Reasonable Stipulated Settlement Sets the Floor, Not the Ceiling, for Bad Faith Damages

On Monday, the Washington State Court of Appeals held that a stipulated covenant judgment settlement that is found “reasonable” by the court “sets a floor, not a ceiling, on the damages a jury may award” in an assigned bad faith case.  So in Miller v. Safeco Ins. Co. et. al, a $4.15 million stipulated judgment became a $13 million bad faith verdict, to which the court added $7 million in prejudgment interest, approximately $1.6 million in attorneys’ fees plus an additional appellate fee award, and remanded for a proper calculation of court costs and post-judgment interest. 

 

The underlying case involved an auto accident in which three passengers of the at-fault driver who rear-ended a truck were claiming bodily injuries.  The auto was insured by Safeco, under a $500,000 liability policy and a $1 million umbrella policy.  Safeco defended without reservation, and eventually offered its policy limits.  Safeco’s alleged bad faith was primarily related to its failure to advise a claimant pre-suit of its policy limits (Safeco claimed the insured did not consent to disclosure, but this was disputed), a dispute over the underinsured motorist limit in the policy, and Safeco’s failure to offer its umbrella policy limits fast enough.  Safeco first offered its $500,000 liability limits, and then a few months later in the litigation offered the additional $1,000,000 umbrella policy limits.  But the claimants were not willing to settle all three claims for policy limits when offered.  Instead, the parties stipulated to covenant judgments totaling $4.15 million (on top of the $1.5 million that Safeco contributed and $300,000 that another carrier contributed to the settlement). 

 

Safeco did not challenge the reasonableness of the stipulated judgment amounts.  Rather, Safeco denied it had acted in bad faith, and argued that if found to have acted in bad faith, then damages were set at $4.15 million.  The primary dispute on appeal was whether Washington case law saying a reasonable stipulated judgment amount sets the “presumptive measure of damages” in the subsequent bad faith case means the $4.15 million stipulated judgment was a damage floor or ceiling.  The appellate court ruled it was a floor, upholding the following instruction to the jury:

 

 

If you find for the plaintiff on Patrick Kenny's claim for failure to act in good faith your verdict must include the following undisputed items:

 

The net amount of the Stipulated Order Re: Reasonableness of Settlements for $4,150,000. 

In addition, you should consider the following past and future elements of damages: 

1.              Lost or diminished assets or property, including value of money;

2.                 Lost control of the case or settlement;

3.               Reasonable value of expert or other costs or reasonable attorney fees  incurred for the private counsel retained by Patrick Kenny;

4.                 Damage to credit or credit worthiness;

5.               Effects on driving or business insurance or insurability;

6.                 Emotional distress or anxiety.

The burden of proving Patrick Kenny did not suffer damages rests upon Safeco. It is for you to determine, based upon the evidence, whether any particular element has been proved by a preponderance of the evidence. 

 

The jury awarded $13 million in damages.  Because the stipulated settlement agreement called for a 12% interest rate, the court added $7 million in prejudgment interest, but held that post-judgment interest should be calculated at the much lower statutory tort rate.  In calculating the $1.6 million attorney fee award, the court permitted plaintiff attorneys to reconstruct their billable hours for the several years the case was in litigation (3,229.8 hours) since plaintiff’s counsel had not kept contemporaneous time records, and held that a $400-450/hr. attorney fee with a 1.5% multiplier was reasonable. 

 

Soha & Lang, P.S.  attorneys are available to assist insurer clients in understanding and addressing the impact of this decision both during the claims handling process and after an allegation of bad faith claims handling has been made.

Disclaimer: The opinions expressed in in this blog are those of the author and do not necessarily reflect those of Soha & Lang, P.S. or its clients.

Not So Fast: Insurer Has No Duty to Defend Road Rage Claims

On January 28, 2014, the Washington Court of Appeals ruled that USAA did not act in bad faith when it declined to defend its insured, Dennis Geyer, under his homeowners and auto insurance policies for claims arising out of an assault at traffic light.  United States Auto. Assoc. v. Speed, No 43728-7-II.

