Northwest Insurance Law Blog : Seattle Insurance Lawyer & Attorney : Williams Kastner Law Firm : Tacoma, Washington, Portland

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Insurers often operate multiple lines of business such that they issue polices through a number of different limited liability entities.  As a result, insureds frequently must ask "who should I sue for coverage?"

USDC Judge Richard Jones addressed this issue in Torvik v. Insurance Company of Pennsylvania (January 10, 2010) (.pdf), a case in which the plaintiff insured had sued both the party issuing the automobile policy underlying the coverage claim and AIG, the parent holding company.  AIG moved for summary judgment based upon declarations from its in house and defense counsel indicating that AIG had played no role in the handling of the plaintiff insured's claim.  After affording the insured additional time to present contrary evidence, Judge Jones dismissed AIG, rejecting the insured's arguments that there was a genuine issue of material fact merely because an AIG claims representative had reportedly attended a prior mediation on behalf of the defendants. 

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Litigants often disagree about where their dispute should be resolved -- Arbitration or court?  And if court, in state court or federal court? 

In McCoy v. Liberty Mutual Insurance Company (December 29, 2009) (.pdf), the insured argued that Liberty Mutual's refusal to arbitrate and subsequent removal of the case to federal court gave rise to claims for bad faith and violations of Washington's Consumer Protection Act and Insurance Fair Conduct Act.   United States District Court Judge Benjamin Settle rejected the argument and dismissed the claims on summary judgment because the policy underlying dispute provided for arbitration only by mutual agreement and there was diversity of citizenship such that the insurer had the right to remove the case from state to federal court.  Judge Settle's decision did not address whether an insured might have a bad faith, CPA and/or IFCA claim when an insurer fails to comply with a mandatory ADR provision or removes a case that is later remanded. 

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Insurance policies typically include provisions that require an insured to cooperate with an insurer's investigation of a claim.  These provisions are generally enforceable, and an insured's failure to cooperate may provide an insurer with an affirmative defense to coverage where such failure prejudices the insurer. 

But a failure to cooperate defense typically raises factual issues that implicate the conduct of the insurer as well as the insured.  This reality is illustrated by the January 5, 2010 summary judgment ruling from Judge Robert Bryan of the United States District Court for the Western District of Washington in Coleman v. American Commerce Insurance Company (.pdf).  American States sought dismissal because the insured had failed to sit for an examination under oath and had not provided medical records to support the emotional injury claim.  But Judge Bryan concluded that there were genuine issues of material fact because, among other things, American Commerce did not request an examination of the insured until several years after the underlying accident and only after the insured had delivered a 20-day notice of intent to sue under Washington's Insurance Fair Conduct Act. 

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The doctrine of uberrimae fidei requires a marine insurance applicant to reveal every fact within his/her knowledge that is material to the risk regardless of whether or not they are asked. In SW Traders, LLC v. United Specialty Insurance Company (December 29, 2009) (.pdf), United States District Court Judge Marsha Pechman applied the doctrine to void, on summary judgment, a hull policy because the insured had not accurately disclosed the registered owner of the vessel. 

Judge Pechman devoted most of her opinion to the parties’ competing recitations of the underlying events such that there appeared to be a factual dispute. But Judge Pechman seemed bothered by the fact that the true vessel owner was a Canadian citizen and had set up a shell company to serve as the nominal vessel owner in order to avoid the longstanding rule that only a U.S. citizen may own a U.S. registered vessel. 

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In Terminal Freezers, Inc. v. US Fire Insurance (.pdf), the 9th Circuit affirmed summary judgment against a cold storage terminal operator on a first party coverage claim arising from excessive ice in a malfunctioning freezer. The policy excluded coverage for “loss of damage caused by or resulting from faulty, inadequate and defective workmanship,” and the insurer had presented undisputed expert testimony to the trial court that the excessive ice resulted from an improperly installed vapor retarder. The policy, however, also provided coverage if faulty workmanship led to a covered cause of loss. But the policy included an exclusion for ice and a number of other natural elements including “rain, snow, sleet, sand, and dust.”

