OPINION
PER CURIAM.
A jury awarded compensatory damages of $1,540,000 and punitive damages of $2,600,000 against Great Divide Insurance Company on claims that it had breached its duties to its insured, Gowdy & Son, while defending a claim brought by Raymond Car[602]*602penter. The five main issues presented in the appeal are:
1. Did the policy issued by Great Divide to Gowdy & Son cover the accident that resulted in injury to Carpenter?
2. Was the jury determination that Great Divide did not fulfill its legal obligations to Gowdy & Son in accord with the law?
3. Was the jury determination that Great Divide did not fulfill its legal obligations to Gowdy & Son supported by the evidence?
4. Should the issue of punitive damages have been submitted to the jury?
5. Was the jury award of punitive damages supported by the evidence?
Carpenter has cross-appealed, raising the question whether the superior court erred in refusing to rule as a matter of law that Great Divide was bound by the arbitration-based compensatory damage judgment of more than $2,000,000 entered in Carpenter v. Gowdy.1
We conclude that the policy covered the accident, that the finding of a breach was legally justified, that there was sufficient evidence that Great Divide breached its defense duties, but that the claim for punitive damages should not have been submitted to the jury because there was no pretrial notice of this claim. Our decision on this issue moots consideration of the fifth issue as to whether the jury award of punitive damages was supported by the evidence. We also conclude that the court properly ruled that Great Divide was not bound by the judgment in Carpenter v. Gowdy. We thus affirm the award of compensatory damages and reverse the award of punitive damages.
I. FACTS AND PROCEEDINGS
A. The Underlying Accident and Coverage
Elmer and Dan Gowdy, d/b/a Gowdy & Son, operated a floor-covering business in Douglas. The business was operated out of Elmer's house that was heated in part by woodstoves. On September 8, 1993, Rick Ostman, a sometime employee of Gowdy & Son, was felling dead trees on the property of John Vavalis in order to obtain firewood to heat Elmer's house. Raymond Carpenter, age eleven, was struck by a falling tree cut by Ostman. He suffered serious, permanent injuries, including brain damage. On the day of the accident, a Sunday, Dan Gowdy was also on the Vavalis property skidding logs that Vavalis had sawn to Vavalis's new portable mill. Dan was working without remuneration to help Vavalis as "the neighborly thing to do." Elmer Gowdy was also on the Vaval-is property "off and on" on the day of the accident. He had directed Ostman to go to the property to cut three dead spruce trees for firewood. Ostman's trial testimony as to whether Elmer or Dan had told him what trees to cut is unclear. Initially he said Elmer told him, then that he could not remember if it was Dan or Elmer, and then that Dan did so. Ostman testified that he was being supervised by Dan at the Vavalis property.
At the time of the accident Gowdy & Son was insured by Great Divide under a commercial general lability policy with an "each occurrence" limit of $1,000,000. In the policy declarations sheet Gowdy & Son was described as a partnership whose business was "floor-covering installation." Its only relevant premium classification was "floor-covering installation-not ceramic, tile or stone." The policy contained a classification limitation stating that "[this insurance does not apply to 'bodily injury' ... for operations which are not classified or shown on the ... Declarations, its endorsements or supplements."
B. Carpenter v. Gowdy
Carpenter sued Dan Gowdy, but not Elmer Gowdy or Gowdy & Son, on February 8, 1995, claiming that the tree that injured him was negligently felled. Carpenter contended that Dan Gowdy was directly and vicariously responsible for this negligence; directly for failing to exercise adequate supervision and vicariously under principles of respondeat superior. The complaint alleged that Dan Gowdy "operated a business in Juneau generally engaged in the operation of the felling [603]*603of trees," and that at the time of the accident Dan was cutting trees on the property at the request of John Vavalis.
When Dan was served with the complaint, he took it to attorney Jim Bradley, a family friend. Bradley gave some advice to Dan and attended a deposition with him, but did not enter an appearance. On August 21, 1995, Bradley wrote a letter for Dan's signature tendering the defense to Great Divide. Upon receiving this letter Great Divide assigned adjuster Greg Anson, whose office was in Arizona, to handle the claim. On August 25, 1995, Anson read the complaint and the policy and identified a potential coverage question based on the classification limitation. He called Anchorage attorney Patrick McKay, who had previously represented Great Divide in numerous cases. According to Anson's contemporaneous notes, McKay told him that the classification limitation would be upheld. The notes also stated that Great Divide should assign attorney Paul Stockler to file a declaratory judgment action on coverage.
