## Facts

- Julie Kathleen Gandy sued her stepfather, Ted Pearce, alleging years of sexual abuse while she was a minor.
- Pearce had been insured under a State Farm homeowner’s policy, but coverage was disputed, including whether the policy was in force and whether intentional abuse was excluded.
- State Farm provided Pearce a defense under an express reservation of rights, allowing Pearce to choose counsel while State Farm preserved coverage defenses.
- During the civil case, Pearce pleaded *nolo contendere* to related criminal charges and received a probated sentence.
- Without notice to State Farm, Pearce and Gandy agreed to a settlement in which Pearce confessed judgment for more than $6 million.
- The settlement included (1) Pearce’s assignment to Gandy of all claims he had against State Farm and (2) Gandy’s covenant not to execute the judgment against Pearce personally.
- Gandy, as Pearce’s assignee, sued State Farm to (1) recover the agreed judgment as within coverage or (2) recover for State Farm’s allegedly improper handling of Pearce’s defense, allegedly causing an excessive judgment.

## Issues

1. Whether an insured’s assignment to a tort plaintiff of claims against the liability insurer, made with a confessed judgment and covenant not to execute while the insurer defends under a reservation of rights, is valid or void as against Texas public policy.
2. If the assignment is invalid, whether the tort plaintiff has any independent right to recover from the insurer for alleged mishandling of the insured’s defense.

## Decision

- The Texas Supreme Court reversed the judgment for Gandy and rendered judgment that she take nothing.
- The Court held Pearce’s assignment to Gandy was void as against public policy and conveyed no rights.
- Because Gandy’s claims against State Farm were wholly derivative of Pearce’s assigned rights, invalidation of the assignment disposed of the suit.
- The Court did not disturb the lower court’s determination that intentional sexual abuse was excluded from coverage under the homeowner’s policy and did not trigger a duty to defend.

## Legal Principles

- An insured’s post-loss assignment of claims against a liability insurer to the tort plaintiff is generally void as against public policy when it is coupled with (1) a consent or confessed judgment and (2) a covenant not to execute, and the insurer is defending or has offered to defend under a reservation of rights.
- Such settlement structures threaten the integrity of the adversarial process by eliminating the insured’s financial incentive to contest liability and damages and by creating a substantial risk of collusive or inflated judgments aimed at the insurer.
- An assignee acquires only the assignor’s rights; if the assignment is invalid, the assignee takes nothing and cannot sue the insurer through that chain of title.
- A liability insurer’s duties in conducting the defense run to the insured, not directly to the third-party claimant; absent a valid assignment, the claimant has no standing to assert “bad defense” claims.
- Intentional sexual abuse constitutes intentional conduct excluded under a standard homeowner’s liability policy and does not trigger a policy duty to defend.

## Conclusion

Texas bars, on public-policy grounds, the use of a consent judgment plus covenant not to execute to support a tort plaintiff’s enforcement of an insured’s assigned claims against an insurer that is defending under a reservation of rights; without a valid assignment, the claimant has no recoverable right against the insurer and must take nothing.


State Farm Fire & Cas. Co. v. Gandy, 925 S.W.2d 696 (Tex. 1996)