Cedell Applied to Liability Insurance Bad Faith Dispute

Earlier this year, the Washington Supreme Court held, in Cedell v. Farmers Ins. Co., 295 P.3d 239, 246, 176 Wn.2d 686 (2013), that when an insured brings a bad faith claim, attorney-client privilege and work  product protections are presumptively inapplicable to the insurer's claim-adjustment communications. Cedell involved first party (property) coverage and the Washington Supreme Court's decision could be construed to apply only to first party insurance. But in an April 12, 2013 opinion (.pdf), federal district court judge Richard Jones ruled that Cedell applies with equal force to third party liability insurance. Judge Jones offered the following reasoning:

The Cedell court grounded its ruling in the quasi-fiduciary duty of an insurer to its insured, along with the public policy interest in regulating the business of insurance. 295 P.3d at 239, 176 Wn.2d 686. The latter consideration is just as important in a third-party claim. As to the former, the "duty of good faith is applicable to both first-party and third-party coverage." St. Paul Fire & Marine Ins. Co. v. Onvia, 165 Wn.2d 122, 196 P.3d 664, 668 (2008).

Washington Narrows Scope of Attorney-Client Privilege Available to Insurers

Last week, in a 5-4 decision authored by recently retired Justice Tom Chambers, the Washington Supreme Court greatly narrowed the scope of the attorney-client privilege available to first party insurers in bad faith litigation. The case – Cedell v. Farmers Ins. Co of Washington, 2013 Wash. LEXIS 149, February 21, 2013 (pdf.) – arose out of a residential fire loss in which Farmers allegedly failed to timely respond and then threatened to deny coverage unless the insured immediately accepted a settlement payment that was less than half of the total reported damages. The insured sued for bad faith and moved to compel after Farmers redacted large portions of its claim file on the basis of privilege. While Justice Chambers’ opinion reads as though he is merely reciting longstanding rules, the dissent points out that the Court in fact is imposing significant new restrictions on the privilege available to first party insurers (pdf). The opinion includes the following summary of the new framework in Washington:

In first party insurance claims by insured's claiming bad faith in the handling and processing of claims, other than UIM claims, there is a presumption of no attorney-client privilege. However, the insurer may assert an attorney-client privilege upon a showing in camera that the attorney was providing counsel to the insurer and not engaged in a quasi-fiduciary function. Upon such a showing, the insured may be entitled to pierce the attorney-client privilege. If the civil fraud exception is asserted, the court must engage in a two-step process. First, upon a showing that a reasonable person would have a reasonable belief that an act of bad faith has occurred, the trial court will perform an in camera review of the claimed privileged materials. Second, after in camera review and upon a finding there is a foundation to permit a claim of bad faith to proceed, the attorney-client privilege shall be deemed to be waived. However, in first party UIM claims, there is no presumption of waiver by the insurer of the attorney-client privilege but, consistent with Escalante, 49 Wn. App. at 394, and Barry, 98 Wn. App. at 206, that privilege may be pierced, among other ways, by the two step procedure described above for showing the bad faith civil fraud exception is applicable.
 

Bad Faith/IFCA Claims Bifurcated

In Karpenski v. Am. Gen. Life. Co., LLC, 2012 U.S. Dist. LEXIS 183976 (W.D. Wash. Dec. 20, 2012) (.pdf), Judge Ricardo Martinez granted a life insurer's request to bifurcate its rescission claim from the insured's claims for bad faith and violation of Washington's Insurance Fair Conduct Act (IFCA). Judge Martinez reasoned that bifurcation was proper because the rescission "issues are not in any way intertwined with the issues presented by [the] claims of bad faith and IFCA violation" and if the insurer defendants "should prevail on their rescission counterclaim, that resolution will be dispositive of the entire case." Based upon this ruling, Judge Martinez stayed all bad faith discovery until resolution of the rescission issues.

"Blanket" AI Endorsement Leads to Big Exposure

General liability insurers in Washington and elsewhere continue to issue "blanket" additional insured endorsements to construction contractors and material suppliers. The decision last week in Tim Ryan Construction, Inc. v. Burlington Ins. Co., 2012 U.S. Dist. LEXIS 178993 (.pdf), illustrates just how much trouble these endorsements can lead to if a liability insurer is not careful. 

The lawsuit stemmed from a poorly built office building for which the owner (Tim Ryan Development) had used an affiliated company (Tim Ryan Construction) to run the project as the general contractor. When widespread leaks were discovered, the owner essentially sued himself (using the legal fiction allowed by the existence of two separate companies and a supposed general contract between them) and then sought coverage from, among other places, the insurers for subcontractors. Burlington Insurance refused to defend and the general contractor sued for breach of the duty to defend, bad faith and IFCA violations. Less than four months into the bad faith lawsuit, Judge Benjamin Settle granted summary judgment against Burlington, finding that it had breached its duty to defend and was also liable for bad faith and IFCA violations. While Burlington was probably right in its belief that the water damage predated its policy and, therefore, was not covered, Burlington had relied upon disputed extrinsic evidence in violation of Washington's broad duty to defend standard. Burlington now faces possible "coverage by estoppel" and could end up paying significant amounts (including treble damages) that may well exceed its policy limits. Had Burlington defended under reservation of rights, things could have turned out far better for the insurer. 
 

