Northwest Insurance Law Blog

Ninth Circuit Strictly Applies Alea and Woo to Bar Insurer From Making Duty to Defend Determination Based Upon Undisputed Extrinsic Evidence Not Relevant to Underlying Claim

Dana Ferestien — Mon, 09 Apr 2012 08:21:45 -0800

Often, whether or not a claim against an insured is covered may depend upon facts that are neither in dispute nor at issue in the underlying lawsuit. A personal injury claim obviously would not be covered if the accident occurred before the inception of a typical general liability policy. But must the insurer defend anyway if the plaintiff’s attorney makes an error and alleges that a 2010 accident took place in 2011? Similarly, for claims made policies, must an insurer defend a claim that was obviously first made before policy inception merely because the plaintiff did not include in their complaint any allegation about the demand letters that they had delivered to the insured the prior year?

While no Washington court has directly addressed this issue, commentators have opined that insurers should be able to rely upon undisputed extrinsic evidence that do not implicate the allegations in an underlying complaint:

[A]n insurer should not have a duty to defend an insured when the facts alleged in the complaint ostensibly bring the case within the policy’s coverage, but other facts that are not reflected in the complaint and are unrelated to the merits of the plaintiff’s action plainly take the case outside the policy coverage. This would encompass the existence of facts showing that the insured forfeited any coverage because of a breach of a policy condition.

A. Windt, Insurance Claims & Disputes § 4.4, fn. 5-6 (5th ed. 2007)

Last year, in Wendel v. Travelers Cas and Sur. Co., 2011 WL 864863 (E.D. Wash. March 10, 2011), Judge Lonny Suko adopted this approach and granted summary judgment in favor of an insurer based upon a prior litigation exclusion and evidence regarding a prior lawsuit against the insured that was admittedly all true but not referenced in the underlying complaint.

On March 29, 2012, the 9th Circuit reversed Judge Suko's summary judgment ruling, finding that it had been error to rely upon out-of circuit precent and secondary sources. Citing to and quoting from the Washington Supreme Court’s decisions in Am. Best Foods, Inc. v. Alea London, Ltd., 168 Wn.2d 398(2010) and Woo v. Fireman’s Fund Ins. Co., 161 Wn.2d 43 (2007), the 9th Circuit stated that Washington law permits the use of extrinsic evidence only for the benefit of the insured and that, to the extent that this issue is unresolved under Washington law, an insurer must give the insured the benefit of the doubt as to how a Washington appelate court would rule. Thus, at least according to the 9th Circuit, an insurer must defend when they are faced with an obviously uncovered claim but plaintiff’s complaint does not include the undisputed facts that demonstrate the absence of coverage.

In Absence of Express Policy Requirement, No EUO Pre-Requisite to Insured Filing Bad Faith Suit

Dana Ferestien — Fri, 06 Apr 2012 14:34:55 -0800

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.

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"

Dana Ferestien — Wed, 28 Mar 2012 08:19:20 -0800

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.

Nautilus Survives Motion to Dismiss Property Claim for Business Losses Caused by Rogue Employee in China

Dana Ferestien — Mon, 19 Mar 2012 08:29:16 -0800

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.

No Fire Damage Coverage for Uncooperative Homeowner

Dana Ferestien — Fri, 16 Mar 2012 12:25:28 -0800

The Oregon federal district court recently addressed the legal effect of an insured's breach of a document production or similar duty after loss provision in a first party property policy. In Schoning v. State Farm Fire & Cas. Co., 2012 U.S. Dist. LEXIS 31371 (D. Or. March 8, 2012), the insured homeowner sued for breach of contract after State Farm had denied coverage for a suspicious fire loss. The fire was believed to be an arson, and the property had been in foreclosure at the time of the loss. But the insured refused to provide State Farm with documents related to the insured's financial condition or the mortgage for, and foreclosure, of the property. The insured insisted that these documents were not relevant to the loss. After making multiple unsuccessful attempts to get these documents from the insured, State Farm denied the claim for failure to cooperate.

Judge Marco Hernandez disagreed with the insured's refusal, finding that the documents requested were relevant and that the insured had prejudiced State Farm's ability to investigate. Judge Hernandez found that, whether the insured's cooperation obligations were analyzed as a condition precedent or a condition of forfeiture, State Farm had properly denied coverage because the insured's refusals had prejudiced the investigation. The court also noted that the insured's lawsuit was barred by the policy's "Suit Against Us" provision which requires an insured to comply with all policy provisions before filing suit.

