Insurer must pay excess consent judgment for bad-faith failure to settle for policy limit
By Jeffrey P. Downer

When a liability insurer commits bad faith for failing to settle within its policy limit and its insured then consents to judgment in a higher amount and assigns its coverage rights to the claimant, the insurer must pay the full judgment, the Washington Supreme Court has held.

In Besel v. Viking Ins. Co., no. 71071-6 (July 2002), the Court held that such "paper judgments," coupled with assignments of bad-faith rights, are enforceable so long as they are reasonable under the circumstances. Insurers long have fought paying such agreements between claimant and insured because they expressly shield the insured against any personal liability and therefore represent no compensable harm to the insured. Besel is the most pointed Washington case yet to reject that argument and to order the insurer to pay the full consent judgment.

In Besel, Robert Besel was a passenger in Mark Ralston’s car. Ralston was driving drunk. Attempting to elude police, Ralston lost control of his speeding truck and hit a tree, injuring Besel and two other passengers.

Ralston had liability insurance with Viking. The policy had limits of $25,000 per person and $50,000 per accident. The value of Besel’s injuries clearly exceeded those policy limits. Besel hired a lawyer who made claim to Viking on Besel’s behalf. Within two months of the accident, Besel’s lawyer demanded Viking’s policy limits.

Over the next several months, Besel’s counsel repeatedly communicated with Viking, and Viking repeatedly failed to respond timely. More than seven months after the accident and more than five months after the first demand for policy limits, Viking told Besel’s counsel that it refused to settle for policy limits because the claims of the three passengers added up to more than the $50,000 per-accident policy limits.

By this time, Besel had sued Ralston and obtained a default judgment against him. Viking hired a lawyer to defend Ralston who obtained an order setting aside the default judgment, but only as to damages; the trial court held against Ralston on liability and causation.

Eight months later, Besel and Ralston settled. Besel covenanted not to enforce the judgment against Ralston’s personal assets. In return, Ralston consented to a $175,000 judgment and assigned to Besel all of his rights of coverage and bad faith against Viking. Some three months later, Viking paid Besel its $25,000 policy limits.

Besel then sued Viking alleging bad faith and similar claims, seeking the $150,000 balance of the $175,000 consent judgment. Both Viking and Besel moved for summary judgment. The trial court dismissed most of Besel’s claims and held that any bad-faith damages were limited to the $25,000 policy limit, which Viking had paid already.

Besel appealed. The Court of Appeals reversed, holding that Viking’s bad faith could render it liable for more than its policy limit, but failing to suggest any criteria by which damages could be measured. The Supreme Court accepted review to determine that measure of damages.

Viking argued that Ralston had suffered no harm because Besel had promised not to execute the judgment against him, so that there was no compensable claim for Ralston to assign to Besel. The Besel Court disagreed, adopting as its holding earlier dicta that when an insurer acts in bad faith, "it is in no position to argue that the steps the insured took to protect himself should inure to the insurer’s benefit."

The Besel Court held that the face amount of the consent judgment is enforceable if it is reasonable, applying the same criteria as those that courts apply when weighing the reasonableness of settlements in contributory-fault situations. Those factors include the claimant’s damages; the merits of the claim and defenses; the released person’s relative fault; the risks and costs of continued litigation; the released person’s ability to pay; and any evidence of collusion or fraud in the settlement. But this ignores that as between claimant and insured, a consent judgment is almost always reasonable because both achieve their objectives — the claimant wants the largest possible consent judgment, and the insured wants to avoid personal liability.

Refusal to divulge policy limits not bad faith
By Aaron V. Rocke

Lliability insurer’s refusal to tell a personal-injury claimant the amount of its policy limits prior to the claimant’s filing suit is not necessarily a violation of its duty of good faith to its insured, the Washington Court of Appeals recently held.

In Smith v. Safeco Ins. Co., no. 26721-7-II (July 2002), Linda Bryce rear-ended a car driven by Janice Smith. Smith hired a lawyer. Nearly two years then passed, and a "claims specialist" in the office of Smith’s lawyer told a Safeco adjuster over the telephone that Smith had suffered a closed head injury, memory loss, almost $20,000 in medical bills, and past and future wage loss. Neither the claims specialist, Smith, nor her lawyer documented any of these assertions to Safeco.

In the several months preceding this conversation, Smith demanded that Safeco disclose Bryce’s liability-policy limits. Safeco declined to do so, at least until Smith or her counsel provided documentation concerning her claim. Safeco asserted that it did not have enough information to believe that the value of the demand exceeded Bryce’s policy limit. Safeco also asserted that it did not know whether Bryce would consent or object to such disclosure.

Smith sued Bryce. Two months later, Smith sent a written description of her claim, including her assertion that her out-of-pocket losses were more than $612,000. Smith demanded Safeco’s "full policy limits" if those limits were less than $1.5 million. Safeco promptly informed Smith that Bryce’s policy limits were $100,000, and two months later Safeco paid Smith those limits.

