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ORDER – 1

UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF WASHINGTON

AT TACOMA

MACLEAN TOWNHOMES, LLC, a

Washington limited liability company, as

assignee of American Heritage Builders, a

Washington corporation,

 Plaintiff,

v.

CHARTER OAK FIRE INSURANCE

CO., a foreign insurance company,

 Defendant. 

CASE NO. C06-1093BHS

ORDER RE: PRESUMPTIVE

MEASURE OF DAMAGES

This matter comes before the Court on the parties’ request for a clarification

regarding the damages on Plaintiff’s bad faith claim. The Court has considered the

pleadings filed in support of each party’s position and the remainder of the file and

hereby finds that the reasonable settlement amount is the presumptive measure of

damages on Plaintiff’s bad faith claim.

I. PROCEDURAL AND FACTUAL BACKGROUND

On August 3, 2006, Plaintiff MacLean Townhomes, LLC filed a complaint for

declaratory relief and monetary damages against Defendant Charter Oak Fire Insurance

Co. Dkt. 1. Plaintiff’s claims are based on the assignment of an insurance contract

between assignor American Heritage Builders (AHB) and Defendant Charter Oak. Dkt.
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ORDER – 2

56 at 1. One of Plaintiff’s claims is that Charter Oak acted in bad faith with respect to

AHB’s claims for indemnity. Dkt. 1, ¶¶ 46-49. 

On March 3, 2005, MacLean and AHB executed a Settlement Agreement,

Assignment of Rights and Covenant Not to Execute (“MacLean/AHB settlement”). 

Declaration of Chris Landschulz (“Landschulz Decl.”), Dkt. 57, Exh. E. The amount of

that settlement was $1,806,219.06. Id. 

On September 9-12, 2008, the Court held a hearing to determine whether the

MacLean/AHB settlement was reasonable. Dkts. 216-220. On September 18, 2008, the

Court concluded that Plaintiff had failed to show that the settlement was reasonable and

reduced the settlement amount by $606,219.06. Dkt. 226. 

On October 9, 2008, the Court held a pretrial conference and the parties disagreed

as to whether the reduced settlement amount determined by the Court to be reasonable is

the presumptive measure of damages for Plaintiff’s bad faith claim against Charter Oak. 

Dkt. 258.

II. DISCUSSION

 Defendant argues that “if plaintiff establishes bad faith, it is entitled only to the

damages it can prove were proximately caused by bad faith . . . .” Dkt. 262 at 6. The

Washington Supreme Court, however, has held that:

the amount of a covenant judgment is the presumptive measure of an

insured’s harm caused by an insurer’s tortious bad faith if the covenant

judgment is reasonable under the [Chaussee v. Maryland Casualty Co., 60

Wn. App. 504 (1991)] criteria. This approach promotes reasonable

settlements and discourages fraud and collusion. Furthermore, using the

amount of a covenant judgment to measure tort damages in this context

makes sense in light of our long standing requirement that such settlements

be reasonable. If a reasonable and good faith settlement amount of a

covenant judgment does not measure an insured’s harm, our requirement

that such settlements be reasonable is meaningless. Finally, the Chaussee

criteria protect insurers from excessive judgments especially where, as here,

the insurer has notice of the reasonableness hearing and has an opportunity

to argue against the settlement’s reasonableness.
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1

 The Chaussee criteria are: the releasing person's damages; the merits of the releasing

person's liability theory; the merits of the released person's defense theory; the released person's

relative faults; the risks and expenses of continued litigation; the released person's ability to pay;

any evidence of bad faith, collusion, or fraud; the extent of the releasing person's investigation

and preparation of the case; and the interests of the parties not being released. Chaussee, 60

Wn. App. at 512.

2

 In Anderson, the appellate court reversed the trial court’s dismissal of plaintiff’s bad

faith claim against plaintiff’s insurer. Anderson, 101 Wn. App. at 339. The appellate court

stated that “[t]he amount of damages caused by [the insured’s bad faith] remains to be

determined at trial.” Id.