Oregon Court of Appeals Refuses to Apply Liability Limits Increase Retroactively

Dana Ferestien — Thu, 15 Mar 2012 07:57:10 -0800

Several months after a restaurant customer killed two people in a drunk driving accident, the insured restaurant sought and received an increase in their liquor liability limits from $1 to $3 million. The insurer issued an endorsement to make this change, and the endorsement stated that the change was effective as of the date it was issued. The decedents' estates later filed wrongful death claims against the insured restaurant and asserted that the new $3 million limits applied to their claims because the change endorsement also noted a full one year policy period.

In a declaratory judgment action to resolve the issue, Capital Specialty Ins. Corp. v. Chan & Lui, Inc., #A146888 (March 14, 2012), the Court of Appeals affirmed summary judgment in favor of the insurer. In support of its decision, the court found that the "effective date" language unambiguously indicated that the increased limit applied prospectively only. The court also observed that the increased premium charged for the change had been prorated to cover only the time remaining on the one year policy period. In addition, the court commented that, if change endorsements were to apply retroactively as the estates contended, then that could often work a hardship on an insured such as when a change endorsement reduces or eliminates coverage.

BROKER NEGLIGENCE CLAIM DISMISSED ON SUMMARY JUDGMENT

Dana Ferestien — Fri, 09 Mar 2012 16:08:55 -0800

Earlier this week, Judge Marsha Pechman granted summary judgment in favor of an insurance broker on a claim that it had failed to obtain adequate insurance for its customer. The case – SMS Services LLC v. HUB Int’l. NW, LLC (2012 U.S. Dist. LEXIS 29824) (March 5, 2012) – involved the total loss of a $33 million airplane that had insurance for only $27 million. The insured sued its broker, HUB Int’l., alleging negligence and seeking recovery for the $6 million shortfall.

Judge Pechman ruled that, as a matter law, HUB did not have any duty to advise its customer as to the adequacy of the insurance. In reaching this decision, Judge Pechman applied the following standard:

It is the insured's obligation to advise the broker of the insurance that he or she wants, including the limits of the policy to be issued. However, if the broker assumes additional duties by contract, holds herself out as possessing an extraordinary skill, or has a special relationship with the buyer, the broker has a duty to advise the buyer of the adequacy of insurance.

Because HUB had worked for the customer for only 2 years and there was no evidence that the insured had requested HUB to determine the adequacy of its coverage, Judge Pechman concluded that HUB owed no duty.

WASHINGTON COURTS REJECT EXTRA-CONTRACTUAL CLAIMS AGAINST FIRST PARTY INSURERS

Dana Ferestien — Fri, 24 Feb 2012 17:52:19 -0800

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.

"Equitable Sharing Rule" Requires PIP Insurer to Pay Pro Rata Fees Even When it Also Insures and Pays Settlement on Behalf of the Tortfeasor

Dana Ferestien — Wed, 15 Feb 2012 08:41:36 -0800

In a 7-1 decision in Matsuyak v State Farm & Casualty Co., handed down on February 9, 2012, the Washington Supreme Court extended the common fund rule adopted in Mahler v. Szucs, 135 Wn.2d 398 (1998) to circumstances where an automobile insurer pays personal injury protection (PIP) benefits to an injured passenger and later pays the passenger again to settle their tort claim against the insured driver.

In Mahler, the court held that a PIP insurer must pay a pro rata share of the insured's attorney's fees incurred to recover from an at-fault driver insured by another insurance company. In that instance, the PIP insurer benefited from the recovery because it received reimbursement for the PIP benefits it had previously paid out to the insured. Relying upon the premise that PIP coverage and liability coverage are two separate policies (even though they are in fact part of a single automobile insurance policy), the Supreme Court reasoned that the PIP insurer benefits from the passenger recovering from the liability insurer such that the PIP insurer must pay a pro rata share of the passenger's attorney's fees even though there is actually no common fund generated from a second insurer.

The majority also held that, contrary to Mahler, the injured passenger was entitled to recover her attorney's fees under the Olympic Steamship doctrine because the lawsuit was necessary for the passenger, as an insured, to obtain the benefits of the insurance contract, and was not merely a dispute over the amount of damages that the insurer should pay.

In dissent, Chief Justice Madsen strongly criticized the majority and questioned the rationale for both aspects of the decision.

