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Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
Bad Faith Nov2013 Mediation Tom Harris
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Bad Faith Nov2013 Mediation Tom Harris

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Bad Faith

Bad Faith

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  • 1. MEDIATION OF BAD-FAITH ISSUES © Thomas V. Harris Washington Arbitration & Mediation Service 600 University Street, Suite 900 Seattle, WA 98101
  • 2. TABLE OF CONTENTS A. Page Introduction ............................................................................................................................................ 1 B. Bad-Faith Litigation in Washington .............................................................................................. 1 C. Litigation Contexts Involving Alleged Insurer Bad Faith……………………………………….10 D. Assignment of Bad Faith Claims ................................................................................................... 11 E. Advance Preparation to Promote a Successful Mediation …………………………………….29 F. Issues Arising During the Mediation………………………………………………………………….. 31 G. Concluding the Mediation Session ……………………………………………………………………...32 H. Mediation Follow-Up………………………………………………………………………………………… 32 i
  • 3. A. INTRODUCTION Issues involving insurance bad faith arise at mediation in several different contexts. Before discussing those situations and mediation strategy, it is important to understand the basics of bad-faith litigation in Washington. B. BAD-FAITH LITIGATION IN WASHINGTON In Tank v. State Farm Fire & Cas. Co.,1 the Supreme Court formulated the following general definition of insurer bad faith:2 The duty to act in good faith or liability for acting in bad faith generally refers to the same obligation…. Indeed, we have used those terms interchangeably…. However, regardless of whether a good faith duty in the realm of insurance is cast in the affirmative or the negative, the source of the duty is the same…. [T]he basis of an insurer’s duty of good faith, implies more than “honesty and lawfulness of purpose” which comprises a standard definition of good faith. It implies “a broad obligation of fair dealing” …, and a responsibility to give “equal consideration” to the insured’s interests…. Thus an insurance company’s duty of good faith rises to an even higher level than that of honesty and lawfulness of purpose toward its policyholders: An insurer must deal fairly with an insured, giving equal consideration in all matters to the insured’s interests.3 The duty to act in good faith is “fairly broad and may be breached by conduct short of intentional bad faith or fraud.”4 Violation of that duty gives rise to a tort action for bad faith.5 An insurer may not deny coverage and/or the duty to defend “based on a laundry list of exclusions without any analysis or correlation to the particular claims.”6 To avoid bad-faith conduct, an insurer must also comply with legislative good-faith standards. The judicial and legislative standards Tank v. State Farm Fire & Cas. Co., 105 Wn.2d 381, 715 P.2d 1133 (1986). In proving bad faith, an insured is not required to show that its insurer had an actual intent to mislead or deceive. Tyler v. Grange Ins. Ass’n, 3 Wn. App. 167, 173, 473 P.2d 193 (1970). 1 2 See also supra§ 2.1 for a discussion of parties’ reciprocal duties to exercise good faith. Tank v. State Farm Fire & Cas. Co., 105 Wn.2d 381, 385–86, 715 P.2d 1133 (1986); Fisher v. Allstate Ins. Co., 136 Wn.2d 240, 244, 961 P.2d 350 (1998) (the duty of good faith requires giving equal consideration to the insured’s interests). An insurer acts in bad faith when it over-emphasizes its own interests. Anderson v. State Farm Mut. Ins. Co., 101 Wn. App. 323, 329, 2 P.3d 1029 (2000), rev. denied, 142 Wn.2d 1017 (2001). 3 Industrial Indem. Co. of the N.W., Inc. v. Kallevig, 114 Wn.2d 907, 916–17, 792 P.2d 520 (1990); Whistman v. W. Co., 99 Wn.2d 65, 73, 659 P.2d 509 (1983); Safeco Ins. Co. v. JMG Rests., Inc., 37 Wn. App. 1, 11, 680 P.2d 409 (1984); American States Ins. Co. v. Symes of Silverdale, 150 Wn.2d 462, 469-70, 78 P.3d 1266 (2003). 4 5 Am. States Ins. Co. v. Symes of Silverdale, Inc., 150 Wn.2d 462, 469, 78 P.3d 1266 (2003). 6 Truck Ins. Exch. v. VanPort Homes, Inc., 147 Wn.2d 751, 764, 58 P.3d 276 (2002). 1
  • 4. coexist.7 Although expressed in different language, the statutory good-faith standard set forth in RCW 48.01.030 is consistent with the Tank standard. The legislature has authorized the Insurance Commissioner to promulgate regulations defining specific acts and practices that constitute a breach of an insurer’s duty of good faith.8 Those requirements, imposed by WAC 284-30-300 et seq., are minimum standards.9 That regulation is not exclusive and other insurer activities may be deemed to constitute violations of the general good-faith standard established by RCW 48.01.030.10 That notwithstanding, an insured cannot establish bad faith merely by showing that his insurer’s coverage decision was incorrect. A denial of coverage based upon a reasonable interpretation of a policy is not bad faith.11 The trier of fact determines the reasonableness of an insurer’s actions.12 Moreover, in cases in which an insurer’s management and handling of a claim are at issue, “mistakes and clumsiness alone do not amount to bad faith.”13 That situation should not be confused with one where an insurer (1) denies coverage by quoting extensively from the policy language and endorsements, (2) but provides neither analysis nor an explanation how the policy language actually excludes the claim. A denial of coverage Tank v. State Farm Fire & Cas. Co., 105 Wn.2d 381, 386, 715 P.2d 1133 (1986). The legislature has not expressed an interest in superseding or preempting the judiciary in this area of law. Cf. the legislative statement in the preamble to Washington’s 1981 Product Liability and Tort Reform Act. 7 The judiciary was already enforcing a good-faith requirement in insurance matters prior to the 1947 enactment of Wash. Rev. Code § 48.01.030 (1999). See Burnham v. Commercial Cas. Ins. Co., 10 Wn.2d 624, 626–27, 117 P.2d 644 (1941). Judicial standards regarding bad-faith liability have continued to “evolve” since the Burnham decision. The court’s doctrinal development in this area has been erratic. 8 Wash Rev. Code §§ 48.02.060 and 48.30.010 (1999). 9 Wash. Admin. Code § 284-30-300 (2001). The statutory duty to exercise good faith relates to all insurance matters. Wash. Rev. Code § 48.01.030 (1999) expressly so provides. 10 Transcontinental Ins. Co. v. Washington Pub. Utils. Dists.’ Util. Sys., 111 Wn.2d 452, 470, 760 P.2d 337 (1988); Castle & Cooke, Inc. v. Great Am. Ins. Co., 42 Wn. App. 508, 518, 711 P.2d 1108, rev. denied, 105 Wn.2d 1021 (1986); Farmers Ins. Co. of Wash. v. Romas, 88 Wn. App. 801, 811, 947 P.2d 754 (1997), rev. denied, 135 Wn.2d 1007 (1998); Fuller v. The Travelers, 88 Wn. App. 797, 946 P.2d 1198 (1997), rev. denied, 135 Wn.2d 1007 (1998); Dombrosky v. Farmers Ins. Co., 84 Wn. App. 245, 260, 928 P.2d 1127 (1996). See also the analogous reasoning used to resolve Consumer Protection Act claims. That discussion is set forth infra§ 8.3. However, an insurer’s denial of coverage, without reasonable justification, constitutes bad faith. American States Ins. Co. v. Symes of Silverdale, 150 Wn.2d 462, 469-70, 78 P.3d 1266 (2003). 11 Industrial Indem. Co. of the N.W., Inc. v. Kallevig, 114 Wn.2d 907, 920, 792 P.2d 520 (1990); Anderson v. State Farm Mut. Ins. Co., 101 Wn. App. 323, 330, 2 P.3d 1029 (2000), rev. denied, 142 Wn.2d 1017 (2001). 12 Insurance Co. of Pennsylvania v. Highlands Ins. Co., 59 Wn. App. 782, 786, 801 P.2d 284 (1990); Mencel v. Farmers Ins. Co., 86 Wn. App. 480, 487, 937 P.2d 627 (1997) (because there was no case law precisely on point, the court did not deem Farmers’ arguments “so completely frivolous” as to constitute bad faith). 13 2
  • 5. without explanation may result in a bad-faith finding.14 To establish bad faith, an insured is required to show that the breach was unreasonable, frivolous, or unfounded.15 The Court held in American Best Food, Inc. v. Alea London, Ltd.,16 that it is possible for an insurer to act in bad faith, as a matter of law, even in cases involving factual/legal settings of first impression: Alea contends that persuasive out-of-state precedent should not trump binding in-state law. We agree. However, as the Court of Appeals noted, Washington courts have yet to consider the factual scenario before us today. Evaluation of out-of-state cases was appropriate in deciding which rule to apply. The lack of any Washington case directly on point and a recognized distinction between preassault and postassault negligence in other states presented a legal uncertainty with regard to Alea’s duty. Because any uncertainty works in favor of providing a defense to an insured, Alea’s duty to defend arose when Dorsey brought suit against Café Arizona. . . . * * * . . . Alea’s failure to defend based upon a questionable interpretation of law was unreasonable and Alea acted in bad faith as a matter of law.17 The court determined that in American Best Food, Inc. v. Alea London, Ltd.,18 that the test is disjunctive, and an insured is not required to prove more than one of those elements.19 As the court held Werlinger v. Clarendon National Insurance Co.20 “[t]he insured may not base a bad faith or CPA claim on an insurer’s good faith mistake, which occurs when the insurer acts honestly, bases its decision on adequate information, and does not overemphasize its own interest.”21 14 American States Ins. Co. v. Symes of Silverdale, 150 Wn.2d 462, 469-70, 78 P.3d 1266 (2003). Kirk v. Mount Airy Ins. Co., 134 Wn.2d 558, 560, 951 P.2d 1124 (1998); Wolf v. League Gen. Ins. Co., 85 Wn. App. 113, 122, 931 P.2d 184 (1997); American States Ins. Co. v. Symes of Silverdale, 150 Wn.2d 462, 469-70, 78 P.3d 1266 (2003); Mut. of Enumclaw Ins. Co. v. Dan Paulson Constr., Inc., 161 Wn.2d 903, 916, 169 P.3d 1 (2007); St. Paul Fire & Marine Ins. Co. v. Onvia, Inc., 165 Wn.2d 122, 130, 196 P.3d 664, 668 (2008). 15 16 168 Wn.2d 398, 229 P.3d 693 (2010). 17 American Best Food, Inc. v. Alea London, Ltd., 168 Wn.2d 398, 408, 413, 229 P.3d 693 (2010). 18 168 Wn.2d 398, 229 P.3d 693 (2010). 19 American Best Food, Inc. v. Alea London, Ltd., 168 Wn.2d 398, 413, 229 P.3d 693 (2010). Werlinger v. Clarendon Nat’l Ins. Co., 129 Wn. App. 804, 120 P.3d 593 (2005), rev. denied, 157 Wn.2d 1004, 136 P.3d 759 (2006). 20 Werlinger v. Clarendon Nat’l Ins. Co., 129 Wn. App. 804, 808, 120 P.3d 593 (2005), rev. denied, 157 Wn.2d 1004, 136 P.3d 759 (2006). 21 3
  • 6. However, insurers should not expect that Washington courts will benignly characterize their decision-making errors, and inappropriate acts and omissions, as mere “mistakes and clumsiness” rather than as bad-faith conduct. The Supreme Court’s decision in Mutual of Enumclaw Insurance Co. v. Dan Paulson Construction, Inc.22 is a case in point. In Dan Paulson Construction, Inc., the insurer filed a declaratory-judgment action at the same time its insured was litigating a first-tier construction-defect arbitration. Under the putative authority of its unperfected, first declaratoryjudgment action, the defendant-contractor’s insurer served a subpoena which required the arbitrator to produce “[A]ll documents submitted … as evidence, from any source,” and “[a]ll correspondence between [the arbitrator] and the parties,” as well as the arbitrator’s “thought processes, including which elements of each witness’ testimony he found credible or not credible, his detailed itemization of the arbitration award, and his analysis of which work had been performed by subcontractors … .”23 Mutual of Enumclaw’s attorney also served the arbitrator with an ex-parte letter informing the arbitrator about the insurer defending under a reservation of rights, and about the basis for its reservation. The insurer’s attorney did not serve a copy of that letter on the first-tier arbitration litigants. Once the arbitrator notified the litigants about the letter, they objected to the contractor’s insurer interjecting itself into the arbitration process in any fashion. The insurer ignored their request to refrain from contacting the arbitrator, and sent a second letter directly to the arbitrator, that time copying counsel for both arbitration parties.24 The Supreme Court rejected both the insurers’ characterization, and the Court of Appeals’ holding, that Mutual of Enumclaw’s conduct did not constitute bad faith: We reject the notion that MOE’s conduct should be excused as merely ‘somewhat clumsy’ and ‘improper.’ … There is no justification for MOE’s conduct. … MOE sought to establish which claimed defects were excluded from coverage because they resulted from work performed by DPCI. Simultaneously, DPCI was contesting liability for any defects in the underlying arbitration action. To the extent that MOE prevailed, it directly prejudiced DPCI’s position in that arbitration, clearly an act of bad faith. … MOE’s bad faith conduct interfered in DPCI’s final hearing preparation, interjected insurance coverage issues into the arbitration, and created uncertainty concerning potential prejudicing of the arbitrator and the effect of MOE’s interference on the confirmability of the arbitration award.25 22 Mut. of Enumclaw Ins. Co. v. Dan Paulson Constr., Inc., 161 Wn.2d 903, 169 P.3d 1 (2007). 23 Mut. of Enumclaw Ins. Co. v. Dan Paulson Constr., Inc., 161 Wn.2d 903, 916, 169 P.3d 1 (2007) (italics added). 24 Mut. of Enumclaw Ins. Co. v. Dan Paulson Constr., Inc., 161 Wn.2d 903, 917, 169 P.3d 1 (2007). 25 Mut. of Enumclaw Ins. Co. v. Dan Paulson Constr., Inc., 161 Wn.2d 903, 918, 922–23, 169 P.3d 1 (2007). 4