Insurers Have No Duty to Defend Additional Insured General Contractor for Post-Construction Defect Claims Because Policies Limited Coverage to Insured Subcontractor's "Ongoing Operations"

Construction defect lawsuits continue to present coverage disputes not only between contractors and their insurers, but also insurers for general contractors and their subcontractors. In Absher Constr. Co. v. N. Pac. Ins. Co., 2012 U.S. Dist. LEXIS 38555 (March 12, 2012, W.D. Wash.), general contractor Absher Pacific and its insurer settled a homeowner's association lawsuit, based upon alleged plumbing defects, for $2.5 million. Absher's insurer then filed suit against the plumbing subcontractor's insurers, all of whom had previously denied Absher's tenders.

Absher was an additional insured under these insurers' policies. But the additional insured endorsement in each policy also included language that limited coverage to liability arising out of the plumbing subcontractor's "ongoing operations". Absher's insurer moved for summary judgment, arguing that the plumbing subcontractor's had improperly refused to defend the claim and had acted in bad faith by failing to properly investigate and, in one instance, by failing to respond for a period of 15 months.

After a detailed discussion of Washington's duty to defend standard, Judge James L. Robart ruled that there was no duty to defend because the complaint against Absher indicated that the damage had occurred after the underlying construction was complete. Citing Hartford Insurance Co. v. Ohio Casualty Insurance Co., 145 Wn. App. 765, 189 P.3d 195 (Div. I 2008) and other recent Washington decisions on this issue, Judge Robart stated that the "ongoing operations" language limits coverage to liability that arises while the named insured's work is still in progress. Judge Robart went on to find that the subcontractor's insurers had each properly refused to defend because the complaint against Absher included an allegation that the plumbing improvements had begun to prematurely fail after completion of the project.

With regard to the bad faith claims, Judge Robart acknowledged that, under St. Paul Fire and Marine Ins. v. Onvia, Inc., 165 Wn.2d 122, 196 P.3d 664, 669 (Wash. 2008), an insurer's mishandling of a claim may give rise to bad faith liability even in the absence of any coverage. But Judge Robart went on to find that, as a matter of law, the only potential liability here was based upon one of the insurer's extended delay in responding to Absher's original tender.

WASHINGTON COURTS REJECT EXTRA-CONTRACTUAL CLAIMS AGAINST FIRST PARTY INSURERS

Earlier this week, two Washington courts rejected extra-contractual claims against first party property insurers that had paid out benefits and followed the appraisal provisions in their policies. 

In Pinney v. American Fam. Mut. Ins. Co. 2012 U.S. Dist. LEXIS 22328 (Feb. 22, 2012), United States District Court Judge Marsha Pechman granted summary judgment in favor of a property insurer that had paid to a homeowner, on a fire loss claim, consistent with the amounts awarded at appraisal.  Rejecting most of the homeowner's IFCA claim, Judge Pechman followed other recent decisions holding that alleged "violation of the enumerated WAC provisions alone is not sufficient to sustain a cause of action."  Judge Pechman allowed the insured to proceed on their extra-contractual claims to the extent that they were based upon the insurer's alleged failure to advise the insured of the alternative living expense benefits available under the policy.  

In Lloyd v. Allstate Ins. Co., 2012 Wash. App. LEXIS 340 (Feb. 21, 2012), the Court of Appeals (Div. II) affirmed the trial court's summary judgment ruling in favor of an automobile insurer who had paid the totaled value of a vehicle consistent with an appraisal award.  Rejecting the insured's bad faith claim, Division II concluded that, as a matter of law, the insurer had acted reasonably in its handling of the claim.   The appraisal award amount was nearly the same as the settlement amount that the insurer had offered before the insured demanded appraisal. 

Tags:

E&O Insurer Prevails on Recission Claim Based Upon Insurance Application Misrepresentations

On August 29, 2011, United States District Court Judge Benjamin Settle granted summary judgment in favor of Tudor Insurance Company in a declaratory judgment action filed against its insured Hellickson Real Estate (2011 U.S. Dist. LEXIS 96768).

Tudor filed the action after Hellickson tendered defense of a Department of Licensing disciplinary proceeding. The Department of Licensing had sent investigation notices to Hellickson before Hellickson had applied for the insurance policy, but Hellickson did not disclose those notices to Tudor in response to insurance application questions inquiring about "any act, error, omission or other circumstances, which might reasonably be expected to be the basis of claim or suit against you." 

