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Washington Supreme Court Rules on Duty Defend and Discovery

In a unanimous decision[1] on an issue it identified as a matter of first impression in Washington, the Washington Supreme Court held discovery that is potentially prejudicial to an insured in underlying litigation must be stayed until the underlying litigation is fully adjudicated.[2]  The Court also held that the trial court erred when it delayed ruling on a motion for summary judgment filed by the insured, Expedia, regarding its insurer’s duty to defend against numerous underlying lawsuits.[3]

 The underlying litigation involved multiple lawsuits brought against Expedia by state and local taxing authorities.  Expedia tendered most of the suits to Zurich; however, some were tendered late.  Zurich declined Expedia’s tender on several grounds, including late tender and that the underlying suits may be excluded from coverage.  

 In November 2010, Expedia filed suit against Zurich for declaratory judgment, insurance bad faith, and violation of Washington’s Consumer Protection Act.  Zurich responded with a counterclaim for declaratory judgment regarding its coverage obligations.  Zurich also asserted various defenses, including late tender, known loss, material misrepresentation, and mistake.  The trial court declined to make a determination of Zurich’s duty to defend Expedia and ordered Expedia to produce discovery that Expedia claimed may be prejudicial to it in the underlying actions. 

 When the matter reached the Washington Supreme Court, the Court rejected Zurich’s argument that under Nat’l Sur. Corp. v. Immunex Corp.,[4] it was entitled to discovery related to its late tender defense, which requires an insurer to prove that it was “actually and substantially prejudiced” by a late tender.[5]  In so holding, the Court stated the following regarding its holding in Immunex:

At most, Immunex indicates that the actual prejudice question is relevant only to the late tender defense and that actual prejudice caused by late tender may relieve the insurer of the duty to pay the cost of defense incurred after the insurer obtains a judicial declaration that it owes no duty to defend.

 The Court held the trial court should have adjudicated the duty to defend issue first.  Then, Zurich could attempt to prove its defenses, including prejudice from late tender.  “In the meantime, however, Zurich should have been required to defend Expedia if the court found that the duty to defend had been triggered.”  The Court also held:

Unless actual prejudice can be established by the insurer as a matter of law, an insurer’s allegations of prejudice cannot preclude a determination that the underlying claim is conceivably covered.

 The Court then addressed Zurich’s argument based upon Overton v. Consolidated Insurance Co.,[6] that it should be permitted to discover and present extrinsic evidence to negate its duty to defend.  The Court held that to the extent Overton supported Zurich’s argument “the opinion predates and conflicts with the extrinsic evidence rule as clarified in Truck Insurance Exchange and its progeny.”[7]    

 Citing a California Court of Appeal decision, Haskel, Inc. v. Superior Court,[8] the Washington Supreme Court held “an adjudication of the duty to defend cannot be delayed by discovery.”  Therefore, the trial court erred by delaying adjudication of Expedia’s summary judgment motion concerning the duty to defend until Expedia complied with potentially prejudicial discovery.

 The Court remanded the case to the trial court to determine Zurich’s duty to defend Expedia in each of the underlying cases subject to Expedia’s motion.  The Court also ordered the trial court “to stay discovery in the coverage action until it can make a factual determination as to which parts of discovery in the coverage action are potentially prejudicial to Expedia in the underlying litigation.”  Finally, the Court instructed that “[a]ll discovery logically related to the underlying claims should be stayed until such claims are fully adjudicated.”

Soha & Lang attorneys are available to assist insurer clients in understanding and addressing the impact of this decision.

Disclaimer: The opinions expressed in in this blog are those of the author and do not necessarily reflect those of Soha & Lang, P.S. or its clients.

 


 

[1] Expedia, Inc. v. Steadfast Ins. Co., No. 88673-3 (July 3, 2014).

[2] The Court’s ruling is understandable, and it is curious why the Court even deemed this a matter of first impression in view of its prior ruling in Mut. Of Enumclaw v. Paulsen Construc., 161 Wn.2d 903, 918 (2007) that “[w]hile defending under a reservation of rights, an insurer acts in bad faith if it pursues a declaratory judgment that it has no duty to defend and that ‘action might prejudice the insured’s tort defense.’”  The only distinction between Paulsen and the current case is that the insurer in Paulsen was defending while Zurich had denied a defense.

