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Gosney v. Fireman's Fund Insurance Co.

Court of Appeals of Washington, Division 1

May 31, 2018

SARAH GOSNEY, as assignee and as Personal Representative of the Estate of Jerry Welch; JOHN VOSE, PIZZA TIME INC., and PIZZA TIME HOLDINGS OF WASHINGTON, INC., Respondents/Cross Appellants,
v.
FIREMAN'S FUND INSURANCE COMPANY and THE AMERICAN INSURANCE COMPANY, foreign insurance companies, Appellants/Cross Respondents.

          DWYER, J.

         Following a five-week trial, the jury returned its special verdicts. After the jury was dismissed, it became apparent that the parties disagreed as to what exactly the jury had been asked and what its answers meant. The trial judge, based on his understanding of what he had asked the jury to decide, entered a significant judgment in favor of plaintiff Gosney. However, applying judicial estoppel, the judge declined to enter judgment on the jury's verdicts in favor of plaintiffs Vose and Pizza Time.

         Defendant Fireman's Fund appeals from the judgment entered against it and in favor of Gosney. Vose and Pizza Time cross-appeal from the trial court's denial of relief. For good measure, all parties seek relief from various other trial court rulings.

         We reverse the trial court's judicial estoppel rulings. In all other respects, we affirm the various decisions of the trial court.

         I

         John Vose is the owner and sole shareholder of Pizza Time, Inc. and Pizza Time Holdings of Washington, Inc. (collectively PT). Vose owns and operates several corporate PT stores and also acts as a franchisor with 30 to 35 franchisees. As the franchisor, Vose personally prepared operational manuals for his franchises that were then incorporated into the franchise agreement by reference. These operational manuals purported to give Vose control over various aspects of franchisee employment procedures, including the right to terminate franchisee employees for any reason at any time.

         Ethan Shaefer owned and operated a PT franchise store prior to and following Vose's acquisition of the PT franchise. Unbeknownst to Vose, one of Shaefer's pizza delivery drivers-Angela Heller-had a poor driving record and a criminal background. On September 1, 2005, Heller, who had been drinking on the job, drove her car across the center line while making a delivery. Heller caused a head-on collision and killed the driver of the other car, Jerry Welch. Vose visited Shaefer shortly after receiving word of the collision. Shaefer told Vose that he had called his attorneys and that he had insurance.

         In September 2006, Jerry Welch's widow filed suit against PT in Thurston County. Sarah Gosney-Welch's daughter-was later substituted as the personal representative and plaintiff in the underlying action.[1] Vose's attorney informed him that, pursuant to the franchise agreement, Shaefer would have to indemnify and defend PT.

         PT has had insurance through Fireman's Fund Insurance Company (Fireman's) since 2005. PT's insurance policy required Fireman's to indemnify it for up to $1.5 million pursuant to a "non-owned auto policy" and an additional $1 million pursuant to a "general liability policy."

         Vose first informed Fireman's of the automobile collision and ongoing litigation on January 31, 2008. Gosney had extended an offer to PT and Shaefer to settle for policy limits. Trial was scheduled for April 21, 2008. Fireman's began investigating coverage and liability on February 8, 2008. On February 21, 2008, Gosney's counsel, David Beninger, wrote to Robert Novasky, counsel for both Vose and Shaefer, to notify Novasky that Gosney's offer to settle would remain open for only seven more days. Novasky forwarded this letter to Paul Badaracco, Fireman's primary claims handler assigned to the matter, for resolution.

         On February 22, 2008, Badaracco wrote to Vose to acknowledge receipt of his claim. Badaracco noted that "[a]lthough this incident occurred on Sept 1, 2005 and the lawsuit was filed on Sept 14, 2006, Fireman's Fund's first notice of this claim and ongoing litigation was ... on Feb. 8, 2008, some two and a half years after the accident."

