if the amount was not reasonable, the injured plaintiff still has the right to prove the actual amount of damages in a trial.
The case will be returned to the trial court for further proceedings, which may result in a settlement or a trial before a jury.