In Hidalgo et al. v. Barker et al. ___Wn. App. __, __P.3d__ ;  No. 30544-9-III (Sept. 10, 2013), the Washington Court of Appeals addressed the following issues of first impression in Washington State with regard to the determination of the reasonableness of a covenant judgment: 

The answer to the first question is “no.”  Absent a material change in one or more reasonableness factors, a court that has already conducted a reasonableness hearing and determined a reasonable settlement amount for those parties is not required to entertain evidence and argument in support of revising that amount.

The answer to the second question is “yes.”  It is within the trial court’s discretion to either include or exclude prejudgment interest for the period between the date of settlement and the date judgment is entered.  

The Hidalgo Court also held that the trial court did not abuse its discretion when it found the parties’ first settlement agreement unreasonable and then multiplied what the court found to be the mid-point of the expected verdict range if the case went to trial by the perceived chance of a favorable verdict to determine the reasonableness of the settlement.

Manuel Hidalgo was convicted of a crime and served over four years in prison before his judgment and sentence were reversed on the basis of the newly discovered evidence.  Mr. Hidalgo then broughta malpractice action against his public defenders and their law firm.  Westport Insurance Corporation insured the law firm and its attorneys under a professional liability policy with “wasting” limits (coverage limits included defense costs), meaning that every dollar spent defending the malpractice case reduced available coverage.

Westport appointed counsel to defend the law firm and its attorneys against Mr. Hidalgo’s claim and other related claims.  Efforts at a global settlement proved unsuccessful.   Mr. Hidalgo made several decreasing offers to settle with one of the attorneys, Mr. Stevensen, with a final offer of $75,000.  However, the claims against Mr. Stevensen were not settled.  In May 2005, after the limits of the insurance policy were exhausted, counsel appointed by Westport withdrew from the case.

In May 2007, Mr. Stevensen reached an agreement with Mr. Hidalgo to settle for a $3.8 million covenant judgment. The Hidalgo/Stevensen settlement agreement included a covenant not to execute against Mr. Stevensen  in exchange for  an assignment of Mr. Stevensen’s claims against Westport.  The agreement also provided for prejudgment interest from the date of the agreement until the entry of judgment and for post-judgment interest from date of entry.  In addition, the settlement was contingent on the court approving it as reasonable.

In February 2009, after reviewing “voluminous” briefing from both sides, the trial court conducted a reasonableness hearing lasting about three hours.  At the conclusion of the hearing, the court rejected the $3.8 million settlement figure as unreasonable and ruled that the reasonable settlement amount was $688,875.  The trial court stated that it had considered the nine reasonableness factors set forth in Glover v. Tacoma Gen. Hosp., 98 Wn.2d 708, 717, 658 P.2d 1230 (1983), overruled on other grounds by Crown Controls, Inc. v. Smiley, 110 Wn.2d 695,  756 P.2d 717 (1988), but explained that its conclusion focused on just two Glover factors:  the merits of the plaintiff’s liability theory and the merits of the defense theory.  The trial court found a probable range of damages for a legal malpractice case involving incarceration and the probability of Mr. Hidalgo’s success at trial.  Using these numbers, the trial court multiplied the mid-point of the expected verdict range  by its evaluation of the chance of a favorable verdict to arrive at $688,875 as the reasonable settlement amount.  Because the settlement was contingent on the trial court’s approval of the $3.8 million settlement figure, the settlement was void by its terms.  The litigation continued. 

In May 2010, Mr. Stevensen and Mr. Hidalgo entered into a new settlement agreement. This time, the agreed settlement amount was $2.9 million “or such amount as is found reasonable by the proper court.”  Mr. Hidalgo asked the trial court to rule on the reasonableness of the $2.9 million settlement. The trial court refused.  Instead, the court signed an order on its February 2009 reasonableness determination that included no findings of fact but did append and incorporate a transcript of its oral ruling from the 2009 hearing.   

Before judgment was entered, Mr. Hidalgo argued that he was entitled to prejudgment interest from the date of the agreement.  The trial court agreed and ruled that prejudgment interest of $134,755 was appropriate. The court also awarded post judgment interest at the statutory rate of 12 percent.  Mr. Hidalgo appealed and Westport cross-appealed.  