The insured invoked the canon of noscitur a socii to argue that “ice” as used in the policy was limited to ice in its “natural form” as opposed to ice made by a refrigeration system. The canon provides that the meaning of questionable or doubtful words may be ascertained by reference to the meaning of other words or phrases associated with it. The 9th Circuit, declined to apply the canon, however, because it concluded that the policy language was clear. Citing Webster’s Third New International Dictionary, it observed that “ice”, as commonly used, means “water reduced to the solid state by cooling.” As a result, there was no ambiguity that permitted use of any canon of construction.
 

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In two recent but unrelated decisions, the United States District Court for the Western District of Washington granted insurers' motions for summary judgment to enforce policy provisions limiting the time by which an insured may file suit -- City of Ilwaco v. Affiliated FM Insurance Company (.pdf), decided by Judge Franklin D. Burgess and Chi v. Allstate Insurance Company (.pdf), decided by Judge Marsha J. Pechman. In both cases, the Court rejected the insured's equitable arguments that the insurer should be precluded from enforcing the limitation because of ongoing discussions aimed at resolving the dispute. In City of Ilwaco, the insured argued for equitable estoppel and relied upon ongoing discussions with the administrator of its insurance pool. But the Court rejected this theory because the pool was not an agent of the insurer and, in any event, the insured had not pointed to any statements that caused the insured to refrain from filing suit within the two-year limitation period. The Court in Chi rejected similar arguments because the insured had failed to demonstrate that she had acted with reasonable diligence.

Neither decision put an end to the insureds' claims. In both instances, the Court indicated that the contractual limitations period does not apply to non-contract claims. However, in Chi, the Court still dismissed the tort claims for negligence and bad faith because they remain subject to Washington's three year statute of limitation and the insured filed suit on the three-year anniversary of the underlying loss but failed to serve the summons and complaint within 90 days as required by RCW 4.16.070 such that the service date did not relate back to the original filing date. As a result, in both cases, the insured's only remaining claim is for violation of the Consumer Protection Act which has a four year limitation period.

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It as been about a year since the Washington Supreme Court adopted the selective tender rule in Mut. of Enumclaw Ins. Co. v. USF Ins. Co., 162 Wn.2d 1019 (2008) (.pdf).  In that time, there have been at least two instances in which insurers have called upon the rule in an effort to avoid liability for claims that otherwise might fall within the coverage obligations created by their policies. These efforts have met with varying degrees of success and failure but both provide lessons for insurers and insureds to consider for handling claims in the future.

The Selective Tender Rule, as articulated by the Washington Supreme Court, provides that "where an insured has not tendered a claim to an insurer, that insurer is excused from its duty to contribute to settlement of the claim." In USF Insurance, the Court applied the new rule to dismiss an equitable contribution claim by one insurer against another when the former had defended and settled a claim against their mutual insured and the mutual insured had purposefully elected to tender to the former but not the latter insurer. The Supreme Court, however, limited the new rule to equitable contribution claims and allowed the participating insurer to proceed with its subrogation claim subject to the non-participating insurer's late tender defenses.

In AXIS Insurance Company et al. v. James River Insurance Company (a case that I prosecuted), James River sought dismissal of a contribution action initiated several months prior to the USF decision. In his initial summary judgment ruling (.pdf), Judge Richard Jones acknowledged that the new rule eliminated the two participating insurers' equitable contribution action because there had been no tender by the insured to James River, the non-participating insurer. But Judge Jones allowed the participating insurers to proceed with the action because they had obtained an assignment of the insured's claims against James River and had amended their complaint to assert a direct coverage claim as well as an equitable contribution claim.  Judge Jones reiterated this ruling in his decision on a later round of summary judgment cross-motions (.pdf).

