National Insurance Law Forum : Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

In Putnam, the plaintiff filed a lawsuit against the defendant medical center and several of its employees alleging that they negligently failed to diagnose her ovarian cancer in 2001 and 2002. She alleged that the delay in her diagnosis until 2005 caused her to miss the opportunity to undergo early treatment and reduced the likelihood of her survival. The trial court dismissed the plaintiff’s claims because she failed to file a certificate of merit as required by Washington’s medical malpractice litigation statute, RCW 7.70.150. The trial court also held that the certificate of merit requirement was constitutional. The plaintiff appealed the trial court’s rulings directly to the Washington Supreme Court asserting that RCW 7.70.150 is unconstitutional because it unduly burdens the right of access to the courts and violates the separation of powers.

RCW 7.70.150 requires plaintiffs in medical malpractice actions to file a certificate of merit with the pleadings. The certificate must contain a statement from an expert stating that “based on the information known at the time of executing the certificate of merit, . . . there is a reasonable probability that the defendant’s conduct did not follow the accepted standard of care.” RCW 7.70.150(3).

On the first issue, the Washington Supreme Court found that requiring medical malpractice plaintiffs to submit a certificate of merit prior to the opportunity to conduct discovery may not be possible, and results in hindering the right of access to the courts.

In addressing whether RCW 7.70.150 violates the separation of powers, the Washington Supreme Court noted that the certificate of merit requirement was “procedural” rather than “substantive” because it addresses how to file a claim to enforce a right provided by law. The statute does not address the primary rights of either party but deals only with the procedures to effectuate those rights. The Washington Supreme Court concluded that RCW 7.70.150 is a procedural law that changes Washington’s civil rules governing the procedures for filing pleadings in a lawsuit, and thus invades the court’s prerogative to set court procedures, and violates the doctrine of separation of powers.

It is notable that a significant number of medical associations and insurers filed amicus briefs in this appeal. It is likely that both medical associations and insurers will monitor whether the removal of the requirement that plaintiffs file a certificate of merit with medical malpractice lawsuits results in an increase in the filing of such claims.
 

On competing cross-motions for summary judgment on the application of the various Mold Exclusions, the Court expressly rejected the claimant’s argument that if the efficient proximate cause of the loss is a covered peril, then the efficient proximate cause doctrine per se requires coverage regardless of any other potentially applicable exclusions. The Court was “persuaded” by the Insurers argument that a properly worded Mold Exclusion can operate to exclude “mold damage” irrespective of the application of the “efficient proximate cause” doctrine, even if the efficient proximate cause is a covered peril. At the Insurers urging, the court adopted the holding from the California Court of Appeals decision in DeBruyn v. Super. Ct. , 70 Cal. Rptr. 3d 652, 658-659 (2008) that when a policy “‘plainly and precisely communicates an excluded risk to a reasonable insured’ * * * the efficient proximate cause doctrine [does] not operate to cover the loss. * * * [I]nsurers ‘may limit coverage to some, but not all, manifestations of a given peril, as long as a reasonable insured would readily understand from the policy language which perils are covered and which are not.’” In so holding, the District Court went on to note that the “efficient proximate cause” rule “merely brings about ‘a fair result’ within the reasonable expectations of the parties.”

With respect to the language at issue in this case, the District Court held, in relevant part, that the “[mold] however caused” language in one of the insurers Mold Exclusions “is clear. It communicates to a reasonable insured that mold damage is excluded, even if it was caused by a covered peril.” With respect to the other insurers Mold Exclusion, the Court agreed (ostensibly based upon the “anti-current causation” language), under the same rationale, that it applied irrespective of the “efficient proximate cause” doctrine as well, but found that the Exclusion’s “resulting loss” exception potentially had application, and that was “an issue not before the Court.” The Court’s holding with respect to the later Exclusion is not a model of clarity.

As we all know, the “efficient proximate cause” rule is a very insured friendly doctrine. Washington Courts have not been shy to apply the rule ad nauseam to find coverage regardless of the express policy language. Having the District Court put the brakes on its application and look to the particular language of an exclusion that has application later in the chain of causation is a step in the right direction, and an encouraging result for property insurers in Washington. That being said, it is hard to predict what Washington State Court’s or the Ninth Circuit might do with the decision.

