November 1, 2013November 1, 2013

Covenant Judgments, Assignments and the

Reasonableness Hearing Process

Curt Feig

Nicoll Black & Feig

William C. Smart

Keller Rohrback L.L.P.

Is Collusion OK?

The Problem

When an insured faces a trial that may result in:

• An excess judgment• Some claims which are

covered and some which are not

There is an inherent conflict of interest between the insurer and the insured

Engrafting the Procedure for RCW 4.22.060

(1) A party prior to entering into a release, covenant not to sue, covenant not to enforce judgment, or similar agreement with a claimant shall give five days’ written notice of such intent to all other parties and the court. The court may for good cause authorize a shorter notice period. The notice shall contain a copy of the proposed agreement. A hearing shall be held on the issue of the reasonableness of the amount to be paid with all parties afforded an opportunity to present evidence. A determination by the court that the amount to be paid is reasonable must be secured. If an agreement was entered into prior to the filing of the action, a hearing on the issue of the reasonableness of the amount paid at the time it was entered into may be held at any time prior to final judgment upon motion of a party.

 The burden of proof regarding the reasonableness of the settlement

offer shall be on the party requesting the settlement.

The Chausee FactorsChaussee v. Maryland Cas. Co., 60 Wn. App. 504, 803 P.2d 1339 (1991)

In evaluating reasonableness, the court should consider:(1) the claimant’s damages; (2) the merits of the claimant’s liability theory; (3) the merits of the settling party’s defense theory;(4) the settling party’s relative faults; (5) the risks and expenses of continued litigation;(6) the settling party’s ability to pay; (7) any evidence of bad faith, collusion, or fraud; (8) the extent of the claimant’s investigation and

preparation of the case; and (9) the interests of the parties not being released.

The “White Horse” Cases

Besel v. Viking Ins., 146 Wn.2d 730 (2002)

• Bad Faith Breach of Duty to Settle– Insured may independently negotiate settlement

without involvement of insurer– Insurer liable for amount of settlement so long as the

settlement amount is reasonable and paid in good faith

– Amount of covenant judgment is presumptive measure of insured’s harm

– No limitation by policy limits

Truck v. Vanport Homes, 147 Wn.2d 751 (2002)

• Bad Faith Denial of Defense Obligation– Insurer who fails to defend in bad faith is estopped to

deny coverage– Forfeits right to protect itself from stipulated judgment– Settlements approved by court as reasonable

presumed reasonable in subsequent proceedings– Insurer failing to defend in bad faith bound by

determinations in trial court

Howard v. Royal Specialty Underw., 121 Wn. App. 372 (2004)

• Bad Faith Denial of Defense Obligation– Where insurer fails to defend in bad faith, insured may

enter into settlement with plaintiff and seek recovery from insurer

– Presumptive measure of damages is the settlement amount

– Trial court conducts reasonableness hearing in the tort action (RCW 4.22.060)

Bird v. Best Plumbing, 175 Wn.2d 756 (2012)

• Bad Faith Refusal to Settle– Where insurer refuses to settle in bad faith, insured

may recover amount of settlement, even if it exceeds policy limits

– “Covenant Judgment” recognized– Reasonable settlement amount becomes

presumptive measure of damages but may be rebutted by showing collusion or fraud

– Settling parties bear burden of proof of reasonableness

– No right to jury trial on amount of reasonable settlement; no due process issue with notice and opportunity to be heard

Water’s Edge HOA v. Waters Edge Assoc., 152 Wn. App 572 (2009)

• Failure to Settle/Improper Defense Allegations– Appellate court reviews reasonableness determination for abuse

of discretion– Evidence supported finding that plaintiff’s potential damages

were $500,000, not $8.75 million– Insurer disadvantaged by settlement– Evidence supported finding of collusion in covenant judgment;

burden on settling parties– Court could consider economic loss rule in reasonableness

determination– Dismissal appropriate resolution

Green v. City of Wenatchee, 148 Wn. App 351 (2009)

• Bad faith failure to settle– Insurer generally bound by findings of fact/conclusions of law in

tort action against insured when notice and opportunity to intervene provided

– Covenant judgment without insurer’s consent allowed where insurer refuses to settle

– Stipulated findings and conclusions as part of settlement of tort case not binding on insurer where the stipulated issues were not judicially resolved and insurer intervened in reasonableness hearing

– Factual findings made by trial court in reasonableness hearing will not be disturbed on appeal when supported by substantial evidence

Hidalgo v. Barker, ___Wn. App. __; 309 P.3d

687 (No. 30544-9-III,Sept. 10, 2013)

• Bad faith failure to settle– Trial court not required to conduct second reasonableness

hearing after settling parties modified amount of settlement following trial court’s initial determination that settlement was not reasonable and calculation of and finding of alternative reasonable amount where no facts changed

– Standard of review of trial court’s determination of reasonable amount for settlement is abuse of discretion

– Rate of post-judgment interest is governed by terms of settlement agreement and not underlying allegations of complaint against insured

– Prejudgment interest allowed where original agreement provided for award, even though court found the original amount was not reasonable

