By Sam Abdulaziz, Attorney At Law
This case dealt with an insurance company’s duty to defend a default judgment against its insured.
Reese Jones (“Jones”) filed an arbitration proceeding against STARS Holding Company, Inc. (“STARS”). Jones sought to recover damages for faulty investment and financial planning advice. STARS was unable to put forward a defense because it had become insolvent prior to the proceeding. Jones obtained a $22 million judgment, which was confirmed by a judge.
Executive Risk Indemnity, Inc. (“Executive”) was the insurer for STARS. Executive had issued a $10 million policy providing coverage for claims arising from STARS investment’s advice and financial planning services. The policy covered losses “occasioned by a wrongful act where the insured becomes legally obligated to pay.” Fortunately for Jones, Jones gave notice to Executive prior to the proceeding, but Executive refused to defend, stating that it was not obligated to do so under the terms of Executive’s policy. The trial court agreed with Executive’s argument that it was neither a party nor one in privity with any party to the proceeding. Thereby, it was not bound by the result obtained.
The Appellate Court reversed the decision. The Appellate Court stated that “an insurer, who has undertaken to indemnify another against loss arising out of a certain claim and has notice and opportunity to defend an action brought under such claim is bound by the judgment entered in that action and is not entitled to retry the material facts established by the judgment.”
To be enforceable, the judgment may be based on a default hearing. In this case, Jones obtained a judicially confirmed judgment against STARS to which Executive had notice but refused to defend. Although Executive did not have a duty to defend in order to protect its interest, it could have intervened in the action.
When an insurer is notified of the underlying claim against its insured and given an opportunity to protect its interest, it is bound by any resulting judgment, whether or not its refusal to participate in the underlying proceeding is legally justified.
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