What is a Coblentz Settlement Agreement when an Insurer Denies a Defense to Its Insured?

I have discussed that an insurer’s duty to defend its insured is triggered by the allegations in the complaint (or lawsuit) against the insured. This means in a construction defect lawsuit, the CGL insurer’s duty to defend its contractor-insured will be triggered by the allegations in the complaint against the insured.

What if the insurer denies a defense to its insured? Unfortunately, this does occur.

When a contractor-insured is in a lawsuit where its insurer has refused to defend it, the contractor-insured may want to explore what is known as a Coblentz agreement. This is a type of settlement agreement where the insured settles with the third-party claimant and enters into a consent judgment in favor of the third-party claimant in exchange for the third-party claimant pursuing a coverage action against the insured’s insurer and not executing on the judgment against the insured.

Specifically, under a Coblentz settlement agreement:

  1. The insured gives the third-party claimant a consent judgment that identifies the stipulated damages the insured is liable for;
  2. The insured assigns any claims it has against its insurer to the third-party claimant; and
  3. The third-party claimant agrees not to execute on the consent judgment against the insured.

Insureds should make sure they have legal representation when entering into a Coblentz agreement.

When a third-party claimant seeks to enforce such a Coblentz agreement against a liability insurer (such as a CGL insurer), the claimant must prove:

  1. The insurer wrongly refused to defend the insured in the underlying action (meaning the insurer owed its insured a duty to defend in the underlying action);
  2. The insurer owes the insured a duty to indemnify for the damages in the underlying action (meaning there was coverage under the policy for the third-party claimant’s damages against the insured); and
  3. The Coblentz settlement agreement was made in good faith and reasonable (meaning the stipulated damages in the consent judgment are objectively reasonable).

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

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