[No. 57679-8-I. Division One. April 2, 2007.]
[1] Insurance — Duty To Defend — Declaratory Action To Determine Coverage Obligation — Separate Obligations. An insurer's duty to indemnify an insured is a separate and distinct obligation from its duty to defend. When there is a question about coverage, the insurer may defend the insured under a reservation of rights and, in a separate declaratory action, seek a judicial determination of its coverage and indemnity obligation. [2] Insurance — Duty To Defend — Declaratory Action To Determine Coverage Obligation — Validity — In General. An insurer that provides a defense to an insured in a tort action subject to a reservation of rights has the right to separately file a declaratory action for a judicial determination of its coverage and indemnity obligation. [3] Insurance — Scope of Coverage — Declaratory Action To Determine Coverage Obligation — Covenant Judgment — Effect. A court's determination that the amount of a stipulated judgment settlement agreement between an injured party and an insured tortfeasor is reasonable does not prevent or estop the tortfeasor's insurer from seeking a judicial determination of its coverage and indemnity obligation in a declaratory action so long as the insurer has not, in bad faith, breached its duty to defend the insured. Absent bad faith, the insurer is liable for the judgment only if the act for which the insured was liable is a covered event under the policy and only to the extent that the judgment amount does not exceed policy limits. [4] Insurance — Scope of Coverage — Proof — Shifting Burdens of Proof. A determination of whether a loss is covered under an insurance policy involves a two-step process: First, the insured must show that the policy covers the loss. Second, if the insured meets its burden, the insurer cannot avoid coverage unless it shows that the loss is excluded by specific policy language. [5] Insurance — Scope of Coverage — Proof — Burden of Proof. The burden of establishing that a loss is covered by an insurance policy is on the insured under the policy. [6] Insurance — Settlement — Between Insured and Claimant — Covenant Judgment — Reasonableness — Effect. When an insured, without the consent of the insurer, enters into a stipulated judgment settlement agreement with a claimant, the insurer is presumptively liable for the amount of the stipulated judgment only to the extent that the amount is reasonable. [7] Compromise and Settlement — Settlement Agreement — Reasonableness — Determination — Effect. A court's determination of the reasonableness of a stipulated judgment settlement agreement is not an adjudication on the merits of the underlying claim or a determination of the defendant's actual liability. [8] Insurance — Duty To Defend — Reservation of Rights — Estoppel — Application. When an insurer defends its insured against a claim under a reservation of rights and subsequently files a declaratory action for a judicial determination of its coverage and indemnity obligation to the insured, the findings, conclusions, and judgment entered by the court in the action against the insured are not binding in the declaratory action. [9] Insurance — Scope of Coverage — Limitations — Time-Barred Claim. Under a commercial general liability policy that covers the insured for damages the insured is legally obligated to pay, the insurer has no obligation to cover the insured for statutorily time barred claims. [10] Insurance — Cooperation Clause — Breach — Prejudice — Necessity. An insured's noncompliance with a cooperation clause in the insurance policy does not release the insurer from its responsibilities under the policy unless the insurer was actually prejudiced by the insured's actions or conduct. Whether the insurer was actually prejudiced by the insured's actions or conduct is a question of fact. Nature of Action: An insurer of an administratively dissolved subcontractor that was a defendant in litigation settled by the entry of a covenant judgment and an assignment of claims that were ruled to be reasonable by the presiding court sought a declaration that it had no obligation to indemnify the subcontractor for its liability in the underlying litigation. The defendants counterclaimed that the insurer was estopped from denying coverage or asserting any policy exclusions contesting the amount of the stipulated judgment. The defendants also alleged bad faith, breach of contract, violation of the Consumer Protection Act, unjust enrichment, and negligence. Superior Court: The Superior Court for King County, No. 04-2-23988-5, Julie Spector, J., on January 31, 2006, entered summary judgments in favor of the defendants, including one in which it ruled that