May 2008

Volume 11, Issue 31

INDEMNIFICATION AGREEMENT IS NOT THE

EQUIVALENT OF INSURANCE

In Blessing v. National Engineering & Contracting, Co. (No. 33433, filed April 25, 2008), the Supreme Court of Appeals of West Virginia confirmed that indemnification agreements are non-insurance contractual risk transfers.

Misty Blessing's husband was killed when the scaffolding he was working on collapsed. At that time, Mr. Blessing was working for National Engineering and Contracting Company (NECC) at the Man/Rita Bridge construction site. Mrs. Blessing filed a wrongful death claim against the West Virginia Department of Transportation (the Department) and the Department's project manager, Byron Smith. The Department and Mr. Smith filed a motion for summary judgment asserting lack of subject matter jurisdiction based on the doctrine of sovereign immunity. The trial court granted the motion for summary judgment and ruled that the absence of insurance coverage barred Mrs. Blessing from pursuing her claims under the doctrine of sovereign immunity.

The trial court examined the state's liability policy and concluded that unless "Mr. Blessing's injuries directly resulted from and occurred while employees of the State of West Virginia were physically present at the site of the incident…performing construction, maintenance, repair, or cleaning (but excluding inspection of work being performed or materials being used by others)," there was no coverage under the applicable policy. Deciding that Mr. Smith's on-site duties as the project supervisor did not amount to performance of "construction, maintenance, repair or cleaning," the trial court determined that there was no insurance coverage under the state's liability policy and consequently ruled that Mrs. Blessing's claims were barred by sovereign immunity. The Supreme Court reversed this

decision based on questions that remained regarding the extent of Mr. Smith's on-site involvement in the construction of the Man/Rita Bridge. Thus, there was a genuine issue of material fact that precluded the grant of summary judgment.

As an alternate means of locating the insurance coverage necessary to avoid application of sovereign immunity principles, Mrs. Blessing pointed to NECC's execution of an indemnification agreement. Under the indemnification agreement, NECC agreed to hold the Department and its employees "harmless from all liability for damages to persons or property that may accrue during and by reason of the acts or negligence of the Contractor [NECC], his agents, employees, or subcontractors if there be such." Mrs. Blessing asserted that the indemnification agreement was the practical equivalent of insurance.

The Supreme Court examined its earlier holding that indemnification agreements are by nature "essentially non-insurance contractual risk transfers." Notwithstanding the potential application of a hold harmless agreement, the Court stated that same was not the equivalent of the liability insurance required for purposes of avoiding the bar of sovereign immunity. Because the state would still be at risk for damages awarded in connection with either the actions of the Department of Mr. Smith, the premise for sovereign immunity _ protecting the state's purse _ remained in place. The indemnification agreement did not take the place of an insurance policy issued by an insurer to the Board of Risk for the purpose of protecting the state from damages accruing to it, and state funds still remained at stake with regard to Mrs. Blessings clams against the Department and Mr. Smith.

Prepared for Nationwide Mutual Insurance Company by Martin & Seibert, L.C.

West Virginia Bills and Cases

Monthly Report - March 2008

Page 2

Consent or Confessed Judgment Not

Binding on Insurer in Subsequent Litigation

In the consolidated cases of Horkulic v. Galloway (No. 33352, filed February 19, 2008) and TIG Ins. Co. v. Recht (No. 33353, filed February 19, 2008), the Supreme Court of Appeals of West Virginia held that a consent or confessed judgment against an insured party is not binding on that party's insurer in subsequent litigation against the insurer where the insurer was not a party to the proceeding in which the judgment was entered, unless the insurer expressly agrees to be bound by the judgment.

The Horkulics filed a legal malpractice suit against their former attorney, William Galloway. Mr. Galloway was insured through a lawyers professional liability policy issued by TIG with liability limits of $500,000. TIG hired attorney William Wilmoth to defend Mr. Galloway. The Horkulics amended their complaint to assert a third-party bad faith claim against TIG and others. The bad faith claim was bifurcated and stayed pending the outcome of the legal malpractice claim against Mr. Galloway.

TIG agreed to pay policy limits of $500,000 to the Horkulics. A dispute arose as to the remaining settlement provisions, including Mr. Galloway's confessed judgment of $1.5 million and TIG's refusal to consent to same. The Horkulics subsequently filed a Motion to Compel Enforcement of Compromised Settlement Agreement. The trial court did not permit TIG to participate in the hearing regarding the motion, and granted the Horkulics' motion.

The issue before the Supreme Court was whether the findings of fact and conclusions of law contained in the trial court's order would be deemed binding upon TIG in the subsequent bad faith action. The Court stated that its analysis of this issue was predicated upon the principle that the issues to be addressed in the bifurcated bad faith action were separate questions, dependent only in part upon the underlying facts found by the trial court. Applying collateral estoppel principles, the Supreme Court concluded that TIG was not permitted to participate in the settlement enforcement hearing and thus could not be deemed to have had a full and fair opportunity to litigate the issue. TIG was not a party to the confessed judgment and had not agreed to be bound by the judgment. TIG properly reserved the right to object to the consent judgment beyond policy limits, and the trial court recognized and incorporated that right to object into the stated findings of the order. Thus, the court entertaining the bifurcated bad faith action will be required to determine the admissibility of the order at issue.

Prepared for Nationwide Mutual Insurance Company by Martin & Seibert, L.C.