In Washington, when an insured contractor believes its insurer is refusing to settle a plaintiff’s lawsuit in bad faith, the contractor can negotiate an independent pretrial settlement with the plaintiff. These settlements typically involve a stipulated judgment against the contractor, a covenant not to execute on that judgment against the contractor, and an assignment to the plaintiff of the contractor’s bad faith claim against its insurer. This is referred to collectively as a “covenant judgment.” Once covenant judgment is agreed, a hearing is held to determine whether the amount of the settlement is reasonable. (See RCW 4.22.060). What was unclear under the statute, until recently, was whether the insurance companies had a constitutional right to have a jury, instead of a judge, decide whether the amount of the stipulated judgment was reasonable.
In Bird v. Best Plumbing Group, LLC,[i] a plumbing contractor (Best) caused a sewage line to burst on a neighboring property causing plaintiff personal injury (as he was walking by an exploding sewage pipe) and, overtime, hillside instability on the plaintiff’s property as well as extensive damage to his residence in the form of toxic mold from the sewage intrusion. Shortly before trial, plaintiff made a settlement demand for $2.0 million, the limits of the Best’s insurance policy. In the demand, plaintiff advised Best of liability for treble damages under the Washington trespass statute (which could potentially put the claim at $6.0 million). After Best’s insurance company refused to pay the settlement demand, Best’s owner worried about potential exposure beyond the policy limits and consulted his outside counsel (i.e. not counsel assigned by the insurance company). Best’s outside counsel negotiated settlement between Bird and Best for a $3.75 million stipulated judgment, a promise not to execute the judgment against Best, and an assignment of Best’s bad faith claims against its insurance company.
Bird moved the court for a reasonableness hearing. The insurance company was notified, intervened, and moved for a jury trial. The court denied the motion and held a four day reasonableness hearing. After all the evidence was presented, the court determined – taking into consideration treble damages and 25% discount based on “trebling claim risk” – a total figure of $3.99 million. Thus, the court concluded the $3.75 million settlement was reasonable.
The insurance company appealed the court’s decision to deny the jury trial and the reasonableness of the damages. The Washington Supreme Court upheld the trial court decision and held that insurance companies do not have a constitutional right to have a jury determine whether a covenant judgment is reasonable under RCW 4.22.060.
The Washington Supreme Court’s decision is significant because the covenant judgment becomes the presumptive measure of damages which cannot be disputed (unless there is evidence of fraud of collusion) in a later bad faith action against the insurance company. Thus, the holding will force insurance companies to act with further due diligence before refusing to cover claims made against an insured contractor that is in need of coverage for which contractors pay costly premiums. Insured contractors should be aware that covenant judgments provide a possible avenue for settlement, if the contractor fears its policy limits do not cover a claim and believes its insurer is refusing to settle a lawsuit in bad faith.
Please call our attorneys, if you have any further questions regarding covenant judgments.
[i] Bird v. Best Plumbing Group, LLC, No. 86109-9, 287 P.3d 551 (2012).