Northwest Insurance Law Blog

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

Dana Ferestien — Sat, 30 Jan 2010 18:09:39 -0800

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:

The attorney will give evidence material to the determination of the issues being litigated;
The evidence is unobtainable elsewhere; and
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.

WHO SHOULD I SUE?: COVERAGE CLAIM AGAINST AIG HOLDING COMPANY DISMISSED

Dana Ferestien — Sun, 24 Jan 2010 16:35:50 -0800

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.

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

Dana Ferestien — Thu, 21 Jan 2010 20:16:22 -0800

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.

COURT REJECTS INSURER'S DUTY TO COOPERATE DEFENSE ARGUMENT BECAUSE OF INSURER'S OWN DELAY

Dana Ferestien — Mon, 18 Jan 2010 19:42:04 -0800

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.

DOCTRINE OF UBERRIMAE FIDEI APPLIED TO VOID MARINE INSURANCE POLICY

Dana Ferestien — Sat, 16 Jan 2010 19:37:57 -0800

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.

9th Circuit Affirms Application of "Rain, Snow, Ice . . ." Exclusion To Excessive Ice Formation In Cold Storage Facility.

Dana Ferestien — Sat, 26 Sep 2009 14:48:00 -0800

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.

Federal District Court Enforces Suit Limitation Periods Despite Ongoing Settlement Discussions

Dana Ferestien — Wed, 23 Sep 2009 15:54:31 -0800

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.

Recent Lessons From The New Selective Tender Rule

Dana Ferestien — Tue, 15 Sep 2009 15:40:31 -0800

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.

Other Similar Coverage Claims Held Discoverable Because of Potential Relevance to Policy Interpretation

Dana Ferestien — Tue, 02 Jun 2009 11:16:49 -0800

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.

Insurer Failing To Promptly Accept Tender Commits Bad Faith

Todd Sorensen — Mon, 11 May 2009 13:50:23 -0800

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)

No Coverage For Known Construction Defects Ignored By Developer

Todd Sorensen — Mon, 04 May 2009 09:40:12 -0800

Far Northwest Dev. Co., LLC v. Cmty. Ass’n of Underwriters of Am., Inc. et al., 2009 WL 1099158 (W.D. Wash. April 22, 2009)

Faramarz Ghoddoussi, the sole member of Far Northwest Development, LLC (“LLC”) which built and sold the Somerset Village Townhome Condominiums, admitted that he was aware of construction defects in several condominium units during the construction process. However, Ghoddoussi did not share that information with unit owners or the homeowners’ association (“HOA”), and he did not undertake a full scale investigation of the complex to determine whether the same problems existed in other units. The HOA brought action against the LLC, and Ghoddoussi individually, alleging in part that Ghoddoussi breached his fiduciary duties to the HOA by failing to fully investigate the defects during development, and as a result the condominiums suffered physical damage.

Ghoddoussi and the LLC tendered to their insurers for defense and indemnity. After the insurers denied coverage and indemnity, Ghoddoussi and the LLC initiated a declaratory judgment action. The insurers filed a motion for summary judgment, contending that there could be no coverage or indemnity because the harms alleged in the underlying lawsuit were “expected or intended” by Ghoddoussi.

The insurance policy specifically excluded “‘property damage’ expected or intended from the standpoint of the insured.” Furthermore, in granting the insurers’ motions for summary judgment, the court acknowledged that, even apart from the policy language, as a matter of insurance law “[t]here is never coverage where the harm is expected or intended.”

Ghoddoussi attempted to evade the exclusion by claiming that the damage was not “expected or intended” because he was unaware of any fiduciary duties and he lacked significant experience in construction. The court decisively rejected Ghoddoussi’s “self-serving testimony,” finding that the “expected or intended” exclusion negated any duty to defend or indemnify because Ghoddoussi was aware of the construction defects during the construction of the complex and, out of his own self-interest, failed to take action, thereby causing the damage.

Washington's Consumer Protection Act Applies to Insurers' Subrogation Collection Activities

Todd Sorensen — Mon, 04 May 2009 08:50:33 -0800

Panag v. Farmers Ins. Co. of Wash., et al., 204 P.3d 885 (April 2, 2009)

In consolidated appeals, the Washington Supreme Court evaluated the activities of a collection agency in its pursuit of subrogation claims. Both plaintiffs, Panag and Stephens, were involved in separate automobile accidents. The insurers for the other drivers, Farmers and Omni, provided their insureds with UIM benefits, then set about the business of subrogation. Both Farmers and Omni hired Credit Collection Services, Inc. (“CCS”) to obtain payment from Panag and Stephens, respectively, for the amounts the insurers had paid to their insureds.

