Summary authored by Melissa White of Cozen O’Connor.

An employee of Best Plumbing Group, LLC cut a pressurized sewage pipe, causing sewage to escape into the home of James Bird. Efforts to repair the pipe were not successful and sewage continued to escape for eight months, resulting in hillside instability and toxic mold. Mr. Bird suffered a heart attack that he attributed to the stress of physically removing sewage-laden material from his property.

Bird sued Best, alleging trespass and negligence. Best’s liability insurer, Farmers Insurance Exchange, appointed defense counsel without a reservation of rights. Bird demanded that Farmers settle the case for policy limits of $2 million. Farmers offered $350,000.

Best settled the case directly with Bird, stipulating to a $3.75 million “covenant judgment” that included (1) a stipulated or consent judgment between Bird and Best, (2) Bird’s covenant not to execute on that judgment against Best, and (3) an assignment to Bird of Best’s coverage and bad faith claims against Farmers. Bird asked the trial court to approve the settlement as reasonable under RCW 4.22.060. Farmers intervened and filed a motion for jury trial that was denied. During a four-day hearing in which Farmers actively participated, the trial court evaluated the nine factors set forth in Chaussee v. Maryland Cas. Co., 60 Wn. App. 504, 512, 803 P.2d 1339, 812 P.2d 487 (1991), and valued the damages claims at $3,989,914.83. The trial court therefore concluded that the $3.75 covenant judgment settlement was reasonable. Farmers appealed and the Court of Appeals affirmed. Bird v. Best Plumbing Group LLC, 161 Wn. App. 510, 260 P.3d 209 (2011).

The Washington Supreme Court affirmed:

  • RCW 4.22.060 applies to reasonableness hearings that involve covenant judgments.
  • An insurer does not have a right under article I, section 21 of the Washington Constitution to a jury trial because the reasonableness hearing is equitable in nature.
  • If the amount of the covenant judgment is deemed reasonable by a trial court, it becomes the presumptive measure of damages in a later bad faith action against the insurer. This presumption does not violate due process because it can be rebutted by a showing that the settlement was the product of fraud or collusion.
  • The trial court did not abuse its discretion in determining that the $3.5 million covenant judgment (based in part on trebling of damages under the trespass statute, RCW 4.24.630) was reasonable based upon the evidence presented.

Read the October 25, 2012 Majority Opinion

Read the Dissenting Opinion