Bird v. Best Plumbing Grp., LLC

JAMES A. BIRD, Respondent, v. BEST PLUMBING GROUP, LLC, Respondent, and CONTRACTORS BONDING INSURANCE COMPANY BOND NO. SF3262, Defendant,

and

FARMERS INSURANCE EXCHANGE, Petitioner.

ALLSTATE INSURANCE COMPANY, as subrogee for JAMES A. BIRD, Plaintiff, v. BEST PLUMBING AND HEATING, INC., a/k/a BEST PLUMBING/) HEATING INC., Respondent, and FARMERS INSURANCE EXCHANGE, Petitioner.

NO. 86109-9

SUPREME COURT OF THE STATE OF WASHINGTON EN BANC

Filed October 25, 2012

FAIRHURST, J.—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.

I. FACTS AND PROCEDURAL HISTORY

The facts of this case began inauspiciously over six years ago when James A. Bird returned home from work. He and his wife live on hillside, waterfront property in a house located downhill, away from the street. As Bird approached the house, a sudden burst of sewage erupted from the ground. The sewage went into his eyes, ears, nostrils, and mouth. In the shock and confusion, Bird fell to the ground, cracked his elbow, and began vomiting. He also developed migraines soon thereafter.

The sewage burst was caused by an employee of Best Plumbing Group LLC, who entered Bird's property without permission and cut a pressurized sewage pipe in three places. Bird's next door neighbor had contacted Best to repair a leaking sewer line. The cut sewage pipe extended about 70 feet uphill from the house to the city sewer and pumped wastewater from the house at several times throughout the day. The sewer pump cycled at the moment Bird passed the area cut by Best.

Best told Bird it would repair the line but failed to do so completely. Over the course of eight months, sewage continued to escape from the pipe with every pump cycle. Bird alleged the sewage flow caused dangerous hillside instability on his property as well as extensive damage to his residence in the form of toxic mold from moisture and sewage intrusion. He also suffered a heart attack, which heattributed to the stress of physically removing sewage-laden material from the property.

After Bird hired a number of experts to determine the extent of the damage and necessary repairs, the city of Seattle ordered the mitigation stopped because of concerns about the hillside's stability. Bird submitted a series of proposals to the city, escalating in cost, that were each rejected until the city ultimately approved a soldier-pile retaining wall. The estimated cost of the wall was $851,176.78. Allstate Insurance Company paid Bird $262,000 under his homeowner's insurance policy for home repairs and remediation.

Bird subsequently filed suit against Best alleging trespass and negligence. Best's liability insurer, Farmers Insurance Exchange, appointed defense counsel without a reservation of rights. Allstate filed a separate subrogation claim against Best for the $262,000 payment to Bird, and the two cases were consolidated. The trial court eventually granted partial summary judgment to Bird on liability and proximate cause, leaving the issue of damages for trial.

Shortly before trial, Bird made a settlement demand for $2 million, the limits of Best's insurance policy with Farmers. The demand followed Bird's counsel's assertion that Best may be liable under the treble damages provision of the trespass statute, RCW 4.24.630. Farmers then made a counter settlement offer of $350,000.Worried about potential exposure beyond the limits of his Farmers policy, Best's owner consulted an outside attorney with whom he had worked in the past. That attorney negotiated a settlement between Bird and Best that called for a $3.75 million stipulated judgment against Best. The settlement also included an assignment of Best's claims against Farmers and a covenant not to execute against Best.

After Farmers received notice of the settlement, Bird moved for a determination that the settlement was reasonable under RCW 4.22.060. The trial court granted Farmer's motion to intervene, motion for a continuance, and motion for discovery, but denied its motion for a jury trial. The reasonableness hearing was conducted over the course of four days and was fiercely contested, resulting in a trial court record, now on review, exceeding 3,000 pages. After evaluating the damages claims, the trial court trebled the amounts, then discounted by 25 percent based on a "trebling claim risk," and arrived at a total figure of $3,989,914.83. Clerk's Papers (CP) at 3446. The trial court therefore concluded the parties' $3.75 million settlement was reasonable.