CCS sent both Panag and Stephens a document entitled “FORMAL COLLECTION NOTICE,” setting forth the amounts paid by the insurers to their insureds as the “AMOUNT DUE.” In a series of increasingly threatening communications, CCS continued to pursue those sums, threatening litigation, license suspension, and various other costs. Panag and Stephens allegedly incurred significant costs in their efforts to contest the collection notices.

Panag and Stephens filed class action lawsuits against the insurers and CCS, alleging violation of Washington’s Consumer Protection Act (“CPA”), RCW 19.86 et seq. The traditional test for a CPA claim is known as the Hangman Ridge test, which requires the plaintiff to establish:
(1) an unfair/deceptive act or practice; (2) in trade or commerce; (3) affecting public interest; and (4) an injury to plaintiff’s business or property; (5) caused by that unfair or deceptive practice.

CCS argued that Panag and Stephens lacked standing, contending that a CPA claim could only arise in a business or consumer transaction, not in the context of collections where the parties are engaged in an adversarial relationship. The Washington Supreme Court rejected CCS’s contention, refusing to add a “sixth” element to the Hangman Ridge test. “A private CPA action may be brought by one who is not in a consumer or other business relationship with the actor against whom the suit is brought. . . . We conclude that the CPA is applicable to deceptive insurance subrogation activities.”

9th Circuit Addresses "Gap in Coverage" Issues Created by Liability Insurer Insolvency

Dana Ferestien — Mon, 27 Apr 2009 09:11:06 -0800

Insurer insolvency can have significant impacts for an insured even where a particular claim or loss triggers policies issued by multiple insurers. This point is illustrated by the 9th Circuit's decision earlier this month in California Insurance Company v. Stimson Lumber Co.,2009 WL 1035238 (.pdf) -- a coverage action stemming from Stimson's settlement of a class action lawsuit related to Stimson's Forestex wood siding product. One of Stimson's primary liability insurers, Home Indemnity, was insolvent which raised two coverage issues for Stimson as well as Stimson's other insurers: (1) Whether Stimson was obligated to itself cover Home Indemnity's pro-rata share of defense costs for the class action lawsuit; and (2) Whether an umbrella policy from another insurer "drops down" to fill the gap created by Home Indemnity's insolvency.

The 9th Circuit decided the defense costs issue in favor of Stimson, reasoning "[i]t It is unreasonable to treat Stimson as self-insured, when it sought to limit its liability by purchasing primary insurance."

But the 9th Circuit rejected Stimson's argument for its umbrella insurer to "drop down" as contrary to the umbrella policy language. In connection with this latter ruling, the 9th Circuit noted that the umbrella policy included an other insurance clause that demonstrated that the policy was to be excess over all primary insurance, both scheduled and unscheduled.

Another Chapter In the Ongoing Debate Over Coverage For Continuing and Ongoing Damage

Dana Ferestien — Fri, 17 Apr 2009 14:13:19 -0800

Property damage often results from a continuous and ongoing process occurring an extended period of time rather than from a discrete event such as a windstorm or earthquake. Where damage is continuous and ongoing, there are often disagreements and disputes as to when the property damage “occurred” to trigger coverage under a particular insurance policy. Although Washington courts have addressed this issue in the past in cases such as Gruol Construction Company, Inc. v. Insurance Company of North America, 11 Wn. App. 632, 524 P.2d 427 (1974), and American National Fire Insurance Company v. B & L Trucking and Construction Company, 134 Wn.2d 413, 951 P.2d 250 (1998), insurers and insured continue to litigate over whether or not particular continuous damage “occurred” during a particular policy period.

The Washington Court of Appeals (Division III) ruled on another of these disputes earlier this week in Walla Walla College v. Ohio Casualty Insurance Company, ___ P.3d ___, 2009 WL 987405 (April 14, 2009) (.pdf). The case stemmed from the failure of an underground gasoline storage tank in September 2001 at Walla Walla College. The party that sold and installed the tank in 1991 did not properly backfill the soil below the tank which, over a period of years, placed stress on the tank and ultimately led to its failure. The tank seller and installer was insured by Ohio Casualty Insurance Company from 1990 to 1992. After the college filed suit against the tank seller/installer, a declaratory judgment action was initiated to determine whether the Ohio Casualty polices covered the College’s losses.

