In Brianna Garza and Mario Garza v. Matthew Perry and American Family Insurance Company, No. 83377-4-I, the Washington Court of Appeals determined that an insurance company could not intervene in an action intending to nullify a settlement agreement involving a covenant judgment. The court denied the insurer's attempt to nullify the covenant judgment settlement because it was not a party to the agreement, and upheld the lower court's approval of the agreement through a reasonableness hearing.

Important Facts

Matthew Perry and Brianna Garza were involved in an auto accident in which Garza suffered a traumatic brain injury. Perry was at fault and the Garzas sued Perry seeking damages for Garza's injuries.

The Garzas presented several settlement offers to Perry's insurer, American Family Insurance (AmFam), but all attempts at resolution failed. The Garzas then approached Perry directly and offered to settle in exchange for an assignment of rights against AmFam. Perry retained personal counsel to represent him in an individual capacity. Thereafter, Perry and Garza agreed to a covenant judgment in the amount of $2.5 million. AmFam was not a party to the settlement and did not participate in its negotiation.

In part, the agreement provided: "This Settlement Agreement shall be provided to Defendant's insurers for review so that Defendant's insurers may consider whether to fully protect Defendant from the claims of plaintiff for injuries and Damages Plaintiffs sustained in the crash at issue. If within 30 days from the date of that this Settlement Agreement is signed, Defendant's insurers provide written proof to Defendant, and to Plaintiffs' attorneys, that Defendant's insurers will pay all injuries and damages sustained by Plaintiffs in the crash at issue for which Defendant may be found liable, and to fully indemnify Defendant for any final judgment which may be netted against him for these claims, then the parties mutually release each other from all terms and conditions of this Settlement Agreement and all benefits and obligations of both parties to this agreement, including refund by Plaintiffs to Defendant of any payments made by Defendant pursuant to this Settlement Agreement."

The Garzas notified AmFam's counsel that it had reached a settlement agreement with Perry and a copy was sent via email. Also contained in that email was a final settlement agreement for AmFam, offering to dismiss all potential claims if AmFam paid the agreed upon settlement amount.

AmFam responded to the letter by agreeing to waive the applicable limits of $250,000 and to indemnify Perry over that amount. AmFam further stated "[w]e understand by waiving the limits in this manner, the parties to the Settlement Agreement have now mutually released each other from all terms and conditions of the Settlement Agreement."

The parties clarified that the agreement was not intended to provide a mutual release, and entered into an addendum accordingly. AmFam intervened arguing that it had a valid settlement agreement. The court found that the intent was clear: Garza intended to release the covenant judgment only if AmFam paid the Garzas $2.5 million, not if it made a promise to Perry to indemnify a jury verdict. Thus, read in the context of all the writings, the agreement plainly did not constitute an independent offer to AmFam. A reasonableness hearing went forward and the trial court determined that the $2.5 million settlement was reasonable.

The Covenant Judgment

AmFam argued that the damages were not supported by the evidence because Garza's injuries are not worth $2.5 million. It also asserted that the litigation expert used by Garza was not credible. The court did not find favor with either of these contentions and explained that it views the evidence in the light most favorable to the prevailing party. The appellate court cannot question the trial court's findings on credibility, so Am Fam's arguments failed. The court also found no sufficient evidence to prove that the settlement agreement was the result of collusion.

Key Insights

The case provides insight for insurers related to covenant judgments. It is clear that an insurer will not likely be able to argue that it is a party to a covenant judgment settlement agreement, and it will be difficult for an insurer to reverse the outcome of a reasonableness hearing on appeal. An insurer should fully engage at the reasonableness hearing stage and properly support its arguments as to the value of a case and have the court incorporate the same into its order.

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