Washington courts enforce provisions requiring insureds to sit for examinations under oath and have dismissed bad faith lawsuits where the policy at issue contains provisions requiring an EUO and an insured's compliance with all policy terms before they may file suit. But what happens when a policy does not contain an EUO provision and an insured files suit after refusing an insurer's request for an EUO. The Ninth Circuit addressed this issue last week in Parker v. Allstate Ins. Co., 2012 U.S. App. LEXIS 6464 (March 12, 2012). Reversing Judge Benjamin Settle's summary judgment dismissal in favor of Allstate, the 9th Circuit found "no requirement under Washington law that an insured complete an EUO before suing her insurer when the insuring contract includes no EUO requirement." Under this ruling, insurers in Washington seem to have EUO rights only where they expressly provide for it in their policy.
Nautilus Survives Motion to Dismiss Property Claim for Business Losses Caused by Rogue Employee in China
In late 2008, Nautilus attempted to terminate the manager of its Shanghai subsidiary, Xu Xiaobin. But Mr. Xu refused to cooperate or turn over key items including the subsidiary's business license and "chop" (carved ink notary stamp), both of which are needed in order to conduct business in China. Mr. Xu even hired his own security detail to overpower the security that Nautilus' U.S. representative had hired to take control of the Shanghai office.
After its U.S. executives were unable to resolve the dispute, Nautilus had to shut down its operations and form a new Chinese subsidiary. That took about 9 months and Nautilus had to write off more than $1 million in accounts receivable for the original subsidiary. Nautilus sought coverage for these related expenses (employee severance, legal fees, etc.) from its property insurer, Allianz. Allianz denied coverage and, after Nautilus filed suit, Allianz moved for judgment on the pleadings.
Judge Benjamin Settle mostly denied Allianz's motion on March 8, 2012. In brief summary, Judge Settle ruled that:
The employee dishonest acts exclusion did not necessarily eliminate coverage because Mr. Xu may not have been an employee at the relevant point in time. In other words, Mr. Xu may have caused the damage after Nautilus terminated him, or at least attempted to do so.
The voluntary parting exclusion did not necessarily apply because there were facts to indicate that Mr. Xu took the property in question without Nautilus' consent or authorization.
The accounts receivable coverage provision is ambiguous such that it should be construed to provide coverage even though Nautilus' inability to collect on accounts was the result of its inability to prove that the underlying transactions occurred.
The direct physical loss requirement in the insuring agreement did not require a physical alteration to the condition of the property. Rather, it was sufficient that Nautilus contended that the equipment had been lost.
Washington law has long provided that "[a]n insured may not avoid an exclusion merely by affixing a specific label or characterization to the act or event causing the loss." Thomas V. Harris, Washington Insurance Law, § 6.10, fn. 179. That rule was recently put to the test before Seattle Federal District Court Judge Ricardo Martinez in Johnson v. Allstate Ins. Co., a coverage dispute over a waterfront home damaged during a winter storm. The home was knocked off its foundation by waves crashing against it, and the homeowners alleged that there were logs in the water that caused the damage. Allstate denied coverage, asserting that the loss was not covered because of policy exclusions for "water", "waves" and "weather conditions." The homeowners filed suit seeking coverage, claiming that "water-borne debris is a non-excluded peril."
In a January 10, 2012 order denying Allstate's motion to dismiss, Judge Martinez concluded that the policy's exclusions for "water", "waves" and "weather conditions" do not exclude coverage for logs propelled by waves. Judge Martinez declined to follow Kish v. Ins. Co. of N. Am., 125 Wn.2d 164 (1994), a case in which the Washington Supreme Court held that these exclusions eliminated coverage for similar damage because "flood" and "rain-induced flood" are not distinct perils. Judge Martinez reasoned that Allstate's policy was, at best, ambiguous because it made no mention of destructive material propelled by waves. He also found that an average insurance purchaser would distinguish between waves and destructive material propelled by waves and, to illustrate the point offered what seemed to be a far-fetched analogy to an instance in which waves carry an unexploded World War II mine.
Oregon Supreme Court Reverses Summary Judgment To Revive Homeowner's Claim For Water Damage From Storm During Roof Repair.
On September 16, 2010, in Dewsnup v. Farmers Insurance (.pdf), the Oregon Supreme Court reversed a summary judgment ruling dismissing a homeowner's property insurance claim for water damage occurring after a storm blew tarping off the top of their home.
A contractor was replacing the insured's roof at the time of the storm. He had removed the wood shake roof and put down with staples a polyurethane plastic sheet. But the storm blew the sheet off the house and the contractor was unable to replace it before water came into the house and caused damage. Under the policy at issue, "for coverage to extend to water damage, the 'direct force of wind or hail' must first damage a building by causing an opening in a roof." Farmer's denied coverage because there was no permanent "roof" at the time of the loss, only a temporary cover.
Because the policy did not define the term "roof," the Oregon Supreme Court focused on the ordinary meaning of the term to evaluate Farmer's position. In doing so, it declined to adopt any temporal standard and instead adopted a functional standard under which "a roof should be sufficiently durable to meet its intended purpose: to cover and protect a building against weather-related risks that reasonably may be anticipated." The Court went on to find that the homeowner had raised genuine issues of material fact by presenting expert testimony that the tarping along with the other materials in place “would have been adequate to protect the home for one or two years if necessary.”
On September 9, 2010, the Washington Supreme Court ruled in favor of a plaintiff class and against Farmers Insurance (.pdf) with regard to whether the Actual Cash Value (ACV) provision in Farmers Insurance's renter's polices requires payment of sales tax. The ACV provision states that a "[c]overed loss to property will be settled at actual cash value," and defines ACV as "the fair market value of the time of loss." Farmers had refused to pay sales tax to the class representative and appears to have relied largely on the fact that her policy also included a Contents Cost Replacement Coverage endorsement which provides for reimbursement to the insured if they replace items within 180 days of loss. Farmers took the position that the class representative was entitled to sales tax if she actually spent the money to replace items and incurred sales tax but not if she instead chose to take payment under the ACV provision. The Supreme Court rejected Farmer's position, finding that the undefined term "fair market value" was ambiguous and that it was reasonable to include sales tax within the meaning of the term.
Of particular significance for all insurers, the Court's decision turned largely upon the fact that Farmers had disclosed during discovery that it uses multiple ACV methods to measure including a replacement-cost-less-depreciation formula which sometimes includes sales tax. In responding to Farmer's arguments, the Court stated that "[fair market value's] meaning in the context of this insurance contract is what matters, which is why Farmer's own practice of including sales tax is critical. The Court's decision confirms that both insurers and insureds should carefully examine an insurer's own practices when determining the proper meaning of an insurance contract.