Defense Digest

The Supreme Court of Pennsylvania, in a five-to-one decision, recently made an important clarification in the law pertaining to the assignment of rights in an insurance policy providing excess liability coverage in the case of Patricia M. Egger, Administratrix of the Estate of Charles Egger, et al v. Gulf Insurance Company, et al, 903 A.2 1219 (2006). While the case deals with an important principle of law, an analysis of the procedural facts have some bearing on insurers' claims practices, and decision making.

The legal principle involved can be quite simply stated: Can there be an assignment of the rights in a liability insurance policy by an insured to a plaintiff without the consent of an insurance company at any time after the event which triggers coverage occurs, notwithstanding a policy provision that consent is required?

The facts are as follows: Foulke Associates provided security guards and plant protection personnel for PECO at a power plant. Foulke was insured with a liability policy with primary coverage of $1 million and a second excess policy with Gulf Insurance Company with coverage of $10 million.

On September 5, 1997, the plaintiff's decedent, Egger, was granted access by Foulke's employees to clean a scrubber unit. Egger was using a high pressure water jet to remove residue from a confined area of the scrubber. The water pressure suddenly lessened, Egger lost his balance, and the jet nozzle landed near the back of his knee. The pressure returned and severed several arteries. Egger placed a call for help, and 20 minutes later, Foulke's employees arrived without emergency equipment. They then left and returned with the equipment, but instead of rendering first aid, decided to move him from the scrubber first. In the interim, he bled to death. The widow sued, and the case went to trial in early 2001, and at jury selection the primary carrier tendered its full $1 million to settle the case. The plaintiff rejected the offer and demanded $1.6 million. Gulf refused to participate.

Gulf had reserve rights on its excess policy and, during the trial, disclaimed coverage. The coverage issue revolved around the coverage provided under two different types of coverages and a professional liability exclusion. The policy language was confusing and ambiguous but subject to reasonable arguments later made by Gulf to the Court that coverage would not apply. The Gulf policy contained a condition that stated that the insured's "rights and duties under the policy may not be transferred without prior written consent."

After the disclaimer and before the jury verdict, the plaintiff accepted $825,000 and took an assignment of Foulke's rights to indemnity under the Gulf policy and agreed to hold Foulke harmless. Gulf was not consulted, and consent was not requested or obtained. The primary carrier paid its full $1 million, but $175,000 was allocated to settle PECO's cross claim.

The jury returned a verdict of $3.5 million and delay damages were added. The plaintiff then sued Gulf on the assignment for breach of contract and bad faith.

The trial court found that there was confusing policy language which was ambiguous, construed against the insurer, and Foulke was entitled to coverage. Gulf raised the major issue claiming that the requirement of "consent" was not met and the assignment was not valid. Without a valid assignment, the plaintiff had no standing to bring the action. The trial court ruled that the assignment of policy rights was valid and noted some confusion in Pennsylvania law as to whether such "consent" provisions were effective and concluded they were not as to "post lost" assignments. The Foulke assignment was deemed to be "post lost." Gulf claimed that under two Superior Court cases -- Fran and Johns Doylestown Auto Center, Inc. v. Allstate Insurance Company, 638 A.2d 1023 (1994); High Tech Enterprises, Inc. v. General Accident Insurance Company, 635 A.2d 639 (1993) -- the consent provision was effective in all cases, and especially it was true in the instant case, since they claimed that the "loss" was the jury's verdict, and, therefore, the assignment was made "pre loss." The trial court's rulings were made by granting the plaintiff's Motion for Summary Judgment and denying Gulf's Motion for Summary Judgment. The Trial Court in a bench trial then determined that Gulf's challenge to coverage was not made out of bad faith.

The Superior Court (Intermediate Appellate court) affirmed, noting that the Pennsylvania Supreme Court, in a life insurance case, struck down a non-assignment provision where the assignment was made after the death of the insured. National Memorial Services, Inc. v. Metropolitan Life Insurance Company, 49 A.2d 382 (1946). The rationale of the decision was that there was no reason to allow an insurance company to prevent an assignment of policy rights where the loss had occurred and its liability was fixed. It went on to support an insurance company's right to restrict assignments where the loss had not yet occurred and stated "some improvident or undesirable assignee might allow the policy to lapse for non-payment of premium." The Superior Court in the instant case further agreed with the trial court that the "loss" was the occurrence involving the negligence of Foulke, even though the dollar amount of damages had not yet been determined. Any policy provision prohibiting an assignment after a loss has occurred would be void as against public policy.

