Insurer successfully challenges consent judgment

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The HOA asked the trial court to rule that the settlement was reasonable. The trial court permitted Farmers to intervene, conduct discovery regarding the settlement's reasonableness, and present evidence on that issue. The trial court criticized the defendants’ coverage counsel, who “had never actually tried a construction defect case and that his introduction to the case came late in the litigation.” In contrast, the trial court found more credible the opinion of the defense attorney who had been forced to withdraw, who opined that the case had a settlement value of $500,000 at most. The court also found that the economic-loss rule, which bars recovery of purely economic damages in tort, would bar much of the HOA’s case. The trial court held that the $8.75 amount of the settlement was unreasonable and that a judgment of only $400,000 would have been reasonable.

The Court of Appeals agreed that the economic-loss rule defeated the HOA’s claims of misrepresentation and breach of fiduciary duty. The court also noted that the HOA could recover only limited damages, the lesser of the diminution in value of the condominiums and the cost to repair. Since all unit owners who had sold their condos had made a profit, the Court of Appeals held that there was no proof of diminution in value. The settlement “systematically neglected, ignored, and grossly violated” the interests of Farmers, which the parties excluded from key settlement negotiations. The trial court properly found bad faith and collusion between the HOA and defendants in entering into the settlement. Far from acting as adverse litigants, the parties collaborated to prejudice Farmers. One indication of that collusion was the parties’ agreement that defendants would sue their insurance-defense counsel and apply the proceeds toward the settlement.

Insurers have lost most Washington appellate cases involving attempts to enforce consent judgments like this one and have been forced to pay such “paper judgments” even when they exceeded policy limits. Water’s Edge is the rare decision that recognizes the inherently collusive nature, and thus the unreasonableness, of many settlements of this type.