In March 2009, Geyer assaulted Robert Speed at a traffic signal.  Apparently, Geyer was angry over something Speed had done while driving in front of him.  In an August 2009 letter, Speed’s attorney demanded Geyer pay $650,000 to compensate Speed for his injuries.  The letter alleged that Geyer followed Speed, pulled him out of his vehicle at a stop light, beat him, and then drove away leaving Speed bleeding and unconscious in the street.  The demand letter stated that if this were a negligence case that was covered by insurance, Speed’s attorneys would have sought seven-figures.   

Geyer tendered under his USAA homeowners and auto insurance policies.  Unlike most standard policies, the USAA policies provided that USAA’s duty to defend arose not only when a “suit” was brought against the insured, but also when any “claim” was made for damages arising from acts covered under the policies.  After investigating the claim, USAA reserved rights as to whether the incident involved an “occurrence” under Geyer’s homeowner’s policy, an accident under his auto policy, and whether the claims fell within the policies’ intentional acts exclusions.  USAA continued to monitor the claim, but did not retain counsel to defend Geyer. 

Geyer and Speed later stipulated to a $1.4 million covenant judgment, which included an assignment to Speed of Geyer’s potential contractual and bad faith claims against USAA.  USAA then filed a complaint for declaratory relief against Speed.   USAA moved for summary judgment asking the trial court to declare as a matter of law that (1) there was no coverage under either policy, (2) USAA had no duty to defend Geyer, (3) USAA’s failure to defend was not in bad faith, and (4) USAA was not estopped from denying coverage.  The trial court granted USAA’s motion and a second (unopposed) motion to dismiss Speed’s statutory and regulatory bad faith claims.   Speed appealed.

In affirming the trial court’s finding that USAA had no duty to defend as a matter of law, the Speed Court explained that unlike cases where standard policy language regarding the duty to defend is determined by allegations in the complaint, non-standard language of the USAA policies, discussed above, required that the duty to defend depend upon the allegations in the demand letter.  Then, noting that Washington courts have repeatedly held that an insured’s deliberate conduct does not constitute an accident, the Speed Court held that “[e]ven interpreting the allegations liberally and resolving doubts in favor of a duty to defend,”  the USAA  policies did not conceivably cover the claims alleged in Speed’s demand letter. 

In reaching its holding, the Court of Appeals rejected Speed’s argument that USAA was obligated to defend because USAA expressed uncertainty regarding coverage.  (For example, USAA had advised Geyer that coverage was “questionable" and that “[ c]overage may be precluded.”)  The Speed Court held: “What the insurer believes about the duty to defend or policy coverage is immaterial to the court’s duty to defend determination.”  Further, “to allow an insurer’s conduct to give rise to the duty to defend would conflict with the rule that insurance coverage cannot be created by equitable estoppel.”

 

Once Is Enough: The Washington Court of Appeals Holds Trial Court Was Not Required To Reevaluate the Reasonableness of a Covenant Judgment

In Hidalgo et al. v. Barker et al. ___Wn. App. __, __P.3d__ ;  No. 30544-9-III (Sept. 10, 2013), the Washington Court of Appeals addressed the following issues of first impression in Washington State with regard to the determination of the reasonableness of a covenant judgment: 

1. Is a trial court required to conduct a hearing to determine the reasonableness of a stipulated settlement any time the settling parties modify the terms of their agreement? 
2. Does a trial court have the discretion to provide for prejudgment interest as a component of a reasonableness determination? 

The answer to the first question is “no.”  Absent a material change in one or more reasonableness factors, a court that has already conducted a reasonableness hearing and determined a reasonable settlement amount for those parties is not required to entertain evidence and argument in support of revising that amount.

The answer to the second question is “yes.”  It is within the trial court’s discretion to either include or exclude prejudgment interest for the period between the date of settlement and the date judgment is entered.  

The Hidalgo Court also held that the trial court did not abuse its discretion when it found the parties’ first settlement agreement unreasonable and then multiplied what the court found to be the mid-point of the expected verdict range if the case went to trial by the perceived chance of a favorable verdict to determine the reasonableness of the settlement.

