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Washington Court Reaffirms Insurers’ Right to Participate in Reasonableness Hearings

by | Nov 8, 2024 | Appellate Practice, Events, Featured, Insurance Law, Misc., News & Updates, Professional Liability & Significant Injury Claims

On October 28, 2024, the Washington State Court of Appeals considered the validity of a reasonableness determination obtained without proper notice to the liability insurer, and held that without proper notice, the liability insurer is not bound to the reasonableness determination. This ruling further solidified the procedures set forth allowing liability insurers the opportunity to participate in reasonableness hearings in Washington State.

In Hawkins v. Miguel et al., Shelley Hawkins and Edwin Miguel entered into a covenant judgment settlement, establishing Miguel’s liability and assigning Miguel’s bad faith claims against his employer’s insurer, ACE American Insurance Company (ACE) to Hawkins. Thereafter, Hawkins obtained a ruling from the Court that the amount of the covenant judgment settlement was reasonable. However, in obtaining this reasonableness determination, Hawkins did not provide notice of the reasonableness hearing to ACE, and therefore did not provide ACE with the opportunity to be heard at the hearing.

Hawkins proceeded to obtain judgment against ACE on the assigned claims. In determining the validity of the reasonableness determination, in light of the fact that ACE was not provided notice and opportunity to be heard regarding the settlement amount, the Court of Appeals ruled that ACE was not bound by the reasonableness determination.

On June 23, 2021, Miguel entered into a settlement agreement for 41.5 million, with judgment interest at 12%. Thereafter, Hawkins filed a motion for determination of reasonableness with respect to the June 23, 2021 settlement agreement and for judgment thereon. On July 20, 2021, the superior court granted Hawkins’s motion to find the settlement reasonable. On August 12, 2021, Hawkins and Miguel mailed a 20 day pre-suit IFCA notice to ACE, and thereafter filed a corrected amended complaint, asserting claims against ACE for negligence, violation of IFCA, and breach of the duty of good faith on October 1, 2021. Pursuing litigation, the superior court found that as a matter of law, ACE breached the insurance policy, breached the duty of good faith, and violated IFCA. The court further struck ACE’s affirmative defense that Miguel failed to comply with the policy’s conditions to the prejudice of ACE. The Court awarded enhanced damages under IFCA, as well as attorney fees and costs under Olympic Steamship v. Centennial.  The superior court entered judgment for Hawkins against ACE in the amount of $5,443,200.00, and an additional judgment of $232,195.60 for attorney fees. ACE thereafter appealed.

On appeal, ACE argued that the superior court’s imputation of the reasonableness determination to ACE violated ACE’s right to due process as it was not given notice of the hearing. The Court considered what is meant by the insurer’s having been given the “opportunity to be involved in a settlement” pursuant to Mutual of Enumclaw Insurance Company v. T & G Construction, Inc. 165 Wn.2d 255, 267, 199 P.3d 376 (2008). The Court noted that it is undisputed that Hawkins and Miguel did not give ACE notice of the settlement or of their intent to obtain a reasonableness determination until after they had already presented their motion and obtained the order.

The Court relied on the long-settled rule that an insurer is “bound by the findings, conclusions, and judgment entered in the action against the tortfeasor when it has an opportunity to intervene in the underlying action.” This reflects the notion that where an insurer is given notice but fails to defend where there is an obligation to do so is bound by a litigated judgment on the liability indemnified.

Turning directly to reasonable settlements, the Court notes that Washington applies a corollary rule of equal antiquity that states an insurer is bound by a reasonable settlement, reasonable meaning made without fraud or collusion. The Court notes that reasonableness is especially relevant to a covenant settlement, which involves three features: (1) a stipulated or consent judgment between the plaintiff and insured, (2) a plaintiff’s covenant not to execute on that judgment against the insured, and (3) an assignment to the plaintiff of the insured’s coverage and bad faith claims against the insurer. Once the reasonableness of a stipulated judgment is established, the amount of said judgment becomes the presumptive measure of that component of damages in a later bad faith actions. Simply put, the reasonableness of a stipulated or covenant judgment plays a large role in a later bad faith suit.

In order to protect the integrity of reasonable settlements, and therefore avoid unreasonable settlements, Washington courts have adopted a nine factor test to determine the reasonableness of a settlement amount. Most notable here is the Supreme Court’s emphasis of these factors, especially where “the insurer has notice of the reasonableness hearing and has an opportunity to argue against the settlement’s reasonableness.” Besel v. Viking Ins. Co. of Wisconsin, 146 Wn.2d 730, 739, 49 P.3d 887 (2002). The court notes the importance of allowing an insurer to be heard on reasonableness where the court will bind the insurer to said settlement.  In conclusion, the Court clearly concluded the importance that an insurer is given notice of the reasonable hearing itself in order to be bound by its outcome, not merely notice that the underlying suit had been commenced.

In finding that ACE was not bound by the reasonableness determination, the Court of Appeals stated:

Because Hawkins and Miguel did not give ACE notice of the settlement and the reasonableness hearing, the reasonableness determination cannot bind ACE consistent with due process. As a result, as to ACE, there has been no binding determination that the settlement was reasonable, and there is no current basis on which to bind ACE to the settlement amount, or find it liable for that amount, interest, or treble damages. Therefore, the May 3, 2023 summary judgment order, judgment against ACE finding it liable for the consent judgment, and judgment against ACE finding it liable for treble damages under IFCA must be reversed to that extent.

