State Farm Fire & Casualty Co. v. Gandy

Summary

The Supreme Court of Texas held that an insured's assignment of claims to a plaintiff in exchange for a covenant not to execute a substantial agreed judgment violated public policy and conveyed nothing. Because the plaintiff's claims against the insurer depended on the assignment, the court reversed the court of appeals and rendered judgment that she take nothing.

Holdings

1. The assignment was invalid because it violated public policy and conveyed no enforceable rights to Gandy.
2. A defendant's assignment of claims against an insurer to the plaintiff is invalid when it is made before adjudication of the plaintiff's claim in a fully adversarial trial, the insurer has tendered a defense, and either the insurer has accepted coverage or made a good-faith effort to adjudicate coverage before the plaintiff's claim is adjudicated.
3. In no event is a judgment for the plaintiff against the insured, rendered without a fully adversarial trial, binding on the insurer or admissible as evidence of damages in an action against the insurer by the plaintiff as assignee.
4. The holding applies to this case, to pending cases in which an objection to the assignment was preserved, and to assignments executed after the decision; it does not invalidate assignments to which an objection was not preserved.

Questions Presented

1. Whether Pearce's assignment of claims against State Farm to Gandy, made before an adversarial adjudication of Gandy's claim against Pearce and coupled with a covenant limiting execution, was valid.
2. Whether an agreed judgment against an insured, rendered without a fully adversarial trial, could bind the insurer or serve as evidence of damages in the assignee's action against the insurer.
3. Whether the assignment arrangement violated public policy because it prolonged and distorted litigation and created an opportunity for fraud or collusion.

Disposition

reversed