Pizza Delivery Driver's Accident Uncovered Because Insured Failed to List All of its Businesses

Dana Ferestien — Fri, 03 Feb 2012 18:19:49 -0800

When a business applies for insurance, it is important to pay attention to details. Among other things, an insured needs to list all of the entities for which the business needs coverage. The Court of Appeals' recent decision in West Coast Pizza Co., Inc. v. United Nat. Ins. Co. (Div. I December 12, 2011) makes this point abundantly clear.

The coverage dispute stemmed from a car accident involving a delivery driver from a Mad Pizza restaurant. The business owners also operated about 20 Domino's franchises through a separate corporation, West Cost Pizza, Inc. and, when they had purchased insurance for their businesses, they listed only West Coast Pizza as an entity to be insured. Consistent with the application, the insurer, United National Insurance Company, issued a policy that listed West Coast Pizza as the only insured.

After United National denied coverage for the Mad Pizza accident, the owners sued through West Coast Pizza, and argued that they had intended to obtain coverage for all of their pizza restaurants as evidenced by the the fact that their insurance application estimated the number of drivers employed across all of their outlets.

The trial court and Division I both found that the insurer was entitled to summary judgment. Division I reasoned that the policy unambiguously limited coverage to West Coast Pizza. Division I also rejected the owners' mutual mistake theory, finding that their was no evidence that United National had intended to insure both entities. In particular, the court pointed out that the application provided no information from which United National could have determined that the applicant had intended to insure their Mad Pizza restaurants as well as their Domino's franchises.

Damage Caused By Water-Borne Debris Beyond Flood and Wave Exclusion in Homeowner's Policy

Dana Ferestien — Tue, 17 Jan 2012 08:53:26 -0800

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.

Covenant Judgment Scrutinized and Greatly Reduced

Dana Ferestien — Thu, 12 Jan 2012 08:52:25 -0800

Construction defect plaintiffs in Washington continue to use covenant judgments in an effort to force large settlements with developers' insurers. If the developer's insurer is unwilling to fund a settlement, the plaintiff and defendant developer stipulate to entry of a monetary judgment and the plaintiff agrees that it may not enforce the judgment against any assets other than the insurer's liability insurance. In order for the stipulated judgment amount to serve as the presumptive measure of damages against the insurer, the plaintiff must first obtain a ruling from the trial court that the stipulated amount is reasonable. Washington law provides for trial courts to evaluate such stipulated judgments under a nine factor standard, but many insurers feel that, in practical terms, this standard often amounts to nothing more than a rubber stamp. But there seems to be a growing trend for trial judges to take a closer look at these stipulated judgments.

The latest example comes from United States District Judge John Coughenour in Aspen Grove Owners Assoc. v. Park Promenade Apartments, LLC. On January 9, 2012, Judge Coughenour ruled on the plaintiff condominium owners association's motion for a determination that its stipulated judgment settlement of $5.75 million is reasonable. Judge Coughenour analyzed the settlement from two perspectives -- first, he analyzed the estimated costs of repair submitted by the plaintiff association and the defendant developer; and second, he scrutinized the merits of the association's claims. In doing so, he reduced the plaintiff's total damages from $5.75 million to $4.27 million, and then applied a 55% discount to account for weaknesses in the plaintiff's liability theories. This reduced the approved damages to $1.92 million. But in recognition of the fact that the insurance policy involved only covered liability for breach of fiduciary duty for the developer's representatives who had served on the association's board of directors, Judge Coughenour allocated only $300,000 to the breach of fiduciary duty claim.

Washington Federal District Court Rejects Technical Claims Handling Violations as Basis for Extra-Contractual Claims Against Liability Insurer

Dana Ferestien — Mon, 09 Jan 2012 09:04:11 -0800

Washington's claims handling regulations include short deadlines for responding to an insured's tender of a claim for defense and indemnity: 10 working days to acknowledge a tender (WAC 284-30-360(1)), and 30 days to complete its investigation of a claim unless the investigation cannot reasonably be completed within that time (WAC 284-30-370). When insurers fail to meet these deadlines, Washington insureds often assert claims for violation of Washington's Insurance Fair Conduct and Consumer Protection Acts as well as for bad faith and/or negligence.

