Consent Judgment with Covenant Not to Execute Is Covered Loss
The United States District Court for the Eastern District of New York, applying New York law, has held that a consent judgment accompanied by a covenant not to execute by the claimant was covered “Loss” under a D&O insurance policy where there was no waiver of the right to pursue the insurer. Intelligent Digital Systems, LLC v. Beazley Ins. Co., 2016 WL 5390390 (E.D.N.Y. Sept. 16, 2016).
A business partner and several related parties sued certain former directors of the insured surveillance technology company for negligence, common law fraud, securities fraud, and non-payment of promissory notes. The parties settled pursuant to three separate stipulations, in which the former directors consented to judgments against them individually, the business partner agreed to “unconditionally forbear” the collection of the judgments against the individuals, and the individuals agreed to assign their claims for indemnification under the technology company’s D&O insurance policy. Each stipulation stated, “Nothing contained in the Stipulation shall constitute a waiver or release of the [business partner parties’] right to assert any claim or rights of [sic] against [the D&O insurer].” The business partner parties then filed a coverage lawsuit against the insurer.
During the trial of the coverage action, the insurer filed a motion for judgment as a matter of law, arguing that, because the settlement included an agreement that the judgment would not be enforced against the individual former directors, those individuals never suffered a “Loss” within the meaning of the policy. The policy defined “Loss” to include amounts which insureds “become legally obligated to pay.”
The court declined to grant judgment as a matter of law, finding that the insurance policy covered the consent judgments, notwithstanding the business partner’s agreement not to execute the judgment against the former directors, because the assignment did not release the insurer from liability. The court noted that both New York courts and those in other jurisdictions recognize the right of assignees to pursue coverage on behalf of insureds even when the assignment is coupled with a covenant not to execute and emphasized that the stipulations expressly provided that the settlement did not constitute a waiver to assert a claim or right of action against the insurer.
The court distinguished U.S. Bank National Association v. Federal Insurance Co., 664 F.3d 693 (8th Cir. 2011), relied upon by the insurer, because the definition of “Loss” in that case excluded amounts for which the insured person was “absolved from payment by reason of any covenant, agreement or court order.” The court also declined to follow Jones v. Southern Marine & Aviation Underwriters, Inc., 888 F.2d 358 (5th Cir. 1989), which had held that a consent judgment and stipulation absolved an insured from liability to pay, as non-binding and representing a minority view.
Subsequent to the court’s order on the motion for judgment as a matter of law, the jury entered a verdict in favor of the insurer, concluding that one of the business partner parties had been a director or officer of the insured technology company, triggering the policy’s insured vs. insured exclusion.