Washington Supreme Court Reverses Court of Appeals' Ruling that an Insurer Should be Allowed to "Litigate to Finality" Defenses
In Mutual of Enumclaw Ins. Co. v. T&G Construction, Inc., 2008 Wash. LEXIS 1041 (Oct. 23, 2008), the Supreme Court of Washington was “asked to balance the interests of an insured defendant in reaching a reasonable settlement with a claimant against the insurer’s interest in fully litigating its insured’s legal obligation to that claimant.” Although Mutual of Enumclaw (“MOE”) had “vigorously defended its insured,” a siding contractor, in the underlying construction defect case, “MOE declined to participate in the final round of settlement talks.” 2008 Wash. LEXIS 1041, 1. After those settlement talks resulted in a $3,300,000 settlement, MOE objected to the settlement in a reasonableness hearing, arguing that the insured should have prevailed on the basis of a statute of limitations defense and, therefore, the settlement number was considerably too high. Id. at 5. The judge at the reasonableness hearing reduced the settlement to $3,000,000 but otherwise upheld the settlement as reasonable. Id. at 6.
MOE responded with a declaratory judgment action arguing, among other things, that no indemnity obligation existed because, as a result of the statute of limitations, the insured was not “legally obligated” to pay anything. Id. at 6. Following a judgment for the insured, the Court of Appeals reversed, holding that in the absence of any showing of bad faith, the insurer “should be allowed to litigate to finality whether the statute of limitations had run on the underlying claims.” Id. at 7. The Supreme Court disagreed, reasoning that MOE already had a sufficient opportunity to be heard on the statute of limitations defense in the underlying case through an unsuccessful motion for summary judgment, the settlement negotiations and the reasonableness hearing. Id. at 12. The Court wrote that “[w]hen an insurer had an opportunity to be involved in a settlement fixing its insured’s liability, and that settlement is judged reasonable by a judge, then it is appropriate to use the fact of the settlement to establish liability and the amount of the settlement as the presumptive damage award for purposes of coverage.” Id. at 16. The Court held that, regardless of whether or not an insurer acts in good faith, the insurer “is not entitled to litigate factual questions that were resolved in the liability case by judgment or arm’s length settlement.” Id. at 18.
However, that determination did not resolve the extent of MOE’s indemnity obligation because the policy only covered “property damage” as defined and limited by the policy. As the Court correctly noted, “the coverage issue is different from the global damages issue.” Id. at 25. MOE argued that since the majority of the siding was not damaged, it should not be responsible for the cost to remove and replace the siding. Id. at 21. The Court rejected this argument, reasoning that “[r]emoving and repairing the siding is simply part of the cost of repairing the damage to the interior walls.” Id. at 22. Similarly, the Court rejected MOE’s argument that it should not be responsible for the cost of replacing siding because such costs fell within the “impaired property” and “your work” exclusions, concluding that “if the siding must be removed to repair damage” to other components of the building “then there is coverage for the cost of the removal and replacement of the siding.” Id. at 27. On the other hand, the Court found that the record was insufficient to determine the total amount of “property damage” covered by the policy because the settlement could have included amounts attributable to the diminution in value of the entire development “even if there had been no actual property damage to a particular wall.” Id. at 26. In other words, the Court could not tell whether the trial court’s ruling in the coverage action was based on an actual coverage determination or, rather, “merely” upon “the findings of the liability judge that the settlement was reasonable.” Id. at 26. Accordingly, the Court remanded for a closer examination of what damage had actually occurred.
