COMPARATIVE BAD FAITH LAW: BAD FAITH REFUSAL TO SETTLE; COMPARING Shea (BC) with Besel (WA) – Part 2

This is a continuation of the last post looking at Comparative Bad Faith Law in BC and Washington. We’ll now move onto the comparison with Besel v. Viking Insurance…

COMPARE  Besel v. Viking Insurance, 146 Wn.2d 730 (2002)

Basic facts:

D, insured by Viking, crashes his pickup truck and injures his passenger, Besel.  Viking did not respond to Besel’s phone calls and letters regarding settlement, and in fact lost the claims file at some point during negotiations, causing delay to the evaluation of the claim.  Besel provided clear evidence that his damages exceeded $200,000; D’s policy limit with Viking was for only $25,000.  Viking failed to respond to numerous offers from Besel to settle his claims for $25,000, and ultimately indicates its intent to defend the claim on issues of damages and comparative fault (despite the fact that no WA court has ever assigned more than 50% fault to the passenger in a vehicle driven by an intoxicated driver).

Frustrated, Besel approached D’s counsel directly, and proposed the parties enter into a consent judgment establishing Besel’s damages at $175,000 and his share of comparative fault at zero.  In exchange, Besel agreed not to execute upon the judgment above the $25,000 policy limit against the defendant driver.  Besel then took an assignment of defendant’s bad faith rights against Viking, and sued for the $150,000 difference.

Prior to entry of the consent judgment, Besel appeared before the court to conduct a statutory “reasonableness hearing” to establish the amount of the presumptive settlement was fair and that the terms of the agreement had been negotiated in good faith.  The court found the quantum of damages reasonable under the factors governing such a proceeding.  See RCW 4.22.060.

The Washington Supreme Court held as follows:

• The insurer would not be heard to argue that the defendant cured any bad faith by way of the covenant not to execute.  Rather than grounding this decision in assignor/assignee distinctions, however, the Court expressly held that it would be manifestly unjust for the insurer who committed bad faith in its refusal to settle and forced its insured to negotiate independent settlement to protect his interests to then benefit from the insured’s self-help activities.
• While the insured had a contractual duty to cooperate with his insurer and to permit his insurer to control the settlement of the case, such a right was not absolute.  In the event that an insurer breaches its good faith duty to settle cases in which liability and damages are reasonably clear, the insured may enter into a consent judgment to protect himself from the risk of an excess judgment.  If bad faith conduct is later established, the insurer may not challenge the validity of such an obligation under the cooperation clause of the insurance contract.
• The insured may take such self-help action prospectively, i.e., before a determination in the subsequent litigation as to whether the insurer’s conduct in failing to settle amounted to bad faith, negligence, and/or a CPA violation. (Leaves unanswered questions as to what happens if nervous insured cuts such a deal in the absence of bad faith conduct….)
• If the consent judgment has been submitted for judicial review through the reasonableness hearing process, the value of the insured’s damages will be presumed to be the difference between the policy limits and the amount of the consent judgment, and the insurer will generally be estopped from challenging the evidence supporting such a judgment (assuming bare notice requirements for the reasonableness hearing have been satisfied)

RESULT: Besel provides a plaintiff with substantial settlement leverage over a defendant’s insurer in a Washington tort action that is absent from the B.C. approach expressed in Shea.  If faced with an insurer who asserts unreasonable defences, unrealistically undervalues the potential damage award for the plaintiff, etc., the plaintiff always has the “nuclear option” of writing a “Besel letter” to defence counsel proposing a consent judgment coupled with a covenant not to execute and an assignment of bad faith rights.  Of course, plaintiff must be sure the bad faith claim will pass muster in Round Two of the litigation.