On August 28, 1995, Anson had a telephone conversation with Dan Gowdy. Anson, again according to his notes, advised Dan that a coverage question existed under the classification exclusion and that Great Divide would conduct a defense under a reservation of rights. Anson's notes indicate that Dan said he had nothing to do with cutting trees on the property, that he was operating a skidder at the time of the accident, and that he and his father were hired by the property owner to remove felled trees. Dan also told Anson that his deposition had already partly been taken and was slated to continue on that day, and that he was not currently represented by counsel. Anson called McKay, who was able to cancel the deposition.
On August 31, 1995, Anson wrote both Elmer and Dan Gowdy. He acknowledged receipt of the Carpenter complaint and stated that according to the complaint "Dan Gowdy was conducting a tree-clearing operation" at the time of the accident. Anson stated that he had assigned Pat McKay to defend the Gowdys but that the defense would be "under a full reservation of rights" and that the defense would not "constitute either an ad-
mission of coverage under the policy, or an acknowledgment of any responsibility to pay damages in any judgment against you by Raymond Carpenter." The letter went on to observe that the limits of liability under the policy were $800,000 per occurrence. Relying on the classification limitation exelusion, the letter stated:
Clearly, the pleadings contained in the lawsuit indicate that injury sustained by the plaintiff were [sic] as a result of your conducting a tree clearing operation and is not in any way related to. the business description of your policy. Therefore, if it is determined that there would be no liability coverage available to your [sic] under the above policy, I encourage you to seek and obtain counsel at your own choosing and expense to defend your interests in this matter.
Anson's letter concluded: "If you feel I have overlooked an allegation in the complaint which would be covered under your policy, or potentially covered under your policy, please point out such language to me and I will be happy to reconsider our position."
McKay appeared in the case as counsel for Dan Gowdy and conducted the defense on his behalf. Soon after McKay assumed the defense, Dan was interviewed in person by Mike Trevethan, an independent adjuster hired by Great Divide. Trevethan asked questions that were relevant to liability and coverage issues. In the process of conducting the defense MeKay took and participated in a number of depositions and forwarded reports of the depositions to Great Divide. Whether McKay's questions during the depositions were designed to elicit facts showing no coverage rather than no liability is a disputed issue in the current litigation.
In December 1995 McKay, acting on behalf of Dan, filed a third-party claim against Rick Ostman and John Vavalis, claiming that their negligence had contributed to the accident. In early January 1996 Carpenter filed an amended complaint adding Elmer Gowdy as a defendant. Elmer's attorney, Loren Domke, wrote Great Divide and asked that he be appointed as Elmer's lawyer to defend the case at Great Divide's expense. Great Divide agreed and thereafter McKay and [604]*604Domke cooperated in conducting the defense of the Carpenter action.
The case was set for trial to begin in June 1996. At a mediation conference held in April 1996, Carpenter and the Gowdys agreed to a procedure by which the case would be settled. Contingent on the outcome of an arbitration proceeding, the Gow-dys agreed to confess judgment and assign to Carpenter any rights or claims that they had against Great Divide arising out of Great Divide's conduct of their defense. In exchange Carpenter agreed not to execute on the other assets of the Gowdys. The arbitrator would determine whether the Gowdys were legally responsible for Carpenter's injuries and would determine Carpenter's damages. No fault would be apportioned to Va-valis, Ostman, or Raymond Carpenter. The arbitrator would be selected by Carpenter's counsel. Great Divide was aware of the settlement procedures but did not agree to the settlement or participate in the arbitration called for by the settlement. On July 27, 1998, the arbitrator found that the Gowdys were liable and awarded Carpenter damages of $2,006,000. A judgment was entered in accordance with the arbitration award.
C. Great Divide v. Carpenter
Great Divide's present action against both Gowdys and Carpenter was filed on May 28, 1996, seeking a declaration that there was no coverage because of the classification limitation exclusion. Carpenter answered in his own right and as the assignee of the Gowdys, generally denying that the claims were excluded from coverage. He also asserted a counterclaim that alleged that Great Divide, upon being notified of the Carpenter claim "which on its face was possibly covered by the policy, ... reserved the right to deny coverage, failed to retain independent counsel for Dan Gowdy and failed to obtain independent counsel for Elmer Gowdy until after be had been prejudiced by the absence of counsel." This was alleged to be a breach of the policy and the implied covenant of good faith and fair dealing and to preclude by estoppel Great Divide from denying coverage. Carpenter sought compensatory but not punitive damages.
