New Washington Supreme Court Decision Opens A Troublesome Door

November 12th, 2012

Bird v. Best Plumbing Group, LLC, __ Wn.2d. __, __ P.3d. __, 2012 WL 5269734 (Wash. Oct. 25, 2012).

Bird v. Best Plumbing is the latest opinion from our State Supreme Court on consent judgments.  The Court has clearly pronounced that an insurer is not entitled to a jury trial on the amount of damages and that the consent amount, once found reasonable by a court, is the amount of damages:

When an insured defendant believes its insurer is refusing to settle a plaintiff's claims in bad faith, the insured can negotiate an independent pretrial settlement with the plaintiff.  These settlements typically involve a stipulated judgment against the insured, a covenant not to execute on that judgment against the insured, and an assignment to the plaintiff of the insured's bad faith claim against the insurer.  This is referred to collectively as a covenant judgment.  If the settlement amount is deemed reasonable by a trial court, it becomes the presumptive measure of damages in the later bad faith action.  This case requires us to determine whether Article I, Section 21 of the Washington Constitution entitles an insurer to have that reasonableness determined by a jury.  We hold it does not.

This decision continues our Supreme Court’s trend toward allowing all varieties of consent judgments against insurers simply because the insurer refuses to settle within policy limits.  It lets the plaintiff make a preemptive strike and settle with the insured before a jury has decided the merits of the case and the amount of damages. As such, the decision provides very little incentive to try cases with large ranges of possible damages when a plaintiff can simply agree to a large damage number with the insured that a court will almost certainly accept with minimal scrutiny of the evidence.

In the Best case, there was a sewer leak caused by faulty plumbing work.  The owner of the property sued the plumber for the cost of cleanup and diminution in value to the property.  He also alleged he had suffered a heart attack related to cleaning up the raw sewage.  Farmers defended WITHOUT a reservation of rights.  The Farmers policy had limits of $2 million.  The plaintiff demanded limits, and Farmers countered on behalf of its insured for $350,000.  The plaintiff immediately began negotiating a consent judgment with the insured. The insured, concerned about an excess judgment, consented to a $3.75 million judgment with a covenant not to execute. 

The trial court held a four-day hearing to determine if the settlement amount was reasonable.  The Court concluded it was, and Farmers appealed.  Farmers raised several issues, including whether the Court’s reasonableness determination could be the measure of damages because Farmers was entitled to have a jury determine the amount it owed.  The Supreme Court rejected this argument.  The Supreme Court also affirmed the trial court’s determination that the settlement was reasonable.

This decision further affirms our Court’s ongoing philosophy of embracing consent judgments.  Effectively, if there is a limits demand and the insurer does not either pay limits or agree to pay any excess amount, the insured is free to negotiate a consent judgment amount with the plaintiff for an amount exceeding limits.  If the Court finds the settlement amount reasonable (and courts almost always do), the insurer will be bound to that number.  If the plaintiff, standing in the shoes of the insured, later establishes that the insurer acted in bad faith, the policy limits will be uncapped and the insurer will be obligated to pay the full judgment amount.  In the Best case, that would mean paying $3.75 million even though the policy was only for $2 million.