Limits of Reason: Discovery and Evidence in Covenant Judgment Reasonableness Hearings (Part One)

 In Tactics

In cases with an underinsured defendant and an insurer’s bad faith investigation claims handling, defense preparations, or settlement demands, one appealing option may be to settle with the defendant for entry of judgment for a stipulated amount and an assignment of the defendant’s bad faith claims against the insurer in exchange for a promise not to execute the judgment against the defendant.  Many states permit such settlement agreements. For example, Minnesota refers to them as “Miller-Shugart agreements”; Florida refers to them as “Coblentz agreements.”  In Washington State, such settlements are known as “covenant judgments” or “covenants not to execute.”

However, most states that allow such settlement agreements require the trial court to hold a hearing to determine whether the stipulated judgment amount is reasonable, sometimes known as a “reasonableness hearing.”  In making a reasonableness determination, the trial court will consider various factors that differ from jurisdiction to jurisdiction, but almost always require the trial court to assess the potential costs and risks to the parties had they proceeded to trial and to assure itself that the settling parties themselves did not engage in bad faith, collusion, or fraud in settlement.  The insurance company may move to intervene in the reasonableness hearing and contest the settlement’s reasonableness.

Although a covenant judgment might represent the best litigation option in a case, one critical consideration is controlling the parameters of the reasonableness hearing.  For example, Washington appellate courts have held that trial courts do not abuse their discretion in setting a reasonableness hearing with as little as three days’ notice to the intervening insurer and refusing to reopen discovery for the insurer under the theory that the insurer is not a “stranger to the case” and, thus, is sufficiently familiar with the case to have a fair opportunity to contest the settlement’s reasonableness.  Red Oaks Condominium Owners Ass’n v. Sundquist Holdings, Inc., 128 Wn. App. 317, 325-26, 116 P.3d 404 (2005); Howard v. Royal Specialty Underwriting, Inc., 121 Wn. App. 372, 379-80, 89 P.3d 265 (2004) (emphasis added), review denied, 153 Wn.2d 1009 (2005).

Existing precedent clearly recognizes the lack of an intervening insurer’s need to reopen discovery for a reasonableness hearing.  However, intervening insurers have become more and more aggressive in asserting and successful in convincing trial courts of such a need.  If this happens in your case, you will need to respond with equal aggressiveness in rebuffing the intervening insurer’s attempts to utilize the reasonableness hearing as an unreasonably lengthy, costly, proxy for trial, all in a desperate attempt to limit its own bad faith exposure.  Part two of this series will discuss precedent around the country confronting these issues head-on and delineating a process that keeps the reasonableness hearing itself reasonable in scope.

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