How to Settle

• Policy limits demand and failure to pay

• Personal counsel for the insured

• Choose the right amount

• Negotiate

The Components of the Agreement

– Recitations of facts and damages– Stipulated amount– Assignment of Rights– Direction to pay– Interest at 12%– Reasonableness Hearing– Arbitration – Covenant to satisfy judgment on

payment

Handling the Reasonableness Hearing

• Timing and notice

• Red Oaks Condominium Owners Ass’n v. Sundquist Holdings, Inc., 128 Wn. App. 317 (2005) allows hearings on 6 days notice

Handling the Reasonableness Hearing

• Discovery – within trial court’s discretion. Pickett v. Stephens-Nelson, 43 Wn. App. 326, 212 P.2d 277 (1986).– Should it be unlimited?– Claim file? Defense lawyers file? Plaintiff’s

lawyer’s file?– Length of discovery period

Handling the Reasonableness Hearing

• Participation of Insurer– Notice and opportunity

to intervene– Consequences of

intervention

Bird v. Best Plumbing/Farmers

• 9 depositions• Over 3,000 pages of

transcripts• 4 days of hearing over 3

months• Live testimony• Expert Witnesses• Changing theories for

defense• Jury Trial • Appeals

Welch v. American Ins. Co.

Welch v. American Ins. Co.

• Wrongful Death Case with Horrific Facts– Tortfeasor drunken driver employed by franchisee– American Ins. insured Pizza Time, the franchisor– Plaintiff sued franchisee, franchisor, the driver and others– American Ins. Defended under reservation of rights; limits

issue– Plaintiff’s claimed damages “substantially higher” than $2.5

million in insurance coverage available under two policies– Plaintiff and Pizza Time negotiated settlement:

• Entry of judgment of $2.5 million

• Agreed to arbitrate “all other issues” if the total amount of the settlement (in excess of the $2.5 million) could not be negotiated within 30 days

• Pizza time agreed to cooperate with plaintiffs in proving claims against Pizza Time

• Pizza Time assigned claims against Fireman’s fund to plaintiff

• Plaintiff agreed not to execute on any judgment against Pizza Time

Welch v. American Ins. Co.

• Four years after the partial settlement, claims were resolved by arbitration -- $10.8 million

• Prior to arbitration, plaintiffs (as assignees) sued Fireman’s Fund to recover the amount of the arbitration award– Lawsuit stayed pending resolution of arbitration

– In arbitration, plaintiff had access to defense counsel’s files provided by Pizza Time’s personal counsel

– Court ordered Fireman’s Fund to produce confidential information to plaintiff prior to arbitration

– Pizza Time offered no defense at arbitration

• Arbitration Award confirmed by Superior Court, including finding of no bad faith, collusion, or fraud and finding that amount is reasonable

No Adversarial Relationship“A stamp of judicial approval must be

more than a rubber stamp of a one-sided presentation when it is presented under the guise of a dispute.”

Continental Casualty v. Westerfield, 961 F.Supp. 1502 (D.N.M. 1997)

“The Chausee factor is merely whether there is any evidence of bad faith, collusion or fraud.”

Water’s Edge, 152 Wn.App. 579 (2009) (Finding reasonable settlement to be $400,000 where parties stipulated to $8.75 million)

No Judgment

• Welch – The parties stipulated to a partial judgment of $2.5 million, the amount of the insurance coverage, leaving the remainder to be decided in Arbitration.

No Judgment

• Expert testimony opines “An agreement to litigate their dispute … at a later date is not a covenant judgment.”

• The arbitration award, confirmed by the court found, “A reasonable covenant judgment, considering all Besel/Besel factors is $10,800,289.”

No Amount for Court to Determine Reasonable

• Chausee – Nine factors to determine the reasonable amount.

• Where no settlement number, no way for court to measure the $ number against the factors.

• In Welch, the intent of the settlement appeared to be to exclude consideration of the “released person’s relative fault.”

Cooperation to Engineer Large Award

• Water’s Edge– Plaintiff’s counsel contacted

defendants without notice to insurance appointed defense counsel

– Plaintiff’s counsel selected lawyers to negotiate covenant judgment.

– Plaintiff’s counsel wrote letter criticizing appointed defense counsel

– Hand picked lawyers undermined insurance defense counsel

– Kick back

Cooperation to Engineer Large Award

Welch– Insurance defense lawyers

dismissed– Defendant’s summary

judgment on liability withdrawn

– Defense file given to plaintiffs

– No opposition to arbitration

Retention of Interest by Insured

• Westerfield – Agreement to split any judgment against insurer

• Water’s Edge – hand picked lawyer “Planned to set up a manufactured legal malpractice claim against [insurance defense counsel].

• “Proceeds of legal malpractice claim [used] as a commodity for mutual profit.”

Recommendations for Stipulated Judgment

1. Have a judgment rather than a set of promises

2. Have a reasonableness hearing

3. Establish a number you can support

4. Competent counsel for insured

5. Mechanism for contesting amount– Chose judge’s numbers– Arbitration on damages (fair fight)

6. Don’t retain an interest for the insured

Questions?

Thank you