[3] The opinion refers to the petitioner insureds collectively as Expedia and refers to respondent insurers collectively as Zurich.

[4] 176 Wn.2d 872, 297 P.3d 688 (2013).

[5] Immunex Corp., 176 Wn.2d  at 890.

[6] 145 Wn.2d 417, 38 P.3d 322 (2002).

[7] Truck Ins. Exch. v. Vanport Homes, Inc., 147 Wn.2d 751, 58 P.3d 276 (2002) (the duty to defend must be determined from the “eight corners” of the insurance contract and the underlying complaint; the two exceptions to this rule may be used only to trigger the duty to defend, not to foreclose it).

[8] 33 Cal. App. 4th 963,  39 Cal. Rptr. 2d 520 (1995).

Reasonable Stipulated Settlement Sets the Floor, Not the Ceiling, for Bad Faith Damages

On Monday, the Washington State Court of Appeals held that a stipulated covenant judgment settlement that is found “reasonable” by the court “sets a floor, not a ceiling, on the damages a jury may award” in an assigned bad faith case.  So in Miller v. Safeco Ins. Co. et. al, a $4.15 million stipulated judgment became a $13 million bad faith verdict, to which the court added $7 million in prejudgment interest, approximately $1.6 million in attorneys’ fees plus an additional appellate fee award, and remanded for a proper calculation of court costs and post-judgment interest.

The underlying case involved an auto accident in which three passengers of the at-fault driver who rear-ended a truck were claiming bodily injuries.  The auto was insured by Safeco, under a $500,000 liability policy and a $1 million umbrella policy.  Safeco defended without reservation, and eventually offered its policy limits.  Safeco’s alleged bad faith was primarily related to its failure to advise a claimant pre-suit of its policy limits (Safeco claimed the insured did not consent to disclosure, but this was disputed), a dispute over the underinsured motorist limit in the policy, and Safeco’s failure to offer its umbrella policy limits fast enough.  Safeco first offered its $500,000 liability limits, and then a few months later in the litigation offered the additional $1,000,000 umbrella policy limits.  But the claimants were not willing to settle all three claims for policy limits when offered.  Instead, the parties stipulated to covenant judgments totaling $4.15 million (on top of the $1.5 million that Safeco contributed and $300,000 that another carrier contributed to the settlement).

Safeco did not challenge the reasonableness of the stipulated judgment amounts.  Rather, Safeco denied it had acted in bad faith, and argued that if found to have acted in bad faith, then damages were set at $4.15 million.  The primary dispute on appeal was whether Washington case law saying a reasonable stipulated judgment amount sets the “presumptive measure of damages” in the subsequent bad faith case means the $4.15 million stipulated judgment was a damage floor or ceiling.  The appellate court ruled it was a floor, upholding the following instruction to the jury:

If you find for the plaintiff on Patrick Kenny’s claim for failure to act in good faith your verdict must include the following undisputed items:

The net amount of the Stipulated Order Re: Reasonableness of Settlements for $4,150,000.

In addition, you should consider the following past and future elements of damages:

  1. Lost or diminished assets or property, including value of money;
  2. Lost control of the case or settlement;
  3. Reasonable value of expert or other costs or reasonable attorney fees incurred for the private counsel retained by Patrick Kenny;
  4. Damage to credit or credit worthiness;
  5. Effects on driving or business insurance or insurability;
  6. Emotional distress or anxiety.
  7. The burden of proving Patrick Kenny did not suffer damages rests upon Safeco. It is for you to determine, based upon the evidence, whether any particular element has been proved by a preponderance of the evidence.

The jury awarded $13 million in damages.  Because the stipulated settlement agreement called for a 12% interest rate, the court added $7 million in prejudgment interest, but held that post-judgment interest should be calculated at the much lower statutory tort rate.  In calculating the $1.6 million attorney fee award, the court permitted plaintiff attorneys to reconstruct their billable hours for the several years the case was in litigation (3,229.8 hours) since plaintiff’s counsel had not kept contemporaneous time records, and held that a $400-450/hr. attorney fee with a 1.5% multiplier was reasonable.

