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.

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.”

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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).