the insurer was estopped from contesting coverage. Court of Appeals: Holding that the prior determination of the reasonableness of the settlement agreement does not prevent the insurer from contesting its coverage or indemnity obligation to indemnify the subcontractor, the court reverses the judgments, vacates the judgment against the insurer, and remands the case for further proceedings. James M. Beecher- and Brent W. Beecher- (of Hackett, Beecher & Hart), for appellant. Daniel E. Zimberoff- and Dina Wong- (of Barker Martin, PS), for respondents. ¶1 SCHINDLER, J. — Absent bad faith, the court's determination that a stipulated covenant judgment settlement agreement between an insured and the claimant is reasonable does not prevent an insurer in a declaratory judgment action from contesting coverage and its obligation to indemnify the insured. In this declaratory judgment action, the trial court erroneously relied on the findings and conclusions from the reasonableness hearing in ruling that Mutual of Enumclaw (MOE) was as a matter of law estopped from challenging coverage and its obligation to indemnify and that MOE was obligated to pay the stipulated judgment amount. We conclude MOE is entitled to a determination on whether there is coverage under the policy and, if so, the extent of MOE's obligation to indemnify the insured. We reverse the orders granting summary judgment, vacate the judgment entered against MOE, and remand. FACTS Condominium Construction Defect Lawsuit ¶2 In June 2002, a homeowners association, the Villas at Harbour Pointe Owners Association (the Association), sued the condominium developer and the general contractor, Construction Associations, Inc. (CAI), for $7.3 million in construction and design defects damages. CAI sued a number of subcontractors including T&G Construction, Inc. (T&G), the subcontractor responsible for installing the exterior siding. CAI alleged T&G was liable for breach of contract, breach of warranty, and indemnification. MOE defended T&G under a reservation of rights to deny coverage. ¶3 During the course of discovery, MOE learned that T&G was administratively dissolved on October 23, 2000. T&G filed a motion for summary judgment dismissal arguing that the statutory two-year time limit to file claims against a dissolved corporation barred CAI's lawsuit against it. The trial court ruled the two-year time limitation did not bar CAI's postdissolution claims against T&G, and there were material issues of fact concerning whether CAI's predissolution claims were barred. ¶4 The Association, the developer, CAI, and T&G each retained independent experts to investigate the water damage and determine the scope of repair. The experts agreed that T&G's defective siding work resulted in water damage but disagreed as to the method and cost of repair. ¶5 After failing to reach an agreement on the method and cost of repair, the Association filed a motion for summary judgment arguing that the alleged design and construction defects violated the Uniform Building Code (UBC) and the Washington Condominium Act (WCA), chapter 64.34 RCW. The court ruled that a number of the alleged defects violated the UBC and the WCA. As to T&G's work, the court ruled the improperly installed weather barrier and flashing violated the UBC and the WCA. ¶6 Following a court-ordered mediation in September 2004, the Association reached a settlement with all parties except T&G. As part of the settlement, CAI assigned its claims against T&G to the Association. On October 15, 2004, without MOE's consent, T&G and the Association entered into a settlement agreement. T&G agreed to entry of a $3.3 million stipulated judgment and to assign its coverage and bad faith claims against MOE to the Association. In exchange, the Association agreed to not execute on the judgment and to dismiss the claims against T&G. ¶7 After entering into the settlement agreement, the Association notified MOE and asked the court to schedule a reasonableness hearing. The court scheduled a hearing and granted MOE's motion to intervene to challenge the reasonableness of the settlement agreement between the Association and T&G. Declaratory Judgment Action ¶8 Following entry of the $3 million stipulated judgment, MOE filed an amended complaint in its declaratory judgment action against the Association and T&G. ¶9 In a series of summary judgment decisions, the trial court relied on the findings and conclusions from the reasonableness determination of the settlement agreement in the underlying construction litigation in ruling that MOE was estopped from contesting coverage based on the two-year time limitation for claims against dissolved corporations; that exclusions "l. Damage to