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November 9, 2009
(This article first appeared in the winter 2009 edition of Risk, Howrey’s insurance coverage newsletter.)
Howrey LLP
The Washington Supreme Court has balanced “the interests of an insured defendant in reaching a reasonable settlement with a claimant against the insurer’s interest in fully litigating its insured’s legal obligation to that claimant.” In doing so, the court held that if a coverage question turns on the same facts or law at issue in the underlying dispute between the claimant and the insured, the insurer will be bound by the results of the underlying trial or any judicial finding of a settlement’s reasonableness, barring a showing of collusion or fraud by the insured.
The insurance dispute arose from a homeowners’ association’s lawsuit against its developer relating to the poor installation of siding on recently-constructed homes, which resulted in a rot and mold problem. The developer then filed a third-party action against its general contractor, which, in turn, filed a third-party action against its subcontractors, including a siding subcontractor, T&G Construction. After receiving notice of the lawsuit, T&G's commercial general liability insurer, Mutual of Enumclaw, agreed to defend T&G under a reservation of rights.
A year into the underlying litigation, T&G's defense counsel discovered that the state had administratively dissolved T&G three years before, thus barring any lawsuits brought against T&G more than two years after T&G's dissolution. Because the homeowners’ association filed its lawsuit more than two years after T&G's dissolution, T&G moved for summary dismissal of the claim on statute of limitations grounds. The trial court denied the motion, finding that the limitations period did not apply to dissolved corporations, such as T&G, that had notice of claims against it before dissolution.
After a series of mediations, most parties settled. T&G settled with its subcontractors. But T&G did not participate in the larger, global settlement with the other parties, likely because its insurer balked at making any large contributions to the global settlement on behalf of T&G. After the trial court ordered T&G to participate in the global settlement negotiations, T&G finally agreed to settle the remaining claims against it for $3.3 million.
The insurer, despite its decision to not participate in the settlement negotiations, appeared at the trial court’s hearing on the reasonableness of the settlement, where the insurer objected to T&G's settlement. After determining that a jury would likely reject T&G's statute of limitations defense and enter a significant damage award against T&G, the trial court concluded that T&G's settlement was reasonable. After a motion to reconsider by the insurer, the court reduced the settlement to $3 million.
In a subsequent declaratory judgment action, the insurer asked the court to find that the statute of limitations had expired on the claims against T&G, that T&G's damages were outside the scope of coverage and that, by settling, T&G breached its duty to cooperate with its insurer. According to the insurer, the insurance policy obligated it to pay only those sums that T&G became legally obligated to pay as damages because of property damage, thereby entitling the insurer to an independent determination of the facts establishing T&G's liability. The insurer argued that “the liability suit did not resolve whether its insured was in fact legally obligated to pay damages because there was no final decision on whether the statute of limitations had run before the case was filed.”
The Washington Supreme Court rejected the insurer’s request to re-litigate the validity of T&G's statute of limitations defense, opining that, for better or worse, “what the insured is legally obligated to pay is the exact issue to be determined in the liability suit.” Mutual of Enumclaw Insurance Co. v. T & G Construction, Inc., 165 Wash.2d 255, 199 P.3d 376 (2008).
In the lawsuit, T&G -- whose interests were aligned with the insurer at the time of the underlying lawsuit -- raised its liability defenses, including its statute of limitations defense, and lost. The court believed that public policy prohibited the insurer’s request to re-litigate the very same defenses in the coverage action that already had been evaluated by the underlying trial court in the context of the request for summary dismissal and the subsequent approval of the settlement.
The Supreme Court also addressed whether a reasonable and good faith settlement establishes the fact of liability and the presumptive amount of damages in the absence of an insured’s bad faith. The court, answering in the affirmative, found that absent fraud or collusion, when an “insurer had an opportunity to be involved in a settlement fixing its insured’s liability, and that settlement is judged reasonable by a judge, then it is appropriate to use the fact of the settlement to establish liability and the amount of the settlement as the presumptive damage award for purposes of coverage.” Of course, “presumptive damages” are not the same as “covered damages” under the policy. Accordingly, the court left open the possibility that an insurer could properly litigate the extent to which the “presumptive damages” fell within the scope of the insurance policy’s coverage.
Finally, the Supreme Court rejected the insurer’s argument that T&G violated the policy’s cooperation clause, which required T&G to obtain the consent of the insurer before it settled the underlying lawsuit. The court determined that the insurer was not prejudiced by the settlement because the insurer had prior knowledge of the negotiations, refused to participate in the negotiations, and had notice of and participated in the reasonableness proceedings. The court also pointed out that the insurer owed T&G a “fiduciary-type duty” and that the insurer’s refusal to participate in the settlement negotiations put its own financial interests above T&G's interests and placed T&G at significant financial risk.
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-848-4996 or at paulberning@howrey.com or contact your Howrey attorney. For more information about Howrey’s Construction Practice Group, click here.
©2009 Howrey LLP
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