I. Background

Manuel Hidalgo was convicted of a crime and served over four years in prison before his judgment and sentence were reversed on the basis of the newly discovered evidence.  Mr. Hidalgo then brought a malpractice action against his public defenders and their law firm.  Westport Insurance Corporation insured the law firm and its attorneys under a professional liability policy with “wasting” limits (coverage limits included defense costs), meaning that every dollar spent defending the malpractice case reduced available coverage.

Westport appointed counsel to defend the law firm and its attorneys against Mr. Hidalgo’s claim and other related claims.  Efforts at a global settlement proved unsuccessful.   Mr. Hidalgo made several decreasing offers to settle with one of the attorneys, Mr. Stevensen, with a final offer of $75,000.  However, the claims against Mr. Stevensen were not settled.  In May 2005, after the limits of the insurance policy were exhausted, counsel appointed by Westport withdrew from the case.

In May 2007, Mr. Stevensen reached an agreement with Mr. Hidalgo to settle for a $3.8 million covenant judgment. The Hidalgo/Stevensen settlement agreement included a covenant not to execute against Mr. Stevensen  in exchange for  an assignment of Mr. Stevensen’s claims against Westport.  The agreement also provided for prejudgment interest from the date of the agreement until the entry of judgment and for post-judgment interest from date of entry.  In addition, the settlement was contingent on the court approving it as reasonable.

In February 2009, after reviewing “voluminous” briefing from both sides, the trial court conducted a reasonableness hearing lasting about three hours.  At the conclusion of the hearing, the court rejected the $3.8 million settlement figure as unreasonable and ruled that the reasonable settlement amount was $688,875.  The trial court stated that it had considered the nine reasonableness factors set forth in Glover v. Tacoma Gen. Hosp., 98 Wn.2d 708, 717, 658 P.2d 1230 (1983), overruled on other grounds by Crown Controls, Inc. v. Smiley, 110 Wn.2d 695,  756 P.2d 717 (1988), but explained that its conclusion focused on just two Glover factors:  the merits of the plaintiff’s liability theory and the merits of the defense theory.  The trial court found a probable range of damages for a legal malpractice case involving incarceration and the probability of Mr. Hidalgo’s success at trial.  Using these numbers, the trial court multiplied the mid-point of the expected verdict range  by its evaluation of the chance of a favorable verdict to arrive at $688,875 as the reasonable settlement amount.  Because the settlement was contingent on the trial court’s approval of the $3.8 million settlement figure, the settlement was void by its terms.  The litigation continued. 

In May 2010, Mr. Stevensen and Mr. Hidalgo entered into a new settlement agreement. This time, the agreed settlement amount was $2.9 million “or such amount as is found reasonable by the proper court.”  Mr. Hidalgo asked the trial court to rule on the reasonableness of the $2.9 million settlement. The trial court refused.  Instead, the court signed an order on its February 2009 reasonableness determination that included no findings of fact but did append and incorporate a transcript of its oral ruling from the 2009 hearing.   

Before judgment was entered, Mr. Hidalgo argued that he was entitled to prejudgment interest from the date of the agreement.  The trial court agreed and ruled that prejudgment interest of $134,755 was appropriate. The court also awarded post judgment interest at the statutory rate of 12 percent.  Mr. Hidalgo appealed and Westport cross-appealed.  

II. One Reasonableness Determination Is Enough

The Hidalgo Court ruled that that the trial court did not abuse its discretion by refusing to revisit its original reasonableness determination after the parties settled the second time.  The Court of Appeals explained that if a court determines the settlement is unreasonable, RCW 4.22.060(2) has been construed to require the court to then determine a reasonable settlement value.  “That stand-alone reasonable settlement amount will necessarily be independent of other terms of the parties’ agreement.”  Therefore,  if the “parties renegotiate the terms of a settlement agreement after the trial court determines a reasonable settlement amount, then, no further hearing should be required unless a different issue ‘of the reasonableness of the amount to be paid’ is presented.”

A second reasonableness hearing may be necessary if “[d]evelopments in the lawsuit that affect the merits of the claims, the defenses, or other Glover factors might result in a different issue of reasonableness.”  However:

short of a material change in one or more Glover factors, a new settlement agreement entered into by two parties does not require a court that has already conducted a reasonableness hearing and determined a reasonable settlement amount for those parties to entertain evidence and argument in support of revising that amount.

