§ 7.3 Effect of Collusion on Assignability of Claim
A settlement agreement containing an assignment of a bad-faith claim coupled with a confession of judgment against and covenant not to execute in favor of the assignor-insured might be invalid on the whole, at least if the agreement does not also contain a valid severability provision. In St. Paul Travelers v. Payne,20 the District Court held that an insured cannot confess judgment in favor of the plaintiff for a sum of money that the insured never intends to pay out of his own pocket "while purporting to leave the insurer's obligation to indemnify him for such amount intact."21 In NEMLORP, LLC v. Travelers Indemnity Company,22 the District Court held that while the assignment of the bad-faith claim may be coupled with a covenant not to execute in favor of the insured, those provisions must be severable from such a confession-of-judgment provision in order for the assignment to be enforceable.23 The assignee-plaintiff must also prove that the assignment coupled with the covenant not to execute was not the product of collusion between the assignee-plaintiff and the assignor-insured against the insurer.24
Notably, almost fifty years after the District Court recognized assignments of bad-faith claims in Jolly, the South Carolina Supreme Court recently pointed out, in Reeves v. South Carolina Municipal Insurance and Risk Financing Fund,25 that "[t]his Court has never recognized the validity of any assignment of a bad-faith claim...." The Court gave this reminder to the bench and bar in response to the question "whether the South Carolina Tort Claims Act applies to a bad faith action against the [South Carolina Municipal Insurance and Risk Financing] Fund," which the Court ultimately declined to answer in Reeves.26
Reeves involved the assignment of a bad-faith claim by the Town of Cottageville to the victim of a police shooting27 who had brought a section 1983 claim against the town. The Fund, "a self-insurance liability fund established pursuant to subsection 15-78-140(A) of the South Carolina Code (Supp. 2020),"28 insured the town, and a dispute arose as to the amount of coverage.
After a jury delivered a verdict of $97 million against the town, the plaintiff and the Fund agreed to a settlement of $10 million. The settlement agreement included a provision that allowed the plaintiff to seek a declaratory judgment in state court on the question whether a claim of bad faith against the Fund, which had been assigned to the plaintiff by the town, would be subject to the Tort Claims Act. The Fund argued it would be, and the plaintiff argued it would not. Per the agreement, if the plaintiff were to prevail on the issue in the declaratory judgment action, then the Fund would pay the plaintiff an additional $1 million.29
The Supreme Court declined to answer the question whether the bad-faith claim was subject to the Tort Claims Act. One reason was that the Court questioned whether the claim had been assignable from the Town of Cottageville to the plaintiff in the first place. While the Court generally agreed with the assignability of bad-faith claims in circumstances such as those presented in Schneider v. Allstate, supra, the Court found the circumstances in Reeves different. Ultimately, the Court did not actually determine whether the town's bad-faith claim was or was not assignable, but the Court did mark some differences between Reeves and Schneider that gave the Court pause.
First, in Schneider, where Judge Blatt had found a tort claim of bad faith assignable under the Survival Statute, "[t]he party making the assignment was an individual, not a town."30 The Reeves Court explained that "[t]o reach its conclusion the bad-faith claim was assignable, the district court in Schneider relied exclusively on the applicability of the South Carolina survival statute. In this case, the party making the assignment is a town, to which the survival statute does not apply."31
Second, the Court observed that Schneider had involved the traditional scenario in which the insurance policy limits were known; the injured third party had offered to settle within limits; the insurer did not take advantage of the opportunity to settle within limits; a final judgment was entered against the insured in excess of the policy limits; and the insurer did not satisfy the excess judgment. In Reeves, conversely, the parties had never even agreed on what the policy limits were. Further, the judgment against the town was in the middle of being appealed to the Fourth Circuit when this issue of the Tort Claims Act came before the Supreme Court. That is, the judgment against the insured had not yet achieved true finality.32
The most significant difference between Schneider and [Reeves], however, is that in Schneider the insurance company did not satisfy the judgment, but left the insured exposed beyond the policy limits. [In Reeves], the Fund satisfied the judgment. The insured paid nothing.33
The Court questioned whether a claim of insurance bad faith is assignable under such circumstances. While the Court found assignments in circumstances such as the one in Schneider "would be appropriate," the Court "also recognize[d] there are other considerations that may warrant refusing to allow assignment of bad faith claims in all situations."34 As noted above, however, the Court did not specifically outline the situations in which assignment might be impermissible, but instead left that open for another day.35
In voicing its hesitation to sanction the blanket assignability of bad-faith claims, the Court in Reeves harkened back to its 2010 opinion in Fowler v. Hunter,36 which involved the...