More recently, in Weyerhaeuser Co. v. Ins., Co of the State of Penn. (.pdf), Judge Thomas S. Zilly applied the selective tender rule to dismiss a contribution claim by an excess insurer against a primary insurer brought after the excess insurer had settled with the insured, Weyerhaeuser, by reimbursing it for the costs to defend and settle multiple asbestos-exposure personal injury claims. The insured had tendered the claims to the primary insurer but its written tenders seemed to refer to only a single policy year for which the primary insurer had already paid out policy limits. The primary insurer had issued policies to Weyerhaeuser for many years, and the excess insurer sought contribution under the other policies which apparently were unexhausted. Rejecting the claim, Judge Zilly found that the insured had selectively tendered to the primary insurer for only the single year for which coverage had already been exhausted. Interestingly, the decision gives no indication that the excess insurer obtained any assignment of claims from Weyerhaeuser or pursued any claim for subrogation.

These subsequent cases illustrate that the selective tender rule now presents a significant pitfall for both primary and excess insurers doing business in the State of Washington. While the rule is technical in nature and may be avoided by an insurer seeking the participation of other insurers, it requires advance thought and planning.

Most notably, liability insurers participating in the defense of an insured for a multi-year claim may want to consider the following three issues:
 

1. Upon receipt of a new claim, do you need to request the insured's authority to immediately tender on their behalf to other insurers for prior and subsequent policy years?

2. At or before any settlement of the underlying claim, do you need to request an express written assignment of the insured's rights against their other insurers who have not participated in the defense and settlement but who may have coverage obligations?

3. Does your standard policy language regarding subrogation and the insured's cooperation do enough? Many policies include provisions that require the insured to cooperate in any subsequent subrogation actions. While such language is helpful, it may prove best to have language that automatically assigns the insured's rights against other insurers to the participating insurer upon the payment of defense costs and/or a settlement of the underlying claim.

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In Polygon Northwest, LLC v. Steadfast Insurance Co., 2009 WL 1437565 (W.D.Wash. May 22, 2009) (.pdf), Judge Robert Lasnik of the United States District Court for the Western District of Washington granted in part an insured's discovery motion to compel an insurer to produce certain information and documents about other similar claims. The underlying coverage dispute in the case centers around whether a policy requires the stacking of self-insured retentions (SIR) on a single claim when the underlying construction project spans multiple policy years.

The Court rejected the insured's argument that other claims are discoverable because "the interpretations and intentions of other insureds are relevant to the [alleged ambiguity of the SIR provision." The Court noted that its "determination [of the policy's meaning] is based not on a survey of insured developers but on the policy language itself." However, the Court agreed with the insured that "the manner in which [the insurer] has handled the claims of other insureds with identical policy language is potentially relevant" because any evidence that the insurer" has acted in an inconsistent manner in resolving claims where similar policies were involved 'could undermine defendant['s] position that the language in question is clear and unambiguous'.” (Citing Nestle Foods Corp. v. Aetna Cas. & Sur. Co., 135 F.R.D. 101, 106 (D.N.J.1990)).

Taking into consideration the burden to the insurer, Judge Lasnik ordered the insurer to provide information and non-privileged documents for claims for the preceding five years but authorized the insurer to redact the names of insureds and claimants.
 

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The Washington Court of Appeals recently issued one of its most comprehensive analyses of the rights and obligations arising out of an insurer’s decision to defend under reservation of rights.
Ledcor Industries served as the general contractor for the erection of a condominium in Bellevue, Washington. When the condominium developer homeowners’ association filed suit against the complex’s developer alleging construction defect, the developer filed third party claims against Ledcor. Ledcor tendered the claims to its own insurance carriers, and those carriers accepted the tender and immediately appointed counsel for Ledcor’s defense.

Ledcor had required each of its subcontractors to name Ledcor as an additional insured in their CGL policies. Shortly after beginning Ledcor’s defense, Ledcor’s insurer-appointed attorneys tendered the claims to Ledcor’s subcontractors, including Zanetti Custom Exteriors (“Zanetti”). Zanetti, in turn, tendered to its insurer, Mutual of Enumclaw (“MOE”). Sometime thereafter, Ledcor also filed a fourth party complaint against Zanetti.