The Hidalgo Court ruled that that the trial court did not abuse its discretion by refusing to revisit its original reasonableness determination after the parties settled the second time.  The Court of Appeals explained that if a court determines the settlement is unreasonable, RCW 4.22.060(2) has been construed to require the court to then determine a reasonable settlement value.  “That stand-alone reasonable settlement amount will necessarily be independent of other terms of the parties’ agreement.”  Therefore,  if the “parties renegotiate the terms of a settlement agreement after the trial court determines a reasonable settlement amount, then, no further hearing should be required unless a different issue ‘of the reasonableness of the amount to be paid’ is presented.”

A second reasonableness hearing may be necessary if “[d]evelopments in the lawsuit that affect the merits of the claims, the defenses, or other Glover factors might result in a different issue of reasonableness.”  However:

short of a material change in one or more Glover factors, a new settlement agreement entered into by two parties does not require a court that has already conducted a reasonableness hearing and determined a reasonable settlement amount for those parties to entertain evidence and argument in support of revising that amount.

Accordingly, the Court of Appeals found that it was not an abuse of discretion for the trial court to refused to revisit its prior determination when “it saw nothing in the parties’ submissions that would cause it to revisit its prior determination.”

Next, the Hidalgo Court rejected Mr. Hidalgo’s argument that the trial court abused its discretion when it found the first settlement unreasonable and determined that $688,875 was a reasonable settlement amount.  Mr. Hidalgo argued that the trial court (1) failed to explain how it applied the individual Glover factors; (2) ignored the eighth factor, consideration of the releasing party’s investigation and preparation; and (3) abused its discretion by using a “rigid calculation” and selecting a figure that was the mean of the probable range of recovery rather than a higher figure.

The Hidalgo Court rejected each of these arguments in turn and held that:

Next, the Court of Appeals addressed Westport’s cross appeal challenging the trial court’s inclusion of prejudgment interest and its ruling that the 12 percent contract rate applied to post judgment interest, rather than the lower market-based rate for judgments founded on tortious conduct.  As to post judgment interest, Westport argued that the tort interest rate should apply because the underlying claim against Stevensen was a malpractice claim. The Court of Appeals disagreed.  Quoting Jackson v. Fenix Underground, Inc., 142 Wn. App. 141, 146, 173 P.3d 977 (2007), the Hidalgo Court held that the 12 percent contract rate applied because:

Once parties have agreed to settle a tort claim, the foundation for the judgment is their written contract, not the underlying allegations of tortious conduct.

The Hidalgo Court then addressed whether Mr. Hidalgo was entitled to prejudgment interest.  The court acknowledged that in Washington, a party’s entitlement to prejudgment interest as a question of substantive law turns on whether a claim is “liquidated” and found that Mr. Hidalgo’s claim was not liquidated.  Nevertheless, the Court of Appeals held that it was within the trial court’s discretion to either include or exclude prejudgment interest in its reasonableness determination.

RSUI Indemnity Company, Inc. v. Vision One, LLC, Western District of Washington case number 2:08-cv-01386-RSL, Order on Summary judgment (Dkt. No. 152) (February 21, 2013)

After the state court reasonableness action was litigated and the reasonable settlement value of the udnerlying action was determined to be $2.3M, Vision One, the insured’s assignee, then sought summary judgment against  insurer, RSUI, that the presumptive measure of RSUI’s liability was $2.3 million, the value of the settlement between Vision One and the insured in the underlying litigation (that was found reasonable). RSUI opposed Vision One’s motion on the basis that there must be a finding of bad faith before the presumptive value of the damages may exceed the limits of the underlying insurance policy.  In this coverage action, the court had previously ruled that the RSUI policy provided coverage, but that RSUI had not committed a bad faith coverage determination, but left open whether RSUI had committed bad faith in its claims handling.

First, RSUI opposed Vision One’s request for presumptive damages on the basis that presumptive damages were not appropriate in this case because the insured had not been harmed by the underlying litigation.  The court did not find this argument persuasive and reasoned, “Washington courts have repeatedly rejected this argument, finding that “[an] agreement not to execute does not preclude a showing of harm.” Besel, 146 Wn.2d at 737 (alteration in original) (quoting Safeco Ins. Co. of Am. v. Butler, 118 Wn.2d 383, 397 (1992)). “[A] covenant not to execute coupled with an assignment and settlement agreement is not a release permitting the insurer to escape its obligation.” Kagel v. Aetna Life & Cas. Co., 40 Wn. App. 194, 198 (1985).”

