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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.

Oregon to Permit Substantial Extra-Contractual Claims for Insureds

by | Jun 23, 2023 | Decisions, Insurance Law, Misc., News & Updates

CAs of January 1, 2024, Oregon insurance law will experience a paradigm shift—for the first time, Oregon will allow insureds to present a meaningful and substantial extra-contractual claim for damages.

After the resolution of a legislative impasse that threatened to derail the entire legislative session, the Oregon State Senate returned to business this week and advanced a series of bills to the governor’s desk. Included amongst them was House Bill 3242, which amends Oregon’s Unfair Claims Settlement Practices Act (ORS 746.230) to allow a private right of action for insureds to recover actual damages, treble damages, attorney fees, and litigation costs for an insurer’s unreasonable conduct in violation of the act.

Oregon Governor Tina Kotek is expected to sign the bill in the coming weeks.

Once signed and in effect, an insured may bring a cause of action under ORS 746.230 for violation of the statute, which identifies familiar unfair claim settlement practices such as the following:

 

(a)        Misrepresenting facts or policy provisions in settling claims;

. . .

(d)        Refusing to pay claims without conducting a reasonable investigation based on all available information;

. . .

(g)        Compelling claimants to initiate litigation to recover amounts due by offering substantially less than  amounts ultimately recovered in actions brought by such claimants;

. . .

The statute does contain two important exceptions. The statute does not allow a suit to be brought on medical malpractice claims. The statute also specifically excludes claims against attorneys, “in the attorney’s personal capacity,” for any acts taken on behalf of an insurer.

The statute also contains a 45-day notice requirement with an opportunity to cure on the part of the insurer.

Regarding treble damages, the statute is explicit in stating that the decision whether to award treble damages rests with the “court”. This would appear to signal that, as a practical matter, trebling would be subject to post-trial motions practice. However, it should be noted that in other jurisdictions, the Federal Courts have held that trebling must be decided by a jury as a matter of United States Constitutional Law. This is an issue certain to be litigated as policyholders and insurers begin confronting the practical impacts of the new statute.

Finally, the statute will carry a two-year statute of limitations. The statute is triggered not on the date of the loss, but on the date of the alleged violation of the statute.

House Bill 3243, which would have amended Oregon’s Unlawful Trade Practices Act (UTPA) to create yet another private cause of action for insureds, died in committee.

Lether Law Group has attorneys licensed and actively practicing in the State of Oregon.  To the extent that you have any questions about Oregon law, please feel free to contact Tom Lether or Eric Neal at (855) 467-5444 .

Washington State Court of Appeals New Decision On Covenant Judgments

by | Feb 7, 2023 | Auto & Trucking, Decisions, Insurance Law, Misc., News & Updates

On January 30, 2023, Division One of the Washington State Court of Appeals issued a published opinion further addressing covenant judgments in Washington. In Garza v. Perry, No. 83377-4-I, 2023 Wash. App. LEXIS 144, at *8 (Ct. App. Jan. 30, 2023), the Court of Appeals issued a decision primarily holding that an insurer cannot nullify a stipulated settlement based on mutual release language in the agreement because the insurer is not a party to the agreement.

The Garza case arose out of a motor vehicle accident. After failed negotiation attempts with the defendant’s insurer, the plaintiffs and defendant entered into a stipulated settlement with a covenant judgment in the amount of $2.5M and an assignment of rights against the defendant’s insurer. The settlement agreement contained a paragraph that stated the parties would mutually release each other including from the assignment of rights if the insurer provided written proof that it would fully indemnify defendant from any final judgment.  As required, the parties sent a copy of the settlement agreement to the insurer with an email offering to settle for $2.5M if paid within 10 business days.

The insurer did not agree to pay the $2.5M, but instead waived its limits and advised that it would indemnify the defendant for any judgment. Based on that letter, the insurer asserted that Plaintiffs’ and Defendant had therefore mutually released each other. The parties to the agreement disagreed and made a written addendum to their agreement to accurately reflect the actual meeting of the minds. Nevertheless, the insurer intervened and asserted that it had a valid settlement agreement with the parties.

The trial court rejected the argument and the Court of Appeals affirmed on appeal. The Court of Appeals noted that purpose of a covenant judgment is to protect the insured from the bad faith of an insurer. It does not form a contract with the insurer or for the insurer’s benefit. The Court also rejected the insurer’s argument because the agreement as a whole, including the written reformation, evidenced that the agreement was only between Plaintiffs and Defendants and also required that the intent was to only release the covenant judgment if the insurer agreed to pay the $2.5M.

The insurer also attempted to attack the trial court’s reasonableness determination on appeal based upon three arguments: 1) that the trial court had made oral statements regarding a lack of basis for the $2.5M amount at the reasonableness hearing; 2) that the Plaintiffs’ experts were not credible. and 3) that there was no substantial evidence supporting the conclusion that the agreement was not the product of collusion and fraud. All three arguments were rejected on appeal.

With respect to the oral statements of the trial judge, the Court of Appeals reiterated Washington law that a trial court’s oral statements have no binding effect unless explicitly incorporated into the court’s written order. The statements at issue were not incorporated into the order and, as such, were treated as having no import on the case.

The second and third arguments were effectively rejected for the same reason. Specifically, they were rejected because the substantial evidence review standard for review of reasonableness hearings requires the appellate court to view the evidence in the light most favorable to the prevailing party.  

The bad faith evidence argument was rejected because there was evidence that the settlement agreement was subject to review, revisions, and input by independent coverage counsel. The credibility argument was also rejected because a factfinder’s credibility determination are not subject to review under the substantial evidence standard.

The Garza case provides a two main takeaways for any insurer facing a covenant judgment. First, collateral attacks on the language of the covenant judgment settlement agreement are unlikely to prevail because an insurer is not a party to the agreement. Second, the standard of appellate review for reasonableness hearings is a difficult standard to overcome on appeal.

Because of this, an insurer that fails to fully develop the record at a reasonableness hearing runs the significant risk of being unable to successfully challenge a reasonableness finding on appeal. As a result, insurers need to be fully prepared to fully present their case at any reasonableness hearing. Moreover, insurers and insurer counsel should specifically request that the judge explicitly incorporate any helpful oral statements into its final order.

Lether Law Group has been successfully defending insurers against covenant judgments before the trial court and on appeal for more than 30 years. If you would like to discuss covenant judgment defense or any other matter, please do not hesitate to contact us.