Covenant judgments are one of Washington’s peculiar procedures. Plaintiffs and insureds use them in reservation of rights and excess exposure cases. In these cases, the plaintiff and insured agree – typically without the insurer’s participation – to a judgment amount vastly exceeding the plaintiff’s likely damages. The insured assigns her rights against the insurer, including claims for extra-contractual damages, and the plaintiff and insured agree to execute this judgment only against the liability insurer. The plaintiff and insured then seek the court’s benediction of the covenant judgment amount in a procedure known as a reasonableness hearing.
The understanding of covenant judgments has been if the court consecrated the covenant judgment amount as reasonable in a reasonableness hearing, the amount of the covenant judgment becomes “the presumptive measure of damage in the later bad faith action.”Bird v. Best Plumbing. Or so we thought until the April 28, 2014 Washington Court of Appeals decision in Miller v. Kenny.
In this case, the plaintiff, insured, and insurer agreed to a covenant judgment for $4.15 million. The insurer, relying upon numerous Washington cases holding the covenant judgment amount is the “presumptive measure of damage” in the bad faith case, presumed this $4.15 million covenant judgment was the “presumptive measure of damage” in the bad faith case. Instead the court held that the covenant judgment, rather than setting the “presumptive measure of damage,” merely establishes a minimum damage amount, or floor of damage in the bad faith case. This left the plaintiff, with the insured’s assigned extra-contractual claim, free to recover damage in the bad faith case over and above the covenant judgment amount. The jury returned a verdict for $13 million. With post-judgment interest, attorney fees, costs, and other damages, the final judgment was for $21,827,286.73 (Ouch!!). The original covenant judgment had more than quintupled. So much for the covenant judgment amount establishing the “presumptive measure of damage” in the bad faith case.
To the frustration of those attempting to make sense of this decision, the court never explained how “presumptive measure of damage” morphs into minimum or floor.
While this result is most disturbing, one fact may distinguish Miller v. Kenny from other covenant judgment cases: there was no reasonableness hearing. As its name suggests, in a reasonableness hearing, the parties ask the court to find the covenant judgment reasonable. Again, if the court finds the covenant judgment reasonable, this should set the “presumptive measure of damage” in the bad faith case. Reasonableness hearings provide the insurer an opportunity (sometimes an extremely limited one) to offer evidence and argue that the covenant judgment amount is excessive. For example, the covenant judgment amount may not be consistent with the plaintiff’s actual damages, or a strong liability defense may exist. Insurers also may attack covenant judgments as fraudulent or collusive. By contesting the covenant judgment amount in the reasonableness hearing, insurers make a record so the amount of the covenant judgment can be attacked or reduced on appeal (if not reduced in the reasonableness hearing itself).
For reasons not clear from the opinion, there was no reasonableness hearing in Miller v. Kenney. Instead, the insurer stipulated with the plaintiff and the insured for the $4.15 million covenant judgment. Of course, the insurer stipulated believing this set the “presumptive measure of damage,” and it would not be liable for more than the $4.15 million in the bad faith case.
Because a $22 million bad faith judgment was being affirmed, the court discussed in great detail the facts of the underlying claim and trial court litigation. There were numerous issues besides measuring bad faith damages. So the opinion is quite lengthy. But re-defining damages in covenant judgment cases appears, at this early stage, to be the most significant part of the court’s holding.
Because there was no reasonableness hearing in Miller v. Kenney, insurers have an added incentive to make certain reasonableness hearings occur in covenant judgment cases. Also, this decision may discourage insurers from stipulating to covenant judgments. As of this writing, we do not know if the insurer will move for reconsideration or appeal to Washington’s Supreme Court.