         Novasky wrote to Badaracco again on February 28, 2008. Novasky stated that "[a]ll other defendants have tendered their policy limits, but plaintiff is demanding a 'global' settlement that requires the tender of all available policy limits." Novasky requested that Fireman's contact Beninger to confirm Fireman's position with regard to the demand.[2]

         Fireman's appointed counsel John Matthews of Jackson & Wallace, LLP to defend PT. Matthews contacted Novasky to discuss the case and review court documents. Matthews then contacted Vose and received his approval to request a continuance of the trial date. Trial was rescheduled for December 29, 2008. Gosney withdrew the global settlement offer as a result of the continuance.[3]

         On March 27, 2008, Badaracco wrote to Vose to inform him that PT's coverage for nonowned business automobile exposure covered up to $1.5 million[4] in losses and that the current claim "could result in damages in excess of ... policy limits." Badaracco advised Vose to retain counsel to advise him "with respect to any potential excess exposure above the referenced limits."

         Patricia Anderson, an attorney representing Gosney, later contacted Fireman's to request a copy of the PT insurance policy. On July 17, 2008, counsel for Fireman's sent Anderson a copy of the policy and confirmed that Fireman's "continues to reserve any and all rights and defenses that may now exist or that may arise in the future." Anderson then contacted Howard Bundy, corporate counsel for PT. Anderson told Bundy that Gosney was interested in reaching a settlement and was willing to discuss a settlement "involving an agreement or covenant not to execute against personal assets, in exchange for an assignment of the claims against the insurance company and a stipulated judgment."

         Bundy, who had not represented Vose or PT on any matter related to the Gosney litigation, advised Vose to retain independent counsel. Vose then forwarded the settlement offer to attorney Matthews. Matthews asked Bundy to "please forward these emails and offers to the counsel that [PT] and/or John Vose hires to represent him personally on this coverage issue, as we cannot advise our client on coverage matters." Bundy then agreed to represent Vose in the Gosney litigation.

         Settlement

         Gosney and Vose reached a settlement on September 2, 2008.[5] The settlement offer required Vose and PT to assign to Gosney "all rights, privileges, claims, causes or chose of actions that they may have against their insurer, " including any arising out of the "handling of the claims or suit related thereto, as well as arising out of the insurance contract, obligations, investigation, evaluation, negotiation, defense, settlement, indemnification ... bad faith, negligence, malpractice, breach of contract, fiduciary breach, Consumer Protection Act[6] (CPA)], Insurance Fair Conduct Act[7] (IFCA)], punitive damages and/or otherwise." The settlement offer reserved to Vose and PT all elements of damages "for their personal emotional distress, personal attorneys' fees, personal damages to credit or reputation and other non-economic damages" arising from the assigned causes of action.

         The settlement offer did not specify a dollar amount. Rather, it provided:

Defendants do hereby stipulate and agree to having partial judgment entered against them for the full insurance limits to avoid any delay in executing, garnishing or collecting those offered assets. Plaintiffs agree to withhold formal entry of this partial judgment for fifteen (15) days to allow the insurers to pay all insurance proceeds to the Luvera Trust Account, in trust for the Welchs. Defendants are entitled to a credit, offset and partial satisfaction of any judgment for the amounts paid by their insurers.
Further, the parties agree to have the full amount of the damages and/or judgments determined by stipulation approved as reasonable by the Court, or arbitration. The parties agree to use good faith efforts to reach a stipulated covenant judgment, contingent upon a reasonableness finding by the court. . . .

         The settlement offer further provided for a 12 percent interest rate accruing and compounding annually on the unpaid damages from the date of signing. Finally, the settlement offer contained a covenant not to execute or enforce the judgment against Vose or PT.

         Gosney and Vose-on behalf of himself and on behalf of PT-signed the settlement agreement. Bundy then sent a copy of the settlement agreement to Fireman's along with a letter demanding the payment of policy limits and notice under the IFCA. Fireman's never responded to Bundy and never agreed to the settlement offer.

         On December 19, 2008, Thurston County superior court Judge Gary Tabor entered judgment against Vose and PT for $2.5 million with interest accruing at 12 percent per annum from September 2, 2008. Judge Tabor also issued an order approving the settlement as reasonable as to Welch's minor children. Jackson & Wallace filed a notice of intent to withdraw effective January 29, 2009.