  • 7. In Sharbono v. Universal Underwriters Ins. Co.,26 the court held that an insurer acted in bad faith, as a matter of law, when it failed to assist its insureds in settling with the plaintiffs by refusing to disclose underwriting information that would have promoted settlement negotiations.27 The court recognized in Sharbono that an issue involving whether an insurer acts in bad faith is generally a question of fact.28 However, the court may resolve a factual question as a matter of law if reasonable minds could reach but one conclusion.29 In Sharbono, the insured’s personal attorney requested the insurer to provide the complete underwriting files for the Sharbonos’ three insurance policies so that she could determine the amount of umbrella coverage. The insurer repeatedly refused to provide the underwriting files, stating that they contained proprietary information, and that it was “not aware of any authority that [would] give [the Sharbonos] access to those records.”30 An insurer can plausibly request redaction of certain information in its underwriting file, “[b]ut Universal fails to point to a single document in the underwriting file that contains sensitive information or information that could have impacted its business interests.”31 Similarly, the Court of Appeals held in Smith v. Safeco Ins. Co.32 that “[i]n the absence of a statute or rule requiring disclosure, … the insurer must disclose the insured’s policy limits if a reasonable person in the same or similar circumstances would believe that disclosure is in the insured’s best interests.”33 In Coventry Assocs., L.P. v. American States Ins. Co.,34 the Washington Supreme Court considered whether an insured could prevail on a bad faith claim if his insurer’s coverage argument was meritorious.35 The court refused to adopt American States’ proposed “no harm, no foul” rule. The court held as follows: Sharbono v. Universal Underwriters Ins. Co., 139 Wn. App. 383, 161 P.3d 406 (2007), rev. denied, 163 Wn.2d 1055, 187 P.3d 752 (2008). 26 Sharbono v. Universal Underwriters Ins. Co., 139 Wn. App. 383, 414, 161 P.3d 406, 408 (2007), rev. denied, 163 Wn.2d 1055, 187 P.3d 752 (2008). 27 Sharbono v. Universal Underwriters Ins. Co., 139 Wn. App. 383, 410, 161 P.3d 406, 410 (2007), rev. denied, 163 Wn.2d 1055, 187 P.3d 752 (2008). See also Smith v. Safeco Ins. Co., 150 Wn.2d 478, 484, 78 P.3d 1274 (2003), overruled as stated in In re Estates of Palmer, 145 Wn. App. 249, 187 P.3d 758 (2008). 28 Sharbono v. Universal Underwriters Ins. Co., 139 Wn. App. 383, 410, 161 P.3d 406, 410 (2007), rev. denied, 163 Wn.2d 1055, 187 P.3d 752 (2008). See also Smith v. Safeco Ins. Co., 150 Wn.2d 478, 485, 78 P.3d 1274 (2003), overruled as stated in In re Estates of Palmer, 145 Wn. App. 249, 187 P.3d 758 (2008). 29 Sharbono v. Universal Underwriters Ins. Co., 139 Wn. App. 383, 408, 161 P.3d 406, 408 (2007), rev. denied, 163 Wn.2d 1055, 187 P.3d 752 (2008). 30 Sharbono v. Universal Underwriters Ins. Co., 139 Wn. App. 383, 412, 161 P.3d 406, 412 (2007), rev. denied, 163 Wn.2d 1055, 187 P.3d 752 (2008). 31 Smith v. Safeco Ins. Co., 112 Wn. App. 645, 50 P.3d 277 (2002), rev’d on other grounds, 150 Wn.2d 478, 78 P.3d 1274 (2003), overruled as stated in In re Estates of Palmer, 145 Wn. App. 249, 187 P.3d 758 (2008). 32 Smith v. Safeco Ins. Co., 112 Wn. App. 645, 653, 50 P.3d 277 (2002), rev’d on other grounds, 150 Wn.2d 478, 653, 78 P.3d 1274 (2003), overruled as stated in In re Estates of Palmer, 145 Wn. App. 249, 187 P.3d 758 (2008). 33 34 Coventry Assocs., L.P. v. American States Ins. Co., 136 Wn.2d 269, 961 P.2d 933 (1998). 35 Coventry Assocs., L.P. v. American States Ins. Co., 136 Wn.2d 269, 279, 961 P.2d 933 (1998). 5
  • 8. We hold an insured may maintain an action against its insurer for bad faith investigation of the insured’s claim in violation of the CPA regardless of whether the insurer was ultimately correct in determining coverage did not exist. An insurer’s duty of good faith is separate from its duty to indemnify if coverage exists.36 In third-party settings, once an insured establishes an insurer’s bad faith, a rebuttable presumption of harm arises.37 However, an insured who establishes first-party bad faith is not entitled to the same presumption. As the court held in Coventry Assocs.:38 … While we hold the cause of action is available to first-party insureds, we decline to hold in the first-party context a rebuttable presumption of harm exists once an insured [sic] acts in bad faith … . Because the potential conflict of interest does not exist in the first-party context, we do not think a rebuttal presumption of harm is warranted. * * * The record establishes that Coventry incurred certain expenses as a result of American States’ bad faith investigation. For example, Coventry hired geotechnical and civil engineers to review the facts and circumstances surrounding the incident causing damage to the construction site. Coventry also hired insurance experts to determine if coverage was denied in bad faith. To the extent Coventry can establish it incurred expenses as a direct result of American States’ breach of contract and bad faith actions, it was harmed. Although the court held in Coventry Assocs. v. American States Ins. Co.39 that an insured may prosecute a bad-faith case even in the absence of coverage, the court held in Tornetta v. Allstate Ins. Co.,40 that an insured who perpetrated a fraud may not pursue bad-faith or CPA claims.41 Washington courts will not “further punish [the insurer] when to do so would provide a windfall to Coventry Assocs., L.P. v. American States Ins. Co., 136 Wn.2d 269, 279, 961 P.2d 933 (1998). American States argued that an insured may not pursue bad faith or CPA claims when the court rejected the insured’s substantive coverage argument. 36 Safeco Ins. Co. v. Butler, 118 Wn.2d 383, 390, 823 P.2d 499 (1992); Kirk v. Mount Airy Ins. Co., 134 Wn.2d 558, 564, 951 P.2d 1124 (1998). For a further discussion of those third-party bad- faith decisions, see infra§ 17.9. Washington courts have taken a markedly different approach in the analogous situation in which an insurer alleges an insured failed to comply with a policy provision. The courts do not presume such noncompliance caused the insurer harm. On the contrary, in such situations, an insurer has the burden of proving actual prejudice. See Liberty Mut. Ins. Co. v. Tripp, 144 Wn.2d 1, 18, 25 P.3d 997 (2001). 37 38 Coventry Assocs., L.P. v. American State Ins. Co., 136 Wn.2d 269, 281, 283, 961 P.2d 933 (1998). 39 Coventry Assocs., L.P. v. American State Ins. Co., 136 Wn.2d 269, 284, 961 P.2d 933 (1988). 40 Tornetta v. Allstate Ins. Co., 94 Wn. App. 803, 810–11, 973 P.2d 8, rev. denied, 138 Wn.2d 1012 (1999). 41 Tornetta v. Allstate Ins. Co., 94 Wn. App. 803, 810–11, 973 P.2d 8, rev. denied, 138 Wn.2d 1012 (1999). 6
  • 9. one guilty of fraud.”42 In certain cases, an insured’s prior acts or conduct may render an insurer’s alleged bad faith moot.43 In Ellwein v. Hartford Accident & Indemnity Co., 44 the Supreme Court formulated an imposing burden-of-proof standard for bad-faith cases.45 However, the Supreme Court quickly repudiated its own Ellwein precedent in Smith v. Safeco Ins. Co.46 Stating cryptically that Ellwein “contains a statement that has caused some confusion,” the court expressly held that it’s decision in Ellwein “did not create a special burden for policyholders, nor did it create special standards of summary judgment to benefit insurers accused of bad faith.”47 Whether an insurer acts in bad faith remains a question of fact, and all facts and reasonable inferences are viewed in the light most favorable to the nonmoving party.48 While an insured can file a bad-faith action against her insurer, she may not file such a claim against the insurer’s lawyer.49 As the court held in Manteufel v. Safeco Ins. Co. of Am.,50 an insured 42 Tornetta v. Allstate Ins. Co., 94 Wn. App. 803, 811, 973 P.2d 8, rev. denied, 138 Wn.2d 1012 (1999). Northwest Prosthetic & Orthotic Clinic, Inc. v. Centennial Ins. Co., 100 Wn. App. 546, 555, 997 P.2d 972 (2000). 43 Ellwein v. Hartford Accident & Indemnity Co., 142 Wn.2d 766, 15 P.3d 640 (2001). Ellwein involved a firstparty bad-faith claim against a UIM insurer. The court did not specifically discuss whether its holding applied to other first-party bad-faith cases and/or to third-party cases. One would expect the court, if it had meant to limit its ruling to UIM cases and/or first-party cases generally, to have done so expressly. See Industrial Indem. Co. of N.W., Inc. v. Kallevig, 114 Wn.2d 907, 917, 792 P.2d 520 (1990); Coventry Assocs., L.P. v. American State Ins. Co., 136 Wn.2d 269, 281, 961 P.2d 933 (1998). In Kallevig and Coventry, the court expressly limited its holdings to first-party claims. 44 Ellwein v. Hartford Accident & Indemnity Co., 142 Wn.2d 766, 775–77, 15 P.3d 640 (2001). In Griffin v. Allstate Ins. Co., 108 Wn. App. 133, 29 P.3d 777 (2001), the Court of Appeals had earlier diplomatically taken issue with the holding in Ellwein: 45 The court’s first sentence suggests that an insured cannot survive summary judgment unless the insured can prove a negative by establishing the absence of a jury question as to reasonableness. Such a burden would contravene long-standing case law. Nothing in the opinion indicates such an intent, and the court’s next sentence is a simple statement of the familiar summary judgment standard. Further, the court’s application of the standard was not a departure from traditional analysis. Griffin, 108 Wn.2d at 145. 46 Smith v. Safeco Ins. Co, 150 Wn.2d 478, 78 P.3d 1274 (2003). Smith v. Safeco Ins. Co., 150 Wn.2d 478, 485, 78 P.3d 1274 (2003). In implicitly recognizing that Ellwein had done more than create “some confusion,” the court stated, without further explanation, that “[t]o the extent that Ellwein is inconsistent with these principles, it is overruled.” 47 Smith v. Safeco Ins. Co., 150 Wn.2d 478, 485, 78 P.3d 1274 (2003); St. Paul Fire & Marine Ins. Co. v. Onvia, Inc., 165 WN.2d 122, 131, 196 P.3d 664, 668 (2008). 48 See Kommavongsa v. Haskell, 149 Wn.2d 288, 291, 67 P.3d 1068 (2003) (a legal-malpractice claim is not assignable to an adversary in the same litigation arising out of the alleged legal malpractice); Dong Wan Kim v. O’Sullivan, 133 Wn. App. 557, 563, 137 P.3d 61 (2006), rev. denied, 159 Wn.2d 1018, 157 P.3d 403 (2007). 49 50 Manteufel v. Safeco Ins. Co. of Am.,, 117 Wn. App. 168, 68 P.3d 1093 (2003). 7
  • 10. does not have the right to bring a bad-faith or CPA action against the insurer’s attorneys.51 Washington law does not allow a third party to file a claim based upon an opposing attorney’s competency or strategy.52 Third-party claimants cannot circumvent the rule prohibiting a party from assigning a malpractice claim against his own attorney by assigning only the proceeds of such a claim. As the court held in Dong Wan Kim v. O’Sullivan,53 such an assignment of proceeds was merely an attempt to circumvent the public policy barring assignments of legal-malpractice claims, that the assignee still retained control of the litigation, and the assignment of proceeds was in reality a prohibited assignment of a legal-malpractice claim.54 In Besel v. Viking Ins. Co.,55 the court held that whenever an insurer engages in bad-faith conduct, there is a presumption of harm.56 In Besel, the court rejected the insurer’s suggestion that the presumption of harm, first enunciated in Butler, was limited to bad faith committed in a reservation-of-rights setting: Viking further argues Butler’s presumption of harm should not apply because Butler involved a defense tendered under reservation of rights. This is a distinction without a difference. The principles in Butler did not depend on how an insurer acted in bad faith. Rather, the principles apply whenever an insurer acts in bad faith, whether by poorly defending a claim under a reservation of rights, … refusing to defend a claim, … or failing to properly investigate a claim…. 57 In Mutual of Enumclaw Ins. Co. v. Dan Paulson Constr., Inc.,58 the Supreme Court backtracked sub silentio from its position in Besel v. Viking Ins. Co.59 regarding whether its presumption-of-harm rule only applied to an insurer’s bad-faith breach of its duty to defend: Finally, we emphasize that while we are not retreating from Butler, neither are we extending it. The presumption of harm has previously been applied where the insurer’s bad faith was associated with its underlying defense of the insured. That limitation is unchanged by our decision today. MOE’s bad faith conduct, although perpetrated by its coverage counsel, was intrinsically associated with its underlying defense of DPCI. The conduct cannot reasonably be segregated from that defense—it occurred while MOE 51 Manteufel v. Safeco Ins. Co. of Am., 117 Wn. App. 168, 174, 68 P.3d 1093 (2003). 52 Manteufel v. Safeco Ins. Co. of Am., 117 Wn. App. 168, 174, 68 P.3d 1093 (2003). Dong Wan Kim v. O’Sullivan, 133 Wn. App. 557, 137 P.3d 61 (2006), rev. denied, 159 Wn.2d 1018, 157 P.3d 403 (2007). 53 Dong Wan Kim v. O’Sullivan, 133 Wn. App. 557, 563, 137 P.3d 61 (2006), rev. denied, 159 Wn.2d 1018, 157 P.3d 403 (2007). 54 55 Besel v. Viking Ins. Co., 146 Wn.2d 730, 49 P.3d 887 (2002). 56 Besel v. Viking Ins. Co., 146 Wn.2d 730, 737, 49 P.3d 887 (2002). 57 Besel v. Viking Ins. Co., 146 Wn.2d 730, 737, 49 P.3d 887 (2002). 58 Mutual of Enumclaw Ins. Co. v. Dan Paulson Constr., Inc., 161 Wn.2d 903, 169 P.3d 1 (2007). 59 Besel v. Viking Ins. Co., 146 Wn.2d 730, 49 P.3d 887 (2002). 8
