Can Insurance Provide Legal Defence Against a Criminal Offence ?

In State Farm Fire & Cas. Co. v. Gandy, 925 S.W.2d 696 (Tex. 1996), Gandy sued her stepfather, Pearce, for sexually abusing her as a child. 925 S.W.2d at 697. State Farm Fire and Casualty Company, which at one time had issued Pearce a homeowner's policy, agreed to pay an attorney chosen by Pearce to defend him but reserved the right to deny coverage. Id. State Farm contacted E. Ray Andrews, the attorney representing Pearce in the criminal action initiated by Gandy, and was advised that Andrews represented Pearce in Gandy's suit and would file an answer on Pearce's behalf, which he did. Id. at 698. In February of 1991 (a month after Gandy filed suit), State Farm sent Pearce and Andrews a letter containing a reservation of rights based on State Farm's questions regarding whether the alleged acts were covered. Gandy, 925 S.W.2d at 698-99. After Pearce received the letter, he called State Farm's agent, who asked for an appointment to take his statement. Id. at 699. When the agent met Pearce to take his statement in March of 1991, Pearce denied all of Gandy's allegations. Id. at 699. Pearce called the agent in June, and subsequently received a letter stating that State Farm had made a decision to defend Pearce under a reservation of the rights. Id. In July of 1991, a new adjuster was assigned to the file, and the adjuster wrote Andrews and told him to forward his fee invoices to the adjuster's attention for payment. Gandy, 925 S.W.2d at 699-700. The adjuster asked to be advised on the progress of the lawsuit. Id. at 700. Andrews considered the letter "junk mail," and he never requested payment of his fees from State Farm. Id. In August of 1991, Pearce retained new counsel, Howard Pattison. Id. Meanwhile, Gandy had moved for sanctions against Pearce for failure to comply with discovery. Id. On August 2, the trial court conducted a hearing, at which no one appeared for Pearce, and signed an order requiring Pearce to respond to discovery and to pay $ 300 in sanctions by August 31. Id. The order warned that failure to comply could subject Pearce to further sanctions, including striking his pleadings and rendering default judgment against him. Id. Pearce did not comply, and a second hearing was held on September 30. Id. Pattison was formally substituted, and the hearing was continued to November to hear evidence on the severity of sanctions to be imposed. Id. Outside the courtroom, Gandy's attorney offered to settle with Pearce if Pearce would assign his claims against State Farm and agree to a judgment. Id. Although Pattison advised Pearce that his pleadings would not likely be struck, and Pearce continued to deny the allegations, Pearce accepted the settlement offer because he was "fed up" with the lawsuit. Id. In December, Pearce signed an assignment of claims against State Farm, and Gandy signed a covenant to limit execution. Gandy, 925 S.W.2d at 700-701. The assignment and covenant refer to an agreed judgment dated January 16, 1992. Id. at 701. In January of 1992, State Farm's adjuster called Andrews to inquire about the status of the lawsuit. Id. The adjuster was told that Pattison had been substituted. Id. Pattison told the adjuster that he had not had time to review the file and would call back. Id. Pattison did not call back, and the agreed judgment was signed on January 16, 1992. Id. The recitals in the judgment are incorrect in that: (1) no one appeared before the court when the judgment was signed; (2) no evidence was received concerning the calculation of actual damages. Id. at 703. State Farm learned of the judgment in February of 1992. Id. State Farm called Pattison and asked that he move to set aside the judgment, but Pattison refused. Id. Gandy subsequently sued State Farm as Pearce's assignee. Id. The trial court permitted Gandy to proceed on the claim that State Farm mishandled Pearce's defense. Id. at 704. The trial court concluded that State Farm had voluntarily undertaken to defend Pearce (even though it was not obligated to do so) and, therefore, should have done so properly. Id. Gandy relied on Pearce's testimony that he did not want Andrews to represent him but thought Andrews was State Farm's choice. Id. Pearce testified that he repeatedly called State Farm to complain about Andrews to no avail. Id. Prior to trial, while Andrews was still a named defendant, Andrews testified in his deposition that he was qualified to represent Pearce in Gandy's suit. Id. During trial, after Gandy nonsuited her claims against Andrews, Andrews testified that he was not qualified to represent Pearce. Id. Gandy's expert witness testified that Andrews' representation was negligent, causing an excessive judgment to be rendered against Pearce. Id. The jury found that State Farm was negligent (but not grossly negligent) and that State Farm violated the DTPA (but not knowingly). Id. The jury awarded Gandy $ 200,000 damages, plus attorney's fees, and the court of appeals affirmed. Id. On appeal to the Texas Supreme Court, State Farm argued that Pearce's assignment to Gandy should not be given effect. Id. at 705. The Court explored the history of the law of alienability of choses and four instances in which an assignment of a chose in action had been held invalid under Texas law. Gandy, 925 S.W.2d at 705-711. With regard to these four instances, the Court noted that in widely different contexts, it had invalidated assignments of choses in action that tend to increase and distort litigation. Id. at 711. The Court then noted two concerns with regard to the Gandy assignment. Id. First, the Court noted that Pearce's settlement with Gandy did not end the litigation, nor could there have been any reasonable contemplation that it would. Gandy, 925 S.W.2d at 711-12. The Court asserted the likelihood of a negotiated end with a $ 6 million judgment was virtually nil. Id. at 712. Had the coverage issue been resolved early on in Gandy's litigation, Gandy would not have proposed the settlement. Id. The entire purpose of the arrangement was to prolong the litigation and find a way to recover against State Farm. Id. Second, Pearce's settlement with Gandy greatly distorted the litigation. Id. In arguing for the agreed judgment, Gandy's attorney calculated that she had suffered $ 6 million in damages. Id. In the action against State Farm, Gandy's position was that with competent counsel, Pearce could have shown that she was damaged much less. Id. Pearce also changed positions from denying any abuse, to agreeing to $ 6 million in liability, to denying any abuse in the action against State Farm to show Andrews was ineffective in defending him. Id. Balancing various considerations, the Court held that a defendant's assignment of his claims against his insurer to a plaintiff is invalid if: (1) it is made prior to an adjudication of plaintiff's claims against the defendant in a fully adversarial trial; (2) defendant's insurer has tendered a defense; (3) either (a) defendant's insurer has accepted coverage, or (b) defendant's insurer has made a good faith effort to adjudicate coverage issues prior to the adjudication of plaintiff's claim. Id. at 714. The Court further held that a judgment for plaintiff against a defendant rendered without a fully adversarial trial is not binding on defendant's insurer or admissible as evidence of damages in an action against defendant's insurer by plaintiff as defendant's assignee. Id.