Great Divide answered the counterclaim denying that Carpenter was entitled to any relief. After discovery and pretrial proceedings Great Divide sought to limit the claims at trial, arguing that Carpenter had abandoned his claim that there was coverage based on comments in his initial disclosure statement. The court denied this motion, ruling that the central issue in the declaratory judgment case "is whether there is coverage."
The trial began on August 16, 1999. Carpenter's counsel first mentioned punitive damages after the jury had been selected. Great Divide's counsel objected that punitive damages had not been pled and noted that he would oppose any motion to amend the counterclaim to add punitive damages. Counsel also sought a protective order barring any reference to punitive damages. The court initially ordered Carpenter's counsel not to refer to punitive damages in his opening statement. But at the close of the evidence the court ruled that it would give an instruction on punitive damages.
At the trial both sides agreed that Anson had erred in advising Dan in the August 31, 1995 letter that counsel of Dan's own choosing in the defense of the Carpenter suit would have to be paid for by Dan.2 Alaska decision and statutory law require an insurance company to provide independent counsel selected by the insured at the company's expense in cases where the company defends under a reservation of rights.3 The significance of this mistake was disputed. Also at issue was the broader question of whether the conduct of the defense by Great Divide and McKay was appropriate.
[605]*605Great Divide's expert witness, attorney Michael Geraghty, testified that McKay's conduct was appropriate and that "if anything, [he] bent over backwards to protect his client, who was Dan Gowdy, and, really, to the prejudice of the insurance company...." Geraghty also testified that Anson's failure to advise Dan Gowdy that he could select his own defense counsel, who would be paid by Great Divide, had no impact on the defense of the case in light of the effective representation provided by MeKay. Carpenter's expert witness, John Partlow, an insurance claims supervisor, testified that Great Divide should have conducted an investigation designed to find coverage. Instead, Anson made an initial decision that there was no coverage, and thereafter Great Divide showed no inclination to re-examine that decision. Partlow stated that this "borders on unconscionable." Partlow also opined that McKay had a duty to try to develop facts that would support coverage.
Anson, McKay, and Dan Gowdy also testified concerning their respective activities in connection with the Carpenter case. Anson, who no longer worked for Great Divide, described what he remembered about his conduct pertaining to the case. McKay testified that he believed that his role was to defend Dan Gowdy in the Carpenter case, not to become involved in coverage issues. He testified that his deposition questions were designed to lead to the exoneration of Dan. Dan Gowdy testified that despite the letter to Great Divide that Bradley drafted and he signed claiming coverage and requesting a defense, he did not believe the accident was covered by the policy. He also testified that after the first few conversations he had with McKay, McKay told him that he could pick his own lawyer. Bradley later told him the same thing. But Dan did not testify that either McKay or Bradley told him that the lawyer he chose would be paid for by Great Divide. Both Gowdy and Bradley were satisfied with McKay throughout the defense of the Carpenter case.
At the close of the evidence Great Divide moved for a directed verdict on the question of policy coverage. The court reserved judgment until after the return of the verdict. When the verdict was returned, the court denied the motion and affirmatively ruled that there was coverage.
The jury returned a special verdict that concluded that Great Divide did not fulfill its duties to the Gowdys and assessed compensatory damages of $1,540,000.4 The jury also found that McKay did not fulfill his obligations to Dan Gowdy and that Great Divide had been shown by clear and convincing evidence to have been reckless and indifferent to the rights of the Gowdys and deserved punishment. In subsequent bifurcated proceedings the jury concluded that punitive damages of $2,600,000 should be awarded against Great Divide.
Following post-judgment motions the trial court entered judgment against Great Divide in favor of Carpenter for $1,540,000 plus interest from August 27, 1999, and punitive damages of $2,600,000 plus interest from the date of judgment. Great Divide appeals and Carpenter cross-appeals.
II, DISCUSSION
A. The Accident Was Covered by the Policy.
Great Divide argues that the superior court should have granted its motion for a directed verdiet declaring that its policy did not cover the accident. It contends that the classification limitation excludes coverage. Great Divide also argues that the superior court erred in acting as the trier of fact on coverage issues and that the question of coverage should have been submitted to the jury.
The business description of Gowdy & Son contained in the declarations sheet of the policy was "floor-covering installation," and the relevant classification for premium purposes was the same. The classification exclusion provided that "[this insurance does not apply to 'bodily injury' ... for operations [606]*606which are not classified or shown on the ... Declarations, its endorsements or supplements."
