On behalf of Cross Border Law posted in BC accident on Monday, May 5, 2014.
When a claim is made against a defendant driver with minimum insurance limits, this reality poses a risk for a badly injured plaintiff, who, at least in British Columbia, is fortunately able to access his or her own underinsurance up to a minimum of $1,000,000 per person. But access to one’s own underinsurance does not preclude a separate potential action against the defendant’s insurer for bad faith.
Insurers owe their clients (defendants) a duty to protect their personal assets from the risk of an excess judgment, and to make reasonable efforts to settle a claim within the policy limits of available insurance if it is possible to do so. Should the insurers value their desire to save money over the risk the case poses to the defendant’s assets, the insurer might commit “bad faith” against the defendant, such that they would be liable for an excess judgment beyond the policy limits – a source whose availability is unlikely to be impaired by bankruptcy, fraudulent attempts to conceal assets, or a general inability to pay.
The following is admittedly a complicated blog entry, and most of our readers should stop here. If you’re a lawyer considering this issue, read on. It’s in fact taken from our own research in trying to solve the predicament of this entry’s title-Preserving Joint and Several Liability for Bad Faith involving Multiple Defendants.
THE INSURER’S DUTY TO SETTLE WITHIN POLICY LIMITS
Washington law recognizes a host of duties that an insurer must fulfill to its insureds. Some of these duties are contained in laws passed by the Washington legislature, while others have developed from “common law” judicial precedents. For example, Tank v. State Farm Insurance Co., 105 Wn.2d 381 (1986) established the general rule that an insurer must refrain from engaging in any action that demonstrates a greater concern for the insurer’s monetary interest than the insured’s financial risk. This principle has been interpreted to include situations where an insurer was presented with an opportunity to settle a case posing great risk to the insured’s personal assets for a sum within the policy limits, but declines to do so. If the facts later illustrate that the insurer ignored clear evidence of the risks posed to the insured, the insurer may later be found liable for paying the entire judgment, including the portion in excess of the policy limits. See Evans v. Continental Causalty Co., 40 Wn.2d 614 (1952); see also Besel v. Viking Insurance Co. of Wisconsin, 146 Wn.2d 730 (2002).
The Besel case provides a strategy for maximizing an insurer’s risk, and involves three basic steps:
(1) entry of a consent judgment for the “fair value” of the claim;
(2) execution of covenants not to execute against the defendants beyond the limits of their available insurance; and
(3) assignment of the defendants’ collective bad faith rights to the claimants.
Under RCW 4.22.060, the court is required to conduct a reasonableness hearing to ensure the amount of the settlement was supportable by the circumstances, and not the product of fraud or collusion.
Besel stands for the proposition that the difference between the insurance limits and the value of the settlement approved by a court through RCW 4.22.060 sets the benchmark for evaluating the damages suffered by the insured (or their assignee) in the subsequent bad faith litigation. Besel also rejects the notion that the insured suffered no harm from the insurer’s conduct by virtue of the covenant not to execute. Finally, Besel establishes that the insured has the right to settle a claim on its own behalf, irrespective of any “consent to settle” or “cooperation” clauses in the insurance agreement, if the insurer has acted with negligence or bad faith in refusing to settle the claim for the policy limits (or less).
Unfortunately, there’s no provision in the caselaw under RCW 4.22.060 for allocating fault amongst the parties. Indeed, Price v. Kitsap Transit stands for the proposition that the judge’s authority in a reasonableness hearing is limited to evaluating the fairness of the settlement amount and nothing more.
A “perfect scenario” for resolving a case against multiple defendants would be the entry of a consent judgment which allocates fault…..and then an acceptance of that allocation, with preservation of joint and several liability against any insurer whose conduct led to an inability to settle within the policy limits. However, a settlement executed under RCW 4.22.060 expressly extinguishes any right of contribution between settling and non-settling defendants. If contribution has been extinguished, joint and several liability seems patently unfair. The insurers will undoubtedly argue that joint and several liability does not just “carry over” from the tort litigation to the bad faith litigation.
The problem is one of fundamental fairness for the insurer. If the reasonableness inquiry isn’t broad enough to permit a binding allocation of fault, what inquiry might be? It seems clear that if one seeks to bind defendants to an allocation of fault by way of the settlement process, one would need to propose another method alongside the reasonableness hearing for doing so.
Does RCW 4.60 offer a Solution?
There may be a way to accomplish a binding allocation of fault which has been approved by the court for fairness. RCW 4.60 deals with “judgments by confession”, a species of consent decree which appears to have been (1) usually used in the context of property disputes, and (2) not the source of much reported case law for the last 75 years. Still, the statutes are on the books, so they have to mean something – and they might be used to fill the gaps in the reasonableness hearing process.
Take a quick look at these short statutes:
RCW 4.60.010 authorizes the use of these judgments, without limitation to type of action.
RCW 4.60.060 requires every judgment by confession to include a written statement by the defendant which states the amount owing to the plaintiff and a concise statement of the facts supporting the indebtedness, and a recitation of why the debt is “justly due”.
RCW 4.60.070 suggests that the court must evaluate the writing supporting a judgment by confession for sufficiency before agreeing to enter the stipulated judgment. Upon entry, a judgment by confession operates the same as any other judgment.
Arguably, any Besel style settlement could be submitted to the court for review under both RCW 4.22.060 and RCW 4.60 et. seq. The reasonableness hearing, addressing whether the dollar amount is fair and not the product of collusion, is more of a damages inquiry with some limited evaluation of liability. The judgment by confession would be supported by a statement of facts supporting the allocation of fault between the parties, and could be used to focus squarely on the evidence in favor of the liability breakdown. Presumably, the court could conduct some limited evidentiary inquiry into liability pursuant to its authority to evaluate the sufficiency of the writing supporting the confession judgment. The Claimant wants the court to do this – because the more the court does to establish the propriety of the Claimant’s allocation of fault, the less likely the insurers will be able to collaterally attack it in a subsequent bad faith suit.
The use of the “confession by judgment” statute to “plug the holes” in RCW 4.22.060 is a novel approach. There may be other, simpler ways of obtaining a binding allocation of fault between multiple defendants in the context of a consent decree. Apparently, no one has attempted to completely settle a case with multiple co-defendants and allocate fault through the use of a consent judgment and had their case go up on appeal. The judgment by confession statute may at least provides a solution to offer a judge should one get to the point where judicial approval is required for a settlement.