Bad Faith Award Upheld by Washington Court

On April 28, 2014, the Washington Court of Appeals issued an opinion upholding a $21.8 million judgment against an insurer—$13 million on which was based on a claim for insurance bad faith—in the case titled Miller v Kenny, 2014 WL 1672946, — P.3d —, — Wn.App. — (Apr. 28, 2014).  The 56-page published opinion touched on a wide range of insurance-related issues, including interpretation of a settlement agreement and covenant judgment, underinsured motorist (UIM) policy limits, the admissibility of reserve information, and the amount of attorney fees, costs, and interest awarded.  Most notably, however, the Court of Appeals addressed the extent of damages available following a covenant judgment.  The Court of Appeals determined that, in an insurance bad faith case, the amount of a reasonable covenant judgment sets the floor, not the ceiling, of damages the jury may award.

The case arose from an automobile accident that occurred in 2000 while four friends were on a pre-college road trip in Canada.  Patrick Kenny was driving the insured vehicle when he rear-ended a cement truck, seriously injuring the three passengers—Ryan Miller, Ashley Bethards, and Cassandra Peterson.  The insured vehicle belonged to Peterson.  Kenny was driving the insured vehicle with permission and was covered for liability under an insurance policy issued to Peterson’s parents.

Before starting settlement negotiations, Miller contacted the insurer to inquire about the insurance policy limits.  The insurer did not provide the policy limits, stating that the insureds had not provided permission to disclose that information.  Miller eventually filed suit against Kenny, which made the policy limits discoverable.  The insurer disclosed that the policy provided $500,000 in liability coverage per person/per accident, and further disclosed that the Petersons had a $1 million umbrella policy.  The insurer represented that the underinsured motorist (UIM) limits under the policy were $100,000 based upon a prior rejection by the Petersons of UIM limits of $500,000—equal to the liability limits.

Miller sent the insurer a demand seeking full policy limits.  The demand also called attention to the “substantial” risk of an excess judgment against the insured.  At the time of Miller’s letter, Peterson had already sent the insurer a demand for $350,000.  Shortly thereafter, Bethards sent a demand for $1.25 million.  After receiving the three demand letters, Kenny’s assigned counsel wrote to the insurance adjuster to point out that the cumulative demands exceeded the insurance policy limits.  The assigned counsel demanded that the insurer submit the full policy limits into the court register in exchange for a release and hold harmless agreement from the claimants.  The adjuster responded that the information available at the time did not indicate the combined value of the injuries exceeded the policy limits.  The adjuster then tendered the $500,000 liability limits available under the policy.

Upon receipt of the liability limits, Kenny’s counsel tendered the amount to the three claimants pending their agreement on how to divide the amount.  Kenny’s counsel also offered that he would assign any bad faith claims against the insurer in exchange for their agreement not to execute for enforce any judgment above the insurance policy limits.  A few months before trial on Miller’s claims against Kenny, the insurance adjuster authorized Kenny’s attorney to tender the full $1 million umbrella policy limits in addition to the $500,000 liability policy limits, in exchange for a release.  The offer was too late, however, as Kenny was facing the likelihood of an excess judgment at the pending trial on Miller’s claims.

Acting on the advice of counsel, Kenny reached a global settlement with the three claimants.  Kenny agreed to pay $1.8 million in insurance benefits—he had an additional $300,000 in benefits from his parents’ policy—to the three passengers, plus an assignment of right to sue the insurance company for bad faith and other related claims.  In exchange, the passengers agreed not to execute or enforce any excess judgment.  The parties and the insurance company eventually agreed that the total excess damages were $4.15 million, and a judgment was entered against Kenny for the additional amount.  The insurer reserved all defenses.

After receiving the assignment from Kenny, Miller sued the insurance company for bad faith, negligence, violation of the Consumer Protection Act (CPA), breach of contract, and other theories.  Miller’s claims were based on the allegation that the insurer damaged Kenny by failing to disclose the policy limits—which forced litigation—and by its subsequent handing of the claim.  Miller also sued as assignee of Cassandra Peterson’s bad faith claim, which was based on the allegation that the insurer represented that the insurance policy included $100,000 in UIM coverage, instead of $500,000.  The primary theme of Miller’s case was that the insurance company could have protected Kenny from the excess judgment if it had promoted settlement much earlier in the claim process.  The insurer responded that it never had a genuine opportunity to settle because there were three claimants, and Miller intransigently demanded the full policy limits for himself.

Interpretation of Bad Faith Assignment

The trial court bifurcated the case.  The first phase concerned whether the assignment agreement between Kenny and Miller properly assigned the bad faith claims against the insurance company.  The issue was previously raised at the summary judgment phase.  The Court of Appeals granted discretionary review and concluded that summary judgment was not appropriate due to unresolved factual issues.  See Kenny v. Miller, 158 Wn.App. 1049, 2010 WL 4923873 (2010).  The insurer contended the assignment did not unequivocally assign the right to assert the bad faith claim to Miller.  The trial court disagreed with the insurer’s interpretation of the agreement and found that Kenny properly assigned Miller the full right to assert bad faith claims against the insurer.  The primary issue on appeal was the admission at trial of testimony concerning the parties’ intent in drafting the assignment, which included consideration of the decision in Hollis v. Garwell, Inc., 137 Wn.2d 683, 974 P.2d 836 (1999).  The Court of Appeals ultimately determined that the admission of the disputed testimony was proper or, at the very least, not sufficiently prejudicial to warrant overturning the verdict.

Bad Faith Damages in Excess of Covenant Judgment

Based on the results of the first phase, the trial moved to a second phase which considered the insurer’s liability for bad faith.  The jury was instructed that if it held for Miller, as Kenny’s assignee, it must include the $4.15 million stipulated amount of the covenant judgment.  Over the insurance company’s objection, the jurors were also instructed to consider various other factors in awarding damages.  The jury ultimately awarded Miller $13 million in bad faith damages.

The insurance company moved for partial summary judgment, requesting that the trial court limit Miller’s recovery to $4.15 million—the amount of the excess judgment entered against Kenny.  Relying on Besel v. Viking Ins. Co., 146 Wn.2d 730, 49 P.3d 887 (2002), which holds that the amount of a covenant judgment is the presumptive measure of the insured’s harm, the insurer argued that Miller’s damages were limited to the presumptive amount.  The Court of Appeals disagreed with the insurer, citing Bird v. Best Plumbing Group, LLC, 175 Wn.2d 756, 287 P.3d 551 (2012), and determining that the insured is presumptively entitled to at least the amount of the covenant judgment, not less.  Based on that holding, the Court of Appeals upheld the jury’s bad faith damages award.

Uninsured Motorist (UIM) Policy Limits

The insurer also argued that the trial court erred in holding that the UIM policy limits were $500,000, instead of $100,000.  The insured vehicle at issue in this case was added to an insurance policy.  Cassandra Peterson’s mother previously signed a waiver that lowered the UIM limits to $100,000/$300,000.  Following that waiver, they added the insured vehicle to the applicable insurance policy.  When the vehicle was added, the declarations indicated that the UIM limit on the vehicle was $500,000—and the insurer changed a premium accordingly.  The following year, the insurer reduced the UIM limits per the mother’s prior waiver, but did not obtain a new waiver.  The insurer argued that the lowered limits were appropriate, and were the result of a scrivener’s error.

The Court of Appeals disagreed with the insurer’s argument.  Washington follows a “materiality” standard, which requires the insurance company to obtain a new waiver each time there are material changes to the policy.  Johnson v. Farmers ins. Co. of Wash., 117 Wn.2d 558, 817 P.2d 841 (1991).  Per the Johnson case, the Court of Appeals determined the insurance company was required to obtain a new waiver because there was a material change to the UIM limits.

Admissibility of Loss Reserves

During trial, the court admitted evidence of the insurer’s loss reserves.  The evidence showed that shortly after the accident, the insurer was aware that Kenny was likely 100 percent at-fault and set its liability reserve for $1.5 million—the full amount of liability and UIM coverage limits available.  The insurer objected to the ruling on the basis that the information was irrelevant and more prejudicial than probative.

The Court of Appeals agreed with the trial court and held that the reserve information was admissible in this case.  Citing a Colorado case, Silva v. Basin W., Inc., 47 P.3d 1184 (Colo. 2002), the Court of Appeals held that reserve information may be admissible in bad faith litigation.  According to the court, any prejudice could be offset by the insurer calling an expert or employee to testify concerning the purpose of reserves.  Although the court noted it was preferable that reserve information not be admitted, it may be admissible in a case with facts such as this.

Attorney Fees

Finally, the Court of Appeals addressed the trial court’s decision to award a multiplier of 1.5 to the plaintiff’s attorney fees of $1,071,470, for a total attorney fee award of $1,563,803.  The insurance company argued that the trial court failed to properly scrutinize the time expended by the attorneys and the circumstance of the case did not warrant imposition of a lodestar.  The Court of Appeals addressed the considerations required under Washington law and ultimately upheld the entire attorney fee award.

Maloney Lauersdorf Reiner frequently litigates Washington insurance coverage cases involving issues similar to those involved in this case.  Please contact us with any questions concerning the issues addressed in this case or in any other matter you see in the Insurance Coverage Blog.

 

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