  • 11. was actively defending DPCI and interfered directly in that defense. This case does not present, and we express no opinion regarding, a factual situation in which the insurer fully and satisfactorily discharges its duty to defend and only thereafter engages in bad faith conduct solely in connection with its coverage duties. Here we hold only that, in this third-party reservation of rights situation in which MOE’s bad faith interfered in its defense of DPCI, MOE did not rebut the presumption of harm. As a result, the Martinellis prevail on their bad faith claim, and MOE is estopped from denying coverage.60 Once a trial court determines to apply the presumption-of-harm rule in a given case, it is quite clear that an insurer will have difficulty rebutting that presumption. The court said the following regarding that “almost impossible burden”: The nature of the tort of insurer bad faith dictates that “ ’almost impossible burden’ of proof” will fall either on the insured or the insurer…. As the Butler court recognized, “[t]he course cannot be rerun, no amount of evidence will prove what might have occurred if a different route had been taken.” … Either the insured will face the almost impossible burden of proving that “he or she is demonstrably worse off because of” the insurer’s bad faith or the insurer will face the almost impossible burden of proving the reverse…. As between the insured and the insurer, it is the insurer that controls whether it acts in good faith or bad. Therefore, it is the insurer that appropriately bears the burden of proof with respect to the consequences of that conduct.”61 Ledcor Industries v. Mutual of Enumclaw Ins. Co.62 is a case in which an insurer met its “almost impossible burden” of rebutting the presumption of harm. In that case, Ledcor Industries was the general contractor for the construction of a large condominium project.63 After Ledcor was sued for alleged construction defects, it tendered the claim to its own insurers. Its insurers accepted the tender and appointed counsel for Ledcor.64 Ledcor had also required its subcontractors to name Ledcor as an additional insured in their CGL policies.65 Ledcor subsequently tendered the claims to one of its subcontractors’ insurers, Mutual of Enumclaw. Mutual of Enumclaw failed to respond promptly to Ledcor’s tender of defense and did not participate in defending Ledcor.66 After the construction-defect lawsuit was resolved, Ledcor filed suit against Mutual of Enumclaw, asserting bad faith and Consumer Protection Act claims.67 60 Mutual of Enumclaw Ins. Co. v. Dan Paulson Constr., Inc., 161 Wn.2d 903, 924, 169 P.3d 1 (2007). 61 Mutual of Enumclaw Ins. Co. v. Dan Paulson Constr., Inc., 161 Wn.2d 903, 921, 169 P.3d 1 (2007). 62 Ledcor Indus. (USA), Inc. v. Mut. of Enumclaw Ins. Co., 150 Wn. App. 1, 206 P.3d 1255 (2009). 63 Ledcor Indus. (USA), Inc. v. Mut. of Enumclaw Ins. Co., 150 Wn. App. 1, 6, 206 P.3d 1255 (2009). 64 Ledcor Indus. (USA), Inc. v. Mut. of Enumclaw Ins. Co., 150 Wn. App. 1, 6, 206 P.3d 1255 (2009). 65 Ledcor Indus. (USA), Inc. v. Mut. of Enumclaw Ins. Co., 150 Wn. App. 1, 6, 206 P.3d 1255 (2009). 66 Ledcor Indus. (USA), Inc. v. Mut. of Enumclaw Ins. Co., 150 Wn. App. 1, 7, 206 P.3d 1255 (2009). 67 Ledcor Indus. (USA), Inc. v. Mut. of Enumclaw Ins. Co., 150 Wn. App. 1, 7, 206 P.3d 1255 (2009). 9
  • 12. The court found in Ledcor Industries that Mutual of Enumclaw had acted in bad faith, but declined to award damages for bad faith because Ledcor failed to prove harm: Ledcor contends that bad faith creates a presumption of harm, MOE is estopped from denying coverage, and MOE must indemnify Ledcor for all its liabilities on the entire condominium project, regardless of cause. Ledcor identifies as its damages the entire $1.25 million settlement and all defense costs incurred in the litigation with the homeowners. Ledcor is correct there is a presumption of harm, usually difficult for the insurer to rebut. But Ledcor’s application of the estoppel theory is not supported by the contract or the case law. The remedy for insurer bad faith is compensation for the harm caused thereby and estoppel as to policy defenses to the claim: When the insurer breaches the duty to defend in bad faith, the insurer should be held liable not only in contract for the cost of the defense, but also should be estopped from asserting the claim is outside the scope of the contract and, accordingly, that there is no coverage. The coverage by estoppel remedy creates a strong incentive for the insurer to act in good faith, and protects the insured against the insurer’s bad faith conduct. The insurer acting in bad faith forfeits defenses to the claim tendered and handled in bad faith, including the defense that the claim was never covered at all. MOE therefore forfeited any defenses available to it under Zanetti’s policy. The claim arising out of Zanetti’s work was one of many in the underlying litigation. However, Ledcor’s theory is that MOE’s bad faith handling of the tender under Zanetti’s policy means that MOE must cover Ledcor for all homeowners’ claims involving all the subcontractors, not just those related to Zanetti’s work. Essentially, Ledcor argues that MOE is estopped to assert that these claims were not covered under Zanetti’s policy. But estoppel does not operate to create coverage. Ledcor was not entitled to indemnification under Zanetti’s policy from liability caused by wrongdoers other than Zanetti. The trial court found Ledcor ultimately received what the policy entitled it to and therefore suffered no harm due to MOE’s failure to timely accept tender and defend. The evidence supports this finding. Ledcor was at all times, before and after its tender to MOE, represented by competent counsel who aggressively defended Ledcor’s interests and with whom Ledcor never expressed dissatisfaction. Ledcor’s claim that it wanted MOE to take over the defense is belied by the record, and there is no evidence that MOE’s involvement might have achieved a different end result. MOE stood ready to pay its share of defense costs, and MOE funded the eventual settlement with Zanetti. MOE’s bad faith failure to timely accept tender and promptly become engaged in Ledcor’s defense thus made no difference in the outcome. As Ledcor ultimately suffered no harm resulting from MOE’s 10
  • 13. breach of its duties, the court did not err in awarding no damages for bad faith.68 C. LITIGATION CONTEXTS INVOLVING ALLEGED INSURER BAD FAITH Bad faith issues may arise in different mediation settings. The following are two of the most common situations: In a Tier 1 lawsuit in which a claimant asserts both an underlying claim for coverage and a claim that his own insurer is acting in bad faith. The claimant contends that the insurer acted in bad faith by not paying his claim, (1) the insured coverage claim and alleges that the insurer has acted in bad faith, or (2) an insured defendant is being sued by a third-party alleges that her insurer has acted in bad faith regarding the duty to defend, settle, and/or indemnify. In a Tier 2 action in which the bad-faith claims are the sole or main event. These normally occur after the Tier 1 action has been resolved by summary judgment, trial, settlement, or consent judgment. In any of those situations, the underlying case has already been concluded and the only real focus is on a claim for bad faith and/or other extra-contractual claims. D. Assignment Of Bad-Faith Claims69 Although they cannot invoke the garnishment process for such a purpose, third-party claimants may use a different strategy to recover an excess judgment directly from an insurer. The three-part approach used by the injured claimant in Chaussee v. Maryland Cas. Co.70 is the standard technique. Implementing that strategy involves (1) the third-party claimant71 issuing a legally binding covenant in which she promises not to execute against the insured tortfeasor, (2) the insured-tortfeasor assigning his coverage and bad-faith claims against his insurer to the claimant, and (3) the injured claimant and the insured entering into a consent judgment.72 A consent 68 Ledcor Indus. (USA), Inc. v. Mut. of Enumclaw Ins. Co., 150 Wn. App. 1, 9-11, 206 P.3d 1255 (2009). As a logical matter, the same principles should also be applied with respect to any third-party judgment based upon negligence or Consumer Protection Act theories of liability. In this chapter, distinct tort theories based upon negligence, the Consumer Protection Act, and statutory/judicial bad faith are subsumed within the term “bad faith.” 69 70 Chaussee v. Maryland Cas. Co., 60 Wn. App. 504, 803 P.2d 1339 (1991). An insured has an absolute right to assign claims to third parties after they arise. Even if the policy contains a no-assignment clause, such clauses do not prohibit assignments “made after the events giving rise to liability have already occurred.” Public Util. Dist. No. 1 v. International Ins. Co., 124 Wn.2d 789, 800, 881 P.2d 1020 (1994). 71 Chaussee v. Maryland Cas. Co., 60 Wn. App. 504, 507, 803 P.2d 1339 (1991); Hayden v. Mutual of Enumclaw Ins. Co., 95 Wn. App. 563, 565, 977 P.2d 608 (1999), aff’d, 141 Wn.2d 55, 1 P.3d 1167 (2000) (the plaintiff and alleged tortfeasor entered into a settlement agreement which included entry of a default judgment, execution of a covenant not to execute, and an assignment of the insured’s bad-faith claim against his own insurer); Planet Ins. Co. v. Wong, 74 Wn. App. 905, 909, 877 P.2d 198 (1994) (citing Safeco Ins. Co. of Am. v. Butler, 118 Wn.2d 383, 395, 823 P.2d 499 (1992) for the proposition that an insured may assign her bad-faith claim to a third party). 72 11
  • 14. judgment73 is one to which the parties stipulate. The courts have used the terms consent judgment and stipulated judgment interchangeably. When a claimant and tortfeasor agree to such an arrangement, there is no trial and the amount of the judgment is selected, sometimes arbitrarily, by the injured claimant. A variation on this strategy is a trial at which the tortfeasor appears pro se and/or does not contest the damage proof submitted by the claimant. In some cases, an insured secures an assignment, grants a covenant not to execute, but does not enter into a consent judgment setting a specific judgment amount. That was the case in Unigard Ins. Co. v. Mutual of Enumclaw Ins. Co.74 In such situations, there is no requirement to hold a firsttire bad-faith reasonableness hearing because there is no judgment to be adjudicated.75 In such a setting, the damage determination is a task for the jury in the second-tire bad-faith action.76 When parties do not execute a consent judgment, the normal rules, set forth in Besel v. Viking Ins. Co. of Wis.,77 do not apply since the second-tier jury, and not the consent judgment, will set the damage amount.78 Such an alliance between litigation adversaries serves both of their interests. The covenant not to execute provides an insured with his motivation to agree to the consent judgment. After a claimant promises that she will not enforce her judgment against the personal assets of the insured, the insured has less interest regarding the amount of the consent judgment or the fact that the third-party claimant will file a bad-faith claim against his insurer. An insured does not have equal bargaining power in deciding how to structure such an arrangement. The claimant has substantial leverage over a poor or middle-income tortfeasor threatened with a large judgment. Bankruptcy, problems with the insured’s credit rating, damage to reputation, and loss of business opportunities may all result unless an insured agrees to the assignment and consent judgment.79 In many cases, a third-party claimant suffers no material loss in executing such a covenant because the tortfeasor has limited or nonexistent personal assets. In situations in which a tortfeasor has substantial assets and/or where the bad-faith claim against the insurer is problematic, a claimant is less likely to use this strategy. A third-party claimant may attempt to implement the assignment strategy either before or after a trial judgment is rendered. The impact of this arrangement is far greater when it is employed prior to trial. At that stage of litigation, an assignment and consent judgment allow a claimant to (1) establish liability against an insured on a stipulated basis, (2) set the judgment amount, and (3) sue the insurer directly as the assignee of the insured’s bad-faith claim. If a judgment has already been entered against an insured, a claimant has already incurred the risk and expense of establishing liability. Moreover, the trier of fact, and not the third-party claimant, has set the gross damage value of such a claim. 73 Chaussee v. Maryland Cas. Co., 60 Wn. App. 504, 507, 509, 803 P.2d 1339 (1991). 74 160 Wn. App. 912, 250 P.3d 121 (2011). 75 Unigard Ins. Co. v. Mut. of Enumclaw Ins. Co., 160 Wn. App. 912, 923, 250 P.3d 121 (2011). 76 Unigard Ins. Co. v. Mut. of Enumclaw Ins. Co., 160 Wn. App. 912, 923, 250 P.3d 121 (2011). 77 146 Wn.2d 730, 734, 49 P.3d 887 (2002). 78 Unigard Ins. Co. v. Mut. of Enumclaw Ins. Co., 160 Wn. App. 912, 919, 250 P.3d 121 (2011). 79 Safeco Ins. Co. of Am. v. Butler, 118 Wn.2d 383, 399, 823 P.2d 499 (1992). 12