The Hawkins opinion emphasizes the importance of procedure in covenant judgments and reasonableness hearings. An insured is expressly required to provide notice of a reasonableness hearing to the insurance company, however it is of even more importance that the insurer appears and participates in the reasonableness hearing in good faith.

The attorneys at Lether Law Group have in excess of thirty-five years experience in insurance coverage litigation, including but not limited to covenant judgments, reasonableness hearings and litigation insurance disputes in the state of Washington. Please do not hesitate to contact our office if you have any questions regarding the Hawkins opinions or any other insurance matter.

Washington Update

by | May 11, 2020 | Misc., News & Updates

As we all continue to deal with the social, commercial, and legal fallout from the COVID-19 pandemic, the world continues to turn.  Lether Law Group hopes everyone is staying safe, healthy and positive.
New Washington Regulation

In non-coronavirus news, the Washington Office of the Insurance Commissioner has enacted a new Washington Administrative Code trade practice regulation that goes into effect on August 1, 2020.  WAC 284-30-770.  This new WAC relates to “Adverse Notification Requirements.”  Going forward, for any coverage denial, final claim payment if it is less than what the insured claimed, or cancellation, termination, etc., the letter to the insured must contain the following language:

“If you have questions or concerns about the actions of your insurance company or agent, or would like information on your rights to file an appeal, contact the Washington state Office of the Insurance Commissioner’s consumer protection hotline at 1-800-562-6900 or visit www.insurance.wa.gov. The insurance commissioner protects and educates insurance consumers, advances the public interest, and provides fair and efficient regulation of the insurance industry.”

The foregoing language must be in the same font and size of the text of the rest of the letter and must appear either on page 1 or at the end of the letter.

Although the WAC does not go into effect for a couple of months, Lether Law Group is recommending that the above language be added to outgoing adverse claims correspondence immediately.

Also, although technically this WAC would not apply to ROR letters, it may be prudent to add the language to those correspondence as we often find that policyholders will argue that an ROR letter is tantamount to a denial.

New Washington Caselaw

In other developments, on May 7, 2020, the Washington State Supreme Court issued a decision reaffirming its long-held jurisprudence on the duty to defend.  Robbins v. Mason County Title Ins. Co., 2020 Wash. LEXIS 288.

In Robbins, the insureds sought defense and indemnity from the title insurance provider on their property in a dispute with a local Native American tribe over the tribe’s claim that it had the right to harvest shellfish on the insureds’ property.  The title insurer denied coverage and refused to defend the insureds.  The denial was based on the title insurer’s conclusion that the tribe’s claim was an “easement” and that “[a] treaty between the federal government and a Native American Indian tribe is not a record that imparts constructive notice pursuant to Washington law.” Robbins, 2020 Wash. LEXIS 288, *5.

The Robbins’ then sued in Mason County Superior Court alleging breach of contract and bad faith.  The Superior Court granted summary judgment in favor of the insurer.  The Court of Appeals reversed, finding that not only was there a defense obligation, but also finding that the title insurer had acted in bad faith as a matter of law when it denied the defense.  The Supreme Court accepted review of the Court of Appeals decision.

The Supreme Court affirmed, holding that the insurer breached the duty to defend in bad faith.  The primary basis for the Supreme Court’s ruling is based on its prior decision in Am. Best Food, Inc. v. Alea London, Ltd., 168 Wn.2d 398, 229 P.3d 693, 2010 Wash. LEXIS 250.  Where there is uncertainty in Washington law as to whether a defense is required, an insurer may not adopt its own interpretation of Washington law in order to justify denial of a defense.  Because the title insurer in Robbins adopted its own interpretation of the law on a subject that the Washington Court’s had not addressed, the insurer placed its interests ahead of those of its insureds and acted in bad faith.

This result is frankly not too surprising.  The Washington Supreme Court has been consistent on its stance on the duty to defend for the better part of the past two decades.

“If the insurer is unsure of its obligation to defend in a given instance, it may defend under a reservation of rights while seeking a declaratory judgment that it has no duty to defend. Grange Ins. Co. v. Brosseau, 113 Wn.2d 91, 93-94, 776 P.2d 123 (1989). A reservation of rights is a means by which the insurer avoids breaching its duty to defend while seeking to avoid waiver and estoppel. ‘When that course of action is taken, the insured receives the defense promised and, if coverage is found not to exist, the insurer will not be obligated to  pay.’ “

Truck Ins. Exch. v. VanPort Homes, 147 Wn.2d 751, 761, 58 P.3d 276, 282, 2002 Wash. LEXIS 718, *14.

There is, however, one aspect of the Robbins decision that is novel and should be highlighted.  The Washington Courts have long held that the duty to defend is triggered by the filing of a Complaint against an insured and the insured’s tender of that lawsuit to its insurer.  VanPort, supra., Woo v. Fireman’s Fund Ins. Co., 161 Wn.2d 43, 164 P.3d 454, 2007 Wash. LEXIS 555.

The insurer in Robbins argued that it could not have breached the duty to defend because the tribe’s harvest-rights claim had not been filed as a civil action, but merely was set forth in a demand letter to the insureds.  The Supreme Court rejected that argument based on the insurer’s policy language, which stated that the insurer would defend any “claim or suit” to which the insurance applies.  There has always been some ambiguity in Washington law regarding this issue and now the Supreme Court appears to have firmly resolved the issue.  Insurers with “claim or suit” language should be prepared to assign defense counsel even when the claims against their insureds have not been formalized in a lawsuit.

If you would like to discuss these recent developments in Washington law or any other matters, please feel free to contact us at any time.