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.

Red Oaks requested a reasonableness hearing, but MOE did not learn of it until three days before the hearing. MOE moved to intervene and to continue the hearing so that it could conduct discovery and prepare for the hearing. The parties agreed that MOE could intervene, but the court denied the continuance. MOE chose not to participate in the hearing, because it thought that doing so might breach its duties to Sundquist in its reservation-of-rights defense. The court found the settlement reasonable and entered judgment for the agreed $1.9 million amount. MOE moved for reconsideration, which was denied, and then appealed.

MOE argued that it was denied due process because it had only three days to address reasonableness, which was too little time to prepare, and was not allowed to conduct discovery regarding the circumstances of the settlement. The Court of Appeals acknowledged that an insured might agree to an inflated settlement amount in exchange for immunity from personal liability. The court nevertheless held that MOE had enough time to prepare here, because MOE knew its duties to Sundquist long before the settlement, had ample access to the facts of the case because it had defended Sundquist, and did not explain how more time to interpret the settlement agreement would have made a difference.

Red Oaks follows Howard v. Royal Specialty Underwriting, Inc., 121 Wn. App. 372 (2004), which similarly rejected the insurer's request to conduct discovery relating to reasonableness of the settlement. Neither case adequately addresses the potential bad faith if an insurer did as these courts suggested and used defense-file materials to its own advantage. Nor does either decision observe that even defense-file materials would shed no light on whether the settlement stems from collusion between plaintiff and insured, which often is the main argument against reasonableness.

Legislature enacts more reform of condominium litigation

By Steven G. Wraith

The Washington Legislature has passed Engrossed House Bill 1848, a new statute intended to improve the quality of condominium construction and to reform construction-defect litigation involving condominiums. The statute went into effect August 1, 2005.

In 2004, the Legislature found many problems in the condominium-construction industry in Washington. Condominium owners endured water intrusion and other defects. Court decisions expanded the scope of coverage for such defects beyond the insurers' expectations. As a result, insurers were leaving the condominium market. Contractors faced higher premiums for less coverage, if they could find insurance at all. These problems were causing a decline in the condominium market, hampering the Legislature's intent to expand ownership opportunities for low-income families and for growth management.

The Act applies to certain defined "multi-unit residential buildings," which include any building with more than two attached dwelling units. The Act does not apply to hotels, motels, dormitories, care facilities, floating homes, attached dwelling units on a single platted lot, apartments, or detached townhomes. The Act applies to existing and new construction and to condominium conversions after August 1, 2005.

The portion of the Act that addresses construction quality sets new requirements for building permits for new construction or substantial repair of a condominium. Builders now must submit a building-envelope design that an architect or engineer has stamped and approved. The act also requires periodic inspections of the building envelope to obtain a final certificate of occupancy. These inspections require testing for water-penetration resistance and reviews of as-built construction. The inspector must certify that the as-built construction complies with the design documents.

The Act also requires alternative dispute resolution as a way to enforce warranties under Washington's Condominium Act. Between 30 and 90 days after a condominium-defect action begins, parties now may demand arbitration. For projects permitted after August 1, 2005, the party seeking arbitration advances the costs of the arbitration but can seek reimbursement of those costs if it wins. A losing party may appeal the arbitration decision by seeking a trial de novo in superior court, but if that party then fails to improve its position, it must pay the other party's fees and costs incurred in the trial de novo.

If arbitration is not sought, the court must set a detailed case schedule that includes deadlines for completion of investigation, disclosure of defects, and proposed scopes of repair and cost estimates. Any court-ordered mediation must begin within 14 months.

The Act contains other provisions to make condominium litigation more efficient. Experts for the parties must meet and confer in good faith to try to narrow or resolve issues pertaining to the scope and cost of repair. Either party may petition the court to appoint a neutral expert to investigate, render an opinion on any disputed issues, and potentially testify at trial.

To promote early settlement, the Act contains new rules for offers of judgment and attorney fees. Either party may submit an offer of judgment and must specify the amount of damages the party is willing to pay or receive, excluding attorney fees and costs. An offer by defendant must show that it is able to pay both damages and attorney fees and costs. If plaintiff accepts the defendant's offer, then plaintiff is the prevailing party and may recover its fees in an amount that the arbitrator or judge determines according to existing standards. If plaintiff does not accept the offer and ultimately recovers less than the offer, then defendant is the prevailing party, and plaintiff must pay defendant's costs and reasonable attorney fees incurred after the date of the offer. Plaintiff's liability for attorney fees will not exceed 5 percent of the assessed value of the condominium as a whole.

