Advisories & Insights

Under Washington law, a covenant judgment can become the presumptive measure of damage. A recent Court of Appeals case, however, limits the scope of VanPort Homes, reaffirms reasonableness criteria for covenant judgments, and concludes an insurer need not pay $5 million in agreed liability. Werlinger v. Warner, 126 Wn. App. 342, 109 P.3d 22 (2005).

Michael Warner failed to notice motorcyclist Dean Werlinger before suddenly turning into the same lane and killing Werlinger. As a result, Werlinger's family asserted claims against Warner. Warner's automobile liability carrier, Clarendon National Insurance Company, denied coverage for those claims because the car driven by Warner was not listed on Warner's policy.

Warner, who was already in bankruptcy, was given permission by the bankruptcy court to pursue coverage from Clarendon. Clarendon then reversed its coverage denial and agreed to defend Warner under a reservation of its rights. After Warner's bankruptcy was discharged a few months later, Werlinger's widow formally filed the family's wrongful death lawsuit. Clarendon responded by filing a declaratory judgment action concerning coverage.

While both cases were pending, Werlinger demanded Warner's $25,000 policy limits from Clarendon and requested a response within 60 days. Clarendon responded by filing a motion for summary judgment in its declaratory judgment action. The court denied the motion and found coverage as a matter of law. Clarendon then tendered its $25,000 limits, which Werlinger rejected.

Eventually, Warner agreed to settle the wrongful death lawsuit by entering into a $5 million confession of judgment and assigning his bad faith claims against Clarendon to Werlinger.

Werlinger, in turn, sued Clarendon for bad faith. Werlinger argued that, according to the Washington Supreme Court case Truck Ins. Exchange v. VanPort Homes, Inc., the $5 million consent judgment was presumptively valid, unless the insurer could show fraud or collusion.

The court rejected Werlinger's argument, finding that under VanPort Homes "a covenant judgment can be reasonable per se only when an insurer breaches its duty to defend or otherwise wrongfully ‘exposes its insured to business failure or bankruptcy.'" Since Clarendon provided a defense, and Warner's bankruptcy had nothing to do with the claim, the consent judgment received no presumption of validity.

The court further found that the criteria set forth in the Washington Supreme Court's earlier Glover and Besel opinions still applied. These criteria determine the reasonableness of a consent judgment based on:

the releasing parties' damages; the merits of the releasing parties' liability theory; the merits of the released person's defense theory; the released person's relative faults; the risks and expenses of continued litigation; the released person's ability to pay; any evidence of bad faith, collusion, or fraud; the extent of the releasing person's investigation and preparation of the case; and the interests of the parties not being released.

The court held that each of these factors did not have to be present in every case and that no one factor controlled. Thus, even though Werlinger met a number of the criteria, the single fact that "not a penny could ever be collected from Warner personally" invalidated the judgment.