Washington courts have long held that an insured may enter into a stipulated (or “covenant”) judgment with the plaintiff in a lawsuit. Whether the insurer is liable for the amount of the stipulated judgment usually is decided in a subsequent bad faith lawsuit. However, before that happens, the insured and the plaintiff must conduct a reasonableness hearing under RCW 4.22.060, so that a court can set the reasonable amount of the stipulated judgment. Whether the insurer must receive advance notice, and be allowed to participate at the reasonableness hearing, has been a somewhat unsettled issue in Washington jurisprudence as stipulated judgments have seemingly increased in recent years.
In Hawkins v. ACE American Insurance Company, the Washington State Court of Appeals weighed in on this issue and held that an insurer is not bound by a reasonableness determination obtained without notice and without an opportunity to be heard. The underlying facts of Hawkins are largely unremarkable: the case arose out of a motor vehicle accident that involved two collisions in close proximity and ACE insured the employer of a driver in the second accident. The plaintiff eventually obtained a default judgment against that driver for almost $400,000, and later entered into a stipulated judgment of $1.5 million. Without notice to ACE, the driver and the plaintiff sought court approval of the stipulated judgment amount.
Shortly thereafter, ACE and the plaintiff litigated the coverage and bad faith issues. Among other claims, ACE argued that the driver had breached the cooperation clause of the policy. The plaintiff alleged bad faith and other extracontractual claims against ACE, the rights to which the plaintiff had been assigned from the driver as part of the stipulated judgment. The trial court found, in part, that ACE had breached Washington’s Insurance Fair Conduct Act (“IFCA”) and acted in bad faith. The trial court entered judgment for the plaintiff in the amount of $5,443,200 and later awarded attorney fees of $232,195.60. ACE appealed.
One of the arguments made by ACE on appeal was that the entry of the stipulated judgment without notice violated its due process rights. The Hawkins Court agreed and held that a reasonable amount of a stipulated judgment, as decided by a trial judge, is the presumptive amount for purposes of coverage if the insurer had “an opportunity to be involved in a settlement,” i.e., an entry of the stipulated judgment based on established Washington case law.
The other primary issue before the Hawkins Court was the preclusive effect, if any, for the finding made by the trial court when determining the reasonableness of the settlement. The Hawkins Court sought to distinguish the preclusive impact of court orders in cases where an insurer is given notice of the lawsuit and fails to defend, in which the litigated judgment on the issues of liability is preclusive. In doing so, the Hawkins Court engaged in a long discussion about stipulated judgments in American jurisprudence for the past 100 years and the application of stipulated judgments in different contexts. Eventually, the Hawkins Court returned to the basic principle that while the insured may settle without notice to a non-defending insurer and without obtaining its consent, that does not necessarily mean that the insured can settle for an amount binding on the insurer without the insurer being heard on whether the amount is reasonable.
The impact of Hawkins is the clear guidance that the court provided for requiring notice to an insurer prior to a reasonableness hearing following a stipulated judgment. This is an important development in protecting the due process rights of all parties that have an interest in the amount of the settlement, and provide an insurer with an ability to at least contest the amount of a stipulated judgment before it is entered by its insured.
Read the full Fall 2024 Northwest Insurance Law Quarterly Newsletter here.