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Stipulated Covenant Judgment Sets Minimum Amount of Damages in Bad-Faith Case

On April 28, Division One of the Court of Appeals of Washington State affirmed a jury verdict awarding $13 million in damages to a passenger injured in a car accident, finding that the $4.15 million agreed amount of the covenant judgment in the insurance bad-faith case sets a floor, not a ceiling, on the damages a jury can award. In Miller v. Kenny and SAFECO Ins. Co., the Court of Appeals ruled on several additional issues on appeal including whether evidence of an insurance company’s loss reserves is properly admissible at trial.

The appeal arose out of an automobile accident in which the at-fault driver, Patrick Kenny, rear-ended a cement truck, which resulted in significant injuries to his three passengers, including plaintiff Ryan Miller. The plaintiff sued Kenny and sent one of Kenny’s insurers, SAFECO, a letter demanding a $1.5 million policy limits settlement. The plaintiff’s letter to SAFECO notified the insurer that the case presented a substantial risk to Kenny of an excess judgment. Similarly, Kenny demanded that SAFECO tender the policy limits in exchange for a release and hold harmless from the injured claimants, but SAFECO refused.

Only a couple of months prior to the scheduled start of trial, SAFECO authorized Kenny’s attorney to tender the $1.5 million in available limits in exchange for a release of all claims against Kenny, but the offer came too late. Kenny entered into a settlement agreement with the three passengers, agreeing to pay them $1.8 million in insurance proceeds available, which included $1.5 million from SAFECO. Kenny also agreed to assign his rights to Miller to sue SAFECO for bad faith and related claims or actions. In return, the passengers granted Kenny a covenant not to execute on or enforce any excess judgment. Ultimately, SAFECO agreed on a $4.15 million reasonable total amount for the covenant judgment, which was the amount of damages that remained unpaid after the three passengers received the $1.8 million in insurance proceeds.

As Kenny’s assignee, Miller asserted claims for bad faith against SAFECO, as well as negligence, Consumer Protection Act violations, breach of contract, and other theories in the subsequent bad-faith litigation. The plaintiff’s primary theme was that SAFECO could have protected its insured from exposure to an excess judgment by promoting a policy limits settlement much earlier. SAFECO’s principal defense was that it never had a genuine opportunity to settle the case because there were three claimants, and Miller unreasonably demanded all the policy limits for himself. SAFECO further argued that Kenny had failed to make a valid assignment of his right to sue SAFECO for bad faith in the settlement agreement.

The jury found that the settlement agreement allowed Miller the right to pursue Kenny’s bad-faith claims against SAFECO. Thereafter, the jury entered a plaintiff’s verdict of $13 million in addition to prejudgment interest of $7 million, post-judgment interest at 12 percent, attorneys’ fees and costs of $1.7 million, and treble damages under the Consumer Protection Act. The verdict totaled $21,837,286.73.

As to the damages awarded, at the trial court, Miller moved for partial summary judgment to establish that the $4.15 million stipulated covenant judgment was the minimum amount of harm that SAFECO was liable for, and the court granted the motion. As a result, jury instructions stated that if the jury found SAFECO acted in bad faith as to Kenny, the jury must include the $4.15 million set by the stipulated order and should consider other damages. In addition to the $4.15 million, the jury found other past and future elements of damages, which accounted for $7.75 million, included damages for lost property, lost control of the case or settlement, damage to credit, and emotional distress.

On appeal, SAFECO argued that the jury should not have been permitted to award damages exceeding the net amount set by the stipulated order. The Court of Appeals disagreed and held that “[b]ecause Kenny had the right to sue SAFECO for damages other than and in addition to the amount of the covenant judgment, Miller acquired that right.” Furthermore, the court held that “SAFECO ha[d] not presented a coherent rationale based on policy or precedent for limiting damages to the amount of the covenant judgment.”

Among other issues on appeal, the Court of Appeals also considered whether the trial court erred in admitting evidence at trial regarding the loss reserves that SAFECO set for the case. Specifically, soon after the accident, SAFECO set its reserve for liability at $1.5 million and in revisiting loss reserves over the life of the case, repeatedly concluded that Kenny was exposed to liability substantially in excess of policy limits. Over SAFECO’s objection, the trial court admitted this evidence.

The Court of Appeals upheld the trial court’s evidentiary ruling on loss reserves. In doing so, the court stated that reserves may be relevant and admissible in a case where the issue is whether the insurer fulfilled its duty to adjust the insured’s claim in good faith. According to the court, for many months, SAFECO refused to make the full policy limits available to settle the case even though it had known, as shown by the reserves, that its insured was exposed to much greater liability. As a result, the court found that the evidence was relevant and not unduly prejudicial.

To read the opinion in Miller v. Kenny and SAFECO Ins. Co., 2014 Wn. App. LEXIS 1030 (April 28, 2014), click here.


Sally S. Kim
Stephanie Maria Ries
Donald J. Verfurth