Covenant Judgment Scrutinized and Greatly Reduced

Construction defect plaintiffs in Washington continue to use covenant judgments in an effort to force large settlements with developers' insurers. If the developer's insurer is unwilling to fund a settlement, the plaintiff and defendant developer stipulate to entry of a monetary judgment and the plaintiff agrees that it may not enforce the judgment against any assets other than the insurer's liability insurance. In order for the stipulated judgment amount to serve as the presumptive measure of damages against the insurer, the plaintiff must first obtain a ruling from the trial court that the stipulated amount is reasonable. Washington law provides for trial courts to evaluate such stipulated judgments under a nine factor standard, but many insurers feel that, in practical terms, this standard often amounts to nothing more than a rubber stamp. But there seems to be a growing trend for trial judges to take a closer look at these stipulated judgments.

The latest example comes from United States District Judge John Coughenour in Aspen Grove Owners Assoc. v. Park Promenade Apartments, LLC. On January 9, 2012, Judge Coughenour ruled on the plaintiff condominium owners association's motion for a determination that its stipulated judgment settlement of $5.75 million is reasonable. Judge Coughenour analyzed the settlement from two perspectives -- first, he analyzed the estimated costs of repair submitted by the plaintiff association and the defendant developer; and second, he scrutinized the merits of the association's claims. In doing so, he reduced the plaintiff's total damages from $5.75 million to $4.27 million, and then applied a 55% discount to account for weaknesses in the plaintiff's liability theories. This reduced the approved damages to $1.92 million. But in recognition of the fact that the insurance policy involved only covered liability for breach of fiduciary duty for the developer's representatives who had served on the association's board of directors, Judge Coughenour allocated only $300,000 to the breach of fiduciary duty claim.

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