In Campbell v. Ticor Title Ins. Co., 2009 Wash. Lexis 624 (Supreme Court of Washington, June 18, 2009), a parcel of land was divided into three lots, designated lots A, B, and C. In 1996, a pedestrian easement was granted, benefiting Lot C and burdening Lot B, for access to a lake. In 2001, the Campbells purchased Lot A. A 2002 survey revealed that the easement for lot C actually ran through a house on Lot B. When Edwards purchased Lot C in 2004 or 2005, the problem was discovered, and Edwards initiated a suit against the Campbells seeking a reformation re-drawing the easement so as to burden Lot A and be usable. The Campbells tendered defense of the Edwards suit to Ticor Title Insurance Company (“Ticor”), and Ticor denied coverage. The Court ruled that two exclusions, one for easements not disclosed by the public records, and another for “[d]efects, liens, encumbrances, adverse claims or other matters . . . attaching or created subsequent to Date of Policy,” clearly excluded coverage and there was no duty to defend.

What we find interesting about this case is not so much the unanimous decision on no duty to defend, as unusual as that might be, but the Court’s analysis and use of evidence apparently outside the complaint in reaching its conclusion. It is further interesting that the Court would accept review of an obscure title insurance case to reinforce or restate its duty to defend analysis, including the seemingly more stringent standard established in Woo v. Fireman’s Fund Ins. Co., 161 Wn.2d 43, 164 P.3d 454 (2007): “’[T]he duty to defend is triggered if the insurance policy conceivably covers the allegations in the complaint, whereas the duty to indemnify exists only if the policy actually covers the insured’s liability.’ Id. at 53. An insurer must defend unless it is clear from the face of the complaint that the claim is not covered by the applicable policy. Id. ‘[I]f it is not clear from the face of the complaint that the policy provides coverage, but coverage could exist, the insurer must investigate and give the insured the benefit of the doubt that the insurer has a duty to defend.’ Id.” (Emphasis in original.)

Curiously, the Court does not reference much of the language of the complaint itself, and it seems to rely on matters determined by further investigation to deny the duty to defend. Regarding the first exclusion at issue, the Court states: “Reading the plain language of the title policy’s exclusions, the fact that no record here showed any easement affecting Lot A undermines the Campbells’s duty to defend claim.” The Court then states that the second exclusion is “relevant because the easement dispute arose after the date of the policy, once a survey revealed that the property line between lots A and B ran through the Gromo house and the easement was intended to run along that property line.”

The rule in Washington is essentially that if the complaint is ambiguous, the insurer is required to investigate further to determine whether there is a duty to defend. It also appears clear, however, e.g., Truck Ins. Exch. v. VanPort Homes, Inc. 147 Wn.2d 751, 58 P.3d 276 (2002), that an insurer is not allowed to use further investigation to deny the duty to defend. It appears when a complaint is ambiguous, and further investigation establishes no coverage, under this case analysis, an insurer should be able to deny the duty to defend. That is not, however, explicitly stated.

Using New Jersey as an example of a state that might interpret the insurance policy before it differently due to that state’s rules favoring “broad reading of coverage provisions,” the Dewsnup Court wrote that “the Oregon rules of interpretation, of course, are different, requiring construction against the insurer only in the case of unresolvable ambiguity.” While this statement is helpful because it clarifies that ambiguity, by itself, does not require interpretation against the insured, the Dewsnup case is even more helpful for the fact that the court did not even reach an ambiguity analysis. Instead, the Court held that the undefined policy term “roof” is unambiguous in the first place.

In relevant part, the policy at issue in Dewsnup excluded from coverage water damage to the interior of a dwelling or personal property unless the water damage occurred as a result of damage to the “roof” caused by a windstorm or a falling object. As part of a roof repair, the insureds had removed the roof’s wood shakes and physically attached to the roof several sheets of plastic as a temporary cover. After a storm ripped off one sheet of plastic, the insured went on the roof to replace it. However, the insured “lost his footing and fell off the roof, ripping off all the sheets of plastic as he fell.” As a result, the rain from the storm entered the home through the joints in the plywood sheathing “causing considerable damage to the interior of the house and to plaintiffs’ personal property.”

