Stipulated Findings and Conclusions Not Binding on Insurer at Reasonableness Hearing

Green v. City of Wenatchee (Wash. App. Div. III, January 20, 2009)

A lawyer was sued for legal malpractice by four claimants he had represented as criminal defendants. All four cases were subject to a $500,000 insurance policy limit, including defense costs. When approximately $150,000 to $190,000 remained, the insured instructed defense counsel to reject a global settlement offer of $325,000. Defense counsel withdrew after the policy limit was consumed by four years of litigation costs. The insured negotiated settlements directly with the claimants, including entry of a $1 million covenant judgment in favor of one claimant, Doris Green, and assignment of the insured's rights against his insurer, Westport Insurance Corp.

Ms. Green sought a determination that the insured’s settlement with her was reasonable. She presented stipulated findings of fact and conclusions of law to the effect that the insured had incompetently represented Ms. Green and had referred her to another lawyer the insured should have known was incompetent to handle her case. Westport was allowed to intervene and conduct discovery. Westport submitted evidence that the judgment amount was unreasonably high because the insured had viable defenses to the action. Westport contended that Ms. Green could not prove her actual innocence, her claims lacked substantive merit and were barred by statutes of limitations, the judgment amount was grossly disproportionate to amounts she accepted from other defendants, and the consent judgment was the product of collusion.

The trial court ruled that the settlement was reasonable and that Westport was bound by the stipulated findings of fact and conclusions of law and the covenant judgment, relying on Fisher v. Allstate Insurance Co., 136 Wash.2d 240 (1998). In Fisher, the Washington Supreme Court held that an insurer is bound by the findings, conclusions, and judgment entered in the action against its insured when the insurer had notice and an opportunity to intervene in that action.

The court of appeals reversed the determination of reasonableness. The court held that, although the insured and Ms. Green were free to resolve their liability issues, Westport had no standing to challenge their agreement. “The very purpose of a reasonableness hearing is to determine whether the settlement of the underlying liability case is reasonable[.]” The court distinguished a recent decision of the Washington Supreme Court, Mutual of Enumclaw Insurance Co. v. T & G Construction, Inc., in its application of the Fisher rule based on the trial court’s review of the merits of the underlying action in finding the settlement reasonable. The court of appeals observed, “Critically, in contrast to T & G Construction, the court bound Westport to [the insured’s] liability stipulation without making particular reasonableness findings addressing [his] defenses[.]”

The court of appeals remanded for a new reasonableness hearing in which the trial court must address the merits of Ms. Green’s claims and the insured’s defenses in determining whether the settlement is reasonable, giving no deference to the stipulated findings and conclusions.