After a 14-month delay, MOE accepted Ledcor’s tender under reservation of rights. MOE offered to retain counsel or contribute to fees for attorneys already retained for Ledcor. However, thereafter MOE went silent, never appointing counsel and never requesting copies of attorney invoices. Despite notice to MOE of mediation and a reasonableness hearing, MOE did not participate in settlement efforts and did not appear at the reasonableness hearing. Eventually, Ledcor settled its fourth party claims with Zanetti for $236,000, which MOE, as Zanetti’s insurer, paid.
With the primary lawsuit resolved, Ledcor filed suit against MOE, asserting claims of breach of contract, bad faith, and violation of Washington’s Consumer Protection Act (“CPA”) based upon Ledcor’s failure to thoroughly investigate and promptly accept Ledcor’s tender. After a 3-day bench trial, the court found MOE breached its insurance policy and committed bad faith, awarding $101,873.02 plus prejudgment interest. The trial court also found that MOE’s practices were unfair and deceptive, but ultimately refused to award CPA damages, finding that no harm resulted from MOE’s unfair and deceptive conduct.

Both Ledcor and MOE appealed the trial court’s decision. MOE appealed the court’s finding that its conduct constituted bad faith. The Court of Appeals explained that an insurer defending under reservation of rights has an enhanced obligation to protect the insured by: (1) conducting a thorough investigation; (2) retaining counsel loyal only to the insured; (3) keeping the insured informed and apprised of progress in the lawsuit; and (4) refraining from placing its own interests ahead of the insured. The Court of Appeals found that MOE’s mere acceptance of the tender, some 14 months after the fact, failed to satisfy MOE’s heightened obligations to Ledcor. “The fact that Ledcor's other insurers were actively defending Ledcor's interests does not relieve MOE of its duties . . . to investigate and defend.”

Ledcor appealed the trial court’s failure to award bad faith damages, arguing that where bad faith is established, harm is presumed and the insurer is liable for “all . . . liabilities [incurred by the insured] regardless of cause.” The Court of Appeals acknowledged that a finding of bad faith results in a rebuttable presumption of harm. However, the remedy for bad faith is compensation for the harm caused by the insurer and estoppel as to the insurer’s policy defenses. In this case, because Ledcor had a full and adequate defense through its other insurers, and received $236,000 from MOE through Zanetti, Ledcor suffered no harm as a result of MOE’s bad faith. Contrary to Ledcor’s argument, the Court of Appeals held that the remedy of coverage by estoppel did not allow Ledcor to recover from MOE for harm caused by subcontractors other than Zanetti. Instead, coverage by estoppel simply prohibits the insurer from avoiding coverage under its own policy.

Ledcor also appealed the trial court’s finding on its CPA claims. The Court of Appeals began by reciting the five elements of a CPA claim: “(1) unfair or deceptive act or practice; (2) occurring in trade or commerce; (3) public interest impact; (4) injury to plaintiff in his or her business or property; and (5) causation.” The Court of Appeals found that once again, because Ledcor received an adequate defense through other insurers and ultimately recovered $236,000 from MOE through Zanetti, Ledcor suffered no harm as the result of MOE’s unfair and deceptive insurance practices. As a last ditch argument, Ledcor argued its injury was “loss of peace of mind and uncertainty” while awaiting MOE’s response and intervention. The Court of Appeals rejected the argument, declaring “emotional damages are not compensable under the CPA.”

Finally, Ledcor appealed the trial court’s refusal to award Olympic Steamship attorneys’ fees in its lawsuit against MOE. Under Olympic Steamship, an insured is entitled to recover attorneys fees where it is “compelled to litigate an issue of coverage” and prevails. Because MOE accepted coverage long before Ledcor filed suit against MOE, the Court of Appeals found MOE did not force litigation of coverage and, therefore, Ledcor was not entitled to attorneys fees.

Ledcor Industries, Inc. v. Mutual of Enumclaw, 2009 WL 1191783 (Wn. App. May 4, 2009). (.pdf)