State Farm Fire & Casualty Co. v. Gandy
1996 Tex. LEXIS 109, 39 Tex. Sup. Ct. J. 965, 925 S.W.2d 696 (1996)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A defendant's pre-trial assignment of claims against their insurer to a plaintiff, in exchange for a covenant not to execute on an agreed judgment, is invalid as against public policy when the insurer has tendered a defense and is making a good faith effort to resolve coverage issues.
Facts:
- Julie Gandy alleged that her stepfather, Ted Pearce, sexually abused her for three and a half years at their home and his service station.
- State Farm Fire and Casualty Company had issued a homeowner's policy to Pearce during a portion of the time the alleged abuse occurred.
- After Gandy sued Pearce, State Farm agreed to pay for an attorney chosen by Pearce to defend him, while reserving its right to deny coverage because the policy excluded intentional acts.
- Pearce hired a first attorney, with State Farm's knowledge, but later became dissatisfied and hired a new attorney, Howard Pattison, without informing State Farm.
- While the lawsuit was pending and without notice to State Farm, Pearce's attorney negotiated a settlement with Gandy's attorney.
- Pearce agreed to a judgment against him for over $6 million and assigned to Gandy any claims he had against State Farm.
- In return, Gandy signed a covenant not to execute, promising she would never attempt to collect the $6 million judgment from Pearce's personal assets.
- Separately, Pearce pleaded nolo contendere (no contest) to related criminal charges and received a probated sentence.
Procedural Posture:
- Julie Gandy sued Ted Pearce in Dallas County district court (trial court).
- The Dallas County district court signed an agreed final judgment awarding Gandy over $6 million against Pearce based on a settlement agreement between the parties.
- Gandy, as Pearce's assignee, then sued State Farm in Harrison County district court (trial court) to collect on the judgment and for damages.
- The Harrison County district court granted summary judgment for State Farm on the insurance coverage claim but allowed the claim for negligent defense to proceed to a jury trial.
- The jury found State Farm negligent and awarded Gandy $200,000 in damages, on which the district court entered judgment.
- State Farm, as appellant, appealed the judgment to the court of appeals.
- The court of appeals affirmed the trial court's judgment against State Farm.
- State Farm then appealed to the Supreme Court of Texas.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Is a defendant's pre-trial assignment of his claims against his insurer to a plaintiff, made in exchange for a covenant not to execute on an agreed judgment, valid and enforceable against the insurer?
Opinions:
Majority - Hecht, J.
No. A defendant's assignment to a plaintiff of his claims against his insurer, made prior to a fully adversarial trial and in exchange for a covenant not to execute, is invalid as contrary to public policy. The court reasoned that such arrangements distort the adversarial process, creating a "sham of adversity" where the defendant has no incentive to contest liability or damages. This leads to collusive, inflated judgments designed not to resolve the underlying dispute but to prolong litigation by funding a new lawsuit against the insurer. Drawing parallels to its prior holdings voiding Mary Carter agreements and assignments of legal malpractice claims, the court concluded that the public policy favoring fair trials outweighs the policy favoring partial settlements, especially when those settlements skew the trial process and promote unethical collusion.
Concurring - Enoch, J.
No. The assignment of Pearce's claim is invalid, but the majority's reasoning is unnecessarily broad. The case can be resolved on the narrower ground that Pearce's claim against State Farm for mishandling his defense is analogous to a legal malpractice claim. Under existing precedent from Zuniga v. Groce, Locke & Hebdon, claims for legal malpractice are not assignable as a matter of public policy. Therefore, Pearce's assignment to Gandy was invalid from the start, and the court did not need to create a new, broader rule.
Analysis:
This decision establishes a significant public policy limitation on the assignability of an insured's claims in Texas, specifically targeting collusive settlement agreements. By creating a new test to void such assignments, the court aims to protect the integrity of the adversarial system and prevent insurers from being held liable for inflated judgments reached without a legitimate trial. The ruling forces plaintiffs and insured defendants to either adjudicate the underlying claim through a fully adversarial process or resolve coverage disputes with the insurer before using this type of settlement structure. It significantly curtails a litigation tactic previously used to shift liability to insurers through non-adversarial agreements.
