The Garcias were injured while aboard the Star of Louisville, which was insured by HIH Casualty and General Insurance. While litigation was pending, HIH took bankruptcy and withdrew its defense of the Star. The Star negotiated a settlement with the Garcias, which included assigning their claims against the Star’s insurance agent and broker for placing coverage with an unreliable carrier. The Garcias promised not to enforce judgment against the Star.

Later the Garcias sued HIH, and the agent who had placed the Star’s coverage with HIH. Jefferson Circuit Court dismissed the claims against the agent, and against the a broker that the agent had sued as a third party, holding that those claims sounded in tort rather than contract, and therefore could not be assigned.

Kentucky has allowed an insured to assign claims against its insurer since Manchester Ins. & Indem. Co. v. Grundy, 531 S.W.2d 493 (Ky. 1975). But where the insurer cannot answer a claim because it is insolvent, the Court of Appeals noted that  suing the agent who placed the claim is “an obvious variation” on the Grundy assignment.

The Court of Appeals agreed with the Jefferson Circuit Court that the general rule is that tort claims cannot be assigned. But it reminded the defendants that Grundy allowed assignments “for torts which are founded upon contracts and grow out of the contractual relations between the parties.” Because the duty of care breached by the agent and broker for the Star “gave rise to purely economic injury,” those claims were assignable.

The trial court analogized the claims to one for legal malpractice, which is not assignable. It cited an Arizona case that held an insured’s business relationship with an agent or broker was just as personal as a contract between a client and attorney, and the same public policy prevented either claim from being assigned. But the Court of Appeals distinguished the relationships, noting that the insured/agent relationship does not hinge on privileged communications, and in fact exists in conjunction with the duty of good faith that the agent may owe to represented insurers.

Finally the Court rejected the argument that, even if the assignment was valid, the Garcias’ promise not to execute against the Star made the assignment contract illusory. The Court of Appeals examined conflicting authorities from other jurisdictions. It noted that, in light of the Kentucky Supreme Court’s repeated validations of an insured’s assignment of claims, that Court would like adopt the majority position that a promise not to execute does not destroy the assignment contract.

The Court did agree, however, that such assignments carry a risk of collusive settlements. Thus, it held that the agent and broker were not subject to the recitals of the Garcias’ injuries contained in that agreement. In their suit against the agent and broker, the Garcias will have to prove that they were injured, and the amount of their injury.

Garcia v. Associated Insurance Service, Inc. is to be published.

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