Clarifying Washington law, Division I of the Washington Court of Appeals has held that a jury is not limited in what it awards on a bad faith claim to the amount that the policyholder and the claimant had agreed to as the judgment in the underlying dispute.  The set up: in Miller v. Kenny a young driver crashed his car injuring himself and three passengers (the car actually belonged to one of the passengers).  Driver’s insurer, Safeco, played games with policy limits and its evaluation of the case, putting the insured at risk of a significant judgment against him well in excess of policy limits.  The insured driver and one of the passengers agreed to a stipulated judgment against the insured that was over policy limits, with an assignment of the insured’s claims against Safeco to the passenger, and a covenant that the passenger would not seek to enforce the judgment except to the extent of the passenger’s rights against Safeco.  The parties followed Washington’s procedures for a reasonableness hearing, and it appears that Safeco did not contest the reasonableness of the covenant judgment.  The judgment was for $4.15 million (exclusive of the policy limits, which Safeco paid).

But at the bad faith hearing the passenger, as assignee of  the policyholder’s bad faith claim, put on evidence of damage to the driver caused by Safeco’s bad faith that went well beyond the amount of the covenant judgment.  The jury ended up awarding the passenger/assignee $13 million, inclusive of the covenant judgment amount.  Post-trial the court added prejudgment interest, postjudgment interest, and attorney fees, and some of the damages award was trebled under the Consumer Protection Act. The final judgment was for $21,837,286.73.

On appeal, Safeco argued that under Besel v. Viking Ins. Co. of Wisc., 146 Wn.2d 730, 736, 49 P.3d 887 (2002), which held that the amount of a covenant judgment, when found to be reasonable, is the “presumptive measure of the insured’s harm,” the jury cannot award more than the amount of the covenant judgment.  Not so, said the Court of Appeals in Miller; the covenant judgment is the presumptive floor to the insured’s harm, but not a ceiling.  The Miller court went on to describe the different kinds of harm that the insured can suffer which may be provenin a bad faith action, above and beyond the covenant judgment amount:  damage to “credit rating, damage to reputation, loss of business opportunities, loss of control of the case…, loss of interest, attorney fees and costs, financial penalties for delayed payments, and emotional distress, anxiety, and fear.”

Miller is an important milepost in Washington’s evolving judicial recognition of the extraordinary power that liability insurers have over the lives of  their insureds, and the catastrophic harm that insurers can cause when they try to play things close to the vest in order to save themselves some money.  Miller may have the unfortunate effect of motivating carriers to contest reasonableness hearings, in order to get an early shot at reducing the net recovery on  a bad faith claim.  In the end, that will be a small price to pay for the benefits of this case (assuming that Miller is upheld by the Washington Supreme Court).