As an issue of first impression, the Connecticut Supreme Court recently held that a verdict contingent settlement agreement must be disclosed to the court and non-settling parties. See Monti v. Wenkert et al, (SC 18028 and 18029, decided May 20, 2008). In so doing the Court examined the distinction between so-called “Mary Carter” liability shifting agreements and verdict contingent agreements.

In Monti, the defendant appealed from a verdict claiming that the non-disclosure of a secret settlement agreement reached during trial between the plaintiffs and another defendant prejudiced the defendant and tainted the verdict. By way of background, the plaintiffs had commenced an action against Dr. Naomi Wenkert (settling defendant) and against Dr. Mark Decker (non-settling defendant) for medical malpractice. Prior to her death, Plaintiffs’ decedent had experienced a myriad of symptoms including throat tightness, difficulty swallowing and increased respiratory rate for which she was under Decker’s care. She was also evaluated for panic attacks by Wenkert. An autopsy determined that the decedent died from acute respiratory distress caused by a viral infection that neither Wenkert or Decker had diagnosed. After the plaintiffs rested their case, Wenkert and the plaintiffs entered into a secret settlement agreement whereby the plaintiffs were guaranteed a minimum and maximum damages award depending on the jury’s verdict. The agreement was not disclosed to Decker until after the jury’s verdict was rendered. The jury ultimately found in favor of Wenkert and against Decker and awarded damages of $1,750,000. Decker filed a motion to set aside the verdict claiming, inter alia, that the failure of the plaintiffs to disclose the settlement agreement with Wenkert unfairly prejudiced him and deprived him of the opportunity to challenge certain evidence and to impeach Wenkert’s expert witness. The trial court denied the motion to set aside from which Decker appealed.

The agreement at issue differs from the traditional agreement wherein a settled defendant is withdrawn from the case and released from liability. Herein, the settling defendant remained with the extent of her liability predicated on the verdict. It is in this context that the Court examined the implication of the secret settlement agreements.

One such type of secret agreement which is generally disfavored is called a “Mary Carter” agreement wherein one or more defendants in a multiparty case secretly align with the plaintiff and continue as active defendants, all the while working to aid the plaintiff’s case. The four elements of a Mary Carter agreement are: (1) the settling defendant guarantees the plaintiff a minimum recovery regardless of outcome; (2) the settling defendant remains in the litigation; (3) the settling defendant’s liability is proportionately decreased as non-settling defendant’s liability increases; and (4) the agreement remains secret. See Booth v. Mary Carter Paint Co., 202 So.2d 8 (Fla. Dist. Ct. App.2d 1967). In essence, in exchange for assistance offered to the plaintiff, the settling defendant’s own maximum liability is diminished proportionately by increasing the liability of the non-settling defendants. The courts generally view “Mary Carter” agreements as suspect because they secretly alter the adversarial process and raise a threat to the fairness of a trial for the nonsettling defendants. See Vermont Union School District No. 21 v. HP Cummings Consruction Co., 143 Vt. 416, 469 A.2d 742 (1983). Court generally disfavor the Mary Carter agreement because the settling defendant is given a financial interest in the outcome of the verdict. See also, 22 A.L.R. 5th, 482, 498. Accordingly, a few states consider Mary Carter agreement per se invalid, while many other states have adopted rules to curb abuses by requiring their disclosure to the court, the other parties and sometimes to the jury. We would note that in Monti, the Connecticut Supreme Court did not adopt any specific rule prohibiting Mary Carter agreements, however, the dicta contained in that decision indicates that these types of agreements are disfavored.

Another type of agreement is called the verdict contingent settlement agreement, sometimes also referred to as a “high/low” agreement. The basic elements of a verdict contingent agreement are: (1) the settling defendant guarantees the plaintiff a minimum recovery regardless of outcome; (2) the settling defendant’s maximum exposure is limited; (3) the settling defendant remains in the case and the extent of his liability is predicated on the amount of the jury’s verdict; and (4) the agreement remains secret from the non-settling defendant. The verdict contingent agreement does not have the same liability-shifting feature of the Mary Carter agreement. Accordingly, the verdict contingent agreement is viewed as less problematic because a settling defendant still has an incentive to work to make the verdict as small as possible. Nevertheless, a risk remains that that the adversarial process may be altered if a settling defendant expends less resources to defend against liability knowing that his exposure is capped. Likewise, a plaintiff might more vigorously pursue liability against the non-settling defendant because there is no cap on a verdict against the non-settling defendant. Accordingly, the Court concluded that certain safe-guards should be in place to prevent abuses which may effect the fairness of the adversarial process.

In examining the verdict contingent agreement, the Supreme Court reasoned that it is the sound policy of Connecticut to encourage settlements in avoidance of protracted litigation and, therefore, the verdict contingent agreements are not per se invalid. The Court further reasoned that because the secrecy associated with a verdict contingent settlement agreement poses a threat to the fairness of a trial for the non-settling defendant, an appropriate disclosure requirement must be followed. The Court ruled that all settlement agreements must be promptly disclosed to the trial court and any non-settling defendant. The Court further held that it is within the trial court’s discretion to permit these agreements to be disclosed to the jury for the limited purpose of showing the bias and prejudice of a witness, with an appropriate cautionary instruction, provided such disclosure is not barred by other evidentiary rules.

The Court then examined whether the verdict should be set aside in Monti looking at the nature of the agreement itself. The agreement between the plaintiffs and Wenkert provided for a minimum of $300,000 and a maximum of $1,000,000 depending on the verdict. The agreement further acknowledged that Wenkert’s insurance company was in rehabilitation and the issue of reinsurance was unclear. In exchange for the high/low agreement, the plaintiffs relinquished their rights to personal recovery against Wenkert and any rights to prejudgment or post-judgment interest and costs. The Court concluded that the agreement at issue was not a Mary Carter agreement and, therefore, it did not unfairly interfere with the adversarial process. The Court held that it was nevertheless improper for the plaintiffs and the defendants to have not disclosed its execution to both the court and the non-settling defendant.

The next issue addressed by the Court was whether a reversal was warranted due to potential prejudice to Decker as the non-settling defendant. The Court found that the agreement was executed during the trial after the following had occurred: the plaintiffs had rested their case, the plaintiffs’ expert had testified concerning Wenkert’s breach of the standard of care, and Wenkert had testified in her own defense offering evidence to prove that she had not violated the standard of care nor was she the cause of the plaintiff’s death. Throughout the litigation, Wenkert and Decker has remained in adversarial positions. The Court further held that Decker’s knowledge of the agreement could not have changed his incentive to zealously cross examine witnesses and vigorously present his defense, as he had done at trial. Therefore, the Court determined that under the circumstances of the case, the parties’ failure to disclose the agreement was not so prejudicial as to warrant a reversal.

Although the Court did not reverse the judgment in Monti, it established a mandatory disclosure rule which may greatly impact litigants’ willingness to enter into verdict contingent settlement agreements. Given the Supreme Court’s decision, prior to entering into a verdict contingent agreement, counsel must evaluate the potential prejudicial impact of their disclosure on a jury. Counsel should be prepared to file a motion in limine to seek an evidentiary ruling prior to the commencement of evidence, submit and request a limiting instruction that the agreement may not be used to evaluate liability or damages, and to submit and request a jury charge containing a cautionary instruction regarding its use as evidence of the bias of a witness. It is incumbent upon any attorney, claim representative and risk manager offering advice concerning the execution of a verdict contingent agreement to consider and advise their clients about the disclosure requirement and the potential for consequential impact.