  • 15. The remaining benefit is the assignment. If the award against an insured exceeds his policy limit, the assignment will allow a third-party claimant to stand in the shoes of the insured and assert her bad-faith claim against the insurer. Without such an assignment, a claimant’s garnishment action against an insurer would be limited to the insurance policy limit. In Safeco Ins. Co. of Am. v. Butler,80 the Supreme Court expressly approved such a three-part strategy.81 The court has also subsequently approved the process in Besel v. Viking Ins. Co.82 and Truck Ins. Exch. v. VanPort Homes, Inc.83 In Moratti Tarutis v. Farms Ins. Co. of Wash.,84 the court held that an assignee has three years within which to commence a claim based upon an assignment and consent judgment: Nevertheless, it was error for the trial judge to dismiss the action on grounds that it was barred by the statute of limitations. There is a three-year statute of limitations for tort claims. An action for bad faith in the handling of an insurance claim is a tort. In Bush v. Safeco Ins. Co. of Am., this court stated that “[a] cause of action generally accrues for purposes of the commencement of the statute of limitations when a party has a right to apply to court for relief.” The action “accrues for purposes of the statute of limitation when a final judgment is entered.”85 Insurers have argued that the covenant not to execute renders any assignment moot and of no effect.86 The courts have rejected that argument for both technical87 and policy-oriented reasons. In Safeco Ins. Co. of Am. v. Butler,88 the court asserted the following precedential and equitable reasons for its holding: 1. It is well-established that a claim by an insured against his insurer may be assigned to an injured party; 2. When an insurer has refused to satisfy its obligations to the insured, it is in no position to argue that the steps taken by the insured to protect himself should inure to the insurer’s benefit;89 80 Safeco Ins. Co. of Am. v. Butler, 118 Wn.2d 383, 823 P.2d 499 (1992). 81 Safeco Ins. Co. of Am. v. Butler, 118 Wn.2d 383, 387–88, 397–400, 823 P.2d 499 (1992). 82 Besel v. Viking Ins. Co., 146 Wn.2d 730, 737, 49 P.3d 887 (2002). 83 Truck Ins. Exch. v. VanPort Homes, Inc., 147 Wn.2d 751, 765–66, 58 P.3d 276 (2002). 84 162 Wn. App. 495, 254 P.3d 939 (2011), rev. denied, 173 Wn.2d 1022, 272 P.3d 850 (2012). Moratti v. Farmers Ins. Co. of Wash., 162 Wn. App. 495, 502, 254 P.3d 939 (2011), rev. denied, 173 Wn.2d 1022, 272 P.3d 850 (2012). 85 86 Safeco Ins. Co. of Am. v. Butler 118 Wn.2d 383, 396, 823 P.2d 499 (1992). As a matter of legal doctrine, the court determined that the rights of the assignee (injured claimant) are coextensive with those of the assignor (insured-tortfeasor) as of the time the assignment is made. Safeco Ins. Co. of Am. v. Butler, 118 Wn.2d 383, 398, 823 P.2d 499 (1992); Steinmetz v. Hall-Conway-Jackson, Inc., 49 Wn. App. 223, 227, 741 P.2d 1054 (1987), rev. denied, 110 Wn.2d 1006 (1988). 87 88 Safeco Ins. Co. of Am. v. Butler, 118 Wn.2d 383, 397–99, 823 P.2d 499 (1992). 89 See also Besel v. Viking Ins. Co., 146 Wn.2d 730, 737, 49 P.3d 887 (2002). 13
  • 16. 3. An insurer who is disputing coverage cannot compel an insured to forego a settlement that is in his best interests even if this settlement includes an assignment; 4. Even though a covenant not to execute insulates an insured from the payment of a judgment, the settlement and judgment still constitute a real harm because of the potential effect on the insured’s credit rating, damage caused to his reputation, and loss of business opportunities.90 In cases in which (1) a tort claimant-assignee is asserting a bad-faith claim against the tortfeasor’s insurer, and (2) the amount of the claim is the product of a consent judgment, the claimant must establish all of the following four elements: 1. The insurer acted in bad faith;91 2. The insured was harmed as a result of the bad faith;92 3. The amount of the consent judgment is reasonable;93 and 4. The insured and the injured claimant entered into the consent judgment “in good faith.”94 The proof of the first two elements of the assignee’s prima facie case is required in any badfaith action against an insurer. The courts have required proof of the third and fourth elements in consent judgment cases because of their concern regarding how such “judgments” can be manufactured by an aggressive claimant and a compliant insured.95 Those requirements must be 90 As the court held in Besel v. Viking Ins. Co., 146 Wn.2d 730, 737, 49 P.3d 887 (2002): Washington courts have properly recognized that “a covenant not to execute coupled with an assignment and settlement agreement is not a release permitting the insurer to escape its obligation… . A covenant not to execute coupled with an assignment and settlement agreement does not release a tortfeasor from liability; it is simply “an agreement to seek recovery only from a specific asset–the proceeds of the insurance policy and the rights owed by the insurer to the insured.” Butler, 118 Wn.2d at 399. The insured would necessarily have to meet the same burden if he directly asserted the bad-faith claim against his insurer. 91 92 Safeco Ins. Co. of Am. v. Butler, 118 Wn.2d 383, 397–99, 823 P.2d 499 (1992). Evans v. Continental Cas. Co., 40 Wn.2d 614, 628, 245 P.2d 470 (1952); Chaussee v. Maryland Cas. Co., 60 Wn. App. 504, 510, 803 P.2d 1339 (1991). 93 Evans v. Continental Cas. Co., 40 Wn.2d 614, 628, 245 P.2d 470 (1952); Chaussee v. Maryland Cas. Co., 60 Wn. App. 504, 510, 803 P.2d 1339 (1991). Elements of proof 3-4 should also be applied to other situations in which an insured and a claimant have “manufactured” the amount of a judgment. A non-contested judgment amount awarded against a non-participating pro se plaintiff should be subjected to the same strict scrutiny. 94 Chaussee v. Maryland Cas. Co., 60 Wn. App. 504, 510–11, 803 P.2d 1339 (1991); Viking Ins. Co. v. Hill, 57 Wn. App. 341, 352 n.11, 787 P.2d 1385 (1990).See also Besel v. Viking Ins. Co. of Wis., 146 Wn.2d 730, 49 P.3d 887 (2002). As the court held in Besel: 95 We are aware that an insured’s incentive to minimize the amount of a judgment will vary depending on whether the insured is personally liable for the amount. 14
  • 17. established irrespective of whether the consent judgment is in an amount more or less than the available policy limit. Moreover, the same elements must be proven even if the assignee is not asserting a bad-faith claim for an excess judgment or some other alleged transgression. In any situation in which a consent judgment has been entered, the normal safeguards inherent in an adversarial litigation are reduced. In Besel v. Viking Ins. Co.,96 the court recognized the potential for abusing the consent-judgment process: We are aware that an insured’s incentive to minimize the amount of the judgment will vary depending on whether the insured is personally liable for the amount. Because the covenant not to execute raises the specter of collusive or fraudulent settlements, the limitation on an insurer’s liability for settlement amounts is all the more important. A carrier is liable only for reasonable settlements that are paid in good faith.97 Because a covenant not to execute raises the specter of collusive or fraudulent settlements, the limitation on an insurer’s liability for settlement amounts is all the more important. A carrier is liable only for reasonable settlements that are paid in good faith. Besel v. Viking Ins. Co. of Wis., 146 Wn.2d 730, 737–38, 49 P.3d 887 (2002). 96 Besel v. Viking Ins. Co., 146 Wn.2d 730, 49 P.3d 887 (2002). Besel v. Viking Ins. Co., 146 Wn.2d 730, 737–38. The court also addressed that issue in Northwest Prosthetic & Orthotic Clinic, Inc. v. Centennial Ins. Co., 100 Wn. App. 546, 997 P.2d 972 (2000). Northwest Prosthetic agreed to a settlement with the tort plaintiff for damages it characterized as “personal injuries” resulting from defamation. Northwest Prosthetic & Orthotic Clinic, Inc. v. Centennial Ins. Co., 100 Wn. App. 546, 549, 997 P.2d 972 (2000). The court recognized that such settlement agreements were different than judgments rendered by a “neutral decision-maker” sitting as a trier of fact. Northwest Prosthetic & Orthotic Clinic, Inc. v. Centennial Ins. Co., 100 Wn. App. 546, 554, 997 P.2d 972 (2000). The settling parties in Northwest Prosthetic “shared an interest” in characterizing their settlement as defamation damages rather than as lost wages. Northwest Prosthetic & Orthotic Clinic, Inc. v. Centennial Ins. Co., 100 Wn. App. 546, 554–55, 997 P.2d 972 (2000). The court held in Northwest Prosthetic that, “under these circumstances, one cannot be confident that the litigation accurately established the value of the claim.” Northwest Prosthetic & Orthotic Clinic, Inc. v. Centennial Ins. Co., 100 Wn. App. 546, 555, 997 P.2d 972 (2000). The court contrasted the Northwest Prosthetic situation with that in Pulse v. Northwest Farm Bureau Ins. Co., 18 Wn. App. 59, 566 P.2d 577, rev. denied, 89 Wn.2d 1011 (1977). 97 The arrangement between the third-party claimant and the insured in Chaussee v. Maryland Cas. Co., 60 Wn. App. 504, 803 P.2d 1339 (1991), is an arguable example of overreaching on the part of a third-party claimant. In fact, the factual and transactional setting in Chaussee is an excellent case study of the perils facing an insurer when it rejects a demand to pay its policy limit. Chaussee v. Maryland Cas. Co., 60 Wn. App. 504, 506, 803 P.2d 1339 (1991). In Chaussee, the claimants executed a $1,500,000 settlement and release agreement with a co-defendant. The claimants then demanded that the Chaussees’ insurer pay $2,500,000 as an additional settlement. The insurance policy only provided $500,000 in insurance coverage. After they were mistakenly told that there was a $2,000,000 umbrella policy, the claimants alleged that the effective policy limit available to them was $2,500,000 rather than the $500,000 that was truly in effect. The insurer offered, and ultimately paid, the $500,000 policy limit. Chaussee v. Maryland Cas. Co., 60 Wn. App. 504, 507, 803 P.2d 1339 (1991). In Chaussee, the claimants and the tortfeasor-insureds entered into a stipulated judgment in the amount of $7,500,000. Chaussee v. Maryland Cas. Co., 60 Wn. App. 504, 507, 803 P.2d 1339 (1991). As part of their agreement, the plaintiff executed a covenant not to execute in favor of the insureds, and the insureds assigned their bad-faith claim against their insurer to the plaintiff. Chaussee v. Maryland Cas. Co., 60 Wn. App. 504, 507, 803 P.2d 1339 (1991). The $7,500,000 consent judgment was a full $5,000,000 more than the settlement amount that the plaintiff had earlier been willing to accept from the insurer. Chaussee v. Maryland Cas. Co., 60 Wn. App. 504, 507, 803 P.2d 1339 (1991). 15
  • 18. In Werlinger v. Warner,98 after considering the defendant’s prior discharge in bankruptcy, the court determined that the settlement amount was unreasonable: As the trial court saw it, the fact that the Warners had been granted a discharge in bankruptcy of their personal liability to Werlinger made it unreasonable for them to settle for any amount in excess of the available policy limits. By virtue of the bankruptcy discharge, Warner had a complete defense to personal liability. Besel recognizes that the reasonableness of a settlement with an insured who is not personally liable for settlement is open to question because the insured will have no incentive to minimize the amounts.99 In Besel v. Viking Ins. Co.,100 the court held that an insurer, even if it has acted in bad faith, is only liable for that portion of the consent judgment that the claimant-assignee can prove is both reasonable and the result of a good faith process.101 Because of that concern, the Washington courts have developed criteria “to define what constitute[s] a reasonable settlement in the context of a covenant [consent] judgment.”102 Those identical criteria were first recognized in the context of a RCW 4.22.060 evaluation of the reasonableness of a partial tort settlement.103 As the Court of Appeals had previously determined in Chaussee v. Maryland Cas. Co.,104 there is “little difference between a determination of reasonableness in the context of the contribution statute and [a covenant judgment].”105 Having expressly adopted the Chaussee rationale and formula, the court held in Besel that the trial judge should consider the following factors in determining whether a consent judgment is reasonable: 1. 2. The merits of the releasing person’s liability theory; 3. The merits of the released person’s defense theory; 4. The released person’s relative faults; 5. The risks and expenses of continued litigation; 6. 98 The releasing person’s damages; The released person’s ability to pay; Werlinger v. Warner, 126 Wn. App. 342, 109 P.3d 22, rev. denied, 155 Wn.2d 1025, 126 P.3d 820 (2005). Werlinger v. Warner, 126 Wn. App. 342, 351, 109 P.3d 22, rev. denied, 155 Wn.2d 1025, 126 P.3d 820 (2005). 99 100 Besel v. Viking Ins. Co., 146 Wn.2d 730, 49 P.3d 887 (2002). 101 Besel v. Viking Ins. Co., 146 Wn.2d 730, 49 P.3d 887 (2002). 102 Besel v. Viking Ins. Co., 146 Wn.2d 730, 738, 49 P.3d 887 (2002). As the court discussed in Besel, 146 Wn.2d 730, 738, 49 P.23d 887 (2002), the court first formulated that nine-factor test in Glover v. Tacoma Gen. Hosp., 98 Wn.2d 708, 717, 658 P.2d 1230 (1983), overruled on other grounds by Crown Controls, Inc. v. Smiley, 110 Wn.2d 695, 756 P.2d 717 (1988). 103 104 Chaussee v. Maryland Cas. Co., 60 Wn. App. 504, 510, 803 P.2d 1339 (1991). Besel v. Viking Ins. Co., 146 Wn.2d 730, 738, 49 P.3d 887 (2002) (quoting from Chaussee, 60 Wn. App. 504, 512, 803 P.2d 1339 (1991)). 105 16