Great Divide argues that felling the tree that injured Carpenter was an "operation" within the meaning of the classification exclusion, and since tree felling was not listed in the declarations, there was no coverage. Carpenter argues that the tree felling was an incidental activity that supported the floor-covering operation. The trial court accepted Carpenter's view, noting testimony that Elmer Gowdy burned three to four cords of wood each winter as "supplemental heat for the business/residence." The court ruled that the connection between the cutting of the tree and the business was "not strong" but sufficient, stating:
the fact that there was firewood that was going to the place where the business worked out of, I believe it was not prohibited under the policy. And given the benefits that the business got out of this, and the operations, that I believe there was coverage.
I looked at the jury verdict as an advisory opinion as to what they thought on the issue. But I believe that there was coverage, and I will deny the motion and find coverage.
We interpret insurance policies in accor-danee with the following principles:
To the extent that there are no relevant unresolved or controversial facts, the construction of an insurance contract is a matter for the court. A policy's meaning is determined by examining the language of the disputed policy provisions, the language of other provisions in the policy, relevant extrinsic evidence, and case law interpreting similar provisions. An insurance policy may be considered a contract of adhesion and as such should be construed so as to provide the coverage which a layman would reasonably have expected, given his lay interpretation of the policy language. We therefore resolve ambiguities in the meaning of insurance contracts against the insurer.5
We agree with Carpenter and the superior court that activities that merely support a classified business are covered under policies like the one presently before us. Businesses necessarily engage in much conduct that is incidental to and supportive of revenue-earning operations. Businesses must, for example, acquire supplies, equipment and fuel, pay bills, bank, repair what they use, and send their employees on countless errands in support of operations. Where a business heats its premises by wood, cutting dead trees for firewood can reasonably be viewed as an incidental support activity.6
The result would be different if, as alleged in Carpenter's initial complaint, the Gowdys were in the business of cutting trees and the tree that injured Carpenter had been cut in the course of that business. In that case tree felling would be a revenue-earning activity and thus an "operation," as used in the classification exclusion, and coverage would be excluded.7
Great Divide's second contention concerning coverage is that the court invaded the province of the jury in determining coverage. This argument is inconsistent with Great Divide's position before the trial court. During the course of discussing instructions the court asked what issues the jury should decide and what issues the court should decide. Counsel for Great Divide stated that
[607]*607the Court has to decide whether or not there's coverage.... If the Court decides that there is no coverage ... the court should dismiss the jury and the case is dismissed. If the judge-if Your Honor decides there is coverage, then the jury has these four questions to decide that I've ... laid out in my verdiet form.
Great Divide is precluded from now taking a position inconsistent with the position it took at trial.
Further, only one special verdict question was asked relevant to coverage, namely whether the accident occurred "during the course and seope of business of Elmer & Dan Gowdy, d/b/a Gowdy & Son?" The jury answered "yes." The court considered this answer to be advisory only, but reached the same conclusion. Great Divide did not request any other jury instructions or special verdiet questions pertaining to coverage, nor does it now contend that any other facts were disputed. Under these cireumstances the meaning of the policy was properly a matter for the court.8
B. The Jury Determination that Great Divide Did Not Fulfill Its Defense Obligations Was Not Legally or Factually Erroneous.
In the special verdict the jury was asked: "Did Great Divide fulfill its obligation to Dan and Elmer Gowdy under the contract of insurance in accord with the law?" The jury answered "no" to this question. Great Divide challenges this finding with a number of legal arguments and one factual argument confusingly grouped together under a section of its brief captioned "The Jury Verdict Finding Bad Faith Is Not Supported by the Evidence." In order to understand these arguments, the jury instructions on Great Divide's duties must be described.
The court began by instructing on the obligations of an attorney appointed by an insurance company to defend its insured when coverage is disputed. The court explained the duties of appointed counsel and particularized them to the facts of the case as follows:
Meanwhile, the attorney hired by the insurance company to defend the insured must zealously represent the interests of the insured, not the insurance company. He may, indeed must send progress reports to the insurance company telling it how the case is going. But he must not use his relationship with the insured, his client, to improperly give advantage to the insurance company in its coverage dispute with the insured.
In this case you must determine whether it is more likely than not that Patrick McKay failed in his obligation to represent his client by improperly providing coverage information to Great Divide, or taking other actions.