The only evidence that Hellickson submitted in opposition to Tudor's motion was a declaration from the same person who had completed the insurance application. She testified that the Department of Licensing action was "a complete surprise to her and her husband" and that, when she filled out the application, she thought the Department of Licensing issues had been resolved. 

Judge Settle found that the insured's declaration was insufficient to raise any genuine issue of material fact and ruled that Tudor was entitled to rescind the insurance policy as a matter of law. In explaining his ruling, Judge Settle stated that the insured's testimony about her belief that the Department of Licensing issues had been resolved proved that the insured had knowledge of the undisclosed regulatory investigation and that this evidence reinforced, rather than rebutted, the presumption that the misrepresentation had been made with an intent to deceive. 

Judge Settle also dismissed the insured's counterclaims for bad faith and violations of the Consumer Protection Act and Washington's Unfair Claims Settlement Practices Regulation, WAC 284-30-300 to -450. Although Tudor acknowledged that it had committed at least one technical violation of the claims handling regulations, Judge Settle found that the insured was legally precluded from pursuing any relief on these extra-contractual claims because an insured's fraud is dispositive. 

COURT OF APPEALS REJECTS BROAD APPLICATION OF FRAUD EXCEPTION TO ATTORNEY CLIENT PRIVILEGE IN BAD FAITH LITIGATION

Last week, in Cedell v. Farmers Insurance Company of Washington, 2010 WL 3003535 (August 3, 2010) (.pdf) the Court of Appeals (Div. II) reversed a Grays Harbor trial court order imposing sanctions and ordering Farmer's Insurance to produce the file of an attorney it had  hired to investigate a first party residential fire loss claim.

Rejecting the insured's argument that "an insurance company does not have any right to attorney-client privilege in a bad faith claim," the Court emphasized that "[t]o qualify for the fraud exception to [the] attorney-client privilege, [an insured] must show fraud, as opposed to just bad faith."  The Court of Appeals concluded that, while Farmer's handling of the claim could support a finding of bad faith,  the trial court had not made any finding of fraud -- such as a misrepresentation of material facts to the insured -- such that it was an abuse of discretion to order an in camera review of the attorney's file.

WHEN DOES BREACH OF DUTY TO DEFEND CONSTITUTE BAD FAITH AS A MATTER OF LAW?

Bad faith claims have long been considered to raise questions of fact that normally can be resolved only at trial. 

But in a 5-4 decision issued in American Best Food, Inc., v. Alea London, Ltd. (.pdf) on March 18, 2010, the Washington Supreme Court held an insurer liable for bad faith as a matter of law because it had failed to defend an insured where Washington law was unclear on whether or not there was coverage for the underlying claim.  Although it concluded that the insurer's denial was "unreasonable" as a matter of law, the majority denied that it was finding the insurer's breach of the duty to defend  to constitute per se bad faith. However, four justices dissented from the bad faith ruling, emphasizing that the majority was incorrectly "conflating the duty to defend and the duty of good faith."  (.pdf). 

Tags:

WHEN SHOULD COUNSEL BE DISQUALIFIED BECAUSE THEY MAY TESTIFY AT TRIAL?

Bad faith claims frequently are based, at least in part, upon the communications between, or the conduct of, attorneys representing an insurer and/or insured. As a result, it is not uncommon in bad faith litigation for one or both sides to threaten, or at least consider,  seeking disqualification of opposing counsel.  But when is disqualification really appropriate?  The Washington Court of Appeals (Division II) addressed this issue recently American States Insurance Company v. Nammathao (December 10, 2009) (.pdf) -- a dispute over UIM coverage. 

Nammathao highlights that, while parties often may be tempted to seek disqualification, it is usually a measure of last resort.  Reversing the trial court's disqualification of the insured's counsel, the Court of Appeals held that the trial court had not made the required findings.  Where an opposing party intends to call an attorney at trial, disqualification is warranted only if the trial court makes each of the following three findings:

  1. The attorney will give evidence material to the determination of the issues being litigated;
  2. The evidence is unobtainable elsewhere; and
  3. The testimony is or may be prejudicial to the testifying attorney's client.

The Nammathao court also indicated that the standard for disqualification is lower where a party intends to call its own attorney at trial.  But the trial court must still make specific findings regarding the importance of the anticipated testimony and whether disqualifying the attorney would be a hardship for the client.  

     

INSURER'S PERMISSIBLE VENUE DECISIONS CANNOT GIVE RISE TO BAD FAITH CLAIM

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. 

