Progression of Covenant Judgments

Bad faith claims have become an all too familiar threat when plaintiff’s counsel engages in settlement negotiations. Once a policy limit demand is made and rejected, one of two things will likely happen: either plaintiff’s counsel will approach the insured and ask the insured to agree to a covenant judgment, or the insurer will provide the insured with a “blue sky” letter, which promises the insurer will pay any award in excess of policy limits (thus fully protecting the insured against any contribution).

In 2014, the Washington Court of Appeals increased the damages available to an assignee of an insured’s bad faith claims, holding a covenant judgment sets a floor, not a ceiling, on the damages a jury may award.ⁱ Thus, an assignee was allowed to recover damages in excess of the covenant judgment. This ruling caused a ripple of fear among insurers, as the Washington courts added a significant motivation to settle cases.

What is a Reasonable Settlement Amount?

But what exactly is a reasonable amount for a consent judgment? How is this number determined? Thankfully, Washington courts have set guidelines preventing plaintiff from arbitrarily “formulating” an amount. The Washington Supreme Court analyzed the reasonableness of a covenant judgment in Wood v. Milionis Construction, Inc.,ⁱⁱ recognizing nine nonexclusive factors to help guide courts in determining whether a settlement is reasonable:ⁱⁱⁱ

[T]he releasing person’s damages; the merits of the releasing person’s liability theory; the merits of the released person’s defense theory; the released person’s relative faults; the risks and expenses of continued litigation; the released person’s ability to pay; any evidence of bad faith, collusion, or fraud; the extent of the releasing person’s investigation and preparation of the case; and the interests of the parties not being released.^iv

Although outlined in Glover v. Tacoma Gen. Hosp., these factors are known as the Chaussee^v factors when referencing covenant judgments. All nine factors may not be relevant in every case. The parties who have settled must prove the settlement is reasonable at a hearing mandated by RCW 4.22.060(1). If the trial court finds a settlement reasonable, the settlement amount becomes the presumptive measure of an insured’s harm caused by an insurer’s tortious bad faith, and the burden then shifts to the insurer to prove the settlement resulted from fraud or collusion in the subsequent bad faith action against the insurer.”^vi

Washington courts have upheld both large and small settlement amounts as being reasonable – there is no cap on reasonableness. The Court of Appeals upheld a $17.4 million covenant judgment as being reasonable in Howard v. Royal Specialty Underwriting, Inc., given the extent of the plaintiff’s injuries, the defendant’s clear liability, the defendant’s financial situation, and the anticipated costs of future litigation.^vii Four of the nine factors were applicable, but the strength of each factor carried enough weight for the court to find the settlement amount reasonable.^viii

Courts have also found covenant judgments to be unreasonable. In Water’s Edge Homeowners Assoc. v. Water’s Edge Assocs., the court found an $8.75 million covenant judgment to be unreasonable.^ix There, the insurance-appointed defense counsel had already successfully removed the plaintiff’s warranty claims on summary judgment and anticipated success in defending against most of the plaintiff’s remaining claims.^x The decision was also predicated on the fact defense counsel predicted a “worst case scenario” judgment for the plaintiff between $250,000 and $350,000.^xi

A party that does not agree with a trial court’s ruling may appeal the decision. Appellate review of a trial court’s reasonableness determination reflects deference to the trial court’s ability to consider all relevant facts, make credibility determinations, and evaluate competing damages assessments, while being alert to indicia of fraud, bad faith, or collusion, and the Court of Appeals in Wood misapprehended parts of the record and improperly gave greater weight to certain defense expert testimony.^xii Application of the nine factors to a case is not always easy. The Court of Appeals decision was overturned, and the trial court decision was reinstated.

Avoiding Consent Judgment

Covenant judgment settlement amounts are typically much higher than any potential settlement amount. The reality of bad faith claims in Washington haunts almost every case, and attorneys must apply diligence and caution when providing the insurer and insured with a case valuation range. A $1 million policy limits demand in an auto case can be daunting, especially when there is little or no damage to the vehicles involved. This is where incorporation of a risk analysis is important. An attorney should utilize materials gathered during discovery to analyze their case, incorporating factors such as plaintiff’s credibility, likability, potential sympathy draw, and other similar factors, in conjunction with the severity/gravity of the claimed injury. The attorney should always try and see the plaintiff as a jury will. Then an attorney can give a range. If the case is truly valued below policy limits, an attorney should not be afraid to provide a valuation below those policy limits. Nor should an attorney be afraid to value a case above policy limits if the case carries such value. Insurers and insureds do not like when valuations above policy limits are provided, but it is the attorney’s job to provide an accurate valuation, regardless of what the numbers turn out to be.

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