The court then addressed in particular and general form the defense obligations of an insurance company:
In every insurance policy, there is an implied obligation of good faith and fair dealing on the part of both parties. Raymond Carpenter also alleges that Great Divide Insurance Company breached the covenant of good faith and fair dealing in other ways, including that it did not properly and fully investigate the claim before deciding to file a declaratory judgment action; that Great Divide did not affirmatively look for coverage to protect the insured; and that Great Divide did not inform the insured of the correct amounts of liability coverage provided by the policy; and that Great Divide incorrectly told the insureds that they would have to pay for their own counsel to protect their interests. If you find that any of the above occurred, you must determine if it is more probable than not that Great Divide breached the covenant of good faith and fair dealing.
An insurance company which fails to deal fairly and in good faith with its insured by refusing unreasonably to pay the insured for a valid claim covered by the policy is liable for all damages resulting from such conduct. The duty to defend arises if the complaint, on its face, alleges facts which, standing alone, give rise to a possible finding of liability covered by the [608]*608policy; or, if the complaint does not contain such allegations, where the true facts are within or potentially within the policy coverage, and are known or reasonably ascertainable to the insured [sic].
When investigating a claim, an insurance company has a duty to diligently search for evidence which supports its insured's claim. -If it seeks to discover the evidence that defeats the claim, it holds its interests above that of its insured.
Great Divide does not argue that these instructions misstate the law, nor does it contend that it is not vicariously liable, as the instructions assume, for any dereliction of its appointed counsel, McKay. Thus, for purposes of this case the legal validity of the instructions is assumed.
We turn now to the various legal arguments that Great Divide presents in its challenge to the jury's verdiet that it did not fulfill its defense obligations. Great Divide begins by quoting a treatise to the effect that an insurance company does not breach its policy by unjustifiably reserving its rights to deny coverage.9 Great Divide does not develop this point further or explain how it relates to the court's instructions. But the point appears to be an oblique attack on the court's instruction that an insurance company has an obligation to diligently seek out evidence that will support coverage. Great Divide may be saying that if an insurance company can with impunity reserve its rights regardless of what a proper investigation might show concerning coverage, then it is inconsistent to require it to make an investigation seeking out coverage. We doubt that such an argument, if actually made, would have merit. The covenant of good faith and fair dealing governs all aspects of the insurer-insured relationship, and we see no reason to exempt reservation-of-rights decisions. But we need not do more than express skepticism, for the point is not properly before us. It is inadequately briefed; it is also waived because it was not raised below.10
Great Divide's second argument is that since the Gowdys suffered no damages because of the covenant not to execute aspect of their settlement agreement, Great Divide cannot be liable for breach of its defense obligations. This argument lacks merit. Our case law permits an insured whose insurer has committed a material breach of one of its defense obligations to enter into a settlement agreement with the injured claimant.11 Ordinarily the insured is barred by the cooperation clause of the policy from settling without the insurer's consent. But the prior breach by the insurer precludes it from relying on the cooperation clause as a defense to liability for the settlement.12 And the insured's settlement may involve an assignment of the insured's right against the insurer to the claimant together with a covenant not to execute against the other assets of the insured.13
The covenant not to execute ordinarily means that the insured has not suffered a personal loss. But covenant settlement agreements are given effect because it is [609]*609thought that an insured that has been placed at economic risk by its insurer's breach should be allowed to protect itself by shifting the risk to the breaching insurer without first subjecting itself to potential financial ruin. As the Supreme Court of Minnesota stated in approving a covenant settlement agreement:
If as here, the insureds are offered a settlement that effectively relieves them of any personal liability, at a time when their insurance coverage is in doubt, surely it cannot be said that it is not in their best interest to accept the offer. Nor, do we think, can the insurer who is disputing coverage compel the insureds to forgo a settlement which is in their best interest.14
Covenant settlement agreements are enforceable against an insurance company if the agreements are reasonable. If such agreements were not enforceable, claimants would not make them and insureds would often suffer financial ruin before they could vindicate their rights against their insurers. Affording insurers the right to relitigate liability and damages issues resolved by agreement "would destroy the purpose served by allowing insureds to enter into [covenant settlement] agreements because claimants would never settle with insureds if they never could receive any benefit." 15 But insurers are not precluded from litigating the defenses they relied on in denying coverage, or reserving their rights to disclaim coverage,
or other issues pertaining to whether they have breached their obligations.16
Covenant settlement agreements can be abused. The insured who is fortunate enough to be able to make such an agreement has no incentive not to agree to very high damage awards. In recognition of this, we have been careful to hold that an insurance company that has materially breached its defense obligations whose insured has made such an agreement is not automatically bound by the agreement. Instead, the agreement must be reviewed for reasonableness by the trier of fact.17
