Covenant Not to Execute Not a Release

It is almost common for a plaintiff who gets a large judgment against a tortfea- sor that cannot be collected to enter into an agreement with the defendant to not execute upon the judgment in exchange for an assignment of the defen- dant’s claims against its insurer. It is unusu- al, however, for the insurer to go broke before the suit can be resolved. The assignee then sought recovery against the insurance broker who placed the insurance with the insolvent insurer.

Just such a situation was presented to the Tennessee Court of Appeal in  Littleton v. TIS Insurance Services, Inc., Slip Copy , 2015 WL 443740 (Tenn.Ct.App., 2/3/15) after the trial court granted a judgment to the broker.

FACTS

During a prior lawsuit, a construction company – in exchange for a covenant not to execute against the company’s assets – assigned to the entity that obtained a judg- ment against it the company’s insurance coverage claims. The trial court entered judgment on the pleadings in favor of the insurance broker on the ground that the current plaintiffs would not be entitled to recover any compensatory damages at trial. The plaintiffs appeal.

The plaintiffs, Joy Littleton, Grayling Littleton, and Will Allen Hildreth (“the Assignees”) were assig ned a judgment and settlement order in the amount of $3.2 million. The Merit Litigation arose out of a contract between JAG and Merit for the construction of a Holiday Inn Express hotel in Loudon, Tennessee.

The final judgment references the set- tlement agreement between JAG and Merit and the covenant not to execute on the judgment. After entry of the judgment, JAG was able to collect only a portion of its $3.9 million judgment against Merit because Merit’s Commercial General Liability (“CGL”) carrier, the Highlands Insurance Group (“Highlands”), was placed in receivership by the State of Texas during the pendency of the Merit Litigation. TIS Insurance Services, Inc. (“TIS”) was Merit’s insurance broker and the entity that placed Merit’s CGL coverage with Highlands.

The current action was filed on January 28, 2011, seeking recovery from TIS of the unpaid balance of the judgment (approximately $2.67 million). TIS filed a motion for judgment on the pleadings. On October 12, 2012, the trial court granted the motion and held “that the [Assignee]s’ claim for compensatory damages which they may seek in the trial of this cause is limited to the $25,000 actually paid by Merit Construction in this matter.”

ISSUE

The issue before the court of appeal is whether the trial court erred in entering judgment on the pleadings in favor of TIS on the ground that the Assignees would not be entitled to recover any compensa- tory damages at trial.

DISCUSSION

The trial court’s ruling is directly con- trary to our holding in  Tip’s Package Store, Inc. v. Commercial Insurance Managers, Inc ., 86 S.W.3d 543 (Tenn.Ct.App.2001), in which we held that a judgment creditor’s covenant not to execute on a judgment debtor’s assets does “not extinguish the underlying liability” of the judgment debtor for compensatory damages. The judgment debtor is “an injured party” that can pursue a negligence claim against its insurance provider for procuring a liability policy that allowed a gap in coverage. In light of our decision in Tip’s, JAG’s covenant not to execute on the judgment against Merit does not extinguish the underlying liability of Merit under the judgment.

A covenant not to execute is merely a contract. It is not a release. Covenants not to execute are different from releases, as the legal liability remains in force against those who have covenants, whereas a release represents “total freedom from lia- bility.”  Gray v. Grain Dealers Mut. Ins. Co ., 871 F.2d 1128, 1133 (D.C.Cir.1989)

The Assignees, accordingly, are entitled to assert a claim against TIS for $2,701,607.67, the uncollected balance of the judgment against Merit.

ZALMA OPINION

The assignment was  an assignment of all rights the original defendant had against its insurer and everyone involved in the acquisition of the policy. The broker convinced the trial court that there was a limitation upon what could be recovered and that the assignment was limited by the covenant not to execute. Finding that the covenant was merely a contractual assignment and not a release, the broker was exposed to the entire amount of the judgment assigned. Of course, that does not resolve the situation since the assignees still need to prove responsibility of the agent to the original insured and knowledge that Highlands was not finan- cially stable, a difficult mountain to climb.