The College argued that there was coverage because the improper intallation took place during the policy period and the damage to the tank first started immediately after installation. After discussing Gruol and B&L Trucking as well as Villella v. Public Employees Mutual Insurance Company, 106 Wn.2d 806, 725 P.2d 957 (1986), Division III rejected the College’s arguments for coverage because: (1) there had been not been any actual injury at all until long after policy expiration; and (2) even if one were to accept that the stress to the tank occurring during the policy period constitutes property damage, such damage would be excluded from coverage because it would be damage to the insured’s own work. In reaching this conclusion, Division III relied upon the following reasoning from Wellbrock v. Assurance Company of America, 90 Wn. App. 234, 243,951 P.2d 367 (1998):

The coverage-triggering “occurrence” refers to the event causing injury to the complaining party, not the earlier event that created potential for future injury.

Insurers and insured will continue to debate for the foreseeable future what constitutes an injury triggering coverage.

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

Todd Sorensen — Thu, 09 Apr 2009 08:43:48 -0800

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

Oregon Considering New Punitive Damages Statute

Patrick Clark — Mon, 16 Mar 2009 08:38:49 -0800

Oregon House Bill 2791, currently before the state legislature, would create a private right of action against an insurer that engages in “unfair claim settlement practices,” as defined by ORS § 746.230. Among the practices penalized are an insurer’s misrepresentation of facts to the insured, its refusal to pay claims without conducting a reasonable investigation, and its bad faith denial of a claim.

Under current Oregon law, a plaintiff-insured who proves that his insurer violated the terms of the insurance policy is generally limited to a recovery of “actual damages” based simply on a breach of contract theory. Meanwhile, if HB 2791 passes, plaintiffs who establish that the insurer engaged in an “unfair claim settlement practice” would be entitled to reasonable attorneys fees and treble damages.

In effect, the statute, aimed at punishing and deterring “unfair” conduct, would prescribe a set formula for calculating punitive damages against offending insurers: two times actual damages (one third of the treble damages being actual damages and two thirds being punitive in nature).

An exception to the current “actual damages” limitation, apparently approved of by the Oregon Supreme Court in Goddard v. Farmers Ins. Co., 344 Or 232, 263-264 (2008), is that punitive damages are available to a plaintiff-insured who establishes that an insurer negligently failed to settle a third-party claim within policy limits. Presumably, the bill would not have as significant an impact on such cases, since punitive damages are already available.

The powerful new remedies that HB 2791 would provide has sparked controversy. The insurance industry charges that the bill would drive up the cost of insurance premiums for consumers by hindering insurers’ ability to investigate fraud, encouraging the filing of frivolous lawsuits, and driving up the cost of defending against and settling insurance claims. Meanwhile, proponents of the bill counter that passage of the bill is necessary to protect consumers by deterring insurers from engaging in unfair practices.

District Court Again Refuses To Apply Washington's New Punitive Damages Statute Retroactively

Dana Ferestien — Mon, 09 Mar 2009 09:29:52 -0800

Washington's recent adoption of a treble damages statute -- The Insurance Fair Conduct Act, RCW ch. 48.30 ('IFCA") -- has changed the landscape for insurers and insureds going forward. Insurers now face the possibility of a punitive damages claim whenever they do not accept coverage for a claim.

A number of insureds have also sought punitive damages for claims denials made prior to passage of IFCA on December 6, 2007. Federal district courts in Washington have already concluded several times that IFCA does not apply retroactively -- Malbco Holdings v. Amco Insurance Co., 546 F.Supp.2d 1130 (E.D. Wash. 2008) and Scanlon v. Life Insurance Company of North America, Case No. C08-0256-JCC (W.D. Wash. Dec. 12, 2008); HSS Enterprises, LLC v. AMCO Insurance Co., 2008 WL 312695 (W.D. Wash. Feb. 1 2008); Aecon Buildings, Inc. v. Zurich North America, 2008 WL 895978 (W.D. Wash. March 28, 2008); and Pacific Coast Container, Inc. v. Royal Surplus Lines Insurance Co., 2008 WL 2705588 (W.D. Wash. July 8, 2008).