         On September 1, 2009, Gosney filed suit against Fireman's and named PT and Vose as codefendants. The complaint alleged negligence, breach of the CPA, breach of the IFCA, breach of contract, and breach of the specific unfair claims and settlement practices regulation.[8] In its answer, Fireman's asserted the affirmative defenses of waiver and estoppel, contributory fault, and fraud or collusion in the settlement.

         Arbitration

         On November 1, 2010, Fireman's moved to stay the action "until Plaintiffs and Defendant [PT] conduct and conclude their arbitration to determine the final value of the settlement in their underlying litigation." Fireman's argued that a stay was necessary because

[Fireman's] cannot effectively defend itself in this lawsuit without resolution of the underlying settlement amount, which, if proven reasonable, will form the "presumptive measure of damages" in this lawsuit. [PT] claims it cannot provide [Fireman's] written discovery responses .. . without jeopardizing its position in the eventual arbitration of the settlement amount. This leaves [Fireman's] in a litigation quandary, precluding [Fireman's] ability to prepare for and receive a fair trial.

         King County Superior Court Judge Laura Inveen granted Fireman's motion to stay on November 30, 2010. The stay was granted pending the final determination of damages by either "stipulated amount approved as reasonable by the court, " or "final arbitration decision."

         Gosney and Vose decided to enter arbitration. On September 17, 2012, Beninger notified John Bennett, outside counsel representing Fireman's, of the date and time of the arbitration. Arbitration was scheduled for November 1, 2012 before former King County Superior Court Judge Charles Burdell.

         Beninger described the scope of the arbitration as "all remaining issues." Bennett responded to the notice asking what the "remaining issues" included. On October 4, 2012, Bennett again wrote to Beninger asking "what issues the parties intend to arbitrate." Bennett stated that "[t]ime is of the essence if Fireman's Fund is to make an informed decision whether to participate in the arbitration and to prepare to participate, " and demanded that Beninger respond by the following day. Beninger responded simply that "[t]he issues subject to arbitration are broad."

         Bennett wrote to Beninger on October 9, 2012, declining to participate in the arbitration. Bennett explained,

As I am sure you understand, Fireman's Fund cannot reasonably participate in an arbitration when it does not know what will be arbitrated. Your response that the issues to be arbitrated are "broad" does not provide the information Fireman's Fund needs to be able to participate in the arbitration.
Also, Fireman's Fund is concerned that defendants have shared with plaintiff all confidential information relating to matters at issue in the arbitration, which would preclude any potential for a fair hearing of the matters in dispute. Your response ignores that concern.

         Bennett extended an offer to pay for a transcription of the arbitration. Beninger replied, "It seems like you are trying to generate reasons to avoid the arbitration, rather than participate in good faith. Please keep in mind that you moved the court and compelled the arbitration of all remaining issues." Beninger rejected the offer to pay for transcription of the arbitration. In response, Bennett asserted that Fireman's had no good faith duty to participate in the arbitration as Fireman's was not a defendant and the arbitration was not a reasonableness hearing.[9]

         Following the arbitration, Judge Burdell valued Gosney's claim at $10, 800, 289. Judge Burdell found that PT and Vose were jointly liable for the damages, that there was no bad faith, collusion, or fraud between the settling parties, and that the damages award was a reasonable covenant judgment amount. Judge Burdell further found that Fireman's had "notice and opportunity to participate, submit evidence and be heard." The award caption included Fireman's as a party.

         The arbitration proceeding was unusual and is one of the most contentious subjects in this proceeding. King County Superior Court Judge Sean O'Donnell summarized some of the arbitration oddities:

Mr. Vose admitted personal liability (pursuant to the settlement agreement) when he was not named in the lawsuit brought by Mr. Welch's estate. Prior to reaching an amount for damages and prior to the arbitration, Mr. Bundy ... turned over the confidential Jackson Wallace attorney file to Mr. Benninger [sic] (at Mr. Benninger's [sic] insistence). Mr. Bundy and Plaintiffs' counsel discussed the issues to be arbitrated well in advance of the hearing, and Mr. Bundy even provided Mr. Benninger [sic] with favorable case law prior to appearing before Judge Burdell.
At the arbitration hearing itself, Mr. Bundy failed to submit his own trial brief, he failed to call a single witness to testify, he failed to offer his own exhibits, he failed to call an expert in franchisor liability, and he agreed that Ms. Heller (the driver who killed Mr. Welch) was an employee of Pizza Time (the franchisor) when, in fact, Ms. Heller only worked for the franchisee. He also was silent to the fact that Fireman's Fund was listed in the caption of the arbitration brief (and other pleadings) as a party, when Fireman's Fund was not. Neither he nor Mr. Benninger [sic] made any effort to correct this error before Judge Burdell.
Additionally, Mr. Bundy failed to contest the difference between the damages award and the reasonableness finding/amount entered by Judge Burdell. The corollary to that concession is that Mr. Bundy agreed that Fireman's was liable for the total damage amount, with no discount afforded to Mr. Vose/Pizza Time for issues related to franchisor liability. Finally, the hearing was truncated, lasting only a matter of hours.

         On November 16, 2012, Thurston County Superior Court Judge Thomas McPhee determined that the arbitration award was reasonable and entered judgment against Vose and PT for $10, 800, 289 (hereinafter "underlying judgment"). The judgment included pre- and postjudgment interest accruing at the rate of 12 percent compounded annually from September 2, 2008 until paid.[10]On April 12, 2013, Judge Tabor granted Fireman's motion to remove its name from the caption of the arbitration award. Judge Tabor granted the requested relief but wrote on the order, "Court makes clear this does not affect the award or goes to any of the merits or repercussions of the award."

         On August 23, 2013, Fireman's moved for partial summary judgment in this action, asserting that "(1) as a matter of law Fireman's Fund is not bound by the arbitration award and judgment obtained against [Vose and PT] and that, therefore; (2) Plaintiffs' claim against Fireman's Fund for the amount of the arbitration award should be dismissed." King County Superior Court Judge Timothy Bradshaw denied the motion.

         On November 26, 2013, Judge Bradshaw entered an order preventing Fireman's from deposing Beninger. On January 27, 2014, Judge Bradshaw entered an order "to preclude attempts to relitigate the underlying Thurston County wrongful death action, issues and judgment."

         Trial

         Judge O'Donnell presided over a five-week jury trial in April and May 2015. At the close of Plaintiffs'[11] case, Fireman's moved for judgment as a matter of law pursuant to CR 50(a). Fireman's argued that the covenant judgment was the result of fraud and collusion, that Fireman's had not harmed Vose, and that Vose was judicially estopped from recovering damages because of his failure to disclose his claim during a prior bankruptcy proceeding. The trial court denied Fireman's motion but reserved ruling on the issue of judicial estoppel.

         The jury was asked to resolve five claims: negligence, breach of contract, breach of the CPA, breach of the IFCA, and breach of the duty of good faith. The jury was instructed on Fireman's affirmative defenses of fraud, collusion, excuse of performance by estoppel, and excuse of performance by waiver.

         At trial, Plaintiffs argued various violations of the duty of good faith. The jury was instructed that an insurer "that refuses to defend in good faith voluntarily forfeits its ability to protect itself against a settlement in excess of policy limits unless the settlement or arbitration is the product of fraud or collusion." Instruction 22. The jury was further instructed:

An insurance company will be bound by the findings, conclusions and judgment entered against their insured when it has adequate notice and an opportunity to intervene in the underlying action. The insurer is bound to what might, or should, have been litigated as well as to what was actually litigated. An insurer is not entitled to litigate factual questions that were resolved in the liability case by judgment or arm's length settlement.
This instruction applies only in the absence of fraud or collusion.

Instruction 38.

If you find that Fireman's failed to act in good faith by breaching its duty to defend and/or settle, then the law presumes that Plaintiffs Pizza Time and Mr. Vose were injured and that the failure to act in good faith was the proximate cause of this injury. You are bound by that presumption unless you find that Fireman's failure to act in good faith did not injure Plaintiffs Pizza Time and Mr. Vose.
Fireman's bears the burden of proof that any failure to act in good faith did not injure Plaintiffs Pizza Time and Mr. Vose.
Plaintiffs bear the burden of proving the amount of damages.
For all other claims that Fireman's failed to act in good faith, Plaintiffs have the burden of proving each of the following propositions:
(1) That Fireman's failed to act in good faith;
(2) That Plaintiff Pizza Time or Mr. Vose was damaged; and
(3) That Fireman's failure to act in good faith was a proximate cause of Plaintiff Pizza Time's or Mr. Vose's damages.
If you find from your consideration of all of the evidence that each of these propositions has not been proved, your verdict on the claim of failure to act in good faith should be for Fireman's. On the other hand, if each of these propositions has been proved, you must consider Fireman's affirmative defenses.

