Fifth Circuit Holds Judgment Creditor Pursuing Insurer By Way Of Default Judgment Does Not Violate Texas’ “No-Action” Provision
The U.S. Fifth Circuit Court of Appeals reconciled two lines of Texas cases to hold that a default judgment against an insured can satisfy a “no-action” provision in a liability policy unless the provision expressly requires an adversarial proceeding. One line of cases concerns Texas’ “no-action” rule, under which an injured party has no standing to sue a defendant’s insurer directly until the defendant’s liability has been finally determined by agreement or judgment, i.e., once the injured party has become a judgment creditor. The other line of cases hold that judgment or settlement between a defendant and plaintiff is binding on the defendant’s insurer only if it results from a fully adversarial proceeding where the defendant bore an actual risk of liability for the damages awarded or agreed upon, or had some other meaningful incentive to ensure that the judgment or settlement accurately reflects the plaintiff’s damages. Turner v. Cincinnati Insurance Co., 9 F.4th300 (5th Cir. [Tex.] 2021).
The issue of whether a default judgment allows an injured party to bring an action against an insurer is dictated by the wording of the “no-action” clause in the policy. The court looked at two different common “no-action” clauses:
No action will be taken against [the Company] unless, as a condition precedent, the Insured is in full compliance with all the terms of this policy and until the amount of the insured’s obligations to pay shall have been finally determined, either by judgment against the insured after actual trial, or by written agreement of the insured, the claimant and the Company.
No action shall be taken against us unless, as a condition precedent thereto, there shall have been full compliance with all of the terms of this policy and until the obligation of the “policy insureds” to pay shall have been finally determined, either by an adjudication against them or by written agreement of the “policy insureds,” the claimant and us… (emphasis added).
The first requires a fully adversarial trial; thus, a default judgment will not suffice. In the second, a default judgment can satisfy the requirement as it is an adjudication.