But should insurers face such claims where their only alleged wrongdoing is a short delay in responding to an insured? United District Court Judge Robert Bryan recently addressed this issue in Cardenas v. Navigators Insurance Co., (December 16, 2011), a case in which the liability insurer had agreed to defend its insured against a claim, had paid all pre- and post-tender defense costs, but had not accepted the defense within 30 days of tender. Granting the insurer's motion for summary judgment, Judge Bryan ruled that "[v]iolations . . . of the 10 and 30 day time periods for acknowledging a claim and completing an investigation are simple technical violations and standing alone, do not evidence any unreasonable conduct on the part of [an insurer] in promptly responding to the tender."

Washington Supreme Court Affirms Class Certification and Post-Accident Diminution in Value Award to Automobile Insureds

Dana Ferestien — Thu, 22 Dec 2011 10:18:06 -0800

On December 22, 2011, in Moeller v. Farmers Ins. Co, of Washington, a 5-3 majority of the Washington Supreme Court affirmed lower court rulings in favor of a plaintiff class of automobile insureds seeking breach of contract damages against their insurer for failure to compensate them for the diminished value of a postaccident, repaired car. The Supreme Court acknowledged that a majority of other jurisdictions have previously denied coverage for diminished value because an automobile policy's reference to "repair or replace" unambiguously encompasses only a concept of tangible, physical value. But the Court disagreed with this view, emphasizing that Washington law imposes "presumptions in favor of the insurance consumer that are inherent in the rules of construction regarding insurance contracts." The Court explained that, it "must read an insurance contract as an average person would read it" and that, from the point of view of the consumer, "the reasonable expectation is that, following repairs, the insured will be in the same position he or she enjoyed before the accident."

Broker Malpractice Claim Does Not Require Expert Testimony Proving Reasonableness of Underlying Settlement

Dana Ferestien — Fri, 16 Sep 2011 13:35:02 -0800

On September 12, 2011, United States District Judge Lonny Suko ruled in Colman Coil Manufacturing, Inc. v. Seabury & Smith, Inc., 2011 U.S. Dist. LEXIS 102238, that expert testimony regarding the reasonableness of an underlying products liability settlement is not a prerequisite to a broker malpractice claim.

The insured manufacturer had been sued for damages caused by an ammonia link in their equipment. Their liability insurer, Wausau, provided a reservation of rights defense, but filed a separate coverage action seeking a declaration that the policy's total pollution exclusion eliminated coverage. Based upon advice from both their personal coverage counsel and appointed defense counsel, the insured elected to settle the products liability lawsuit for $1.15 million, with the insured paying $450,000 of the settlement. The insured then sued its broker, Seabury & Smith, alleging that their negligence had resulted in incomplete insurance.

Seabury & Smith argued on summary judgment that the professional malpractice claim failed, as a matter of law, because the insured did not have any expert to establish the reasonableness of the underlying settlement. Judge Suko rejected the argument, noting that there is no Washington authority imposing any expert testimony requirement. Judge Suko distinguished this scenario from cases in which there has been a consent judgment to settle the underlying liability claim. The Court concluded that it is for the finder of fact to weigh whether the insured acted reasonably in settling the underlying claim.

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

Dana Ferestien — Fri, 02 Sep 2011 08:46:01 -0800

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.

Washington Court Of Appeals Rules That Liability Insurer Defending Under Reservation of Rights Is Not Entitled To Reimbursement In The Absence Of Express Policy Language Expressly Reserving Such A Right

Dana Ferestien — Thu, 28 Jul 2011 07:34:51 -0800

On July 25, 2011, the Court of Appeals addressed what had been an open question in Washington: when a liability insurer provides a reservation of rights defense, is it ever entitled to reimbursement of defense costs paid if a court later determines that there is no duty to defend?

The coverage dispute arose from claims that Immunex had artificially inflated the price of prescription drugs. After litigation had been pending for several years and Immunex had already incurred substantial defense fees and costs, Immunex tendered the claims to National Surety, its excess liability insurer, for defense and indemnity. National Surety denied coverage for the claims, but agreed under a reservation of rights to provide a defense with the right to reimbursement if a court later determined that there was no duty to defend.

The King County Superior Court determined that there was no coverage and, therefore, National Surety owed no duty to defend Immunex. But the trial court also ruled that National Surety was obligated to pay Immunex’s defense costs until the date that the court confirmed the claims were not covered, unless National Surety could establish actual prejudice resulting from Immunex’s late tender. Immunex appealed the finding of no coverage, and National Surety cross-appealed the trial court’s determination that its ruling applied prospectively only.