Gulf appealed again, and the Pennsylvania Supreme Court accepted the appeal limiting it to one issue, which was "whether an assignee has standing to sue an insurer where an insured's assignment of its interest in an insurance policy is made to the assignee in violation of a policy restriction requiring the insurer's consent?" The Court answered that query by affirming the Superior Court's decision. The Court re-affirmed its holding in National Memorial Services, Inc. and concluded that there is no reason not to allow an insured to assign rights in an insurance policy after a loss has occurred and the insurer's liability is fixed. Provisions to the contrary are unenforceable. Provisions would be enforceable to protect insurers against events which occur prior to a loss having occurred, as it would increase the risk that the insurer had accepted, and for which it received a proper premium.

The Court pointed to the fact that Gulf's policy was an "occurrence" policy and, in this case, the "occurrence" consisted of the negligent acts of Foulke's employees which caused the plaintiff's damage and which triggered Gulf's coverage. It then looked to the insuring agreement which required Gulf to pay on behalf of Foulke sums in excess of the retained limit "by reason of liability imposed by law shall become legally obligated to pay." It found that this policy language was ambiguous as to the timing of payment and, therefore, would be construed against the insurer and in favor of coverage. The "loss," therefore, was the plaintiff's accident and not the jury verdict as the insuring agreement could be construed to mean this. The Court cited decisions in other state courts and local federal courts in support of its analysis as to when a "loss" occurs in this set of circumstances.

Gulf contended that its risk was increased after the assignment, and before the jury's verdict, in that Foulke and its primary insureds did not aggressively defend after the agreement was made to make the assignment and Foulke's liability was capped. Gulf contended that an important defense witness was not called and that testimony could have made a difference in the outcome of the trial. The Court's response to this argument was that Gulf's policy gave it the right to participate inter alia, in any trial, and that they chose not to do so and, in fact, disclaimed coverage during the trial. The Court stated, "Because Gulf opted to deny coverage and not participate in the proceedings, any adverse consequences arising from that decision, real or purported, do not constitute increased risk arising from an assignment of the policy." In a footnote, the Court recognized that an insured and an assignee could engage in some type of "illegitimate manipulation," but stated that an insurer would have a "full array" of affirmative defenses to negate its obligation to indemnify.

The Court's express holding was that the jury's verdict was irrelevant and that the "loss" was the "occurrence." Any assignment "post occurrence" was valid, notwithstanding a policy provision to the contrary.

Mr. Chief Justice Cappy filed a short concurring opinion making the point that the majority opinion was not merely advisory, but decided that the binding agreement to assign between Foulke and the plaintiff's pre-jury verdict was a legally significant transaction and was "post loss."

Mr. Justice Saylor authored an interesting dissent. He felt that the Court should tread lightly in invoking public policy to intervene in private contractual affairs. He believed that public policy considerations are usually better suited for the legislative rather than judicial forum. He felt that there must be a demonstration of an overriding public policy before there can be voidance of an unambiguous contractual term. Justice Saylor's second point is one near and not so dear to those who practice on the defense side. He pointed out that cases involving liability insurance are usually more complex than life insurance, and the interests of third parties (plaintiffs) intervene, creating an additional layer of risk to the insurer's obligation to make payments under the policy. The potential for manipulation is known, especially in an excess policy, giving the insurer additional reason to attempt to protect itself against this added risk He believed that this case on its facts was distinguishable from National Memorial Services, Inc.

Consent to assign and non-assignment provisions in liability insurance policies have now gone into obliteration since there are no claims, or litigation, before the "loss" has occurred.

*Jack Warner is a senior shareholder in the firm's King of Prussia, Pennsylvania, office. He can be reached at jrwarner@mdwcg.com or (610) 354-8253.