The insureds argued that their loss should be covered because the plastic sheets, which were a part of the roof, were damaged by a windstorm and/or a falling object (the insured). The Court consulted a dictionary and rejected this argument, concluding “that the term ‘roof’ has an unambiguous meaning, and that it does not include the tarps that plaintiffs placed over the house while the shakes were being replaced.” Most refreshing was the Court’s resort to old-fashioned common-sense, writing: “If someone attempted to sell a house that was covered by such a plastic sheet, we doubt that any reasonable buyer would believe that he or she was buying a house that had a ‘roof.’ Most likely, the buyer would say, ‘Where’s the roof?’” The Court’s use of common-sense reasoning should lend some support to insurers using the same tactic in face of insureds’ arguments that undefined policy terms are unambiguous.

The policy defines “employee” to include a “leased worker,” but not to include a “temporary worker.” “Temporary worker” is defined as “a person who is furnished to you to substitute for a permanent ‘employee’ on leave or to meet seasonal or short-term workload conditions.”

The insured contended that the policy definition of “temporary worker” is ambiguous as it could be read to apply to any person who was hired to meet seasonal or short-term workload conditions, regardless of who furnished the worker. The insured also contended that the policy is unclear as to whether the worker may “furnish” himself. In addition, the insured contended that the record supported that the individual was hired to meet short-term workload needs.

Employing Oregon’s rules to interpret the terms of an insurance contract, the Oregon Court of Appeals found that the policy’s definition of “temporary worker” plainly and unambiguously provided that a temporary worker is “a person who is furnished to you” either to substitute for a permanent employee or to meet seasonal or short-term workload conditions. The court then turned to the question of the meaning of “a person who is furnished to you,” and whether it encompasses an individual who plaintiff hired directly and whether a person can “furnish” himself or herself to an employer. As the policy does not define “furnished,” the court looked to the plain meaning of the term. Utilizing Webster’s Third New Int’l Dictionary, the court found that, in the context of human labor, the definition of “furnish” could conceivably mean that a person could provide or supply himself or herself to an employer. The court found, however, that ambiguity is not determined by what a single word in a policy means in the abstract, but what that term most likely was intended to mean when viewed in the context in which the term is used in the policy as a whole.

The court held that the insured’s proposed reading of the term “furnished” becomes untenable in the context of the whole policy because it renders the entire phrase “a person furnished to you” superfluous. Oregon courts do not lightly assume that contract language is superfluous in determining whether a phrase is ambiguous. For that reason, the court concluded that the phrase “a person who is furnished to you” as used in the definition of temporary worker means a person who is referred from, or provided by, a third party. Because the insured hired the individual directly and not with the aid of a third party, he was not a “temporary worker” within the meaning of the policy, and coverage of his claims against the insured is excluded.

In so holding, the Court of Appeals affirmed Oregon’s rules to interpret the terms of an insurance contract, and confirmed that when determining whether a term is ambiguous the issue is not what a single word in a policy means in the abstract, but what that term most likely was intended to mean when viewed in the context in which the term is used in the policy as a whole.
 

In affirming the trial court’s order granting summary judgment in favor of Farmers, the Oregon Court of Appeals addressed the meaning of the products-completed operations hazard in the context of a claim for water intrusion arising from defective construction, in turn affirming a number of key legal concepts in Oregon relating to insurance coverage. As to the exclusion, the court held that the “products-completed operations” hazard unambiguously includes all damages arising away from premises owned or rented by the insured and arising out of the insured’s work, unless one of the exceptions relating to ongoing operations applies. “Your work”, defined to include work done on the insured’s behalf, was interpreted as plainly including work performed on the insured’s behalf by subcontractors. Significantly, the Court of Appeals rejected an argument that the subcontractor exception in the separate “your work” exclusion expressed an intent for the policy as a whole to cover damages caused by the work of subcontractors, holding that an exception to one exclusion does not modify other aspects of the policy. Because the insured presented no evidence as to the timing of the water damage, the insured failed to meets its burden of proof to present any evidence indicating the applicability of the exception for damages taking place during ongoing operations.