Soon thereafter, Smith and Bryce settled. Bryce agreed to have partial judgment entered against her in the amount of $100,000 and to assign to Smith any rights she might have against Safeco. Smith agreed not to enforce the judgment against Bryce.

Safeco filed a declaratory-judgment action against Smith and Bryce, alleging that it had withheld policy-limits information because disclosure of limits was often against its insured’s best interests. Smith amended her personal-injury complaint to make claim against Safeco. The trial court consolidated the two actions. Smith and Safeco cross-moved for summary judgment on the issue of whether Safeco’s refusal to divulge the policy limits was bad faith. The trial court agreed with Safeco, and Smith appealed.

Smith argued that Safeco owed her, as claimant, a duty of good faith. The Court of Appeals summarily rejected this assertion, following Washington case law that such third-party claimants have no right to claim bad faith in their own right.

Smith next argued that Safeco breached its duty of good faith to Bryce, who had suffered damages as a result. Smith asserted this in her role not as claimant but as assignee of Bryce’s claims.

The Smith court noted that neither party cited a statute or rule specifying whether disclosure of policy limits was required, and the court had found none.

But the Smith court rejected Smith’s claim that Safeco had violated its duty of good faith to Bryce. The court noted, "Smith fails to distinguish benefit to a third-party claimant from benefit to the insured. Although compliance [with a claimant’s demand for disclosure of policy limits] may always benefit the third-party claimant, it may or may not benefit the insured," depending on the circumstances. For instance, if disclosure would cause the claimant to increase her settlement demand, it might be better for the insured to withhold that information.

The court declined to hold that a liability insurer always may withhold policy-limits information. Instead, "the insurer must disclose the insured’s policy limits if a reasonable person in the same or similar circumstances would believe that disclosure is in the insured’s" best interests. The insurer need not disclose if a reasonable person would believe that disclosure would harm the insured’s interests or would not have enough information to determine that disclosure would serve those interests.

The Smith court’s decision was made easier by the failure of Smith and her counsel to document her claim until after Safeco had divulged the policy limits.

Around The Firm

David L. Martin has been named by Washington Law & Politics magazine as one of the top 100 lawyers in the state of Washington. Congratulations, Dave! … Washington Law & Politics has named Jeffrey P. Downer a litigation Superlawyer. The award recognizes skill in a lawyer’s practice area. The magazine previously named Lee Smart shareholders Dave Martin, Michael A. Patterson, Steven J. Jager, August G. Cifelli, and Richard C. Robinson as Superlawyers.

Joel E. Wright and Jennifer M. Ilenstine won dismissals for attorney clients in Cunningham v. City of Wenatchee and Gausvik v. Perez, two federal civil-rights claims arising out of the Wenatchee "sex ring" prosecutions in Chelan County in the mid-1990s. Plaintiffs alleged that their attorneys inadequately defended them in the criminal cases and violated their civil rights. But federal law requires "state action," and attorneys are not "state actors" because they owe undivided loyalty to their clients, whose interests conflict with the state’s. The federal court dismissing the federal claims and then dismissed the remaining state claims because they declined to exercise supplemental jurisdiction. … Joel Wright and Stacy D. Heard won a summary judgment motion dismissing plaintiff's claim in Christensen v. Walker, a legal-malpractice action arising from a family-law case. Plaintiff claimed that the attorney violated ethical rules governing his acting as an intermediary in assisting the plaintiff and her ex-husband in their dissolution. Plaintiff agreed to the attorney’s role in several documents, including the fee agreement and separation agreement. The court dismissed the claims against of Joel and Stacy’s client.

Tammy L. Williams and Shahzad Q. Qadri won summary judgment dismissal in Godfrey v. Argonne Family Restaurants, a premises-liability case in Spokane. Plaintiff alleged that she tripped on a raised sidewalk leading into a restaurant. The judge agreed that the sidewalk was not dangerous, and there was no evidence of prior incidents in the area. He noted, "80 percent of the sidewalks in Spokane are in worse condition than this sidewalk," and that plaintiff had used this sidewalk to enter the restaurant on three prior occasions without difficulty. … Philip B. Grennan and Aaron V. Rocke won the real-estate malpractice action of Case v. Langer. Plaintiff bought beachfront property that had large rocks as breakwater. The Army Corps of Engineers had told the seller and other landowners that they might have to remove the rocks, but the issue was unresolved. After the sale to plaintiff, the federal government sued for removal of the breakwater. Plaintiff sued the seller, who then sued her real estate agent, claiming that he negligently assisted her filling out a property-disclosure form. Phil and Aaron moved for summary judgment on the agent’s behalf, arguing that the seller had no right to rely and that the seller had possessed more information than the agent did. The court agreed and dismissed the claims against Phil and Aaron’s client.

Mike Patterson, Duncan K. Fobes, and Marc Rosenberg won Pruitt v. Island County, a wrongful-death road-design claim, on summary judgment. Mike persuaded the court that the state, not the county, had de facto control over the design and maintenance of the county road in question.