Farmers appealed the trial court's denial of the request for a jury trial, as well as the reasonableness determination. The Court of Appeals affirmed the trial court, Bird v. Best Plumbing Group LLC, 161 Wn. App. 510, 260 P.3d 209 (2011), anddenied a subsequent motion for reconsideration. We then granted Farmers' petition for review. Bird v. Best Plumbing Group LLC, 172 Wn.2d 1010, 259 P.3d 1109 (2011).

II. ISSUES

A. Does an insurer have a constitutional right to a jury trial on the reasonableness of a covenant judgment between an insured defendant and a plaintiff under RCW 4.22.060?

B. Did the trial court abuse its discretion in determining the covenant judgment was reasonable?

III. ANALYSIS

On the primary issue, we hold an insurer does not have a constitutional right to a jury trial on the reasonableness of a covenant judgment under RCW 4.22.060. We also hold the trial court did not abuse its discretion in determining the covenant judgment was reasonable. We affirm the trial court and Court of Appeals.

A. Farmers Does Not Have a Constitutional Right to a Jury Trial on the Reasonableness of a Covenant Judgment

To resolve the first issue, we need a preliminary understanding of the nature of covenant judgments. We then analyze Farmers' argument that the reasonablenessof a covenant judgment must be determined by a jury trial, along with its brief due process contention in light of our constitutional jurisprudence.

1. Covenant judgments are determined reasonable under RCW 4.22.060

We have recognized an insured defendant may independently negotiate a pretrial settlement if the defendant's liability insurer refuses in bad faith to settle the plaintiff's claims. Besel v. Viking Ins. Co., 146 Wn.2d 730, 736, 49 P.3d 887 (2002). This protection for the insured augments another well established rule: "[I]f an insurer acts in bad faith by refusing to effect a settlement for a small sum, an insured can recover from the insurer the amount of a judgment rendered against the insured, even if the judgment exceeds contractual policy limits." Id. at 735.

As happened in this case, the typical settlement agreement involves three features: (1) a stipulated or consent judgment between the plaintiff and insured, (2) a plaintiff's covenant not to execute on that judgment against the insured, and (3) an assignment to the plaintiff of the insured's coverage and bad faith claims against the insurer. Id. at 736-38; Thomas V. Harris, Washington Insurance Law § 10.02, at 10-3 (3d ed. 2010). This type of settlement agreement, often referred to as a covenant judgment, "does not release a tortfeasor from liability; it is simply 'an agreement to seek recovery only from a specific asset—the proceeds of the insurance policy and the rights owed by the insurer to the insured.'" Besel, 146 Wn.2d at 737 (quoting Safeco Ins. Co. of Am. v. Butler, 118 Wn.2d 383, 399, 823 P.2d 499 (1992)).

If the amount of the covenant judgment is deemed reasonable by a trial court, it becomes the presumptive measure of damages in a later bad faith action against the insurer. Id. at 738. The insurer still must be found liable in the bad faith action and may rebut the presumptive measure by showing the settlement was the product of fraud or collusion. Mut. of Enumclaw Ins. Co. v. T&G Constr., Inc., 165 Wn.2d 255, 264, 199 P.3d 376 (2008).

As a policy matter, we have carefully considered and endorsed the propriety of this process:

An insurer refusing to defend exposes its insured to business failure and bankruptcy. An insurer faced with claims exceeding its policy limits should not be permitted to do nothing in the hope that the insured will go out of business and the claims simply go away. To limit an insurer's liability to its indemnity limits would only reward the insurer for failing to act in good faith toward its insured. We therefore hold that when an insurer wrongfully refuses to defend, it has voluntarily forfeited its ability to protect itself against an unfavorable settlement, unless the settlement is the product of fraud or collusion. To hold otherwise would provide an incentive to an insurer to breach its policy.

Truck Ins. Exch. v. VanPort Homes, Inc., 147 Wn.2d 751, 765-66, 58 P.3d 276 (2002) (citation omitted). We have equally acknowledged the danger for collusive or fraudulent settlements but concluded the reasonableness determination "protect[s] insurers from excessive judgments especially where . . . the insurer has notice of the reasonableness hearing and has an opportunity to argue against the settlement'sreasonableness." Besel, 146 Wn.2d at 739.

There are nine factors the trial court must consider to determine if a settlement is reasonable:

(1) [T]he releasing party's damages; (2) the merits of the releasing party's

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