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)