Soha & Lang attorneys are available to assist insurer clients in understanding and addressing the impact of this decision both during the claims handling process and after an allegation of bad faith claims handling has been made.

Disclaimer: The opinions expressed in in this blog are those of the author and do not necessarily reflect those of Soha & Lang, P.S. or its clients.

Not So Fast: Insurer Has No Duty to Defend Road Rage Claims

On January 28, 2014, the Washington Court of Appeals ruled that USAA did not act in bad faith when it declined to defend its insured, Dennis Geyer, under his homeowners and auto insurance policies for claims arising out of an assault at traffic light.  United States Auto. Assoc. v. Speed, No 43728-7-II.
In March 2009, Geyer assaulted Robert Speed at a traffic signal.  Apparently, Geyer was angry over something Speed had done while driving in front of him.  In an August 2009 letter, Speed’s attorney demanded Geyer pay $650,000 to compensate Speed for his injuries.  The letter alleged that Geyer followed Speed, pulled him out of his vehicle at a stop light, beat him, and then drove away leaving Speed bleeding and unconscious in the street.  The demand letter stated that if this were a negligence case that was covered by insurance, Speed’s attorneys would have sought seven-figures.
Geyer tendered under his USAA homeowners and auto insurance policies.  Unlike most standard policies, the USAA policies provided that USAA’s duty to defend arose not only when a “suit” was brought against the insured, but also when any “claim” was made for damages arising from acts covered under the policies.  After investigating the claim, USAA reserved rights as to whether the incident involved an “occurrence” under Geyer’s homeowner’s policy, an accident under his auto policy, and whether the claims fell within the policies’ intentional acts exclusions.  USAA continued to monitor the claim, but did not retain counsel to defend Geyer.
Geyer and Speed later stipulated to a $1.4 million covenant judgment, which included an assignment to Speed of Geyer’s potential contractual and bad faith claims against USAA.  USAA then filed a complaint for declaratory relief against Speed.   USAA moved for summary judgment asking the trial court to declare as a matter of law that (1) there was no coverage under either policy, (2) USAA had no duty to defend Geyer, (3) USAA’s failure to defend was not in bad faith, and (4) USAA was not estopped from denying coverage.  The trial court granted USAA’s motion and a second (unopposed) motion to dismiss Speed’s statutory and regulatory bad faith claims.   Speed appealed.
In affirming the trial court’s finding that USAA had no duty to defend as a matter of law, the Speed Court explained that unlike cases where standard policy language regarding the duty to defend is determined by allegations in the complaint, non-standard language of the USAA policies, discussed above, required that the duty to defend depend upon the allegations in the demand letter.  Then, noting that Washington courts have repeatedly held that an insured’s deliberate conduct does not constitute an accident, the Speed Court held that “[e]ven interpreting the allegations liberally and resolving doubts in favor of a duty to defend,”  the USAA  policies did not conceivably cover the claims alleged in Speed’s demand letter.

In reaching its holding, the Court of Appeals rejected Speed’s argument that USAA was obligated to defend because USAA expressed uncertainty regarding coverage.  (For example, USAA had advised Geyer that coverage was “questionable” and that “[ c]overage may be precluded.”)  The Speed Court held: “What the insurer believes about the duty to defend or policy coverage is immaterial to the court’s duty to defend determination.”  Further, “to allow an insurer’s conduct to give rise to the duty to defend would conflict with the rule that insurance coverage cannot be created by equitable estoppel.”

Washington Supreme Court Rules In Favor of Insurer on Exception to Insured Contract Provision

On November 27, 2013, in a 5-4 decision, the Washington Supreme Court ruled that a commercial general liability policy issued to a general partnership, ABCD Marine, LLC (“ABCD”), did not provide coverage for bodily injury suffered by one of its general partners while he was working as an independent contractor for Northland Services Inc. (“NSI”).   Int’l Marine Underwriters v. ABCD Marine, LLC, No. 87231-7, __Wn.2d__, __P.3d __ (Nov. 27, 2013).

ABCD’s liability policy excluded coverage of liability ABCD contractually assumed, but exempted from that exclusion agreements assuming liability for injury to third persons.  The Court ruled the general partner was not a “third person” and therefore not covered for injuries he sustained while doing work for NSI under ABCD’s agreement to indemnity NSI for injuries arising out of the ABDC’s operations or use of NSI’s property.