  • 19. 7. Any evidence of bad faith, collusion, or fraud; 8. The extent of the releasing person’s investigation and preparation of the case; and 9. The interests of the parties not being released.106 As the court reiterated in Bird v. Best Plumbing Group, LLC,107 no one factor controls a trial court’s reasonableness determination.108 Even the oft-litigated issue of “collusion” is simply one of the nine factors to be considered by the court in making its reasonableness determination.109 The Supreme Court of Washington recognized in Mutual of Enumclaw Ins. Co. v. T&G Constr., trial judges have the authority to conduct reasonableness hearings to evaluate consentjudgment settlements even when the underlying case is a contract-based condominium-defect action.111 As is the case with tort actions, the trial judge employs the nine-factor Chaussee formula adopted in Besel.112 Inc.110 that Glover v. Tacoma Gen. Hosp., 98 Wn.2d 708, 717, 658 P.2d 1230 (1983), overruled on other grounds by Crown Controls, Inc. v. Smiley, 110 Wn.2d 695, 756 P.2d 717 (1988). See also Besel v. Viking Ins. Co., 146 Wn.2d 730, 738, 49 P.3d 887 (2002). 106 The advantages of the nine-factor approach are that (1) no one factor controls and each case can be weighed on an individual basis, and (2) the application of formula resolves both the reasonableness and good-faith issues. Glover v. Tacoma Gen. Hosp., 98 Wn.2d 708, 717, 658 P.2d 1230 (1983), overruled on other grounds by Crown Controls, Inc. v. Smiley, 110 Wn.2d 695, 756 P.2d 717 (1988). In resolving the reasonableness issue, one must take into consideration more than just the abstract merits of the case. Factors 1-4 relate to the merits-value of the case. The settlement and/or consent-judgment value of a case also depend on Factors 5-9. Each of the nine Glover factors is not necessarily relevant in every case, and the court has the discretion to weigh each case individually. Werlinger v. Warner, 126 Wn. App. 342, 349, 351, 109 P.3d 22, rev. denied, 155 Wn.2d 1025, 126 P.3d 820 (2005); Heights at Issaquah Ridge Owners Ass’n v. Derus Wakefield I, LLC, 145 Wn. App. 698, 703, 187 P.3d 306 (2008). 107 175 Wn.2d 756, 287 P.3d 551 (2012). 108 Bird v. Best Plumbing Group, LLC, 175 Wn.2d 756, 766, 287 P.3d 551 (2012). 109 Bird v. Best Plumbing Group, LLC, 175 Wn.2d 756, 287 P.3d 551 (2012). 110 Mut.of Enumclaw Ins. Co. v. T&G Constr., Inc., 165 Wn.2d 255, 199 P.3d 376 (2008). 111 Mut.of Enumclaw Ins. Co. v. T&G Constr., Inc., 165 Wn.2d 255, 263–264, 199 P.3d 376 (2008). Mut.of Enumclaw Ins. Co. v. T&G Constr., Inc., 165 Wn.2d 255, 263–264, 199 P.3d 376 (2008). Parties should disregard the contrary statement in Heights at Issaquah Ridge Owners Ass’n v. Derus Wakefield I, LLC, 145 Wn. App. 698, 187 P.3d 306 (2008), which was decided a few months earlier than Mutual of Enumclaw Ins. Co. v. T&G Constr., Inc. In Derus Wakefield I Court of Appeals’ decision, the court held that: 112 Because construction defects settlements may become the presumptive measure of damages for a bad faith claim against an insurer, a reasonableness hearing is appropriate. But, the nature of construction defect cases requires a different approach to determining reasonableness. Construction defect cases, like the case at hand, implicate contractual liability, rather than tort liability. Here, the defendants involved are not joint tortfeasors. Instead, they face liability due to statutory warranty or contractual obligations. The cases that establish and extend the use of reasonableness factors—Glover, Chaussee, and Besel—originate in tort law and construe the reasonableness requirements of RCW 4.22.060, which concerns tort settlement agreements. As a result, the Glover factors reflect the tort concept of comparative fault. But, comparative fault has no role in construction defect cases which involve 17
  • 20. Even after adopting the nine-factor formula, the Washington courts needed to determine the nature of the process in which that formula would be employed. Insurers have traditionally argued that the nine-factor “reasonableness” test should be deferred to a second-tier bad-faith action filed by the tort claimant/consent-judgment creditor against the insurer.113 For obvious reasons, an insurer being sued for bad faith would much prefer to litigate the reasonableness issue as part of the damage phase of such a second-tier action. The defendant insurer would have a full discovery period and an entire trial to litigate that issue. However, the court held in Besel that an insurer had no right to litigate the reasonableness and good-faith issues as part of a subsequent bad-faith action: Finally, the Chaussee criteria protecting insurers from excessive judgments especially where, as here, the insurer has notice of the reasonableness hearing and has an opportunity to argue against the settlement’s reasonableness.114 The insurer Bird v. Best Plumbing Group, LLC115 contended that it had a constitution right to have a jury make the reasonableness determination.116 The insurer alleged that striking its jury demand deprived the company of its rights under Article I, Section XXI of the Washington State Constitution. 117 The court rejected the insurer’s argument and held that reasonableness determinations are to be made by the court.118 The court in Bird relied on the equitable nature of reasonableness hearings in affirming the striking of the insurer’s jury demand.119 In Besel, the court unintentionally modified the manner in which the nine Glover/Chaussee factors are to be applied at the trial court level. Rather than calling for a multifactorial consideration of all nine factors, Besel provides that the trial court should engage in the following two-step process: contractual obligations to indemnify. In these cases, protecting the insurer from excessive judgments that are the product of collusion or fraud between the claimants and insured is the main concern. Besel, 146 Wn.2d at 738–39. Therefore, in a contract action where the insurer is intervening to protect its interests in a separate bad faith claim, the insurer’s interest relates only to the existence of bad faith, collusion, and fraud in the settlement agreements. The remaining Glover factors, otherwise applicable in a tort case, are relevant here only to the extent they inform the question of bad faith, collusion, and fraud. Heights at Issaquah Ridge Owners Ass’n v. Derus Wakefield I, LLC, 145 Wn. App. 698, 704–705, 187 P.3d 306 (2008). Without referencing Derus Wakefield I, or specifically raising any issues regarding the differences between tort and contract consent judgments, the Supreme Court held that all nine Glover factors “must be carefully considered in any judicial proceeding to determine the reasonableness of the settlement.” Mut.of Enumclaw Ins. Co. v. T&G Constr., Inc., 165 Wn.2d 255, 264, 199 P.3d 376 (2008) (italics added). 113 See, e.g., Howard v. Royal Specialty Underwriting, Inc., 121 Wn. App. 372, 377, 89 P.3d 265 (2004). 114 Besel v. Viking Ins. Co., 146 Wn.2d 730, 739, 49 P.3d 887 (2002). 115 175 Wn.2d 756, 287 P.3d 551 (2012). 116 Bird v. Best Plumbing Group, LLC, 175 Wn.2d 756, 767, 287 P.3d 551 (2012). 117 Bird v. Best Plumbing Group, LLC, 175 Wn.2d 756, 767, 287 P.3d 551 (2012). 118 Bird v. Best Plumbing Group, LLC, 175 Wn.2d 756, 767, 287 P.3d 551 (2012). 119 Bird v. Best Plumbing Group, LLC, 175 Wn.2d 756, 770, 287 P.3d 551 (2012). 18
  • 21. We hold the amount of a covenant judgment is the presumptive measure of an insured’s harm caused by an insurer’s tortious bad faith if the covenant judgment is reasonable under the Chaussee criteria… . At the reasonableness hearing, the trial court specifically addressed the Chaussee criteria and found that Besel could likely prove the accident caused him severe injury; Ralston’s liability was clear, absolute, and indefensible; the risk and expense to Ralston of continued litigation was extreme, and Ralston could not pay any judgment against him; Besel had thoroughly investigated and prepared his case; the settlement was reached through arm’s length negotiations; and there were no other parties to the litigation whose interests were affected. Once the court determined the covenant judgment was reasonable, the burden shifted to Viking to show the settlement was the product of fraud or collusion.120 In order to establish fraud or collusion, an insurer must produce evidence and not simply “draw [something to] the court’s attention,” such as the short period of time between the filing of the plaintiff’s complaint and the settlement.121 As the court held in Martin v. Johnson:122 We cannot infer bad faith, collusion or fraud merely based on innuendo and speculation alone. … (“[F]raud will not be presumed and must be proven by evidence that is clear, cogent, and convincing.”)123 The court held in Sharbono v. Universal Underwriters Ins. Co.,124 that an insurer cannot successfully oppose a reasonableness determination with “bare allegations” of collusion.125 In Truck Ins. Exch. v. VanPort Homes, Inc.,126 the Supreme Court again emphasized that “once a court determined the covenant judgment to be reasonable, it was presumptively reasonable and the burden shifted to the insurer to show that the settlement was the result of fraud or collusion.”127 The Washington courts have given their imprimatur to the three-part process involving a covenant not to execute, assignment, and consent judgment. In fact, the Supreme Court Besel v. Viking Ins. Co., 146 Wn.2d 730, 738–39, 49 P.3d 887 (2002). Contrary to the holding in Besel, issues involving “bad faith, collusion, or fraud” already constitute the seventh Glover/Chaussee criteria. Consideration of that criteria is an intrinsic part of the first (and only) analytic step, and one which must be resolved in determining a priori that the settlement was “reasonable.” Glover v. Tacoma Gen. Hosp., 98 Wn.2d 708, 658 P.2d 1230 (1983), overruled on other grounds by Crown Controls, Inc. v. Smiley, 110 Wn.2d 695, 756 P.2d 717 (1988). See also Truck Ins. Exch. v. VanPort Homes, Inc., 147 Wn.2d 751, 765, 58 P.3d 276 (2002). It would seem both unnecessary and confusing to perform that intellectual step a second time in the context of having “the burden shift[ing] to Viking to show the settlement was the product of fraud or collusion.” 120 121 Martin v. Johnson, 141 Wn. App. 611, 622, 170 P.3d 1198 (2007). 122 Martin v. Johnson, 141 Wn. App. 611, 170 P.3d 1198 (2007). 123 Martin v. Johnson, 141 Wn. App. 611, 623 170 P.3d 1198 (2007). Sharbono v. Universal Underwriters Ins. Co., 139 Wn. App. 383, 161 P.3d 406 (2007), rev. denied, 163 Wn.2d 1055, 187 P.3d 752 (2008). 124 Sharbono v. Universal Underwriters Ins. Co., 139 Wn. App. 383, 407, 161 P.3d 406 (2007), rev. denied, 163 Wn.2d 1055, 187 P.3d 752 (2008) 125 126 Truck Ins. Exch. v. VanPort Homes, Inc., 147 Wn.2d 751, 58 P.3d 276 (2002). 127 Truck Ins. Exch. v. VanPort Homes, Inc., 147 Wn.2d 751, 765, 58 P.3d 276 (2002). 19
