Washington Court Holds Stipulated Covenant Judgment Sets Minimum Amount of Damages in Bad Faith Case. (from FC&S Legal: The Insurance Coverage Law Information Center) Recently, 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.,[1] 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.

1. The Insurance Coverage Law Information Center
The following article is from National Underwriter’s latest online resource,
FC&S Legal: The Insurance Coverage Law Information Center.
WASHINGTON COURT HOLDS STIPULATED COVENANT JUDGMENT
SETS MINIMUM AMOUNT OF DAMAGES IN BAD FAITH CASE
June 10, 2014 Donald J. Verfurth, Sally S. Kim, and Stephanie M. Ries
Recently, 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.,[1] 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.
Background
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.
Settlement
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.
Claims against Safeco
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.
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2. Jury Verdict
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.
The Issues on Appeal
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.”
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.
Note
[1] Miller v. Kenny and SAFECO Ins. Co., 2014 Wn. App. LEXIS 1030 (April 28, 2014).
About the Authors
Donald J. Verfurth is the co-managing partner of the Seattle office of Gordon Rees Scully Mansukhani, LLP, focusing his
practice on insurance coverage, with special emphasis on environmental, products liability, commercial general liability,
professional liability, directors and officers, excess casualty, ERISA, construction, and title insurance.
Sally S. Kim is a partner in firm’s Seattle office, practicing insurance coverage and bad faith litigation in state and federal
courts, involving directors and officers, commercial general liability, errors and omissions, fidelity and surety, excess casu-
alty, life and health benefits, and first party insurance policies.
Stephanie M. Ries is senior counsel in the Seattle office of the firm and is a member of the Insurance practice group.
The authors may be contacted at dverfurth@gordonrees.com, sallykim@gordonrees.com, and sries@gordonrees.com,
respectively.
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