This document summarizes issues that can arise when an insured faces litigation that may result in an excess judgment or claims that are both covered and not covered by their insurance policy. It discusses the inherent conflict of interest between the insurer and insured in these situations. It also outlines procedures for reasonableness hearings on settlement agreements between plaintiffs and insureds to determine if the settlement amount is reasonable. Key court cases are discussed that establish standards for reasonableness hearings and the rights and responsibilities of insurers and insureds in settlement agreements. Recommendations are provided for structuring settlement agreements to avoid issues of collusion.

1. November 1, 2013

2. Covenant Judgments,
Assignments and the
Reasonableness
Hearing Process
Curt Feig
Nicoll Black & Feig
William C. Smart
Keller Rohrback L.L.P.

3. Is Collusion
OK?

4. The Problem
When an insured faces a trial
that may result in:
• An excess judgment
• Some claims which are
covered and some which
are not
There is an inherent conflict of
interest between the insurer and
the insured

5. Engrafting the Procedure for
RCW 4.22.060
(1) A party prior to entering into a release, covenant not to sue,
covenant not to enforce judgment, or similar agreement with a
claimant shall give five days’ written notice of such intent to all other
parties and the court. The court may for good cause authorize a
shorter notice period. The notice shall contain a copy of the
proposed agreement. A hearing shall be held on the issue of the
reasonableness of the amount to be paid with all parties afforded an
opportunity to present evidence. A determination by the court that
the amount to be paid is reasonable must be secured. If an
agreement was entered into prior to the filing of the action, a hearing
on the issue of the reasonableness of the amount paid at the time it
was entered into may be held at any time prior to final judgment
upon motion of a party.
The burden of proof regarding the reasonableness of the settlement
offer shall be on the party requesting the settlement.

6. The Chausee Factors
Chaussee v. Maryland Cas. Co., 60 Wn. App. 504, 803 P.2d 1339 (1991)
In evaluating reasonableness, the court should consider:
(1) the claimant’s damages;
(2) the merits of the claimant’s liability theory;
(3) the merits of the settling party’s defense theory;
(4) the settling party’s relative faults;
(5) the risks and expenses of continued litigation;
(6) the settling party’s ability to pay;
(7) any evidence of bad faith, collusion, or fraud;
(8) the extent of the claimant’s investigation and
preparation of the case; and
(9) the interests of the parties not being released.

7. The “White
Horse” Cases

8. Besel v. Viking Ins., 146 Wn.2d 730 (2002)
• Bad Faith Breach of Duty to Settle
– Insured may independently negotiate settlement
without involvement of insurer
– Insurer liable for amount of settlement so long as the
settlement amount is reasonable and paid in good
faith
– Amount of covenant judgment is presumptive
measure of insured’s harm
– No limitation by policy limits

9. Truck v. Vanport Homes, 147 Wn.2d 751 (2002)
• Bad Faith Denial of Defense Obligation
– Insurer who fails to defend in bad faith is estopped to
deny coverage
– Forfeits right to protect itself from stipulated judgment
– Settlements approved by court as reasonable
presumed reasonable in subsequent proceedings
– Insurer failing to defend in bad faith bound by
determinations in trial court

10. Howard v. Royal Specialty Underw., 121 Wn.
App. 372 (2004)
• Bad Faith Denial of Defense Obligation
– Where insurer fails to defend in bad faith, insured
may enter into settlement with plaintiff and seek
recovery from insurer
– Presumptive measure of damages is the settlement
amount
– Trial court conducts reasonableness hearing in the
tort action (RCW 4.22.060)

11. Bird v. Best Plumbing, 175 Wn.2d 756 (2012)
• Bad Faith Refusal to Settle
– Where insurer refuses to settle in bad faith, insured
may recover amount of settlement, even if it exceeds
policy limits
– “Covenant Judgment” recognized
– Reasonable settlement amount becomes
presumptive measure of damages but may be
rebutted by showing collusion or fraud
– Settling parties bear burden of proof of
reasonableness
– No right to jury trial on amount of reasonable
settlement; no due process issue with notice and
opportunity to be heard

12. Water’s Edge HOA v. Waters Edge Assoc., 152
Wn. App 572 (2009)
• Failure to Settle/Improper Defense
Allegations
– Appellate court reviews reasonableness determination for abuse
of discretion
– Evidence supported finding that plaintiff’s potential damages
were $500,000, not $8.75 million
– Insurer disadvantaged by settlement
– Evidence supported finding of collusion in covenant judgment;
burden on settling parties
– Court could consider economic loss rule in reasonableness
determination
– Dismissal appropriate resolution

13. Green v. City of Wenatchee, 148 Wn. App 351
(2009)
• Bad faith failure to settle
– Insurer generally bound by findings of fact/conclusions of law in
tort action against insured when notice and opportunity to
intervene provided
– Covenant judgment without insurer’s consent allowed where
insurer refuses to settle
– Stipulated findings and conclusions as part of settlement of tort
case not binding on insurer where the stipulated issues were not
judicially resolved and insurer intervened in reasonableness
hearing
– Factual findings made by trial court in reasonableness hearing
will not be disturbed on appeal when supported by substantial
evidence

14. Hidalgo v. Barker, ___Wn. App. __; 309 P.3d
687 (No. 30544-9-III,Sept. 10, 2013)
• Bad faith failure to settle
– Trial court not required to conduct second reasonableness
hearing after settling parties modified amount of settlement
following trial court’s initial determination that settlement was not
reasonable and calculation of and finding of alternative
reasonable amount where no facts changed
– Standard of review of trial court’s determination of reasonable
amount for settlement is abuse of discretion
– Rate of post-judgment interest is governed by terms of
settlement agreement and not underlying allegations of
complaint against insured
– Prejudgment interest allowed where original agreement provided
for award, even though court found the original amount was not
reasonable