Second, RSUI contended that even if presumptive damages were appropriate in this case, the amount of the presumed damages cannot exceed the $1 million limit of the  policy with RSUI, absent a finding of bad faith. Vision One, relying primarily on Mut. Of Enumclaw Ins. Co. v. T&G Const., Inc., 165 Wn.2d 255 (2008), argued that this Court’s earlier finding of coverage under the RSUI policy and the recent appellate court decision affirming the trial court’s reasonableness finding mandated a finding that the presumptive measure of RSUI’s liability in this case is $2.3 million, the reasonable settlement value.

The court found that presumptive damages were appropriate in this case, and having found so, the next issue that court must address is what the amount of the presumptive damages should be.  The court reasoned, “Unlike the present case, T&G Construction did not involve a covenant judgment that exceeded the insured’s policy limits. Vision One concedes that T&G Construction does not expressly address the circumstances presented here, but it concludes that the Washington Supreme Court nevertheless intended its holding in that case to apply to situations in which the covenant judgment is higher than the insured’s policy limits. The Court disagrees.”

The Court reasoned that bad faith needed to be shown to have a presumption of damages in excess of policy limits.  Although the court had earlier ruled that RSUI did not act in bad faith by making an unreasonable coverage determination, the court indicated that Vision One may still be able to establish RSUI’s bad faith based on its failure to investigate, which could enable Vision One to recover more than the policy limits.  That issue was reserved for trial, so in order to get a presumptive measure of damages above policy limits, the court ruled that Vision One must prove RSUI’s bad faith claims handling at trial. 

The court also found that Vision One was entitled to pre-judgment interest on the presumptive measure of damages.  The court reasoned, “Having determined that coverage existed and that the presumptive measure of damages is the policy limit, the Court finds that the amount Vision One seeks to recover is a “liquidated sum,” and therefore, Vision One is entitled to prejudgment interest.”  Vision One argued that it was entitled to a 12% rate for prejudgment interest and RSUI argued that the rate should be set under RCW 4.56.110(3)(b) for tort claims.  The court found that issues of fact regarding the components of the final judgment existed, and that determining how the interest rate would be set was a question to be left for after trial.

First Mercury Insurance Company v. Miller Roofing Enterprises, WDWA Case No. 2:11-cv-00105-JCC, Dkt. No. 51, Order on summary Judgment (February 22, 2013)

This coverage action arises out of a construction defect claim alleging water intrusion due to roofing repairs made on an EIFS clad building.  The Roofer’s insurer, First Mercury,  defended the roofer in the underlying construction defect suit under a reservation of rights and then filed a declaratory judgment action seeking a determination of no coverage.  The insurance policy at issue contains the following EIFS exclusion:

First Mercury moved for summary judgment that the policy did not cover the breach-of-oral-contracts damages Miller Roofing allegedly owes McClincy Brothers and Tim McClincy in the underlying construction defect action.  The court did not hesitate in finding that the EIFS exclusion applied to bar coverage:

“The EIFS exclusion bars coverage. Defendants do not contest that the alleged breach-of-oral-contracts damages are for “property damage” arising out of Miller Roofing‟s “work” on the roof. They do not contest that “exterior insulation and finish system‟ is used on any part of th[e] [building].” And they do not contest that the roof is “an[] exterior component, fixture or feature of . . . that [building].” Under the plain language of the EIFS exclusion, there is no coverage. See, e.g., Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co., 292 S.W.3d 48, 62–63 (Tex. Ct. App. 2006), reversed in part on other grounds, 279 S.W.3d 650 (Tex. 2009).”

Defendants argued that the EIFS exclusion did not apply because the leak was the result of “defective workmanship to the roof itself,” and “Miller Roofing did not install the EIFS on the building, nor did it undertake to make any repairs to the EIFS itself.”   The court stressed that “[e]ven if that is true, it is irrelevant. The exclusion applies not only to property damage arising from EIFS-related work by the insured; it applies to property damage arising from “any” work by the insured on an exterior component, fixture, or feature of a structure, as long as “exterior insulation and finish system‟ is used on any part of that structure.” Those conditions are met here.”