Accordingly, the Court of Appeals found that it was not an abuse of discretion for the trial court to refused to revisit its prior determination when “it saw nothing in the parties’ submissions that would cause it to revisit its prior determination.”

III. The Reasonableness Determination

Next, the Hidalgo Court rejected Mr. Hidalgo’s argument that the trial court abused its discretion when it found the first settlement unreasonable and determined that $688,875 was a reasonable settlement amount.  Mr. Hidalgo argued that the trial court (1) failed to explain how it applied the individual Glover factors; (2) ignored the eighth factor, consideration of the releasing party’s investigation and preparation; and (3) abused its discretion by using a “rigid calculation” and selecting a figure that was the mean of the probable range of recovery rather than a higher figure.

The Hidalgo Court rejected each of these arguments in turn and held that:

1. Washington decisions do not require trial courts to explain their application of the Glover Factors.
2. Absent some showing that an incorrect standard may have been applied, Washington appellate courts do not review a trial court’s reasonableness determination for a sufficient explanation, but for substantial evidence.
3. The trial court did not abuse its discretion by failing to consider or misapplying the eighth Glover Factor—the releasing party’s readiness for trial.  
4. The trial court did not abuse its discretion when it multiplied the mid-point of the expected verdict range by the perceived chance of a favorable verdict to determine the reasonableness of the settlement.

IV.  Prejudgment and Post Judgment Interest

Next, the Court of Appeals addressed Westport’s cross appeal challenging the trial court’s inclusion of prejudgment interest and its ruling that the 12 percent contract rate applied to post judgment interest, rather than the lower market-based rate for judgments founded on tortious conduct.  As to post judgment interest, Westport argued that the tort interest rate should apply because the underlying claim against Stevensen was a malpractice claim. The Court of Appeals disagreed.  Quoting Jackson v. Fenix Underground, Inc., 142 Wn. App. 141, 146, 173 P.3d 977 (2007), the Hidalgo Court held that the 12 percent contract rate applied because:

Once parties have agreed to settle a tort claim, the foundation for the judgment is their written contract, not the underlying allegations of tortious conduct.

The Hidalgo Court then addressed whether Mr. Hidalgo was entitled to prejudgment interest.  The court acknowledged that in Washington, a party’s entitlement to prejudgment interest as a question of substantive law turns on whether a claim is “liquidated” and found that Mr. Hidalgo’s claim was not liquidated.  Nevertheless, the Court of Appeals held that it was within the trial court’s discretion to either include or exclude prejudgment interest in its reasonableness determination.

Soha & Lang, P.S. attorneys are available to assist insurer clients in understanding and addressing the impact of this decision.

The opinions expressed in in this blog are those of the author and do not necessarily reflect those of Soha & Lang, P.S. or its clients.

 

Washington Insurers Denied Right To Jury Trial

On October 25, 2012, the Washington Supreme Court ruled that an insurer was not entitled to have the reasonableness of “covenant judgment” determined by a jury. Bird v. Best Plumbing Group, LLC, 86109-9, 2012 WL 5269734 (Wash. Oct. 25, 2012).

  

The insured was a plumbing company that was sued for severing a sewage line on the claimant’s property. When the claimant sued for damages, the insurer defended the insured without a reservation of rights. The claimant made a $2 million policy-limits demand. The demand was rejected. The insured then settled with the claimant for $3.75 million subject to a covenant not to execute against the insured and an assignment of rights to the claimant. The trial court found the $3.75 settlement amount reasonable after a four-day hearing, in part due to a treble-damages provision in Washington’s trespass statute that was never pled.

On appeal, the insurer contended that the reasonableness hearing violated its right to jury trial under Article I, Section 21 of the Washington State Constitution because the hearing set the presumptive damages for the claimant’s soon-to-follow bad faith lawsuit against the insurer. The Court of Appeals rejected the argument, reasoning that the reasonableness hearing was an equitable proceeding with no right to trial by jury. The Court of Appeals then affirmed the trial court’s finding of reasonableness. The insurer appealed to the Washington Supreme Court.