15. How to Settle
• Policy limits demand
and failure to pay
• Personal counsel for
the insured
• Choose the right
amount
• Negotiate

16. The Components of the
Agreement
– Recitations of facts and damages
– Stipulated amount
– Assignment of Rights
– Direction to pay
– Interest at 12%
– Reasonableness Hearing
– Arbitration
– Covenant to satisfy judgment on
payment

17. Handling the Reasonableness
Hearing
• Timing and notice
• Red Oaks Condominium Owners
Ass’n v. Sundquist Holdings,
Inc., 128 Wn. App. 317 (2005)
allows hearings on 6 days notice

18. Handling the Reasonableness
Hearing
• Discovery – within trial court’s discretion.
Pickett v. Stephens-Nelson, 43 Wn. App.
326, 212 P.2d 277 (1986).
– Should it be unlimited?
– Claim file? Defense lawyers file? Plaintiff’s
lawyer’s file?
– Length of discovery period

19. Handling the
Reasonableness Hearing
• Participation of Insurer
– Notice and opportunity
to intervene
– Consequences of
intervention

20. Bird v. Best
Plumbing/Farmers
• 9 depositions
• Over 3,000 pages of
transcripts
• 4 days of hearing over 3
months
• Live testimony
• Expert Witnesses
• Changing theories for
defense
• Jury Trial
• Appeals

21. Welch v. American Ins. Co.

22. Welch v. American Ins. Co.
• Wrongful Death Case with Horrific Facts
–
–
–
–
Tortfeasor drunken driver employed by franchisee
American Ins. insured Pizza Time, the franchisor
Plaintiff sued franchisee, franchisor, the driver and others
American Ins. Defended under reservation of rights; limits
issue
– Plaintiff’s claimed damages “substantially higher” than
$2.5 million in insurance coverage available under two
policies
– Plaintiff and Pizza Time negotiated settlement:
• Entry of judgment of $2.5 million
• Agreed to arbitrate “all other issues” if the total amount of the
settlement (in excess of the $2.5 million) could not be negotiated
within 30 days
• Pizza time agreed to cooperate with plaintiffs in proving claims
against Pizza Time
• Pizza Time assigned claims against Fireman’s fund to plaintiff
• Plaintiff agreed not to execute on any judgment against Pizza Time

23. Welch v. American Ins. Co.
• Four years after the partial settlement, claims were
resolved by arbitration -- $10.8 million
• Prior to arbitration, plaintiffs (as assignees) sued
Fireman’s Fund to recover the amount of the arbitration
award
– Lawsuit stayed pending resolution of arbitration
– In arbitration, plaintiff had access to defense counsel’s files provided by
Pizza Time’s personal counsel
– Court ordered Fireman’s Fund to produce confidential information to
plaintiff prior to arbitration
– Pizza Time offered no defense at arbitration
• Arbitration Award confirmed by Superior Court, including
finding of no bad faith, collusion, or fraud and finding that
amount is reasonable

24. No Adversarial Relationship
“A stamp of judicial approval must be
more than a rubber stamp of a onesided presentation when it is
presented under the guise of a
dispute.”
Continental Casualty v. Westerfield,
961 F.Supp. 1502 (D.N.M. 1997)
“The Chausee factor is merely whether
there is any evidence of bad faith,
collusion or fraud.”
Water’s Edge, 152 Wn.App. 579 (2009)
(Finding reasonable settlement to be
$400,000 where parties stipulated to
$8.75 million)

25. No Judgment
• Welch – The parties stipulated to a
partial judgment of $2.5 million, the
amount of the insurance coverage,
leaving the remainder to be
decided in Arbitration.

26. No Judgment
• Expert testimony opines “An
agreement to litigate their
dispute … at a later date is not a
covenant judgment.”
• The arbitration award, confirmed
by the court found, “A
reasonable covenant judgment,
considering all Besel/Besel
factors is $10,800,289.”

27. No Amount for Court to
Determine Reasonable
• Chausee – Nine factors to
determine the reasonable amount.
• Where no settlement number, no
way for court to measure the $
number against the factors.
• In Welch, the intent of the
settlement appeared to be to
exclude consideration of the
“released person’s relative fault.”

28. Cooperation to Engineer
Large Award
• Water’s Edge
– Plaintiff’s counsel contacted
defendants without notice to
insurance appointed defense
counsel
– Plaintiff’s counsel selected
lawyers to negotiate covenant
judgment.
– Plaintiff’s counsel wrote letter
criticizing appointed defense
counsel
– Hand picked lawyers
undermined insurance defense
counsel
– Kick back

29. Cooperation to Engineer
Large Award
Welch
– Insurance defense lawyers
dismissed
– Defendant’s summary
judgment on liability
withdrawn
– Defense file given to
plaintiffs
– No opposition to arbitration

30. Retention of Interest by Insured
• Westerfield – Agreement to split any
judgment against insurer
• Water’s Edge – hand picked lawyer
“Planned to set up a manufactured legal
malpractice claim against [insurance
defense counsel].
• “Proceeds of legal malpractice claim
[used] as a commodity for mutual profit.”

31. Recommendations for Stipulated
Judgment
1. Have a judgment rather than a set of
promises
2. Have a reasonableness hearing
3. Establish a number you can support
4. Competent counsel for insured
5. Mechanism for contesting amount
–
–
Chose judge’s numbers
Arbitration on damages (fair fight)
6. Don’t retain an interest for the insured

32. Questions?

33. Thank you