  • 22. emphasized that it would give the insurers short shrift when they employed “a laundry list of exclusions without any analysis or correlation to the particular claims.”128 As the court emphasized in VanPort Homes: An insurer faced with claims exceeding its policy limit should not be permitted to do business in the hope that the insured will go out of business and the claims simply go away. To limit an insurer’s liability to its indemnity limits would only reward the insurer for failing to act in good faith toward its insured. We therefore hold that when an insurer wrongfully refuses to defend, it has voluntarily forfeited its ability to protect itself against an unfavorable settlement, unless the settlement is the product of fraud or collusion… . To hold otherwise would provide an incentive to an insurer to breach its policy.129 Allowing tort plaintiffs to prove reasonableness in the underlying personal-injury action, and requiring insurers thereafter to prove a settlement was the product of fraud or collusion, encourages “settlement so necessary to the orderly disposition of cases.”130 The ruling in Mutual of Enumclaw Ins. Co. v. T&G Constr., Inc.131 confirmed that settlements, including stipulated judgments, are to be favored.132 In that regard, the court held that a good-faith settlement amount establishes the insured’s presumptive damages irrespective of whether the insurer has acted in bad faith.133 On that issue of first impression, the court held that, even in cases not involving bad faith, its ruling was “consistent with this court’s observation in Besel that ‘[i]f a reasonable and good faith settlement amount of a covenant judgment does not measure an insured’s harm, a requirement that such settlements be reasonableness is meaningless.’ ”134 A plaintiff-assignee may still face an important damage-related issue even after a reasonableness determination establishes its presumptive measure of harm. As the court emphasized in Mutual of Enumclaw Ins. Co. v. T&G Constr., Inc.:135 We hasten to add that the presumptive damages are not necessarily the covered damages. Settlements are generally global, covering all of the plaintiff’s harm caused by the insured. An insurance policy might provide coverage for only some—or none—of the harm. Although the coverage court may rely upon the factual findings of the liability court, where the issues presented to the liability court differ from the issues before [the] coverage court, the coverage court must determine 128 Truck Ins. Exch. v. VanPort Homes, Inc., 147 Wn.2d 751, 764, 58 P.3d 276 (2002). 129 Truck Ins. Exch. v. VanPort Homes, Inc., 147 Wn.2d 751, 765–76, 58 P.3d 276 (2002). 130 Truck Ins. Exch. v. VanPort Homes, Inc., 147 Wn.2d 751, 765, 58 P.3d 276 (2002). 131 Mut.of Enumclaw Ins. Co. v. T&G Constr., Inc., 165 Wn.2d 255, 199 P.3d 376 (2008). 132 Mut.of Enumclaw Ins. Co. v. T&G Constr., Inc., 165 Wn.2d 255, 266–267, 199 P.3d 376 (2008). 133 Mut.of Enumclaw Ins. Co. v. T&G Constr., Inc., 165 Wn.2d 255, 266–268, 199 P.3d 376 (2008). 134 Mut.of Enumclaw Ins. Co. v. T&G Constr., Inc., 165 Wn.2d 255, 267, 199 P.3d 376 (2008). 135 Mut.of Enumclaw Ins. Co. v. T&G Constr., Inc., 165 Wn.2d 255, 199 P.3d 376 (2008). 20
  • 23. that the damages are covered damages. It may be that the coverage court concluded that all of the subsurfaces were impaired by the manner in which the weather resistance paper was applied. But we agree with the Court of Appeals that from the record before us, we cannot tell if he coverage trial court concluded substantially all of the subsurfaces were impaired or merely accepted the findings of the liability judge that the settlement was reasonable given (among other things) that the value of all the poorly sided property had been impaired even if there had been no actual property damage to a particular wall. Therefore, we remand to the trial court for further proceedings on the applicability of this exclusion.136 In Howard v. Royal Specialty Underwriting, Inc., 137 the court set forth the following reasoning supporting the Besel holding that a reasonableness determination should be undertaken in the first-tier personal-injury action rather than in any second-tier bad-faith action against the insurer: We first address whether the trial court erred in making the reasonableness determination in the suit between Alia and Howard instead of requiring the reasonableness determination to be made in the bad faith suit against Royal. RCW 4.22.060 provides for a reasonableness hearing after a settlement has been reached… Royal argues, however, that we should distinguish Besel because there the insurer did not dispute the reasonableness of the settlement. This distinction, however, does not affect the analysis. Regardless of whether the insurer disputes the amount of the settlement, the trial court must make an objective finding, based on the Chaussee/Glover factors, that the settlement is reasonable. Additionally, there is no suggestion in Besel that the parties’ agreement on reasonableness was the Supreme Court’s basis for sanctioning this approach… . Royal also argues that the timing of the hearing was inappropriate because the reasonableness hearing was essentially the damages phase of the bad-faith action. The court in Besel held that ‘the amount of a covenant judgment is the presumptive measure of an insured’s harm caused by an insurer’s tortious bad faith if the Mut.of Enumclaw Ins. Co. v. T&G Constr., Inc., 165 Wn.2d 255, 267, 272–273, 199 P.3d 376 (2008) (bracketed material added). See also Martin v. Johnson, 141 Wn. App. 611, 170 P.3d 1198 (2007). In Martin, the court held that: 136 Moreover, the trial court’s decision that the settlement is reasonable does not determine whether Metropolitan provides coverage; the declaratory judgment action will answer that question. If the trial court in that case rules there is no coverage, Metropolitan will not be liable for the settlement amount, reasonable or not. If the trial court in that case rules that Metropolitan does provide coverage, the settlement will be the presumed damages. Martin v. Johnson, 141 Wn. App. 611, 619, 170 P.3d 1198 (2007). 137 Howard v. Royal Specialty Underwriting, Inc., 121 Wn. App. 372, 89 P.3d 265 (2004). 21
  • 24. covenant judgment is reasonable under the Chaussee criteria.’ Besel, 146 Wn.2d at 738. The fact that a reasonableness determination may have this impact is not a basis to conclude that the procedure is not appropriate, as the Supreme Court, in Besel, has already held that a reasonableness hearing in this situation is appropriate. Next, we address whether the trial court erred in denying Royal’s request to reopen discovery and postpone the date of the reasonableness hearing. Royal argues that due process and fundamental fairness require permission to conduct discovery into the reasonableness of the settlement. Alia and Howard, on the other hand, argue that matters of discovery are within the trial court’s discretion. We review the trial court’s decision to limit discovery and to deny a motion for continuance for an abuse of discretion… . Thus, the issue is whether the trial court abused its discretion in denying Royal’s request to conduct discovery. Royal received notice of the reasonableness hearing 30 days before the hearing. Royal was not a complete “stranger to the case.” Royal provided counsel for its insured Cascade, and Cascade had the opportunity to participate in discovery. Royal had access to all of Howard’s medical records and copies of the correspondence between the settling parties. At the reasonableness hearing, Royal was allowed to cross-examine Howard’s treating physician and was able to present substantial evidence. Under these circumstances, the trial court did not abuse its discretion in refusing to reopen discovery and continue the hearing.138 If the court holds that the amount of a consent judgment is unreasonable, its inquiry does not necessarily end with that determination. In Howard v. Royal Specialty Underwriting,139 the court determined that the parties’ $20 million consent judgment was unreasonable, but that a $17.4 million consent-judgment would have been reasonable. The parties then entered into a new consent judgment in the stipulated amount of $17.4 million.140 The Court of Appeals affirmed the trial court’s determination that a $17.4 million would be reasonable, and further held that the trial judge’s consideration of that issue did not constitute an abuse of discretion.141 The court affirmed a similar determination in Owners Ass’n v. Meadow Valley, L.L.C.,142 where the trial court determined that the $2.4 million attorney-fee component of a consent judgment was unreasonable, but that an attorney-fee award of $1.6 million would have been reasonable.143 The court rejected the argument that the trial judge’s determination, regarding what amount would be reasonable, was an “improper adjustment” of the settlement agreement in 138 Howard v. Royal Specialty Underwriting, Inc., 121 Wn. App. 372, 375, 89 P.3d 265 (2004). 139 Howard v. Royal Specialty Underwriting, 121 Wn. App. 372, 89 P.3d 265 (2004). 140 Howard v. Royal Specialty Underwriting, 121 Wn. App. 372, 377, 89 P.3d 265 (2004). 141 Howard v. Royal Specialty Underwriting, 121 Wn. App. 372, 377, 89 P.3d 265 (2004). 142 Owners Assn v. Meadow Valley, L.L.C., 137 Wn. App. 810, 156 P.3d 240 (2007). 143 Owners Assn v. Meadow Valley, L.L.C., 137 Wn. App. 810, 813, 156 P.3d 240 (2007). 22
  • 25. violation of RCW 4.22.060(3).144 A determination that a consent judgment is unreasonable does not affect the validity of the settlement agreement. Moreover, it does not prevent the parties from agreeing to revise the settlement amount to the dollar figure which the court determined would be reasonable.145 The court held that the situation in Owners Ass’n v. Meadow Valley, L.L.C. was not distinguishable from that in Howard. In that regard, the court can make the same assessment regarding reasonableness, irrespective of whether the original consent judgment was contingent on a subsequent reasonableness determination: St. Paul claims Howard is distinguishable because the settlement agreement in that case was contingent on the court’s reasonableness determination. St. Paul also claims Howard is distinguishable because the parties entered into a new settlement agreement. St. Paul’s attempt to distinguish Howard is unpersuasive. Here, while the parties did not use the word “contingent,” the settlement agreement expressly addresses scheduling a hearing to determine the reasonableness of the settlement.146 In Owners Ass’n v. Meadow Valley, L.L.C., the court also rejected the insurer’s contention that, once the court determines that a settlement is unreasonable, covenanting parties are precluded from adjusting the consent-judgment amount, and thereafter can only establish damages, as a matter of specific proof, in a later second-tier action against the insurer: Because the trial court ruled that the $2.4 million in attorney’s fees was unreasonable, St. Paul also argues that the court’s decision in Werlinger v. Warner, 126 Wn. App. 342, 352, 109 P.3d 22 (2005), requires the Association to establish damages in a later bad faith action and ‘in the ordinary way.’ We disagree. … We conclude that after the court determines the settlement amount is unreasonable, neither RCW 4.22.060 nor case law precludes the parties from then agreeing to entry of a new stipulated judgment in the amount the court determined would be reasonable.147 The Court of Appeals enforced the Besel and VanPort Homes criteria in Howard. In Howard, the Court of Appeals confirmed the trial-court determination that the settlement was reasonable, and held as follows: 144 Owners Assn v. Meadow Valley, L.L.C., 137 Wn. App. 810, 813, 156 P.3d 240 (2007). 145 Owners Assn v. Meadow Valley, L.L.C., 137 Wn. App. 810, 813, 156 P.3d 240 (2007). 146 Owners Assn v. Meadow Valley, L.L.C., 137 Wn. App. 810, 813, 156 P.3d 240 (2007). 147 Owners Assn v. Meadow Valley, L.L.C., 137 Wn. App. 810, 821822, 156 P.3d 240 (2007). 23
  • 26. We affirm the finding of reasonableness because (1) the personal injury action was a proper form for the reasonableness determination, (2) the insurer had adequate notice, (3) the insurer had a meaningful opportunity to be heard, and (4) the settlement amount was reasonable.148 As a threshold matter, the plaintiff and the insured-defendant are not required to notify the defendant’s insurer of their proposed settlement prior to consummating that agreement. As the court held in Sharbono v. Universal Underwriters Ins. Co.,149 while RCW 4.22.060(1) requires that all parties receive notice of the settlement, the defendant’s insurer was not a party to the underlying lawsuit and was not entitled to the statutorily-required notice of settlement.150 The court held in Howard that the trial court did not abuse its discretion in denying an insurer a continuance of the hearing date when the insurer received 30-days notice.151 In Red Oaks Condominium Owners Ass’n v. Sundquist Holdings, Inc.,152 the court affirmed a consent-judgment reasonableness determination even though the defendant’s insurer only received 6-days notice of the reasonableness hearing and only received a copy of the settlement agreement three days before the hearing.153 The court rejected an insurer’s attempt to relitigate an earlier reasonableness determination in Mutual of Enumclaw Ins. Co. v. Dan Paulson Constr., Inc.154 In Dan Paulson Constr., Inc., the insurer of the defendant contractor contended that it had a right to challenge an arbitrator’s earlier determination that the parties $1.3 million consent judgment was reasonable.155 The court rejected that argument holding that Mutual of Enumclaw had already had the opportunity to challenge the award before two other tribunals, failing to intervene in the first, and failing to persuade the trial court in the second.156 Insurers who engage in bad-faith conduct face substantial exposure if their insured agrees to entry of a consent judgment and assigns her coverage and bad-faith claims against the insurer to the tort claimant. The insured may agree to a consent judgment substantially above the insurer’s policy limit. Furthermore, an insurer has no ability to prevent such a process. As the court held in Besel, an insurer cannot assert its “cooperation clause” to prohibit an insured from entering into a 148 Howard v. Royal Specialty Underwriting, Inc., 121 Wn. App. 372, 379, 89 P.3d 265 (2004). Sharbono v. Universal Underwriters Ins. Co., 139 Wn. App. 383, 161 P.3d 406 (2007), rev. denied, 163 Wn.2d 1055, 187 P.3d 752 (2008). 149 Sharbono v. Universal Underwriters Ins. Co., 139 Wn. App. 383, 407, 161 P.3d 406 (2007), rev. denied, 163 Wn.2d 1055, 187 P.3d 752 (2008). 150 151 Red Oaks Condominium Owner Ass’n v. Sundquist Holdings, Inc., 128 Wn. App. 317, 116 P.3d 404 (2005). Red Oaks Condominium Owner Ass’n v. Sundquist Holdings, Inc., 128 Wn. App. 317, 320, 324, 116 P.3d 404 (2005). 152 153 Howard v. Royal Specialty Underwriting, Inc., 121 Wn. App. 372, 377–79, 89 P.3d 265 (2004). 154 Mutual of Enumclaw Ins. Co. v. Dan Paulson Constr., Inc., 161 Wn.2d 903, 169 P.3d 1 (2007). 155 Mutual of Enumclaw Ins. Co. v. Dan Paulson Constr., Inc., 161 Wn.2d 903, 912, 925, 169 P.3d 1 (2007). 156 Mutual of Enumclaw Ins. Co. v. Dan Paulson Constr., Inc., 161 Wn.2d 903, 925–926 169 P.3d 1 (2007). 24