Great Divide's third legal challenge to the jury determination that it violated its defense duties is to suggest that we adopt a recent California case limiting covenant settlement agreements to cases in which the insurer has failed entirely to provide a defense,18 or a Texas case that ruled that such agreements are void as against public policy.19
In Washington Insurance Guaranty Ass'n v. Ramsey,20 we rejected the argument that the only defense obligation breach that would justify enforcement of a covenant settlement agreement is an outright refusal to defend. In that case, the insurer defended the action but unreasonably refused to settle within policy limits. The insured then entered into a covenant settlement agreement with the plaintiff. We declined to hold the agreement invalid despite the specific argument that such agreements were only enforceable where there is a refusal to defend. We adhere to our decision in Ramsey.*21 The [610]*610focus of our case law has been on whether the insurer "has materially breached its contractual obligation to the insured.22 Where such has occurred the insurer cannot escape liability merely because the insured has taken control of the defense and settled the case in a manner that, except for the insurer's material breach, would violate the cooperation clause or other terms of the insurance contract.23
With respect to Great Divide's argument that we should adopt the Texas rule holding that covenant settlement agreements are void as against public policy, we disagree. That approach is contrary to our case law and contrary to the decisions of most of the other states whose courts have ruled on the validity of covenant settlement agreements.24
In summary, we conclude that the legal challenges presented by Great Divide to the jury's determination that it is liable for failing to fulfill its defense obligations do not require reversal of the judgment.
Great Divide raises only one factual argument challenging the sufficiency of the evidence to support the jury's verdict. The argument is that Great Divide's failure to advise Dan Gowdy that it would pay for independent counsel selected by Dan was a mere technical violation of its defense duties. We discuss and reject this argument in the following paragraphs.
Great Divide argues that its failure to advise Dan Gowdy that it would pay for independent counsel selected by Dan was an inconsequential failure because at some fairly early time McKay and Bradley advised Gowdy of his CHI rights.25 But while there is uncontradicted testimony that Dan Gowdy was told that he could select his own counsel, it is not clear that he was ever told that counsel of his selection would be paid by Great Divide. Even at trial he seemed not to understand this point.
We reject Great Divide's contention that failure to advise Dan Gowdy of his CHI rights was necessarily inconsequential. Independent counsel of Gowdy's choosing might have developed the theory of coverage which the trial court, and this court, accepted: that felling the tree for firewood to heat the business was incidental to the classified business and not a separate operation. If this had been done, Anson, who invited the presentation of overlooked theories of coverage in his August 31, 1995 letter, might have reconsidered his position on coverage. This could have greatly changed prospects for a settlement between Carpenter and Great Divide. Another possibility is that Great Divide might have chosen to defend without a reservation of rights in order to maintain control of the defense. Of course these are merely possibilities. But we held in Lloyd's v. Fulton that an insurer's breach of its duty to provide a conflict free defense "must be considered a material breach ... unless the breach clearly has no adverse impact on the relationship between the insurer and the insured."26 In the present case Anson's failure to advise Dan Gowdy of his CHI rights was not clearly without adverse impact, and thus properly can be considered a material breach.
Finally, we also observe that the jury was instructed on other theories under which it could find that Great Divide breached its defense obligations. The sufficiency of the evidence to support a compensatory damage award under these theories has not been challenged. Thus Great Divide's claim that [611]*611the verdict concerning its breach of its defense obligations is factually unsupported fails.
C. The Issue of Punitive Damages Should Not Have Been Submitted To the Jury.
We turn now to Great Divide's contention that punitive damages should not have been submitted to the jury because the claim for punitive damages was not pled and no notice of such a claim was given prior to trial.
Carpenter's counterclaim alleged that Great Divide reserved the right to deny coverage, failed to retain independent counsel for Dan Gowdy, failed to obtain independent counsel for Elmer Gowdy until after he had been prejudiced by the absence of counsel, and failed to obtain a written waiver of the right to independent counsel from Dan Gow-dy. The counterclaim alleged that this conduct "constituted a breach of the insurance contract, a violation of the implied covenant of good faith and fair dealing and a violation of Alaska law in effect at the time of plaintiff's conduct." The counterclaim went on to allege that the Gowdys were prejudiced by this conduct and that as a consequence of this conduct Great Divide "is estopped from denying coverage under the contract of insurance and is liable to Raymond Carpenter, Gowdy's assignee, for the fall amount of any liability the Gowdys incur as a result of the injuries suffered by Raymond Carpenter on September 83, 1993." In the wherefore clause of the counterclaim, judgment was sought by Carpenter "[als and for his special and general damages, an amount to be determined at trial;" plus interest, costs and fees and "Isluch other and further relief as the court may grant in equity."