Once Is Enough: The Washington Court of Appeals Holds Trial Court Was Not Required To Reevaluate the Reasonableness of a Covenant Judgment

 

In Hidalgo et al. v. Barker et al. ___Wn. App. __, __P.3d__ ;  No. 30544-9-III (Sept. 10, 2013), the Washington Court of Appeals addressed the following issues of first impression in Washington State with regard to the determination of the reasonableness of a covenant judgment: 

 

  1. Is a trial court required to conduct a hearing to determine the reasonableness of a stipulated settlement any time the settling parties modify the terms of their agreement? 
  2. Does a trial court have the discretion to provide for prejudgment interest as a component of a reasonableness determination? 

 

The answer to the first question is “no.”  Absent a material change in one or more reasonableness factors, a court that has already conducted a reasonableness hearing and determined a reasonable settlement amount for those parties is not required to entertain evidence and argument in support of revising that amount.

 

The answer to the second question is “yes.”  It is within the trial court’s discretion to either include or exclude prejudgment interest for the period between the date of settlement and the date judgment is entered.  

 

The Hidalgo Court also held that the trial court did not abuse its discretion when it found the parties’ first settlement agreement unreasonable and then multiplied what the court found to be the mid-point of the expected verdict range if the case went to trial by the perceived chance of a favorable verdict to determine the reasonableness of the settlement.

 

I. Background

Manuel Hidalgo was convicted of a crime and served over four years in prison before his judgment and sentence were reversed on the basis of the newly discovered evidence.  Mr. Hidalgo then broughta malpractice action against his public defenders and their law firm.  Westport Insurance Corporation insured the law firm and its attorneys under a professional liability policy with “wasting” limits (coverage limits included defense costs), meaning that every dollar spent defending the malpractice case reduced available coverage.

Westport appointed counsel to defend the law firm and its attorneys against Mr. Hidalgo’s claim and other related claims.  Efforts at a global settlement proved unsuccessful.   Mr. Hidalgo made several decreasing offers to settle with one of the attorneys, Mr. Stevensen, with a final offer of $75,000.  However, the claims against Mr. Stevensen were not settled.  In May 2005, after the limits of the insurance policy were exhausted, counsel appointed by Westport withdrew from the case.

In May 2007, Mr. Stevensen reached an agreement with Mr. Hidalgo to settle for a $3.8 million covenant judgment. The Hidalgo/Stevensen settlement agreement included a covenant not to execute against Mr. Stevensen  in exchange for  an assignment of Mr. Stevensen’s claims against Westport.  The agreement also provided for prejudgment interest from the date of the agreement until the entry of judgment and for post-judgment interest from date of entry.  In addition, the settlement was contingent on the court approving it as reasonable.

In February 2009, after reviewing “voluminous” briefing from both sides, the trial court conducted a reasonableness hearing lasting about three hours.  At the conclusion of the hearing, the court rejected the $3.8 million settlement figure as unreasonable and ruled that the reasonable settlement amount was $688,875.  The trial court stated that it had considered the nine reasonableness factors set forth 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), but explained that its conclusion focused on just two Glover factors:  the merits of the plaintiff’s liability theory and the merits of the defense theory.  The trial court found a probable range of damages for a legal malpractice case involving incarceration and the probability of Mr. Hidalgo’s success at trial.  Using these numbers, the trial court multiplied the mid-point of the expected verdict range  by its evaluation of the chance of a favorable verdict to arrive at $688,875 as the reasonable settlement amount.  Because the settlement was contingent on the trial court’s approval of the $3.8 million settlement figure, the settlement was void by its terms.  The litigation continued. 

In May 2010, Mr. Stevensen and Mr. Hidalgo entered into a new settlement agreement. This time, the agreed settlement amount was $2.9 million “or such amount as is found reasonable by the proper court.”  Mr. Hidalgo asked the trial court to rule on the reasonableness of the $2.9 million settlement. The trial court refused.  Instead, the court signed an order on its February 2009 reasonableness determination that included no findings of fact but did append and incorporate a transcript of its oral ruling from the 2009 hearing.   