Your Work," "m. Damage to Impaired Property," and "n. Recall of Products, Work or Impaired Property" did not apply; and that MOE was obligated to pay the stipulated $3 million judgment amount. The court then entered a $3 million judgment against MOE plus interest, costs, and attorney fees. MOE appeals. ANALYSIS ¶10 MOE contends that the trial court in the declaratory judgment action erred in ruling that it could not contest coverage or its obligation to indemnify based on the findings and conclusions that supported the court's reasonableness determination of the settlement in the underlying construction action. ¶11 On review of summary judgment, this court engages in the same inquiry as the trial court. Reynolds v. Hicks, 134 Wn.2d 491, 495, 951 P.2d 761 (1998). Summary judgment is proper where there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. CR 56(c); Mains Farm Homeowners Ass'n v. Worthington, 121 Wn.2d 810, 813, 854 P.2d 1072 (1993). The court must view the facts and all reasonable inferences in the light most favorable to the nonmoving party. Mason v. Kenyon Zero Storage, 71 Wn. App. 5, 8-9, 856 P.2d 410 (1993). Only when reasonable minds could reach but one conclusion on the evidence should the court grant summary judgment. Smith v. Safeco Ins. Co., 150 Wn.2d 478, 485, 78 P.3d 1274 (2003). We also review questions of law de novo. Dep't of Ecology v. Campbell & Gwinn, LLC, 146 Wn.2d 1, 9, 43 P.3d 4 (2000). ¶13 In both the underlying construction lawsuit and in the declaratory judgment action, MOE argued that the claims against T&G were barred by the two-year time limitation under former RCW 23B.14.340 (1995) of the Washington Business Corporation Act, Title ¶15 The coverage section of the commercial general liability policy states that the policy only applies to damages the insured is "legally obligated" to pay. Coverage A. Bodily Injury and Property Damage Liability 1. Insuring Agreement. a. We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies. ¶16 T&G was administratively dissolved on October 23, 2000. CAI sued T&G for breach of contract, breach of warranty, and indemnification in the condominium construction defect case in April 2003. On summary judgment, T&G argued that CAI's claims were barred under former RCW 23B.14.340. Former RCW 23B.14.340 provided that "any right or claim existing" against a corporation before its dissolution is barred if the claim is not brought within two years of the corporation's dissolution. The dissolution of a corporation either: (1) By the issuance of a certificate of dissolution by the secretary of state, (2) by a decree of court, or (3) by expiration of its period of duration shall not take away or impair any remedy available against such corporation, its directors, officers, or shareholders, for any right or claim existing, or any liability incurred, prior to such dissolution if action or other proceeding thereon is commenced within two years after the date of such dissolution. Any such action or proceeding against the corporation may be defended by the corporation in its corporate name. RCW 23B.14.340, as amended in 2006, provides: The dissolution of a corporation either (1) by the filing with the secretary of state of its articles of dissolution, (2) by administrative dissolution by the secretary of state, (3) by a decree of court, or (4) by expiration of its period of duration shall not take away or impair any remedy available against such corporation, its directors, officers, or shareholders, for any right or claim existing, or any liability incurred, prior to such dissolution or arising thereafter, unless action or other proceeding thereon is not commenced within two years after the effective date of any dissolution that was effective prior to June 7, 2006, or within three years after the effective date of any dissolution that is effective on or after June 7, 2006. Any such action or proceeding against the corporation may be defended by the corporation in its corporate name. LAWS OF 2006, ch. 52, § 17. ¶17 After the Association and T&G entered into a settlement agreement with a stipulated judgment and covenant not to execute, the Association requested a reasonableness hearing. The court granted MOE's request to intervene to challenge the reasonableness of the settlement. After a two-day hearing, the court concluded the settlement agreement was reasonable. ¶18 During the reasonableness hearing, the Association and T&G submitted additional evidence on whether CAI was a known claimant. The court, in its findings and conclusions on the reasonableness of the settlement, concluded it likely that the jury would have found CAI was a known claimant. While acknowledging the risk of reversal on