A scheduling order of December 30, 1998, required the parties to file proposed jury instructions in advance of trial. Carpenter filed proposed instructions on July 14, 1999, a month before the trial began. No jury instructions on punitive damages were included.
The first indication by Carpenter that he sought punitive damages occurred in comments his counsel made to the trial court on the first day of trial. Great Divide immediately objected on the ground that punitive damages had not been pled and asked for a protective order preventing any reference to punitive damages during the course of the trial. The court initially barred reference to punitive damages. On the second day of trial the court ruled that it would not bar Carpenter from "exploring those avenues that you believe will sustain a punitive damages claim," while indicating that it would decide later whether punitive damages would be submitted to the jury. Ultimately the court instructed the jury on punitive damages.
Pleadings provide an opposing party with notice of the nature of claims being asserted.27 The Alaska Rules of Civil Procedure require a party who seeks special damages to specifically state this in a pleading.28 But the rules do not require that punitive damages be specifically pled.
Some jurisdictions have ruled on the question whether a litigant must include a reference to punitive damages in pleadings. The North Carolina Supreme Court has held that a plaintiff need not explicitly plead punitive damages in order to recover them, though the pleading must "fairly apprise[ ] opposing parties of facts which will support an award of punitive damages. ..."29 The Oregon Supreme Court has similarly commented that "exemplary damages are so intimately connected with general damages that if the general allegations are sufficient to show the wrong complained of was inflicted with malice or oppression or other like circumstances, the complaint will be sufficient to authorize the infliction of punitive or exemplary damages."30
We agree with the approach taken by these authorities. We believe that [612]*612although punitive damages need not be pled in a complaint, the complaint should, at a minimum, allege conduct that meets the legal standard for the award of punitive damages. Alternatively, a sufficiently early notification in the course of pretrial proceedings that punitive damages are being sought could also serve to give fair notice to the opposing party.
Since the advent of tort reform in 1986, punitive damages have been governed by statute. They may be awarded only on proof by clear and convincing evidence that a defendant's conduct was either outrageous, including acts done with malice or bad motives, or evidenced reckless indifference to the interests of another.31
In the present case we have little doubt that fair notice that punitive damages would be sought was not given. The conduct alleged in the counterclaim was not necessarily outrageous or recklessly indifferent, nor was it so characterized. The allegation that Great Divide violated the implied covenant of good faith and fair dealing is not sufficient to support a claim for punitive damages.32 Further, the body of the complaint seeks only a judgment for the full amount of the liability the Gowdys incurred as a result of Carpenter's injuries, with no claim for personal wrongs to the Gowdys for their treatment by Great Divide. Consistent with the body of the counterclaim, the wherefore clause of the counterclaim simply requested special and general damages, both of which are categories of compensatory rather than punitive damages. No pleadings subsequent to the counterclaim gave notice that punitive damages would be sought. One occasion for the assertion of punitive damages would have been in proposed jury instructions as required by the scheduling order. Carpenter's proposed instructions did not include punitive damages instructions. For these reasons we conclude that appropriate standards relating to notice of punitive damages claims were not satisfied in this case.
The trial court did not rule on whether punitive damages would be submitted to the jury until after the close of the evidence in the process of deciding on jury instructions. At that point, following Great Divide's renewal of its objection to punitive damages instructions, the court stated:
Well, I believe that it places Great Divide in a difficult situation. I do believe that we've litigated the issues during the course of the trial. I'll give the instruction. I guess I do that because Mr. Choate moved for a continuance, and Great Divide wanted to go ahead with the trial at the trial date that it was set. And, to some extent, you're in a difficult position because of that decision. And I acknowledge that it wasn't your desire to be in that place where you had to make that decision. I'll give the instruction....
We agree that Great Divide was placed in a difficult situation given the lack of fair notice of the punitive damages claim. It was prejudiced because it had done no legal or factual preparation or discovery related to punitive damages. Great Divide's counsel made a persuasive showing of prejudice. He argued that depositions of supervisors of Great Divide would have been taken inquiring about Great Divide's training methods, claims handling practices, and company policy with respect to the CHI decision. He contended that the purpose of these inquiries would be to establish that at worst a mistake was made, as opposed to deliberate or malicious acts deserving of punishment. He noted that the pre-trial phase of the case was over, and with these witnesses being thousands of miles away, "I can't go redo all those depositions...."