  • 27. consent judgment. The court correctly rejected Viking’s cooperation-clause argument in Besel.157 Even when an insurer has not acted in bad faith, its “cooperation” clause only imposes a duty on the insured to cooperate in the defense. It has no bearing whatsoever on the wholly separate issue of when an insured can enter into a settlement. The Supreme Court addressed this issue again in Mutual of Enumclaw Ins. Co. v. T&G Constr., Inc.,158 holding that a “consent” clause, requiring the consent of an insurer before settlement could be achieved, did not prevent the insured from entering into a consent-judgment in that case.159 Furthermore, as the court recognized in VanPort Homes, an insurer who has acted in bad faith is estopped from denying coverage or asserting coverage defenses.160 Insurers cannot expect their situation to improve on appeal. In Howard v. Royal Specialty Underwriting, Inc.,161 “[a] trial court’s finding of reasonableness is a factual determination that will not be disturbed on appeal when supported by substantial evidence.” 162 In Water’s Edge Homeowners Ass’n v. Water’s Edge Associates,163 the Court took a somewhat different approach and held that (1) the reasonableness hearing necessary involves factual findings which will not be disturbed on appeal if they are supported by substantial evidence, and (2) the reasonableness determination itself shall be reviewed on an abuse-of-discretion basis.164 Under either approach, the insureds cannot expect, in most situations, to reverse the trial court’s determination on appeal. 157 Besel v. Viking Ins. Co., 146 Wn.2d 730, 739, 49 P.3d 887 (2002). 158 Mut.of Enumclaw Ins. Co. v. T&G Constr., Inc., 165 Wn.2d 255, 199 P.3d 376 (2008). Mut.of Enumclaw Ins. Co. v. T&G Constr., Inc., 165 Wn.2d 255, 268–269, 199 P.3d 376 (2008). As the court held in Mutual of Enumclaw Ins. Co. v. T&G Constr., Inc.: 159 MOE argues T&G violated the policy condition requiring it to obtain the consent of the insurer before it settled with the plaintiff. But “an insured’s non-compliance with a cooperation clause releases the insurer from its responsibilities ‘only if the insurer was actually prejudiced by the insured’s actions or conduct.’… We find MOE’s contention to be completely without merit. MOE owes a fiduciary-type duty to its insured. … MOE refused to participate in settlement negotiations that would have relieved T&G and its principals of significant financial risk. MOE cannot put its financial interest before the interest of its insured; for an insurer to do so is to act in bad faith. … MOE was on notice of the settlement and had an opportunity to intervene in the reasonableness proceedings. MOE did intervene, was heard, and as a result, the presiding judge over the reasonableness proceedings reduced the reasonable value of the settlement by $300,000. MOE has not shown possible prejudice.” Mut.of Enumclaw Ins. Co. v. T&G Constr., Inc., 165 Wn.2d 255, 268–269, 199 P.3d 376 (2008). Truck Ins. Exch. v. VanPort Homes, Inc., 147 Wn.2d 751, 775, 58 P.3d 276 (2002). See also James E. Torina Fine Homes, Inc. v. Mut. of Enumclaw Ins. Co., 118 Wn. App. 12, 18, 74 P.3d 648 (2003), rev. denied, 151 Wn.2d 1010 (2004). 160 161 121 Wn. App. 372, 89 P.3d 265 (2004). Howard v. Royal Specialty Underwriting, Inc., 121 Wn. App. 372, 380, 89 P.3d 265 (2004) (citing Brewer v. Fibreboard Corp., 127 Wn.2d 512, 524, 901 P.2d 297 (1995)); Sharbono v. Universal Underwriters Ins. Co., 139 Wn. App. 383, 400, 161 P.3d 406 (2007), rev. denied, 163 Wn.2d 1055, 187 P.3d 752 (2008). 162 163 152 Wn. App. 572, 216 P.3d 1110 (2009). 164 Water’s Edge Homeowners Ass’n v. Water’s Edge Associates, 152 Wn. App. 572, 584, 216 P.3d 1110 (2009). 25
  • 28. Furthermore, the appellate court will affirm a trial court’s reasonableness-hearing factual determinations as long as there is substantial evidence that would persuade a fair-minded person of the truth of the asserted statement.165 A trial court abuses its discretion only when its decision is manifestly unreasonable or based upon untenable grounds such that no reasonable person would have taken the view adopted by the trial court.166 Washington’s courts have been quite forgiving regarding the specificity with which trial judges should recite the bases for their reasonableness determinations. As the court discussed in Sharbono v. Universal Underwriters Ins. Co.:167 Although the Sharbonos claim that the trial court addressed each Chaussee/Glover factor in making its determination, the record does not contain the pertinent Report of Proceedings. And the trial court’s order merely stated that the court reviewed the files and records before ruling on the settlement’s reasonableness. Accordingly, the trial court’s considerations in weighing the factors are unclear. But the record contains enough evidence to support the court’s conclusion that the settlement was reasonable. … Although the record does not conclusively establish that the trial court explicitly considered the nine Chaussee/Glover factors, sufficient evidence supports the court’s conclusion that the settlement was reasonable. The Sharbonos presented substantial evidence of each of the nine Chaussee/Glover factors. And we are not willing to speculate that the trial court ignored the extensive briefing and argument from both parties and found the settlement reasonable on some basis other than the Chaussee/Glover factors. In any event, as we have discussed, the record amply supports the court’s finding of reasonableness.168 In addition to the challenges insurers face appealing a first-tier determination of reasonableness, they will find that consent judgments substantially constrain their ability to re- 165 Bird v. Best Plumbing Group, LLC, 175 Wn.2d 756, 775, 287 P.3d 551 (2012). 166 Bird v. Best Plumbing Group, LLC, 175 Wn.2d 756, 774-75, 287 P.3d 551 (2012). Sharbono v. Universal Underwriters Ins. Co., 139 Wn. App. 383, 161 P.3d 406 (2007), rev. denied, 163 Wn.2d 1055, 187 P.3d 752 (2008). 167 Sharbono v. Universal Underwriters Ins. Co., 139 Wn. App. 383, 401, 407, 161 P.3d 406 (2007), rev. denied, 163 Wn.2d 1055, 187 P.3d 752 (2008). See also Martin v. Johnson, 141 Wn. App. 611, 170 P.3d 1198 (2007). In Martin, the Court of Appeals also accepted a lack of specificity in the trial-judge’s reasonableness order: 168 Here, the trial court did not specifically address the Chaussee factors, stating only that no party had provided it with any “information … that this settlement proposal is anything but reasonable.” … The parties did, however, address the Chaussee factors in their briefs to the trial court. And the trial court stated that it had reviewed the parties’ briefs twice before the reasonableness hearing. Given the parties’ extensive briefing on the issue and the trial court’s statements that it considered the briefs and found nothing showing that the settlement was unreasonable, we cannot conclude that the trial court failed to weigh the Chaussee factors. … Moreover, the record contains enough evidence to support the trial court’s conclusion that the settlement was reasonable. Martin v. Johnson, 141 Wn. App. 611, 620, 170 P.3d 1198 (2007). See also Water’s Edge Homeowners Ass’n v. Water’s Edge Associates, 152 Wn. App. 572, 585, 216 P.3d 1110 (2009). 26
  • 29. litigate facts common to both the underlying litigation and subsequent declaratory judgment action. The court discussed this issue in Mutual of Enumclaw Ins. Co. v. T&G Constr., Inc.169 as follows: The primary issue we must resolve is whether the insurer is entitled to an independent determination in a coverage declaratory judgment action of the facts establishing its insured’s liability when those disputed facts are considered in the liability case and the parties reached a settlement which was judicially approved as reasonable. MOE contends that the liability suit did not resolve whether its insured was in fact legally obligated to pay damages because there was no final decision on whether the statute of limitations had run before the case was filed. T&G and its assignee, the homeowners, counter that by virtue of the settlement and its approval by the trial court in a reasonableness hearing, whether it is ‘legally obligated to pay damages’ were finally adjudicated and should not be relitigated.170 The Supreme Court ruled in favor of the insured-defendant and the plaintiff-assignee on that important issue: Generally speaking, “an insurer will be bound by the ‘findings, conclusions and judgment’ entered in the action against the tortfeasor when it has notice and opportunity to intervene in the underlying action.” Fisher v. Allstate Ins. Co., 136 Wn.2d 240, 246, 961 P.2d 350 (1998). … This avoids inconsistent judgments, delay, additional expense, and the creation of a perverse incentive for carriers to wait until liability and damages have been established before deciding whether it is cost-effective to intervene.171 An insurer that properly intervenes to contest the reasonableness of a settlement is not collaterally estopped or bound by agreed findings and conclusions in a consent judgment executed by its insured. Rather, such an insurer is entitled to have a court evaluate the reasonableness of the settlement in light of the Chaussee factors. Green v. City of Wenatchee172 is illustrative. In Green, Westport’s insured, Barker, entered into a consent judgment with claimant Green. The findings and conclusions of the consent judgment established Barker’s liability and damages.173 Westport intervened, but the trial court summarily held that Westport was bound by the terms of the settlement between Barker and Green.174 On appeal, Westport contended that it was entitled to have the court specifically address the Chaussee factors. The Court of Appeals agreed in Green, noting that, unlike the insurer in Mut. of Enumclaw Ins. Co. v. T&G Constr., Inc.,175 the Chaussee factors had never been specifically addressed: 169 Mut.of Enumclaw Ins. Co. v. T&G Constr., Inc., 165 Wn.2d 255, 199 P.3d 376 (2008). 170 Mut.of Enumclaw Ins. Co. v. T&G Constr., Inc., 165 Wn.2d 255, 262–263, 199 P.3d 376 (2008). Mut.of Enumclaw Ins. Co. v. T&G Constr., Inc., 165 Wn.2d 255, 263, 199 P.3d 376 (2008). The court rejected the insurer’s contention that its statute-of-limitations defense was somehow different than other tort-related issues considered by the trial court in the underlying reasonableness hearing. Mut.of Enumclaw Ins. Co. v. T&G Constr., Inc., 165 Wn.2d 255, 265, 199 P.3d 376 (2008). 171 172 Green v. City of Wenatchee, 148 Wn. App. 351, 199 P.3d 1029 (2009). 173 Green v. City of Wenatchee, 148 Wn. App. 351, 358–359, 199 P.3d 1029 (2009). 174 Green v. City of Wenatchee, 148 Wn. App. 351, 358–359, 199 P.3d 1029 (2009). 175 Mut.of Enumclaw Ins. Co. v. T&G Constr., Inc., 165 Wn.2d 255, 199 P.3d 376 (2008). 27
