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Mutual of Enumclaw Insurance Co. v. Day

Court of Appeals of Washington, Division 1

February 6, 2017

MUTUAL OF ENUMCLAW INSURANCE COMPANY, Appellant/Cross Respondent,
v.
MYONG SUK DAY, Respondent/Cross Appellant.

         ORDER DENYING DAY'S MOTION, FOR RECONSIDERATION, GRANTING MOE'S MOTION FOR RECONSIDERATION IN PART, AND WITHDRAWING AND REPLACING OPINION

         Appellant and respondent have each filed motions for reconsideration of the court's December 12, 2016 opinion and each have filed answers. The panel has considered the motions and answers and determined that Day's motion should be denied, that MOE's motion should be granted in part, and the opinion should be amended as follows:

         Page 2, last paragraph, delete the phrase "and attorney fees awarded by the trial court" at the end of the first sentence.

         Page 6, delete the last sentence in the second paragraph and replace it with "The trial court authorized the entry of a supplemental judgment for attorney fees to Day, but no supplemental judgment has been entered."

         Page 17, delete the last sentence in the first paragraph.

         Page 17, delete the word "also" in the second paragraph.

          Page 17, change the first sentence of the second paragraph to read "We affirm the judgment in favor of Day for $300, 000 for emotional distress damages and the $600, 000 of multiplied damages under IFCA awarded by the court." Add a footnote at the end of that sentence which reads, "On reconsideration in this court, the parties debate whether a supplemental judgment may yet be entered for Day's attorney fees in the trial court. Because this question was not meaningfully addressed in the parties' briefs, we express no opinion."

         Now therefore, it is hereby

         ORDERED that Day's motion for reconsideration is denied. It is further

         ORDERED that MOE's motion for reconsideration is granted in part and changes are made to the opinion as outlined above. It is further

         ORDERED that the December 12, 2016 opinion be withdrawn and replaceehwitrp a revised opinion reflecting the changes herein.

          Verellen, C.J.

         Instead of a more traditional covenant judgment, Myong Suk Day gave agreed judgments to tort victims William Lee and Dawn Smith but retained her claims against her insurer, Mutual of Enumclaw (MOE). Day assigned only her claims against an independent agent. Lee and Smith agreed not to execute against any of Day's assets except her claims against the agent. Lee and Smith also agreed to fully satisfy their agreed judgments against Day once the assigned claim against the agent was resolved.

         In a more traditional covenant judgment, the insured gives the tort victim an agreed judgment and assigns her claims against her own insurer in exchange for the tort victim's covenant not to execute on any asset of the insured except the insured's claims against her insurer. If the insurer has engaged in bad faith while defending the tort victim's personal injury claim under a reservation of rights, then the tort victim pursuing the assigned bad faith claim against the insurer is entitled to a rebuttable presumption of harm and coverage by estoppel. If the settlement is reasonable, then the amount of the agreed judgment is the tort victim's presumptive recovery on the assigned bad faith claim. The covenant judgment is not a release of the tort victim's claims against the insured. But if the insured is legally insulated from any exposure to the tort victim, then the presumption of harm is rebutted, precluding any coverage by estoppel.

         Here, the trial court concluded that a presumption of harm supported coverage by estoppel, resulting in a judgment for Day against MOE in the amount of the tort victims' agreed judgments against Day.

         Because Day's right to full satisfaction of the agreed judgments is unrelated to the resolution of any claims (retained or assigned) against Day's insurer, Day is legally insulated from any exposure on the agreed judgments. Even assuming a presumption of harm applies, the presumption would be rebutted by Day's absolute right to a full satisfaction of the agreed judgments. There is no coverage by estoppel. We reverse the judgment in favor of Day based on coverage by estoppel.

         We also affirm the trial court's denial of Day's claim to reform the insurance contract.

         We affirm the judgment in favor of Day for the $300, 000 emotional distress damages awarded by the jury, together with the IFCA[1] multiplier. We also award Day her reasonable attorney fees on appeal on the issues she has prevailed upon.

         FACTS

         In May 2008, a teenager purchased alcohol at Day's grocery store and shared it with his underage friends. The teenagers raced through Point Defiance Park and injured two pedestrians, William Lee and Dawn Smith, who sued Day in 2009.

         Day contacted her independent insurance agent, Michael Huh. Day met Huh when she purchased the grocery store in 2003. Although Day and Huh have different versions of their November 2003 meeting and whether Day asked for liquor liability coverage, it is undisputed that the insurance contract did not provide for liquor liability coverage. Subsequent automatic annual policy renewals occurred without any coverage review. All renewed policies lacked liquor liability coverage.

         Day claims Huh told her she had insurance that covered the lawsuit and that she should contact her insurer, MOE. Huh tendered the claim to MOE for Day. MOE instructed Day "to contact her personal attorney."[2] The MOE claims adjustor had no explanation why MOE did not interview Day about the coverage issue or ask Day what she had discussed with Huh or why she thought she had liquor liability coverage. MOE did not tell Day that Huh claimed she had declined liquor liability coverage.

