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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.