the summary judgment rulings regarding the corporate dissolution time bar and the statute of limitations, the court concluded CAI would have prevailed at trial. If the matter proceeded to trial, C.A. faced the risk that later the Court of Appeals would reverse summary judgment determined in its favor regarding corporate dissolution, the existence of written contracts, statute of limitations and indemnity. C.A. also would have had to prevail in proving certain facts to defeat some of T&G's legal issues at trial, such as the corporate dissolution defense and to prove the existence of written contracts. However, the evidence supplied at the reasonableness hearing and in summary judgment hearings suggested C.A. should have been able to prevail in proving these facts. Although there was certainly some risk C.A. would not ultimately prevail on these issues, the risk was relatively small. I am aware the ramifications of losing on these legal issues would be great. C.A. could lose all or most of its claims. Therefore, this court has carefully weighed that risk in determining the value of C.A.'s claims. ¶19 In the declaratory judgment action, the court relied on the findings and conclusions from the reasonableness determination in ruling that MOE was estopped from arguing T&G's dissolution barred coverage. MOE contends the court erred in relying on the reasonableness determination to establish MOE's obligation under the policy to indemnify T&G for the stipulated judgment amount. We agree. ¶20 When an insured, without the consent of the insurer, enters into a settlement agreement with a stipulated judgment, the insurer is presumptively liable only to the extent the amount is reasonable. Besel v. Viking Ins. Co. of Wis., 146 Wn.2d 730, 738, 49 P.3d 887 (2002). In determining whether a settlement is reasonable, the trial court considers the factors first adopted in Glover v. Tacoma General Hospital, 98 Wn.2d 708, 711, 658 P.2d 1230 (1983), overruled on other grounds by Crown Controls, Inc. v. Smiley, 110 Wn.2d 695, 756 P.2d 717 (1988), and later in Chaussee v. Maryland Casualty Co., 60 Wn. App. 504, 803 P.2d 1339 (1991). The Glover/Chaussee factors include: "[T]he 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." Glover, 98 Wn.2d at 717 (alteration in original). ¶21 Below and on appeal, the Association mischaracterizes a reasonableness hearing as a "mini-trial" to determine liability and an adjudication on the merits. ¶22 The Association relies on Besel, to argue that the stipulated judgment entered after the reasonableness hearing establishes MOE's legal liability under the policy. But the court in Besel only held that the amount of a covenant judgment is the presumptive measure of harm if the insured established bad faith and the covenant judgment is reasonable under the Glover/Chaussee factors. Besel, 146 Wn.2d at 738. In other words, under Besel, coverage by estoppel is only imposed if the insurer acted in bad faith. Kirk, 134 Wn.2d at 563. Here, although the Association, as T&G's assignee, alleged bad faith, the court did not rule that MOE acted in bad faith. Absent bad faith, MOE is not estopped from disputing coverage or its obligation to indemnify T&G on the stipulated judgment. ¶23 The underinsured and uninsured motorist (UIM) cases relied on by the Association are also inapposite. Finney v. Farmers Insurance Co. of Washington, 21 Wn. App. 601, 617-18, 586 P.2d 519 (1978); Fisher v. Allstate Insurance Co, 136 Wn.2d 240, 246, 961 P.2d 350 (1998); and Lenzi v. Redland Insurance Co., 140 Wn.2d 267, 275, 996 P.2d 603 (2000) hold that when an insurer refuses to participate in the arbitration between its insured and the tortfeasor, it is bound by the judgment entered against the insured for underinsured or uninsured benefits. ¶24 Because there was no finding of bad faith, on remand MOE is entitled to a determination in the declaratory judgment action as to whether there is coverage under the policy. ¶25 Citing this court's recent decision in Ballard Square Condominium Owners Ass'n v. Dynasty Construction Co., 126 Wn. App. 285, 108 P.3d 818 (2005), aff'd on other grounds, . . . . 2. Duties In the Event Of Occurrence, Offense, Claim or Suit. . . . . d. No insureds will, except at that their own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent. 3. Legal Action Against Us. No person or organization has a right under this Coverage Part. b. To sue us on this Coverage Part unless all of its terms have been fully complied with. CONCLUSION ¶27 We conclude that MOE is entitled to adjudication on coverage and the extent of its obligation to indemnify T&G. We reverse the trial court's orders granting summary judgment, APPELWICK, C.J., and COX, J., concur.