Wash. Supreme Court Reverses, Finds $1.7 Covenant Settlement Reasonable

An insurer that refused a $399,000 settlement offer may have to pay more than $1.7 million because of a settlement that was made separately between its policyholder and an aggrieved customer, under a unanimous decision by the Washington Supreme Court on Thursday.

The high court overturned a decision by the Court of Appeals and reinstated a judgment by a Spokane Count Superior Court judge, but that doesn’t end five years of litigation over what the high court called “a dream house that turned into a nightmare.” Kevin Roberts, an attorney for the homeowners, said his clients must still prove that the insurers acted in bad faith.

The Court of Appeals had decided that the trial court erred by approving a covenant settlement far in excess of the actual damages.

“In finding an abuse of discretion, the Court of Appeals majority misapprehended parts of the record and substituted its assessment of the competing damages evaluations for the trial court’s assessment,” the Supreme Court said.

The American Property Casualty Insurance Association and the National Association of Mutual Insurers had both filed amicus briefs in support of the defendant in the case, Cincinnati Specialty Underwriters Insurance Co.

Jeffrey and Anna Wood contracted with Milionis Construction Inc. to build a home in Newman Lake, Washington for $1,356,000. Work ceased on Nov. 1, 2016 because of substandard work by various subcontractors that left the house with multiple defects. The Woods say they had paid $550,000 by that time.

Roberts, a partner with the Roberts Freebourn law firm in Spokane, said there were significant structural defects in the trusses and spans because Milionis did not correctly follow the architectural plans for the 5,000-square foot house, which was built on a lot overlooking Newman Lake.

The Woods filed a lawsuit against Milionis Construction and its owner Steve Milionis. Cincinnati hired attorney Shane McFetridge to represent Milionis, but reserved its right to deny coverage.

The parties tried twice to mediate in 2017, but couldn’t reach an agreement. While preparing for a third mediation, McFetridge asked Cincinnati for authority to offer a settlement of up to $350,000.

The Woods’ experts estimated that it would cost more than $2.7 million to fix all of the defects in the home, not including general and consequential damages. McFetridge asserted that the defects could be fixed and the home completed for the $807,135.97 that remained on the contract.

After a third mediation, the Woods and Milionis agreed to settle the lawsuit for $399,514.58. Cincinnati contended that it owed nothing because the policy did not cover poor workmanship and Milionis had failed to obtain signed contracts with subcontractors, as required. However, it offered to settle the matter for $100,000.

After the Woods refused, Cincinnati filed a lawsuit in federal court seeking a declaration that no coverage was owed. The district court denied the insurer’s motion for summary judgment.

The Woods’ lawsuit against Milionis was scheduled for arbitration. During mediation, McFetridge learned that the Woods had already spent $200,000 to repair defects to the home. Also, a forensic accounting firm hired by the couple reported that Milionis had tried to overcharge the Woods by $302,264.84 and had failed to pay sales taxes on $297,233 in invoiced charges.

McFetridge told Cincinnati that the Woods might recover $1.14 million in their lawsuit and recommended again that the insurer accept the $399,000 settlement offer.

A week before the scheduled arbitration, the Woods and Milionis reached their own settlement agreement. Milions agreed to stipulate to a $1.7 million judgment and assigned all rights and claims against Cincinnati to the Woods. The Woods agreed not to collect the stipulated judgment against Milionis.

McFetridge was not included in those negotiations.

Washington courts have long recognized that parties involved in a dispute have a right to reach such “covenant agreements” when an insurer refuses to settle, but they must be approved by the superior court because of the potential for fraud and collusion. That decision is reached after the parties present the facts that led to the settlement during a “reasonableness hearing.”

A reasonableness finding becomes the presumptive amount of damage in a subsequent bad faith lawsuit against an insurer. Cincinnati may also be liable for legal costs and 12 percent interest on the $1.7 million settlement amount if it is found to have acted in bad faith.

After a reasonableness hearing was held in Woods lawsuit, Cincinnati asked for a continuance and discovery. The request was denied.

A trial court finding that a settlement is reasonable should not be disturbed if is supported by substantial evidence, the Supreme Court said. And despite the Court of Appeals’ decision to overturn the Spokane County Superior Court’s decision, the Supreme Court said substantial evidence exists to determine that amount was reasonable.

The opinion noted that one of three judges on the Court of Appeals panel dissented.

“The dissenting judge criticized the majority for misunderstanding the various evaluations and substituting its own judgment for the trial court’s,” the opinion says.

“The Court of Appeals majority erroneously reweighed the evidence and substituted its own judgment for the trial court’s, contrary to the deferential standard of review that applies.”

Also, the trial court acted within its discretion when it denied the continuance motion, despite assertions to the contrary by the insurance groups, the high court said.

The opinion says “Cincinnati was not a stranger to the case and had been heavily involved in multiple settlement discussions in the months just before the scheduled arbitration.”

About the photo: Newman Lake, Washington is shown. Photo courtesy of the Idaho Washington Aquifer Collaborative.