(Article from Insurance Law Alert, September 2021)
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The Fifth Circuit ruled that underlying claimants who had obtained a default judgment against the policyholder had standing to sue the insurer directly notwithstanding a “no action clause.” The court held that the default judgment constituted an “adversarial assignment” and that a valid assignment of rights was not required. Levy v. Cincinnati Ins. Co., No. 20-50548 (5th Cir. Aug. 13, 2021).
In several different actions filed over the course of a year, former students sued a trade school company, alleging negligence, fraud and various statutory violations. In one suit, the trade school failed to appear and the state court entered a default judgment in favor of the plaintiffs. Thereafter, plaintiffs sued Cincinnati Insurance as “judgment creditors” of the trade school, seeking to enforce the insurer’s obligations under the policy. A Texas district court ruled that plaintiffs lacked standing to bring a direct action against Cincinnati because there was no judgment against the school resulting from a fully adversarial trail or a valid assignment of the policyholder’s claims. Alternatively, the district court held that the policy did not cover the claims at issue based on a “first filed” provision in the policy. The Fifth Circuit reversed in part and affirmed in part.
Addressing this matter of first impression under Texas law, the Fifth Circuit noted that the specific language of the no action clause at issue required only “an adjudication against” the policyholder, and not an “actual trial.” The court concluded that a default judgment satisfied that adjudication requirement so as to allow the plaintiffs to bring a direct action against Cincinnati.
However, the Fifth Circuit affirmed the district court’s ruling that the lawsuit fell outside the scope of coverage. The court held that the claims in the lawsuit were sufficiently interrelated to those in prior suits filed before the policy incepted. As such, coverage was barred by a provision relating to claims “first made” prior to the period of policy coverage.