Essential strategies for insurance companies in Washington state

Mitigating consent judgment risks: Washington state presents unique and difficult challenges to insurers.

In Washington state, even when an insurer is defending under a reservation of rights, if the insurer rejects a demand to settle within limits, the insured can settle for any reasonable amount, including amounts in excess of the policy limits. By either wrongfully denying a defense or refusing to settle within limits, an insurer loses all coverage defenses and its policy limits and must pay any reasonable settlement or judgment amount. In addition, if it is found to have done either of those things in bad faith, that judgment or settlement becomes the presumptive floor for any bad faith damages, which may be trebled. (Credit: Joseph Sohm/Shutterstock)

Insurers operating in Washington state must navigate such distinct challenges as exposure to extra-contractual liability for breach of the duty to settle, even when the insurer is defending the insured.

What can an insurer do to protect itself from the threat of consent judgments? Here are some general guidelines…

Practice claims-handling best practices

What to do when you get a demand

Considerations in responding to a demand

A decision to turn down a settlement within limits is always going to be subject to hindsight bias by a reviewing court after an excess judgment or settlement. It is important to consider the following factors when deciding how to respond:

I also is essential to document your reasoning for accepting or rejecting the demand contemporaneously with the decision.

It’s also key to consider all options. Discuss whether to accept the demand or not, and whether further negotiations could be fruitful (remembering to be careful in negotiating off the demand, as negotiation could be considered a rejection, allowing the insured to enter into a consent judgment).

In he right case, consider waiving the policy limits. This is not the right answer in every case — not in a strong defense case. But it can give the insured the peace-of-mind a consent judgment would, while allowing the insurer to still defend the case and protect the insured.

Of course, after waiving limits, the insurer must be prepared to pay what the case is worth, whether by judgment or settlement, and does not have the limits as a defense.

Responding to a demand

If you decide to accept a demand, do so in writing before the deadline and make sure plaintiffs’ counsel receives the acceptance. Do not leave it to chance.

If you decide not to accept a demand, either because additional information is needed to evaluate the claim or because the evaluation of the claim does not support accepting the demand, respond in writing to the demand. Document what steps have been taken to investigate the claim so far, as well as what information or steps remain outstanding, and be specific.

If the case value does not support accepting the demand, include an analysis of the reasons and consider whether further negotiation might be warranted to resolve the case.

If a consent judgment arrives…

Prepare for the possibility that a time-limited demand could come at any time in a case and be ready to respond. Document your case file with your evaluation and plan. The key to defending against a consent judgment is to have a thoroughly documented claim file that explains the basis for the decisions made contemporaneously with the decisions that demonstrate the reasonableness of the position taken at the time.

Terri A. Sutton

Terri A. Sutton is a partner at Kennedys in Seattle. She advises insurers and litigates complex coverage issues under general, professional, pollution, and excess/umbrella policies, treaty and facultative reinsurance, medical malpractice, and directors and officers and employment practices liability coverages, and bad faith. Contact her at Terri.Sutton@kennedyslaw.com or at  (564) 224-9101.

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