Before judgment was entered, Mr. Hidalgo argued that he was entitled to prejudgment interest from the date of the agreement.  The trial court agreed and ruled that prejudgment interest of $134,755 was appropriate. The court also awarded post judgment interest at the statutory rate of 12 percent.  Mr. Hidalgo appealed and Westport cross-appealed.  

II. One Reasonableness Determination Is Enough

The Hidalgo Court ruled that that the trial court did not abuse its discretion by refusing to revisit its original reasonableness determination after the parties settled the second time.  The Court of Appeals explained that if a court determines the settlement is unreasonable, RCW 4.22.060(2) has been construed to require the court to then determine a reasonable settlement value.  “That stand-alone reasonable settlement amount will necessarily be independent of other terms of the parties’ agreement.”  Therefore,  if the “parties renegotiate the terms of a settlement agreement after the trial court determines a reasonable settlement amount, then, no further hearing should be required unless a different issue ‘of the reasonableness of the amount to be paid’ is presented.”

A second reasonableness hearing may be necessary if “[d]evelopments in the lawsuit that affect the merits of the claims, the defenses, or other Glover factors might result in a different issue of reasonableness.”  However:

short of a material change in one or more Glover factors, a new settlement agreement entered into by two parties does not require a court that has already conducted a reasonableness hearing and determined a reasonable settlement amount for those parties to entertain evidence and argument in support of revising that amount.

Accordingly, the Court of Appeals found that it was not an abuse of discretion for the trial court to refused to revisit its prior determination when “it saw nothing in the parties’ submissions that would cause it to revisit its prior determination.”

III. The Reasonableness Determination

Next, the Hidalgo Court rejected Mr. Hidalgo’s argument that the trial court abused its discretion when it found the first settlement unreasonable and determined that $688,875 was a reasonable settlement amount.  Mr. Hidalgo argued that the trial court (1) failed to explain how it applied the individual Glover factors; (2) ignored the eighth factor, consideration of the releasing party’s investigation and preparation; and (3) abused its discretion by using a “rigid calculation” and selecting a figure that was the mean of the probable range of recovery rather than a higher figure.

The Hidalgo Court rejected each of these arguments in turn and held that:

  1. Washington decisions do not require trial courts to explain their application of the Glover Factors.
  2. Absent some showing that an incorrect standard may have been applied, Washington appellate courts do not review a trial court’s reasonableness determination for a sufficient explanation, but for substantial evidence.
  3. The trial court did not abuse its discretion by failing to consider or misapplying the eighth Glover Factor—the releasing party’s readiness for trial.  
  4. The trial court did not abuse its discretion when it multiplied the mid-point of the expected verdict range by the perceived chance of a favorable verdict to determine the reasonableness of the settlement.

IV.  Prejudgment and Post Judgment Interest

Next, the Court of Appeals addressed Westport’s cross appeal challenging the trial court’s inclusion of prejudgment interest and its ruling that the 12 percent contract rate applied to post judgment interest, rather than the lower market-based rate for judgments founded on tortious conduct.  As to post judgment interest, Westport argued that the tort interest rate should apply because the underlying claim against Stevensen was a malpractice claim. The Court of Appeals disagreed.  Quoting Jackson v. Fenix Underground, Inc., 142 Wn. App. 141, 146, 173 P.3d 977 (2007), the Hidalgo Court held that the 12 percent contract rate applied because:

 

Once parties have agreed to settle a tort claim, the foundation for the judgment is their written contract, not the underlying allegations of tortious conduct.

The Hidalgo Court then addressed whether Mr. Hidalgo was entitled to prejudgment interest.  The court acknowledged that in Washington, a party’s entitlement to prejudgment interest as a question of substantive law turns on whether a claim is “liquidated” and found that Mr. Hidalgo’s claim was not liquidated.  Nevertheless, the Court of Appeals held that it was within the trial court’s discretion to either include or exclude prejudgment interest in its reasonableness determination.

 

 

 

Soha & Lang, P.S. attorneys are available to assist insurer clients in understanding and addressing the impact of this decision.

 

The opinions expressed in in this blog are those of the author and do not necessarily reflect those of Soha & Lang, P.S. or its clients.