ORDER – 3

Besel v. Viking Ins. Co. of Wisconsin, 146 Wn.2d 730, 738-39 (2002)1. 

Defendant contends that this authority is distinguishable on the basis of how the

covenant judgment was determined to be reasonable. In Besel, the trial court found that

the amount of the actual covenant judgment was reasonable. Besel, 146 Wn.2d at 739. In

this case, the Court concluded that Plaintiff has failed to prove that the MacLean/AHB

settlement was reasonable and reduced the settlement by a reasonable amount. Dkt. 226. 

Defendant cites Werlinger v. Warner, 126 Wn. App. 342 (2005), for the proposition that

“if the amount of a covenant judgment is found unreasonable, there is no presumptive

measure of damages and the plaintiff is entitled to only the damages it can prove were

proximately caused by the bad faith.” Dkt. 262 at 2.

In Warner, the trial court determined that the covenant judgment was

unreasonable. Warner, 126 Wn. App. at 347. The plaintiffs appealed that decision and

the Washington Court of Appeals, Division I, upheld the trial court. Id. at 352. The

Court of Appeals stated that “[i]n the event that the bad faith claim against [defendant’s

insurance company] is found to be viable, this decision does not preclude [plaintiffs] from

proving [the insured’s] damages in the ordinary way. See Anderson v. State Farm, 101

Wn. App. 323, 333, 2 P.3d 1029 (2000).” Id. at 351-52 (emphasis added).2

 Defendant

claims that the phrase “in the ordinary way” means something other than a presumptive

measure of damages. Dkt. 262 at 4-6. While this question has not directly been

addressed by the Washington courts, they have provided some guidance on this issue.
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ORDER – 4

In Meadow Valley Owners Ass’n v. St. Paul Fire & Marine Ins. Co., 137 Wn. App.

810 (2007), the Washington Court of Appeals, Division I, considered the effect of its

prior ruling in Warner on a settlement amount that the trial court had determined to be

unreasonable. Id. at 821-22. The trial court found that “the $2.4 million attorney fee

amount was unreasonable but $1.6 million would be reasonable.” Id. at 820. On appeal,

the defendant argued that, based on Warner, plaintiff was required “to establish damages

in a later bad faith action ‘in the ordinary way.’” Id. at 821. The appellate court

“disagree[d]” and distinguished the facts of Warner by recognizing that, in Warner, “the

insured’s bankruptcy insulated him from any harm resulting from the insurer’s bad faith.” 

Id. at 821-22.

In this case, Defendant’s reading and application of Warner is equally misplaced. 

While AHB may not have suffered damages as a result of the alleged bad faith failure to

defend, the damages for the alleged actions of bad faith in the duty to settle must be the

reasonable settlement amount. Otherwise, as Plaintiff asserts, “the reasonableness

hearing is meaningless.” Dkt. 263 at 5. Moreover, at the time of the settlement, AHB

was not “insulated” from exposure as was the insured in Warner. Requiring Plaintiff to

prove its damages on its bad faith claim would allow Defendant another opportunity to

protect its interests and relitigate the measure of the insured’s harm for the alleged bad

faith actions. Defendant had a full and fair opportunity to attack the presumptive measure

of damages at the reasonableness hearing. Therefore, Defendant’s request that the Court

require Plaintiff to prove its bad faith damages at trial is denied because if Plaintiff is able

to meet its burden at trial in proving a bad faith failure to settle, then Defendant should be

liable for the reasonable settlement amount.
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ORDER – 5

III. ORDER

Therefore, it is hereby

ORDERED that Defendant’s request that the reasonable settlement amount of the

MacLean/AHB settlement not be the presumptive measure of damages on the bad faith

claim is DENIED. The presumptive measure of damages on Plaintiff’s bad faith claim

will be the amount determined by the Court to be reasonable, which was $1.2 million.

DATED this 21st day of October, 2008.

A 

BENJAMIN H. SETTLE

United States District Judge