The Washington Supreme Court affirmed the decisions of the trial court and Court of Appeals finding that an insurer does not have a constitutional right to have a jury determine the reasonableness of a covenant judgment under RWC 4.22.060 or in a subsequent bad faith action, and that the trial court did not abuse its discretion in determining that the amount of the covenant judgment was reasonable.
The case arises out of an incident involving a sewage pipe erupting from the hillside into the face of the property owner, James A. Bird (“Bird”), who fell, cracked his elbow, vomited and later developed migraines. The sewage burst was caused by Best Plumbing Group, LLC (“Best”) who, at the request of a neighbor, entered Bird’s property without permission and cut the pressurized sewage pipe resulting in wastewater escaping from the pipe several times a day over the course of eight months. Bird alleged the sewage flow caused extensive property damage and toxic mold, and that it also led to him suffering a heart attack.
Bird hired experts to appraise and repair the damage, but the City of Seattle stopped the mitigation efforts due to concerns about the hillside’s stability. Eventually the City approved a mitigation proposal totaling $851,176.78. Bird’s insurer, All State Insurance Company (“All State”) paid $262,000 to Bird under his homeowner’s insurance policy. Bird then filed suit against Best for trespass and negligence.
Best’s liability insurer, Farmers Insurance Exchange (“Farmers”), appointed defense counsel without a reservation of rights. All State filed a subrogation claim against Best for the $262,000 paid to Bird and the cases were consolidated. The trial court granted summary judgment to Bird on liability and proximate cause, leaving only the issue of damages for trial.
Before trial, Bird’s counsel asserted that Best might be liable for treble damages under Washington’s trespass statute and made a settlement demand of $2 million, the limits of the policy with Farmers. Farmers countered with $350,000. Worried about exposure beyond policy limits, Best consulted an outside attorney who negotiated a settlement involving a $3.75 million stipulated judgment against Best, an assignment of Best’s claims against Farmers and covenant not to execute against Best.
Bird then moved for a determination that the settlement was reasonable under RCW 4.22.060, and Farmers intervened in the reasonableness hearing and filed a motion for a jury trial. The trial court denied Farmers’ motion for a jury trial and after a four day hearing, the trial court concluded that in light of the risk of treble damages, the settlement amount was reasonable. Farmers appealed the denial of the jury trial request and the reasonableness determination and the Court of Appeals affirmed the trial court on both grounds. Farmers’ petition for review by the Washington Supreme Court was granted.
The Court first stated that an insured defendant may independently negotiate a pretrial settlement if the insurer refuses in bad faith to settle, and in such circumstances an insured can recover from the insurer the amount of the judgment rendered against the insured even if it exceeds policy limits. The Court also stated that covenant judgments were typical in settlement agreements in which: 1) there was a stipulated judgment between the insured and the plaintiff; 2) the plaintiff agrees not to execute on the judgment; and 3) the insured assigns its bad faith claims against the insurer to the plaintiff. If the trial court deems the amount of the covenant judgment reasonable, it becomes the presumptive measure of damages in a later bad faith action against the insurer.
The Court then addressed Farmers’ contention that it was entitled under the constitution to have a reasonableness determination heard by a jury during the reasonableness hearing. Citing to precedent, the Court held that the reasonableness hearing under RCW 4.22.060 is an equitable proceeding, and the Court further noted that the statute itself expressly provides for a determination “by the court” as to the reasonableness of the amount paid. The Court held that there was no right to a jury trial in equitable matters or in statutory actions without common law analogues. The Court also rejected Farmers contention that the reasonableness hearing should be considered equitable only in a contribution setting but not in the context of covenant judgments, finding that similarities between the two scenarios required identical standards for determining reasonableness.
The Court then addressed Farmers’ contention that it was entitled to a jury trial in the subsequent bad faith action. The Court stated that there was no universal proposition that the measure of damages in any tort claim always presents a question of fact for the jury. To the contrary, the Court cited precedent for the principle that where the issue of damages has been resolved in a prior proceeding, no fact finding duty remains for the jury. The Court further held that if the reasonableness determination did not affect a later damages action, the requirement that such settlements be reasonable would be rendered meaningless.
The Court then held that the reasonableness hearing afforded Farmers sufficient due process and that the trial court did not abuse its discretion in determining that the covenant judgment was reasonable. Finally, the Court held that the trial court properly considered the viability of the treble damages claim based on what the parties knew at the time of the settlement, and even imposed a twenty-five percent reduction to reflect the risk in Bird’s treble damages claim. As a result, the Court affirmed the rulings of the trial court and Court of Appeals.
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