         MOE notified Day that it would appoint an attorney to defend her, but because she did not have liquor liability coverage in her contract, MOE would defend under a reservation of rights. MOE also informed Day that it might bring a declaratory judgment action to determine its obligations under the policy.[3]

         MOE filed a declaratory judgment action (the coverage case) to determine its obligation to defend or indemnify Day for Lee and Smith's personal injury claims. In her answer, Day sought reformation of the contract to include liquor liability coverage or to otherwise provide Day coverage.

         Day amended her answer to allege bad faith, CPA[4] and IFCA violations, and coverage by estoppel.[5] The amended answer also added Huh as a third-party defendant.

         The parties in the personal injury lawsuit reached a settlement in June 2011. MOE paid Lee and Smith $125, 000 on Day's behalf. Day agreed to entry of judgments for Lee and Smith against Day totaling $7, 986, 222. Lee and Smith agreed not to execute on the agreed judgments, except as to Day's claims against Huh. Day assigned Lee and Smith all rights, privileges, claims, and causes of action that she may have against Huh, but retained her claims against MOE. The 2011 settlement included an obligation to fully satisfy the judgments against Day once the claims against Huh were concluded:

In consideration for the assignment and cooperation as described herein, Plaintiffs do hereby covenant not to execute or attempt to enforce any judgment obtained against any assets of Day other than Day's rights, privileges, claims, and causes of action assigned. Plaintiffs' sole remedy is to pursue the assigned claims against others. As soon as the assigned claims have concluded (whether by settlement, final judgment, or exhaustion of all appeals and the time for further action has expired), Day may enter a full satisfaction of judgment signed by Plaintiffs in favor of Day, which full satisfaction shall be signed by Plaintiffs when this settlement is executed. The full satisfaction is to be entered regardless of the amount of any judgment awarded or settlement accepted and regardless whether the result is less than the judgment agreed in this settlement.[6]

         The agreement also contemplated a hearing to determine the reasonableness of the settlement.

         The trial court dismissed the personal injury lawsuit with prejudice as "fully settled and compromised" including all claims against Day.[7] But the agreed judgments were not entered, there was no reasonableness hearing, and the plaintiffs did not sign and deliver a satisfaction of the agreed judgments to be filed when claims against Huh were resolved.

         Lee and Smith, as assignees of Day, later reached a settlement with Huh in the coverage lawsuit. Huh paid Lee and Smith $600, 000, and the court dismissed all claims against Huh with prejudice.

         Almost a year later, the trial court granted an agreed motion in the personal injury action to reopen "for the limited purpose of permitting the Court to conduct a hearing to determine the reasonableness of the Stipulated Settlements and Judgment amounts in favor of Plaintiffs, William R. Lee and Dawn Smith, against [Day], as was agreed in the Stipulated Settlement among Plaintiffs Lee and Smith and Defendant Day."[8] The trial court also consolidated the personal injury action with the coverage case. The trial court entered an order on June 27, 2014 finding the settlement reasonable and entered the agreed judgments in favor of Lewis and Smith against Day.

          The remaining claims in the coverage case were scheduled for trial. Before trial, the court ruled the jury would determine whether MOE breached its duty of good faith and would assess any damages for Day's emotional distress; the trial judge would decide whether to impose the remedy of coverage by estoppel and whether to reform the insurance contract.

         The jury found that MOE's bad faith caused Day emotional distress damages in the amount of $300, 000. Based on the IFCA multiplier, the trial court awarded Day an additional $600, 000 in damages. The trial court authorized the entry of a supplemental judgment for attorney fees to Day, but no supplemental judgment has been entered.

         The trial court denied Day's claim to reform the insurance contract, [9] but applied coverage by estoppel to award Day a judgment against MOE in the amount of the agreed judgments for Lee and Smith, with interest, totaling $10, 460, 366.14.

         MOE appeals. Day cross appeals.

         ANALYSIS

         I. Presumption of Harm and Coverage by Estoppel

         MOE argues Day was not entitled to a presumption of harm and coverage by estoppel. For the reasons set forth below, we conclude that even if a presumption of harm applies here, such presumption is rebutted because of the settlement provision to fully satisfy the agreed judgments once the claims against Huh were resolved in any manner. We need not define the exact limits for the presumption of harm and coverage by estoppel in bad faith cases.

         An insurer has an "enhanced obligation of fairness toward its insured."[10] That enhanced obligation imposes a duty beyond that of the standard contractual duty of good faith.[11] Tank v. State Farm Fire & Casualty Co. recognized the two forms of bad faith at issue here: "the company must thoroughly investigate the cause of the insured's accident and the nature and severity of the plaintiffs injuries, " and "the company has the responsibility for fully informing the insured not only of the reservation of rights defense itself, but of all developments relevant to his policy coverage and the progress of his lawsuit."[12]

         In a more traditional covenant judgment, the tort victim takes an agreed judgment against the insured in exchange for a covenant by the tort victim not to execute on any of the insured's assets except the insured's claims against its own insurer, and the insured assigns those claims to the tort victim.[13] Such covenant judgments do not release the insured from liability; rather, they limit recovery to "'a ...


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