Instruction 53.

If your verdict is for the Plaintiffs on their claim that Fireman's Fund/American Insurance Company failed to act in good faith, then you must determine the amount of money that will reasonably and fairly compensate the plaintiffs for such damages as you find were proximately cause[d] by Fireman's Fund/American Insurance Company's failure to act in good faith.
If you find for the Plaintiffs on their claim that Fireman's Fund/American Insurance Company failed to act in good faith as to [the] duty to defend or settle, your verdict must include the amount of the judgment on the arbitration award, unless you further find for Fireman's Fund/American Insurance Company on its affirmative defense that the settlement was the product of fraud or collusion. The judgment amount is $10, 800, 289, plus interest.

Instruction 54.

         The interrogatories on the special verdict form, and the jury's answers, were as follows:

         QUESTION 1a: Plaintiffs' Claims

Have the Plaintiffs proven all elements of any or all of their claims as to the Defendants? (The elements of these claims are described in the accompanying Jury Instructions.)
ANSWER: (Check "yes" or "no")
Negligence X___ Yes ___No
Breach of Contract X___ Yes ___No
Breach of the Consumer Protection Act X___ Yes ___No
Breach of the Insurance Fair Conduct Act X___ Yes ___No
Breach of Duty of Good Faith X___ Yes ___No

         QUESTION 1b

If you answered "yes" to Question 1a as to Breach of Duty of Good Faith, did you find a breach of the duty to defend or settle?
X___ Yes ___No

         QUESTION 2: Contributory Negligence

QUESTION 2A: Have the Defendants proven that Plaintiffs were contributorily negligent?
ANSWER (Check "yes" or "no")
___Yes X___No

         QUESTION 3: Defendants' Defenses

Have the Defendants proven all elements of any or all of their defenses? Answer each of the subparts below. (The elements of these claims and defenses are described in the accompanying Jury Instructions.)
ANSWER: (Check "yes" or "no")
Fraud ___Yes X___No
Collusion ___Yes X___No
Excuse of Performance by Estoppel ___Yes X___No
Excuse of Performance by Waiver X___ Yes ___No

         QUESTION 4a: Damages

Based on the jury instructions, what amount of damages, if any, do you find were incurred by Plaintiffs John Vose and Pizza Time?
(INSTRUCTION No. 1: Do not duplicate damages across multiple claims.)
(INSTRUCTION No. 2: Do not reduce the damages for Negligence for any contributory negligence you may find in Question 2. The Court will determine that amount.)

Damages:

Negligence:

$100, 000.00

Breach of Contract:

$20.000.00

Breach of Duty of Good Faith:

$300, 000.00

Breach of Consumer Protection Act:

$20.000.00

Breach of the Insurance Fair Conduct Act:

$20, 000.00

         Question 4b:

If you awarded damages in Question 4a, does the damages amount include the judgment?
___Yes X No

         SUPPLEMENTAL QUESTION:

Of the damages identified in the Verdict Form in Question 4a, what is the total dollar amount of damages incurred by Plaintiff John Vose, as opposed to those incurred by Pizza Time?
$240.000.00

         Following receipt of the jury's verdict, the trial court discharged the jury and granted Plaintiffs' motion to prohibit contact with the jurors. Plaintiffs later filed a presentation of judgment, asserting that the amount that should be entered as the principal judgment amount, based on the jury's verdict, was $11, 260, 289. In response, Fireman's argued that the jury did not award the amount of the underlying judgment and that, even assuming that it did, Fireman's was not bound by that judgment.

         The trial court agreed with Plaintiffs as to the legal effect of the jury's verdict and entered judgment in favor of Plaintiffs.[12] The trial court awarded interest on the underlying judgment beginning from the date of entry of the arbitration award. The trial court also concluded that Fireman's was estopped from contesting the arbitration award. The trial court found that Fireman's had sufficient notice of the arbitration hearing, that the arbitration hearing was "actually litigated, " and that Fireman's was in privity with Vose and PT at the time of the arbitration hearing.

         Fireman's then filed a motion for reconsideration. The trial court reviewed the jury's special verdict and concluded:

The jury here made a factual determination of plaintiffs' bad faith damages other than and in addition to the covenant judgment in the amount of $300, 000.00. The jury accordingly found harm as a result of Fireman's ... failure to act in good faith. But the plaintiffs' floor on damages had already been determined by entry of the Thurston County judgment (resulting from the arbitration/reasonableness hearing).... As a matter of law, the jury's apparent conflict in the verdict form (finding harm for the breach of duty of good faith but not writing in the amount) must be resolved to include the arbitration amount.

         The trial court then addressed Fireman's judicial estoppel claim. Pursuant to CR 50(a), Fireman's had moved to bar Vose from collecting on the jury's damages award based on Vose's failure to disclose a potential claim against Fireman's during a prior bankruptcy proceeding. The trial court agreed with Fireman's and concluded that both Vose and PT were judicially estopped from recovering damages.

         The trial court entered judgment in favor of Gosney and against Fireman's, awarding Gosney the amount of the underlying judgment and accrued interest totaling $15, 612, 624.34. The trial court additionally awarded Gosney attorney fees and costs totaling $2, 484, 542.50 and awarded Vose and PT attorney fees and costs totaling $405, 612.50. The trial court's awards of attorney fees and costs included a lodestar multiplier of 1.25. Fireman's now appeals. Gosney, Vose, and PT cross-appeal.

         II

         "An insured may independently negotiate a settlement if the insurer refuses in bad faith to settle a claim. In such a case, the insurer is liable for the settlement to the extent the settlement is reasonable and paid in good faith." Besel v. Viking Ins. Co. of Wis., 146 Wn.2d 730, 736, 49 P.3d 887 (2002) (citing Evans v. Cont'l Cas. Co., 40 Wn.2d 614, 628, 245 P.2d 470 (1952)). Such a settlement agreement typically involves three features: "(1) a stipulated or consent judgment between the plaintiff and insured, (2) a plaintiffs covenant not to execute on that judgment against the insured, and (3) an assignment to the plaintiff of the insured's coverage and bad faith claims against the insurer." Bird v. Best Plumbing Grp., LLC, 175 Wn.2d 756, 764-65, 287 P.3d 551 (2012) (citing Besel, 146 Wn.2d at 736-38). This type of settlement agreement is often referred to as a covenant judgment. Bird. 175 Wn.2d at 765.

         "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." Bird, 175 Wn.2d at 765 (citing Besel, 146 Wn.2d at 738). The insured can recover from the insurer "the amount of a judgment rendered against the insured, even if the judgment exceeds contractual policy limits." Miller v. Kenny, 180 Wn.App. 772, 799, 325 P.3d 278 (2014). This is sometimes referred to as the "'judgment rule.'" Miller, 180 Wn.App. at 799 (quoting Besel, 146 Wn.2d at 735). "The insurer still must be found liable in the bad faith action and may rebut the presumptive measure by showing the settlement was the product of fraud or collusion." Bird. 175 Wn.2d at 765 (citing Mut. of Enumclaw Ins. Co. v. T&G Constr., Inc., 165 Wn.2d 255, 264, 199 P.3d 376 (2008)).

         The propriety of this process has been considered and endorsed by our Supreme Court.

Whether the insurer acts in bad faith by refusing to settle in good faith or by refusing to defend, the consequences to the insured are the same. The defense may be of greater benefit to the insured than the indemnity. The defense must be prompt and timely. An insurer refusing to defend exposes its insured to business failure and bankruptcy. An insurer faced with claims exceeding its policy limits should not be permitted to do nothing in the hope that the insured will go out of business and the claims simply go away. To limit an insurer's liability to its indemnity limits would only reward the insurer for failing to act in good faith toward its insured. We therefore hold that when an insurer ...

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