Bad Faith Nov2013 Mediation Tom Harris

MEDIATION OF BAD-FAITH ISSUES ©

Thomas V. Harris
Washington Arbitration & Mediation Service
600 University Street, Suite 900
Seattle, WA 98101

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

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

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

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

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

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

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

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

163 Wn.2d 1055, 187 P.3d 752 (2008).
30

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

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

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

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


58

Mutual of Enumclaw Ins. Co. v. Dan Paulson Constr., Inc., 161 Wn.2d 903, 169 P.3d 1 (2007).

59


8

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


65


66


67


9

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

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

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


77

146 Wn.2d 730, 734, 49 P.3d 887 (2002).

78


79

Safeco Ins. Co. of Am. v. Butler, 118 Wn.2d 383, 399, 823 P.2d 499 (1992).

12

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


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

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

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, 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

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


101


102


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

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

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


115

175 Wn.2d 756, 287 P.3d 551 (2012).

116


117


118


119


18

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).

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


19

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


129

Truck Ins. Exch. v. VanPort Homes, Inc., 147 Wn.2d 751, 765–76, 58 P.3d 276 (2002).

130


131


132


133


134

Mut.of Enumclaw Ins. Co. v. T&G Constr., Inc., 165 Wn.2d 255, 267, 199 P.3d 376 (2008).

135


20

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

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

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


145


146


147


23

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).

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

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


158


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.”
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

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


166

Bird v. Best Plumbing Group, LLC, 175 Wn.2d 756, 774-75, 287 P.3d 551 (2012).

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

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


170


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


27

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

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

Bad Faith Nov2013 Mediation Tom Harris

Bad Faith Nov2013 Mediation Tom Harris

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