Another consent judgment enforced against liability insurer

by Jeffrey P. Downer

A Washington appellate court again has enforced against a liability insurer a judgment to which its insured had consented as part of a settlement.

In Red Oaks Condominium Owners Assn. v. Sundquist Holdings, Inc., no. 54398-9-I (Div. I May 31, 2005), Red Oaks made claim against its developer, Sundquist, for construction defects. Sundquist later tendered the defense to its liability insurer, Mutual of Enumclaw (MOE). MOE defended Sundquist under a reservation of rights. With MOE’s consent, the parties entered into two consecutive tolling agreements to stop the statute of limitations from running while they explored settlement. MOE paid for an investigation into Red Oaks' claims.

MOE then filed a declaratory-judgment action to establish that there was no coverage for Red Oaks' claims. The next day, Red Oaks and Sundquist mediated the claims and agreed on a damage amount, but MOE refused to pay. Red Oaks sued Sundquist, which immediately entered into a settlement with Red Oaks in which Sundquist stipulated to a settlement amount of more than $1.9 million, assigned to Red Oaks its rights against MOE, and received a covenant not to execute.

The agreement was contingent on the court finding the settlement reasonable. In such circumstances Washington law obligates the liability insurer to pay the face amount of such an agreed judgment against the liability insurer if the insurer acted in bad faith and if the court finds the settlement reasonable.