  • 30. Westport’s position that the relevant Chaussee factors, including the merits of Ms. Green’s case and Mr. Barker’s defenses, must be specifically addressed finds strong support in T&G Construction, 165 Wn.2d 255. There, the insurer (Mutual of Enumclaw (MOE)) vigorously defended its insured (T&G) until MOE declined to participate in the final round of settlement talks. MOE then challenged the settlement at a reasonableness hearing. A separate coverage action ensued and MOE challenged its obligation to pay, primarily contending it was not legally obligated under the policy language because T&G should have prevailed on a statute of limitations affirmative defense in the liability case. But the judge in the underlying liability case had rejected that affirmative defense several times, including at summary judgment and at the reasonableness hearing. Id. at 261–262. In binding MOE to the result in the underlying liability action and the reasonableness hearing, the Supreme Court partly reasoned: The merits of the homeowners’ liability case and the merits of T&G’s defense theories were, of course, central to any settlement because whether to settle, and under what terms, turned in large part on the risk of an adverse judgment. Those same issues must be carefully considered in any judicial proceeding to determine the reasonableness of the settlement. … MOE’s insured was already allowed to argue the statute of limitations defense theory in the liability suit. In the liability suit, MOE’s interest and its insured’s interest in advancing the statute of limitation defense were one and the same. When the insured lost on its motion for summary judgment on the statute of limitation defense, both T&G and MOE were put at risk of an adverse judgment. T&G had no reason not to vigorously assert its theory. Third, there is nothing special about the statute of limitations defense when, as here, it largely turns on disputed facts. It is just an affirmative defense like any other affirmative defense. Allowing the insurer to relitigate it in the coverage suit once liability has been evaluated and a settlement judicially approved runs afoul [of] the very policy concerns articulated in Fisher. Id. at 264–65 (emphasis added). Thus, while Fisher did apply in T&G Construction, that case illustrates why Fisher does not apply here. While the liability case was still in federal court, Westport filed on Mr. Barker’s behalf a motion for summary judgment and comprehensive memorandum seeking dismissal of all claims, both on the merits and under affirmative statute of limitations defenses. The district court dismissed Ms. Green’s federal claims. It did not address the state claims and instead remanded them to the superior court. Mr. Barker did not reassert his summary judgment motion in state court. Thus, the merits of Ms. Green’s liability theories and Mr. Barker’s defenses were never judicially addressed in the state court liability action prior to the settlement. Critically, in contrast to T&G Construction, the court bound Westport to Mr. Barker’s liability stipulation without making particular reasonableness findings addressing Mr. Barker’s defenses, including the statutes of limitations. 28
  • 31. During the April 2006 proceedings, Westport clearly preserved its right to challenge the reasonableness of the settlement under all of the Chaussee factors without any binding effect of the Green/Barker stipulation. Ms. Green’s claims to the contrary rest upon the incorrect assumption that Westport had standing to intervene for the purpose of challenging the Green/Barker agreed findings and conclusions. Moreover, the policy concerns expressed in Fisher, 136 Wn.2d at 249, are not present here because the reasonableness result was still pending when Westport promptly complied with the court’s May 2006 order to intervene. Given all, we conclude that the trial court erred in binding Westport to the agreed findings and conclusions regarding Mr. Barker’s liability. Those findings and conclusions are impertinent [sic] to the reasonableness proceeding and do not collaterally estop or bind Westport… . *** Accordingly, we vacate the [trial court] order declaring the consent judgment amount reasonable and remand the matter to the trial court to reconsider the Chaussee factors, while giving no effect to the Green/Barker agreed liability findings and conclusions. We direct the trial court to enter findings of fact reflecting its consideration of each relevant Chaussee factor based upon the facts and law at the time of the settlement.176 A consent-judgment amount represents a liquidated amount with respect to any second-tier action against the defendant’s insurer.177 Moreover, in such a second-tier action, the consentjudgment amount retains its liquidated status even if it is necessary to allocate the amount among various insurers and/or policy period. As the court recognized in Polygon Northwest Co. v. Am. Nat’l Fire Ins. Co.:178 That the parties put forward a motley of variously plausible theories as to how the Polygon settlement should be allocated does not make their obligations discretionary with the trial court and thus “de-liquidate” that settlement.179 E. ADVANCE PREPARATION TO PROMOTE A SUCCESSFUL MEDIATION The following are some of the important steps which every insured or claimant should take in structuring an upcoming mediation: 176 Green v. City of Wenatchee, 148 Wn. App. 351, 366–369, 199 P.3d 1029 (2009) (emphasis in original). 177 King County v. Puget Sound Power & Light Co., 70 Wn. App. 58, 62–63, 852 P.2d 313 (1993). 178 Polygon Nw. Co. v. Am. Nat’l Fire Ins. Co., 143 Wn. App. 753, 189 P.3d 777 (2008). 179 Polygon Nw. Co. v. Am. Nat’l Fire Ins. Co., 143 Wn. App. 753, 792–793, 189 P.3d 777 (2008). 29
  • 32. Secure personal attendance by a representative of the insurance company with settlement authority. If possible, discourage the insurance company from sending a representative who was transactional to the underlying bad faith. That person will be defensive, probably angry, and far less willing to settle the claim on an objective basis. Even when an appropriate representative is scheduled to attend, make certain that insurance representative will be able to contact her superiors after hours. That supervisor may be in a different time zone. In a Tier 1 case, do not file weak knee-jerk bad-faith claims. Most insurers automatically transfer the claim from their local adjusters to their extracontractual units. Extra-contractual supervisors do not analyze bad-faith allegations with equanimity or as just-doing-business. Moreover, they will be handling your entire claim, not just the bad-faith claims. Share your mediation materials with the other parties, and try to secure a commitment that the other participants will do the same. The mediator will be able to accelerate the process if she can avoid spending 2-3 hours summarizing your arguments to the other side. If the parties share materials, they are far less likely to overstate, shade, and misrepresent facts and legal theories to the mediator. In fact, the parties would benefit if they share materials 14 days in advance, allow their opponents to prepare a reply, and then submit an integrated mediation letter which includes her clients’ own affirmative statements and her reply to their opponents’ mediation positions. When mediating claims asserted by minors, or legally-incompetent claimants, the defendant should request that a settlement guardian ad litem attend the mediation. The SGAL is the person whose only responsibility is to represent that person, and who will be the person who ultimately makes a recommendation to the court regarding settlement approval of the settlement. If a claimant is asserting a tort claim, and wishes to preserve a potential UIM claim, it is critical that, prior to concluding a binding settlement, she offer the UIM insurer a opportunity to make substitute payment consistent with the requirements set forth in Hamilton v. Farmers Ins. Co. of Wash., 107 Wn.2d 721, 734, 733 P.2d 213 (1987). A claimant who plans to pursue her UIM claim, after settling the tort claim, should confirm in writing, using intra-mediation e-mail, that the UIM insurer will not invoke its right to make substitute payment. Prior to the mediation, counsel, particularly claimants’ attorneys, should advise their clients that mediation is about compromise. Clients should not become 30
  • 33. invested with the numbers set forth in their mediation letters, or the offers which they exchanged prior to the mediation. In a small number of cases, plaintiff’s counsel appears at a mediation without her client. That is not helpful. There needs to be a very important reason to justify a plaintiff not attending his mediation. Moreover, it is good form to have the claimant’s spouse attend, particularly if the spouse is asserting a loss-ofconsortium claim. All parties should notify one another in advance if their clients are not going to attend. An unexpected lack of participation is one of the surest ways to derail the mediation at its very outset. If you share your mediation materials, you should assume that opposing counsel will send them with his client. You should refrain from setting forth anything that will needlessly offend the opposing party. If you believe harsh comments are necessary (against either the attorney or her client), you should set those forth in a private mediation submission. Private submissions are also useful for preserving the impact of impeachment facts as-yet unknown to your opponent. If defense counsel knows that the insurer will only make de minimus settlement offers, he should notify plaintiff’s counsel in advance. The plaintiff may want to cancel or reschedule. If there are insurance policies central to the underlying claim, or bad-faith allegations requiring a review of the policy, address those in your submission to the mediator. You should also have the underlying insurance policies to the mediation. Prior to the mediation, plaintiff’s counsel should address issues involving his client’s liens and unpaid bills. A claimant cannot intelligently determine whether or not to settle unless he knows the amount he will net from the settlement. The mediator can assist in negotiating downward any subrogation interests, liens, or unpaid bills. However, she will not be able to negotiate those obligations downward if the first-party creditor is not available, not immediately responsive during the mediation, or if that person lacks authority to compromise the owed amounts. The failure to assess and deal with those matters, prior to the mediation, can torpedo the entire mediation. Medicare has become the tail wagging the dog in personal-injury cases, irrespective of whether bad faith is involved. You should obtain a conditional payment order prior to the mediation and submit it to opposing counsel. Moreover, you should be aware of any potential that Medicare will require a future set-aside. Defendants require that Medicare liens and future set-asides be handled in a reassuring way, before they will conclude a settlement. 31
  • 34. Analyze your space needs well prior to the mediation. Advise the mediator’s staff of your needs for additional rooms, a breakout room, and other needs. Especially when there are mixed compensatory and bad-faith claims, an insurer needs a room for its insured and a separate room for any coverage counsel representing the insurer on the bad-faith claims. In many cases, it is not possible to secure 3-4 additional rooms on short notice. F. ISSUES ARISING DURING THE MEDIATION If non-clients will be attending the mediation, it is best if you secure a commitment that you will not be waiving the attorney-client privilege by having these people in your room. That can be done right on the mediation agreement which the parties sign at the beginning of the mediation. Be aware that you cannot relate to the court, or the jury, anything that takes place during the mediation. You may not tell the court what the mediator has said, or ask the mediator to sign a declaration regarding the mediation. Those matters are protected under the privilege and in the agreement which you sign at the outset of the process. Matters occurring during the mediation are off record. If a plaintiff wishes to send a policy-limits demand to promote a bad-faith claim, setting forth the demand at the mediation is worthless. A separate letter, outside the mediation process, which does not mention the mediation, should be sent the next day, or whenever else counsel decides would be appropriate. G. CONCLUDING THE MEDIATION SESSION If a case settles globally, make certain to have a signed CR 2A agreement signed before everyone leaves. The CR 2A agreement is a template for the final settlement documents, and those documents should not be inconsistent with the CR 2A agreement. Even though the final documentation will be broader, you should not assume that you may add new and important settlement terms in the final papers. For instance, if a defendant wants to require confidentiality, that needs to be negotiated and specifically set forth in the CR 2A agreement. The parties should be thinking, from the outset, about the non-financial terms they will require. Do not save that task for the end of the mediation. In any case involving first-party bad-faith, the claimant should demand that her insurer pay at least the undisputed amounts. The Washington Administrative 32
  • 35. Code requires such payments even where there are other monetary issues in dispute. H. MEDIATION FOLLOW-UP Not every mediation results in an immediate settlement. Very often, mediation is a process rather than an event. One of the advantages of conducting future negotiations through the mediator is the confidentiality attached to those negotiations. That is extremely important for a Tier 2 case involving bad faith. In bad-faith cases, otherwiseprivileged settlement discussions are relevant and inadmissible. The mediation privilege is broader than ER 408. If you want to take advantage of the benefit of the mediation privilege, conduct all follow-up negotiations through the mediator. You can take whatever formal positions helpful in non-mediation letters and communications. 33

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