After agreeing that there was no coverage for the underlying claims, the Court of Appeals affirmed that National Surety remained obligated for defense costs incurred up until the trial court’s summary judgment rulings unless National Surety could prove actual prejudice resulting from Immunex’s late tender. Relying upon Washington cases noting the broader scope of a liability insurer’s duty to defend, the court reasoned that “payment of defense costs for claims that are potentially covered is part of the bargained-for exchange between the insurer and the insured” and the reservation of rights defense provides an insurer with “the benefit of insulating itself from a bad faith claim and possibly coverage by estoppel.”

Notably, the court indicated that its decision may have been different had National Surety’s policy included express language reserving to the insurer the right to reimbursement in the event that it defends a claim under a reservation of rights and then obtains a court determination of no coverage. Whether the Court of Appeals would actually enforce such a provision remains to be seen. But liability insurers now should give careful consideration as to whether to include a reimbursement provision in policies issued to Washington insureds.

In reaching this outcome, the Court of Appeals rejected several arguments advanced by National Surety. The court declined to draw any distinction between instances where an insurer defends under a reservation of rights because Washington law is unresolved as to the meaning of policy language as opposed to instances where a claim involves unresolved questions of fact for which there may or may not ultimately be coverage. The Court of Appeals also rejected reimbursement based upon theories of unilateral implied contract or unjust enrichment. And the court declined to reach a different outcome because National Surety had yet to reimburse Immunex for any of its defense costs, explaining that such a result would improperly reward insurers who withhold defense costs payments.

Seminar: Changes in International Insurance - How to Protect Your Company Overseas

Dana Ferestien — Wed, 22 Sep 2010 14:51:42 -0800

It has been anticipated that the 21st century will mark the rise of the Asia Pacific region as the economic/geopolitical center of the world. The recent global financial recession, which has resulted in unmanageable public debt and slow recovery in the West, accelerated the economic rise of the East. With Asia leading the world out of this unprecedented crisis and emerging relatively unscathed, a new enthusiasm for deals has emerged especially in Australia, China, India, Indonesia, Singapore and South Korea.

These changes have brought about a new climate in international insurance. Underwriters of global insurance risks are more focused on insolvency issues impacting businesses in western countries and product liability, along with employment practice issues impacting the East. Of course, fraudulent business practices traverse the two worlds.

With the current global economic transition, US businesses along with their directors and officers could face new liabilities doing business abroad in the context of civil actions as well as regulatory and law enforcement proceedings. What legal pitfalls can US businesses face when operating within Asian Pacific jurisdictions? What regulatory issues must they be concerned with and what civil liabilities can they incur?

Jörg Ahrens is Head of Financial Lines Claims (common law) for Allianz Global Corporate & Specialty Insurance. He oversees Allianz’s large claim exposures in such jurisdictions as Australia, Canada and the UK, including the entire Asian market (Singapore, Hong Kong, Tokyo, India and China). He weathered some of the largest Professional Indemnity cases in the London market including Arthur Andersen and the TMT stock crash, as well as the US corporate bond crisis cases. He oversaw such noteworthy Directors and Officers Liability claims as Daimler Chrysler, Deutsche Telekom, WestLB and OneTel.

Mr. Ahrens is admitted to the bar in Germany and England (solicitor), in addition to holding 2 Master titles in competition law and economics. He has worked as a lawyer in Germany and the UK and as in-house counsel for the German television channel ZDF (Zweites Deutsches Fernsehen) as well as the Gerling Insurance Company. Mr. Ahrens is fluent in German, English, Russian and French.

Date: Monday, October 11th, 2010

Time: 8:00am - 9:30am

Where: Greater Seattle Chamber of Commerce, 1301 5th Avenue, Suite 2500, Seattle, WA, 98101

RSVP Required

________________________________________________________________________________

Registration The cost for this event is $12 for members of TDA and $15 for non-members. Refunds cannot be made after Wednesday, October 6. For more information or to register over the phone please contact Samantha Paxton at 206-389-7319 or samanthap@seattlechamber.com.

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Oregon Supreme Court Reverses Summary Judgment To Revive Homeowner's Claim For Water Damage From Storm During Roof Repair.

Dana Ferestien — Mon, 20 Sep 2010 08:41:28 -0800

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.”

Washington Supreme Court Requires Property Insurer To Pay Sales Tax For Actual Cash Value Claim

Dana Ferestien — Fri, 17 Sep 2010 08:30:06 -0800

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.