A covenant not to execute is basically an agreement in a lawsuit where the plaintiff promises not to enforce a judgment against the defendant. In the context of an insurance claim lawsuit, this type of covenant is usually given by a plaintiff who aims to collect part of the total damages from the insured, while still keeping the option open to file additional claims against other policies until all damages are fully compensated.
Learn more about Covenant Not To Execute
The covenant not to execute is basically a promise from the plaintiff that they won’t go after more damages from the insured. When it comes to insurance claim lawsuits, there are three key players: the insured, the insurer, and the claimant. Each of these parties has its own goals they want to achieve. The insured is looking to settle for the least amount possible. The insurer aims to minimize its loss exposure as much as it can. Meanwhile, the claimant is after getting the highest payout from the lawsuit.
The insurer indemnifies the insured, which means it’s on the hook for defending the insured in the lawsuit. But sometimes, the insurer doesn’t act in the best interest of the insured and might refuse to settle. In such situations, the insured and the claimant might come to an agreement to limit the judgment, allowing the claimant to pursue the insurer instead.
The Problem
Many insurance companies believe that if a defendant agrees to a judgment but has a covenant not to execute, they aren’t legally required to pay the plaintiffs, meaning they haven’t really lost anything. However, a few courts have rejected this idea, stating that a confession of judgment, where the insured doesn’t expect to pay from their own funds, negates the chance of coverage. These courts warn that allowing this would encourage collusion between the parties involved in the settlement.
Using a covenant not to execute can be a complicated tactic and varies by state jurisdiction. There’s a majority viewpoint, seen in states like California, and a minority viewpoint, found in states like North Carolina. In North Carolina, courts have suggested that a covenant not to execute acts as a release for the insured from their legal responsibilities. They argue that this also frees insurers from having to indemnify the claimants.
California has set specific requirements for a covenant not to execute to be considered valid. One key requirement is that the insurance company must first deny coverage and defense to the policyholder before the covenant is put into effect. Additionally, the state mandates that settlement agreements between the insured and the plaintiffs must be reasonable, non-collusive, and made in good faith.
The Example
For example, a construction firm buys a liability insurance policy to safeguard itself from specific risks while building a new hospital. Years later, after the project wraps up, they discover that the hospital has some construction flaws, leading the hospital operator to file a claim for repairs. Now acting as the plaintiff, the hospital operator demands a settlement from both the insurer and the construction company, but the insurer refuses to agree to the plaintiff’s settlement request. The plaintiff then suggests that they won’t pursue a judgment against the construction company if the company assigns its claim against the insurer to them. This way, the plaintiff can go after damages from the insurer.