Insurer Failing To Promptly Accept Tender Commits Bad Faith

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)
 

Washington Court of Appeals Rules That Insurer's Claims Policies and Procedures Are Not Trade Secrets

Plaintiff McCallum sued Allstate Insurance Company, alleging bad faith and violation of the Washington Consumer Protection Act (“CPA”). Plaintiff theorized that Allstate maintained a national policy to drag out the claims process, making it unnecessarily difficult and expensive for UIM insureds to obtain their benefits.

In an effort to establish her theory, McCallum issued discovery requests seeking Allstate’s claims manual, claims bulletin, Claim Core Process Redesign Implementation Training Manual, and documents related to a third party consultant firm’s efforts to revamp Allstate’s claims procedures in the 1990s. When Allstate resisted disclosure of these documents, McCallum filed a motion to compel, prompting Allstate to seek a protective order.

The court granted Allstate a protective order, based in large part upon declarations from its assistant Vice President and a local claims representative, who asserted that the documents were confidential trade secrets. Under the terms of the order, the documents were only to be used in litigation, and only disclosed to McCallum, her attorneys, and her experts. McCallum’s attorneys then deposed the Vice President and claims representative, who failed to support their prior declarations. In particular, the witnesses: (1) had no knowledge of the amount of time, manpower, or financial resources that had been expended in developing their policies and procedures, and (2) had no knowledge of how their policies and procedures differed from their competitors. McCallum then used those depositions in order to convince the trial court to vacate its existing protective order.

On appeal, the Washington Court of Appeals affirmed vacation of the protective order. The court “begins with a presumption of openness,” and to overcome that presumption in the context of discovery, the party seeking a protective order must establish “good cause.” To establish “good cause,” one must demonstrate specific prejudice or harm that will result if not granted, ideally supported with specific examples.

Allstate asserted that the claims procedures constituted trade secrets, and their disclosure would destroy their inherent value. To constitute trade secrets, claims procedures must: (1) derive independent economic value from not being known or readily ascertainable by others and (2) be subject to reasonable efforts to maintain their privacy. The Washington Court of Appeals found that Allstate had engaged in reasonable efforts to maintain the privacy of their claims procedures by seeking protective orders in this and other prior litigation. However, the deposition testimony from Allstate’s assistant Vice President and claims representative failed to support the proposition that Allstate’s claims procedures were materially different than their competitors, and failed to demonstrate that significant time, money and manpower had been expended to develop the claims procedures. Thus, Allstate failed to prove that the claims procedures derived independent economic value from not being known to others. Accordingly, the Court of Appeals found Allstate’s claims procedures were not trade secrets and affirmed the trial court’s vacation of the protective order.

Mar. 31, 2009 - 36624-0 - Colleen Mccallum, Respondent V. Allstate Ins. Co., Petitioner

Washington Insureds May Claim Bad Faith Against Liability Insurers Even in Absence of Any Duty to Defend or Indemnify

In response to certified questions from the United States District Court for the Western District of Washington, the Washington Supreme Court has held that an insured may have a cause of action against its liability insurer for procedural bad faith and violation of Washington’s Consumer Protection Act (CPA) even if the insurer had no contractual duty to defend, settle, or indemnify the insured. But an insured must show actual harm; damages are not presumed.


The case, St. Paul Fire & Marine Insurance Co. v. Onvia, Inc., involved a class action complaint against Onvia for sending unsolicited advertising, by facsimile in violation of the Telephone Consumer Protection Act of 1991. Onvia’s insurer, St. Paul Fire & Marine, failed to timely respond to a tender of the claim. Onvia later settled the class action, agreeing to entry of a judgment in favor of the class for $17.515 million and an assignment of its claims against St. Paul in exchange for an agreement that the judgment would be enforced only against St. Paul.


St. Paul filed a declaratory judgment action in federal district court to establish that there was no coverage. The class representative counterclaimed for procedural bad faith and violation of the CPA based upon St. Paul’s handling of Onvia’s tender. While the district court agreed that St. Paul had no duty to defend or indemnify, it certified questions regarding the counterclaims to the Washington Supreme Court.


Focusing on an insurer’s duty of good faith, the Supreme Court held that “a third-party insured has a cause of action for bad faith claims handling that is not dependent on the duty to indemnify, settle, or defend .” In doing so, the Court rejected St. Paul’s argument that there can be no liability for violation of Washington’s insurance claims-handling regulations (WAC 284-30-330(2)-(4); WAC 284-30-360(1), (3); WAC 284-30-370). Similarly, the Washington Supreme Court held that “the CPA recognizes a claim for violation of claims-handling regulations that does not depend on a finding of bad faith or the existence of a duty to settle, indemnify, or defend.”


The Court, however, declined to recognize coverage by estoppel in this context. Instead, the Court stated that the insured must provide actual harm and that the insured’s damages are limited to the amounts incurred as a result of the proven bad faith.

 

Tags: