Liability Insurer's Opportunity to Challenge Washington Insured's Settlement Limited to Reasonableness Hearing
On October 23, 2008, the Washington Supreme Court rejected a liability insurer’s attempt to use a subsequent declaratory judgment action to challenge a settlement entered into by its insured. In doing so, the Court held that if an insured obtains a reasonableness determination from the trial court in the underlying liability action, the settlement amount presumptively establishes the amount of the damages award for purposes of coverage and an insurer (even in the absence of any bad faith) cannot later attempt to re-litigate issues resolved by the settlement:
When the insurer had an opportunity to be involved in a settlement fixing its insured's liability, and that settlement is judged reasonable by a judge, then it is appropriate to use the fact of the settlement to establish liability and the amount of the settlement as the presumptive damage award for purposes of coverage. . . .
[I]t would be inequitable to allow an insurer to relitigate questions that were resolved in the underlying liability action. Accordingly, we hold that an insurer is not entitled to litigate factual questions that were resolved in the liability case by judgment or arm's length settlement.
As a practical matter, the decision appears to give insureds in Washington the ability to settle claims over their insurers’ objections so long as the settlement can withstand scrutiny at a reasonableness hearing.