In Rinehart v. Life Insurance Company of North America, the insured plaintiff attempted to sidestep the non-retroactive application of IFCA by focusing upon the insurer's conduct after adoption of IFCA. The case involved long term disability benefits; the insurer terminated benefits in October 2007 prior to IFCA, but denied the insured's appeal of that decision 11 days after IFCA's passage. The insured argued that the insurer's denial of the appeal constituted an independent unreasonable act in violation of IFCA. On March 2, 2009, ruling on the insured's motion for a jury trial on the issue of punitive damages, Judge Ronald Leighton rejected the insured's argument and dismissed the punitive damages claim. Relying upon the Malbco and Scanlon decisions, the court reasoned that the precipitating event behind the claim was the decision to terminate benefits made prior to IFCA.

Certified Mail Does Not Satisfy "Mailing Requirement" For Notice of Cancellation

Dana Ferestien — Wed, 07 Jan 2009 08:47:12 -0800

Many people, insurer’s included, believe or assume that certified mail is better or safer when sending someone an important document because certified mail, unlike plain old first claim mail, provides official written proof of delivery. But people are not always available to sign for certified mail or willing to go pick up that mail at the post office. As a result, certified mail often gets returned to the sender. When this happens in the insurance context, insurers and insureds are left asking whether an insurer’s notice unsuccessfully sent by certified mail constitutes valid notice binding upon its insured.

The Washington Supreme Court addressed this issue on December 18, 2008, in Cornhusker Cas. Ins. Co. v. Kachman. The Court ruled that an insurer who sends a notice of cancellation by certified mail does not satisfy the “mailed” requirement imposed by a Washington statute – in this instance RCW 48.18.290 as it read in 2004 – providing for notice by “actual delivery or mail.” The Supreme Court reasoned that certified mail imposes additional burdens and obligations upon an insured and that, if the Washington legislature had wanted to permit “mailed” notice by certified mail, it could have done so by specifying “certified mail” as it has done in a number of other insurance-related statutes.

While RCW 48.18.290 was amended in 2006 to eliminate the “actual delivery” prong of the statute, the decision remains of potential significance for insurers and insureds. As the Ninth Circuit noted in its decision certifying the question to the Washington Supreme Court, the current statute “still distinguishes between delivering and mailing a notice of cancellation without either defining mail to include certified mail or instead requiring delivery of certified mail” such that “resolving this issue by the Washington State Supreme Court will also clarify the meaning of the word ‘mail’ in the current version of the statute.”

The potential significance of this ruling is illustrated by the dispute underlying the Cornhusker decision. The insured was involved in a fatal motor vehicle accident in October 2004. About a month before the accident, Cornhusker Insurance had sent its insured, by certified mail, a notice of cancellation for non-payment of premiums past due. The notice stated that the insurance would be cancelled effective three days before the accident unless the insured paid the past due premiums. But the insured never received the notice and it delivered payment only after the fatal accident and the insurer’s payment deadline. After receipt of the claim, Cornhusker Insurance filed a declaratory judgment action against its insured and the estate of the individual killed in the accident. While the Washington Supreme Court did not state that Cornhusker’s policy remained in effect and available to satisfy the estate’s claims against Cornhusker’s insured, that appears to be the likely result because the notice that Cornhusker sent by certified mail was never actually delivered to the insured’s last known address. And under the Court’s ruling, certified mail does not constitute “mailed” notice.

"Personal and Advertising Injury" Coverage Requires Defense of Trade Dress Infringement Claim

Dana Ferestien — Tue, 06 Jan 2009 08:54:48 -0800

In Australia Unlimited, Inc. v. Hartford Cas. Ins. Co., the Washington Court of Appeals held that Hartford had a duty to defend its insured against a trade dress infringement claim. The umbrella policy at issue provided “personal and advertising injury” which it defined to include “injury arising out of . . . copying in your advertisement [of] a person’s or organization’s advertising idea or style of advertisement.”

In determining that Hartford had a duty to defend the trade dress infringement claim, the court adopted the following three-part analysis used by the United States District Court for the Eastern District of Virginia in a 2002 decision involving Hartford and the same policy language:

(1) whether the insured was engaged in advertising;

(2) whether the insured's alleged conduct was one of the offenses enumerated by the policy as giving rise to an advertising injury, and

(3) whether the injury arose from an offense committed during the policy period and in the course of the advertising activity.

Applying this framework, the Court of Appeals rejected Hartford’s argument that there was no coverage because the insured had copied a product and then merely portrayed that product in its advertisement because “trade dress protection is based on marketing and advertisements.”

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

Dana Ferestien — Mon, 05 Jan 2009 16:10:04 -0800

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.