But we do not agree with the continuance rationale employed by the trial court. The continuance motion was filed on August 10, the week before trial was to begin. The [613]*613motion did not mention punitive damages. It was based on two reasons. The first was so that the deposition of Anson could be taken, and the second was so that additional motion practice could take place in order to decide unresolved questions of law. The Anson deposition was taken without the need for a continuance. The time for motions on questions of law had expired on June 15, 1999. Further, the objective underlying this reason was to narrow issues, rather than broaden them. Thus it is hard to see how it could later be related to punitive damages.
Carpenter argues though that "the punitive damages claim arose primarily as a result" of the deposition testimony of Anson. Carpenter does not further explain this rationale, and we do not find it to be persuasive. What Anson did and did not do was evident from Great Divide's claims file that had been furnished to Carpenter much earlier in the case. Carpenter's expert, Partlow, concluded before Anson's deposition was taken that Great Divide's conduct was not merely a mistake but rather a willful attempt to avoid its obligations.33 Further, much of the focus of Carpenter's claim for punitive damages was on the conduct of McKay, and Anson's deposition contributed no significant new knowledge about McKay's conduct.
In summary, we conclude that Great Divide did not have fair notice that punitive damages were being sought, that it was prejudiced when the court instructed on punitive damages, and that the court abused its discretion when it so instructed the jury.
D. Great Divide Was Not Automatically Bound by the Judgment in Carpenter v. Gowdy.
On cross-appeal, Carpenter argues that the trial court erred in failing to rule that the amount of the judgment in Carpenter v. Gowdy was binding on Great Divide. Carpenter sought such a ruling after the jury was selected but before evidence was presented. Great Divide contended that not only was the judgment not binding but should be inadmissible. As a back-up position, Great Divide contended that if the judgment was admitted in evidence then the details of Carpenter's injury should not be included.
The court declined to rule that the judgment was binding, allowed the fact of the Judgment to go to the jury, but ruled that the details of Carpenter's injuries and his course of recovery would not be admitted. During oral argument leading up to this ruling, Great Divide's counsel stated that if Carpenter's counsel believed that the Carpenter v. Gowdy judgment "is binding on this court, it could be argued and be in a jury instruction." But no jury instruction concerning the effect of the judgment was given, nor was one requested.
Carpenter's argument that Great Divide is bound as a matter of law by the judgment entered in Carpenter v. Gowdy is in conflict with our case law. We have held that covenant settlement agreements can only be binding on an insurance company that does not consent to them if they are found to be reasonable.34 In Ramsey and in Grace we indicated that a number of factors are relevant to the question of reasonableness:
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 [sic]; 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 interest of the parties not being released.[35]
[614]*614Grace makes it clear that these factors should be considered by the jury in a jury-tried case.36
Although the settlement agreement in the present case was combined with an arbitration proceeding that at least superficially resembled a contested trial, the fact that the judgment in Carpenter v. Gowdy was entered by arbitration rather than by agreement does not eliminate the applicability of the requirement that covenant settlement agreements must be found to be reasonable before they may be given effect. The arbitration proceeding was not truly adversarial since Carpenter had already agreed not to execute against the Gowdys at the time that the proceeding took place. Further, the arbitrator was chosen solely by Carpenter's counsel, and the parties agreed to exclude considerations of comparative fault. These factors prevent the Carpenter v. Gowdy judgment from being accorded unquestioned acceptance.37
Carpenter's argument that the court erred in refusing to hold that Great Divide was bound by the underlying judgment must be rejected for the above reasons. Carpenter does not claim that the court erred in failing to submit to the jury the question whether the settlement and resulting judgment were reasonable, or that the court erred in refusing to permit detailed evidence of Carpenter's injury and course of recovery. If these points had been raised and argued, they might have merit and could warrant setting aside the judgment for compensatory damages and remanding for a new trial on the issue of the reasonableness of the settlement.38 But as these points have not been raised and this remedy is not sought, the award of compensatory damages must stand.
III. CONCLUSION
For the above reasons the judgment is AFFIRMED as to compensatory damages and REVERSED as to punitive damages. This case is REMANDED for modification of the judgment consistent with the views expressed herein.39