Around The Firm

Joel E. Wright and Alan M. Singer successfully resolved Devine v. Century 21, an action against a real estate broker for fraud, negligent misrepresentation, breach of contract, and violation of the Consumer Protection Act claims. Joel and Alan successfully moved for partial summary judgment on the fraud and CPA claims, and moments after the court granted that motion, handed opposing counsel a second summary judgment motion. Faced with losing the entire case, plaintiff and his counsel agreed to settle for nuisance value, ending more than four years of litigation.

Michael A. Patterson, Duncan K. Fobes, and Daniel G. Lloyd won summary judgment of dismissal in two federal cases, Startzell v. Clallam County and Tolan v. Clallam County. Tolan was a defamation action. Plaintiff alleged that the county clerk published false information in a disposition report that the law required the clerk to send to the State Patrol, even though he was never convicted of a crime. Mike, Duncan, and Dan persuaded the court that the clerk was entitled to a privilege, which shielded her from liability absent knowledge of falsity or reckless disregard of the truth. Because no such evidence existed, and because plaintiff lacked legal or factual support for any of his other claims, the federal court dismissed the action. Startzell involved alleged unreasonable force when sheriff's deputies made an arrest in a domestic-violence case. Plaintiff claimed there was no probable cause to arrest him. Mike and Dan successfully argued that probable cause existed as a matter of law and that plaintiff lacked evidence to support his claim of excessive force. The federal court dismissed the action, and plaintiff decided not to appeal. … Mike Patterson, Charles P.E. Leitch, and Dan Lloyd won a motion for partial judgment on the pleadings in Bakay v. Clallam County. Plaintiffs alleged that county sheriffs wrongfully euthanized more than 65 cats that they had discovered living in unhealthy conditions. Mike, Charles, and Dan persuaded the federal court that Washington law did not allow a pet owner to recover for emotional or consortium damages related to the loss of a pet.

Steven G. Wraith and Dan Lloyd won summary judgment of dismissal of indemnity and contract claims in Riverfront Landing v. Dale Well Roofing, Inc., a construction-defect claim against a dissolved corporation. Steve and Dan successfully argued for dismissal based on the Washington Corporation Act's limitations period in which to bring a claim against a dissolved corporation. ... Sam B. Franklin and Marc Rosenberg won a Washington Supreme Court decision in Ang v. Hansen, a legal-malpractice case. The Court adopted in Washington the majority rule where the claim of malpractice arises from the lawyer's defense of the client in a criminal case, the client must prove his actual innocence of the crimes in addition to meeting the four standard elements of negligence. … In CNA v. Cadet, Marc Rosenberg won an attorney-fee dispute in the Ninth Circuit Court of Appeals, which reversed a federal district-court decision that had denied his request for attorney fees. … In Timson v. Pierce County Fire Protection Dist., Mike Patterson, Marc Rosenberg, and John W. Schedler won summary judgment. Plaintiff, the mother of a girl injured in an auto accident, claimed that she suffered emotional distress when she saw her daughter on the floor of the automobile before the District found her. The court agreed that the plaintiff did not show an exception to the Public Duty Doctrine that would create a duty to her and dismissed the case. … John Schedler and Rosemary J. Moore obtained dismissal of a firefighter's wrongful-termination and due-process claims breaches of a right of representation and a right to due process in Flowers v. Pierce County Fire District No. 17. John and Rosemary argued that these claims required interpretation of the Collective Bargaining Agreement, and therefore the firefighter's union had to submit them to arbitration as the CBA's terms required. The union declined to do so. The court would have jurisdiction only if plaintiff also had sued the union, which he had failed to do. Further, there was no evidence that the union had acted arbitrarily or in bad faith, necessary elements of an action against the union. Therefore, the court granted partial summary judgment dismissing these claims. The court also dismissed claims against the individual commissioners because the plaintiff had no claim against them in their individual capacities. ... Patricia K. Buchanan, Rosemary Moore, and Nicholas L. Jenkins won summary judgment of dismissal of Miller v. Estate of Campbell, a sex-abuse action, on the eve of trial. The court agreed that plaintiff sufficiently knew the elements of his claim when he filed Chapter 7 bankruptcy in 1998, so that he had a duty to disclose the potential claim to the bankruptcy trustee. The court rejected plaintiff's argument that the cause of action did not exist in 1998 because plaintiff had not yet obtained medical diagnoses of post-traumatic stress disorder and depression.

Michael A. Guadagno won summary judgment dismissal of Jacob's Meadow v. Plateau 44 II, LLC, a $450,000 construction-defect claim against a framing subcontractor. Mike argued that the statute permitting survival of such claims did not apply to the general contractor's post-dissolution claims against their client, because the claims were unknown at the time of dissolution. Mike also argued that the fourth-party plaintiff's claims for equitable indemnity and negligent construction should be dismissed. The court agreed and dismissed all claims against the framing subcontractor.