In a six to three opinion, the Washington Supreme Court affirmed the decisions of the trial court and Court of Appeals. The Washington Supreme Court:

•   Approved the application of RCW 4.22.060 reasonableness hearings to settlements involving a covenant judgment (i.e. a settlement between an insured defendant and a plaintiff where the plaintiff agrees to seek recovery only from a specific asset—the proceeds of the defendant’s insurance policy and the rights owed by the insurer to the insured, but do not release the insured from liability);
• Held that determining the reasonableness of a covenant judgment under RCW 4.22.060 is an equitable proceeding to which no jury trial right is afforded;
• Held that the due process rights of the insurer were not violated where the insurer was afforded notice of the reasonableness hearing, allowed to intervene, and given the opportunity to participate in a lengthy and highly contested hearing on the issue of the reasonableness; and
•  Held that the trial court did not abuse its discretion in holding the $3.5 million covenant judgment was reasonable.

The opinions expressed in in this blog are those of the author and do not necessarily reflect those of Soha & Lang, P.S. or its clients.

Covenant Judgment Found Unreasonable by Washington Federal District Court

Despite the challenges facing carriers in Washington when disputing the reasonableness of a covenant judgment, Soha & Lang, P.S. attorneys have once again obtained a judicial determination that a stipulated covenant judgment settlement was unreasonable.

On January 9, 2012, Federal District Court Judge John Coughenour ruled that a $5.75 million covenant judgment settlement of a condominium construction defect lawsuit was unreasonable, that the reasonable settlement value of all of the plaintiff homeowners association’s claims was $1,921,525.70, and that the value of the association’s breach of fiduciary duty claim, the only potentially covered claim, was $300,000.ⁱ

Applying the first of the factors identified in Chaussee v. Maryland Cas. Co.,ⁱⁱ the releasing party’s damages, Judge Coughenour first considered the association’s cost of repair claim. Judge Coughenour found that the defense repair estimate prepared by McBride Construction, which was about $1.8 million less than the association’s estimate, was more reasonable than plaintiff’s repair cost estimate prepared by Charter Construction. The court also reduced the association’s loss of use claim from $963,012 to $96,000— a reduction of over 90%—and reduced the association’s attorney fee claim by about 65%. As a result of the court’s adjustments, the amount of the association’s damages was reduced from $8,463,679 to $4,270,057 before the court applied the remaining Chaussee factors.

Judge Coughenour then discussed several of the remaining Chaussee factors, including the merits of the association’s liability theories, the merits of the defense theories, and the defendants’ ability to pay. Based upon the weaknesses in the association’s legal theories, evidentiary problems with the association’s case, and the defendants’ lack of material assets to satisfy a judgment, the court applied a 55% reduction to the association’s adjusted damage claim of $4,270,057 to arrive at $1,921,525.70 as the reasonable settlement value of the all of the association’s claims.

Recognizing that the association’s breach of fiduciary duty claim was the only potentially covered claim, Judge Coughenour separately addressed this claim’s value. The association argued that the measure of damages for this claim was the cost of repair. However, Judge Coughenour expressed doubt that any alleged breach of fiduciary duty by the developer-appointed pre-turnover board caused water damage to the complex. Moreover, citing Water’s Edge Homeowners Ass’n v. Water’s Edge Assocs.,ⁱⁱⁱ the court held that the cost of repair is not the proper measure of damages for a breach of fiduciary duty claim. Based upon evidence presented by the intervening insurers represented by Soha & Lang, P.S., the court held that the reasonable value of the only potentially covered claim was $300,000.

Judge Coughenour’s analysis reflects further recognition by Washington courts that stipulated settlements involving judgment-proof defendants raise concerns about the reasonableness of such settlements. The court explained that because of the defendants’ lack of material assets, the defendants did not have incentive to obtain the best possible settlement amount. Accordingly, the court held that the “final settlement amount must be discounted to reflect this reality.”

_______________________________________________________

i. Aspen Grove Owners Ass’n v. Park Promenade Apartments, LLC et al., No. CV09–1110 (W.D.Wash. Jan. 9, 2012). Soha & Lang, P.S. attorneys Tyna Ek, Mary DeYoung, and Paul Rosner represented the intervening insurers.

ii. 60 Wn. App. 504, 803 P.2d 1339 (1991).

iii. 152 Wn. App. 572, 216 P.3d 1110 (2009).