While we might file lawsuits for any number of reasons, when somebody injures us we want them to pay us the money they owe for causing our injuries. Because most people are not wealthy or responsible with their money, we typically only sue people who are insured because that is the only way we will get reimbursed for the damage their actions caused. But even though attorneys deal with defendants’ insurance companies when attempting to settle a case, it is important to remember that you are still only suing the defendant and not the insurance company in its personal capacity.
Because you are technically suing the defendant and not the insurance company, many problems can arise that make it difficult for the innocent injured party to get the money he or she deserves in a reasonable amount of time. Sometimes insurance companies deny that their insured (the party that injured you) is covered under their insurance policy. Sometimes insurance companies draw out the process to the point where there is the threat of a lawsuit hanging over both parties for years. Often the insured defendant wants to admit liability (that he or she was responsible for your injuries), yet the insurance company will fight liability to the end, wasting every parties’ time and money.
This is where covenant judgments can help. A plaintiff and a defendant can negotiate a settlement out of the watchful and unreasonable eye of the defendant’s insurance company. The plaintiff and defendant can then ask the judge to determine whether or not the settlement is reasonable. If the judge finds the settlement reasonable, the insurance company must pay the plaintiff the entire amount of the settlement agreement, completely apart from any policy limits in place. In return for this “covenant judgment,” the plaintiff signs an agreement to limit his money recovery to the maximum amount of the defendant’s insurance policy. The defendant also signs over to the plaintiff any right the defendant has to sue his insurance company for “bad faith” in representing him.
An example is probably necessary to better explain the concept. Let’s say Andy is suing Betty for injuries he sustained in a car accident as a result of Betty’s negligence. Betty has an auto insurance policy with a limit of $100,000. Andy believes he is entitled to about $150,000 and offers to settle the case for $100,000, the policy limits on Betty’s auto policy. However, Betty’s insurance company refuses to settle for any more than $5,000, even in the face of evidence that easily proves damages much higher than $5,000. Andy and Betty can settle for $125,000 and take that settlement to the judge. The judge can declare the $125,000 settlement reasonable and order Betty’s insurance company to pay the entire $125,000 to Andy, even though it was originally only contractually obligated to pay up to the $100,000 policy limit.
Obviously this is just a quick overview of covenant judgments and there are a lot of details I had to leave out for the sake of brevity. You can find more information about covenant judgments in Washington State here: Bird v. Best Plumbing Group, LLC, 287 P.3d 551 (Wash. 2012); Thomas V. Harris, Washington Insurance Law § 10.02, at 10–3 (3d ed. 2010); Mut. Of Enumclaw Ins. Co. v. T&G Constr., Inc., 165 Wash.2d 255 (Wash. 2008). Also see what others have to say about the topic: http://www.northwestinsurancelawblog.com/articles/covenant-judgments/, http://www.thefederation.org/documents/franco.htm, http://www.highbeam.com/doc/1G1-314139801.html