Last week, the Washington Court of Appeals held that “in an insurance bad faith case, the amount of a reasonable covenant judgment sets a floor, not a ceiling, on the damages the jury may award.” Miller v. Safeco Ins. Co., No. 68594-5-1. The claim arose out of an automobile accident in 2000, when Patrick Kenny, the at-fault driver, rear-ended a cement truck, severely injuring his three passengers: Ryan Miller, Ashley Bethards and Cassandra Peterson. Kenny was driving Peterson’s car, with her permission, and was covered under Peterson’s parents’ policy issued by Safeco Insurance Company. The insurer defended Kenny without a reservation of rights. In 2001, Miller inquired about the insurer’s policy limits with the hope of settling his claim, but the insurer refused to disclose them, forcing Miller to file suit. The insurer then disclosed its primary liability limits of $500,000 per person and per accident, its umbrella limits of $1 million, and its UIM limits of $100,000. The court later determined UIM limits were $500,000.

After the insurer rejected several settlement demands, the three passengers settled with the insured by covenant judgment, in which the insured assigned his bad faith claims against the insurer to plaintiff. In lieu of a reasonableness hearing, the insurer stipulated that $4.15 million was reasonable for the covenant judgment, reflecting damages the passengers sustained beyond the insurance proceeds. Plaintiff, as the insured’s assignee, sued the insurer for bad faith, consumer protection violations, and many other claims based upon the insurer’s alleged failure to protect its insured from exposure to an excess judgment by refusing to offer policy limits earlier in the claim and case. The trial resulted in a $13 million jury verdict, $7 million award of prejudgment interest, $1.7 in attorney fees and costs, and post-judgment interest — all together totaling $21,837,286.73 against the insurer.

Reasonable Covenant Judgment is Floor for Damages

The court affirmed the trial court’s instruction to the jury that if it found bad faith, it must award the $4.15 million stipulated covenant judgment, but it must also consider other damages including lost control of the case or settlement, the reasonable value of attorney fees for the insured’s private counsel, damage to credit or creditworthiness, and emotional distress or anxiety. In so holding, the court rejected the insurer’s argument that the amount of the covenant judgment was the maximum that could be awarded. The court reasoned that a covenant judgment that has been deemed reasonable is the “presumptive” measure of the insured’s harm, but presumptive is not a limitation. Covenant judgments generally measure an insured’s liability to a third party for the underlying claim, but the insured may experience additional damages caused by an insurer’s bad faith. Thus, the court found it appropriate to require the jury to consider additional damages to the insured beyond the covenant judgment.

Settlement Agreement Properly Assigned Rights

In the settlement agreement in which the insured assigned his rights against the insurer to plaintiff, the insured also expressly retained an interest in any damages recovered from the assigned claims. The court rejected the insurer’s argument that the reservation rendered the assignment defective, finding instead that while unusual, the agreement simply shows the difficult position in which the insurer put its insured by refusing to offer its policy limits for settlement. Plaintiff obtained the right to sue for bad faith, but the insured retained an interest in any damages plaintiff was able to achieve.

Evidence of Insurer’s Loss Reserves Was Admissible

The court found no error in admitting evidence that the insurer placed its policy limits on reserve soon after the accident and reviewed its reserves 20 times as the case went on, each time finding that the insured was exposed to liability substantially in excess of policy limits. The court held loss reserves cannot be equated with an insurer’s settlement authority because reserves account for other costs like attorney fees and are not admissible to show acknowledgement of liability, but are admissible on the issue of whether the insurer adjusted a claim in good faith. While the court noted that generally loss reserve information is not admissible because the court does not want insurers to make their reserve decisions based upon how it will look in the litigation, here the discrepancy between the insurer’s loss reserves and its settlement posture was so large that it overcame the policy in favor of excluding evidence of loss reserves.

Policy Issued After Merger Is a New Policy Rather Than a Renewal for UIM Limits

The court upheld the trial court’s ruling that the insurer’s UIM limit was $500,000 rather than $100,000. Originally, American States issued the named insureds’ liability policy. In accordance with a Washington statute, American States obtained a signed waiver from the named insured in order to reduce her UIM limit to $100,000. The waiver was effective for renewals of policies, but not for the issuance of new policies. When the named insured added the vehicle involved in the accident to the policy, the UIM limits were reset to $500,000, which the insurer claimed was a scrivener’s error. Safeco then acquired American States and issued a policy to the named insureds with limits set back to $100,000, but the insurer failed to obtain a second waiver. The court found that because the named insured paid the premium for the $500,000 limit, the increased limit could not be considered a scrivener’s error, and the reduction in UIM limits when the insurer issued the policy was a material change rendering the policy a new policy in need of a new wavier. Because the insurer had not obtained the waiver, its limits were $500,000.

Plaintiff’s Attorney Not Required to Testify

The court affirmed the trial court’s ruling declining to compel a deposition of plaintiff’s attorney. The insurer wanted to depose plaintiff’s attorney to find out if the attorney purposefully postured the case to give rise to a bad faith claim. The court ruled that the insurer could not compel the deposition because the information the insurer sought was privileged; the insurer could not show that denial of the deposition prejudiced it, and the legal argument the insurer was attempting would fail anyway. The court stated, “[p]ressing for a policy limits settlement for a badly injured client is a professional responsibility, not a sinister plot.”

The court, in the 55 page opinion, also resolved several other issues, including cost awards, attorney fees awards, admissibility of the deposition of a claims adjuster, and issues regarding attorney conduct at trial.