Insurer successfully challenges consent judgment

By Steven G. Wraith

The Washington Court of Appeals rejected a consent judgment that plaintiffs sought to enforce against a liability insurer, in a rare victory for an insurer in such cases.

In Water’s Edge Homeowners Assn. v. Water’s Edge Associates, 216 P.3d 1110 (Sept. 29, 2009), the plaintiff Homeowners Association (HOA) at Water’s Edge condominiums sued the seller, Water’s Edge Associates, and its property manager, alleging that they failed to disclose widespread rot in the condominium property when they converted it from apartments into condominiums.

Farmers Insurance Exchange and related companies insured the defendants. Farmers defended the case under a reservation of rights. Defendants hired separate coverage counsel who sued Farmers, seeking coverage for the HOA’s lawsuit and alleging bad faith in Farmers’ handling of the claims.

The HOA’s counsel suggested that defendants hire as coverage counsel two lawyers who “have had substantial success squeezing every possible nickel out of insurance companies on behalf of their clients.” Defendants did so but did not tell their insurance-defense counsel. Their relationship with insurance-defense counsel deteriorated, and their coverage counsel asserted that he had conflicts of interest. Insurance-defense counsel withdrew, and Farmers hired new defense counsel.

The HOA later settled with defendants without Farmers’ participation. The defendants agreed to pay $215,000 in cash, consented to judgment of $8.75 million, and assigned to the HOA all coverage and bad-faith claims that defendants had against Farmers. The HOA covenanted not to execute against the defendants’ personal assets and to pursue only coverage and bad-faith damages against Farmers.