In so holding, the Court of Appeals affirmed a number of key concepts. The court confirmed that, under Oregon’s rules for interpretation of insurance contracts, extrinsic evidence is irrelevant to determining the rights and obligations of the parties to an insurance contract, which is based solely on the terms of the policy. The Court further confirmed that the insured bears the burden of proving the applicability of an exception to an exclusion. Perhaps more significantly, the Court of Appeals held that the insured had the burden to submit proof that the property damage took place during ongoing operations. Although determined in the context of an exception to an exclusion, this holding will likely be useful in asserting that the insured also bears the burden of affirmatively submitting evidence as to the timing of the property damage for purposes of triggering the coverage grant, which is often a significant issue in water intrusion cases. Finally, the Court of Appeals confirmed that insureds cannot attempt to create ambiguity in an insurance contract by presenting evidence of an insurer’s claims handling practices and that the doctrine of waiver does not apply to exclusions in insurance contracts.

While some may criticize Hennessy as a liberal interpretation of “collapse” coverage, see dissenting opinion by Judge Landau (“I respectfully disagree with the majority that what is essentially a crack between a piece of stucco and the building to which it is adhered is a ‘collapse’ of that stucco”), the decision also represents a substantial victory for insurers with respect to the scope of coverage. Specifically, whereas the trial court had awarded the insured $98,859.03 to entirely replace the failed stucco system, the Court of Appeals reduced the award to $2,469.68 to reflect only those costs directly associated with repairing the “collapsed” portion of the stucco. Even though the parties had agreed that it was “reasonable and prudent” to replace all of the stucco that “was no longer attached to the underlying walls,” the court found that no “collapse” had occurred where the stucco was no longer properly adhered to the building but “had not moved or fallen.” Thus, repairs to those areas of the building were not necessitated by any “collapse” but by the hysteresis (grout decay) that had caused the adhesion to fail.

Prior to the Hennessy decision, insureds repeatedly argued in Oregon that once coverage is found the insurer must pay for all work that is necessary to complete the repair job in a “good and workmanlike fashion.” Thus, if, as the parties agreed in Hennessy, it was “reasonable and prudent” to repair all stucco while repairing the portion that had actually separated from the building, the insured would argue that the entire repair project should be covered. Hennessy stands for the proposition that although a broad scope of work may be “reasonable and prudent,” or even required in order for a contractor to complete the job in a workmanlike manner, coverage only extends to those repairs actually necessitated by a covered event. "Logically, this rule should not be limited to "collapse" claims but should extend to all first-party property claims, and potentially even to third-party liability claims. In most cases, a reasoned expert opinion will likely be helpful to properly limit an insured’s recovery pursuant to the Hennessy standard.
 

The central issue was the definition of “occurrence” and how it applied to property damage in construction defect claims. The Court of Appeals first found that the majority rule is that damage to an insured’s own work is not an occurrence because such damage is not unexpected. The Court also followed the corollary to this majority rule that damage to the work of other contractors is considered an occurrence. Based on the facts before it, the Court of Appeals found there was no occurrence because the damage did not extend beyond the work of Foster Frames and its sub-subcontractors. The Court of Appeals ruled that the insurers for the sub-subcontractors did not have a duty to defend because there was no indication in the complaint that “consequential damage” went beyond the work of the sub-subcontractors. To the extent the D.R. Horton complaint alleged damage to other parts of the structure, those damages were wholly unrelated to the work of Foster Frames and there was no allegation connecting Foster Frames’ work to the claimed damage. The Court of Appeals rejected the argument that simply because a complaint states generally that there was “consequential damage” there was a duty to defend. The fact that the Court of Appeals considered the work of the subcontractor and its sub-subcontractors to be all the work of the subcontractor for the purposes of whether there was an occurrence may also impact how the definition is applied to general contractors in future cases.

Regence Bluecross successfully argued to the trial court that the claim was barred by the six year statute of limitations, ORS 12.080, because any breach occurred in May of 1999 when the company first changed the amount of its payments. The insured argued on appeal that there were multiple breaches: one for every month when Regence Bluecross paid 50% rather than 80% of the medication costs. While conceding that the statute of limitations barred her claim with respect to deficient payments prior to December of 2000, the insured argued that the statute did not bar her claim with respect to deficient payments after that time. The Court of Appeals agreed with the insured. After acknowledging the general rule that “an insurance contract is breached when benefits are wrongfully denied by the insurer,” the Court ruled that “each wrongful denial of a claim for benefits constitutes a discrete act by the insurer that causes harm to the insured separate from and independent of the injuries caused by the denial of other claims, and accordingly, constitutes a discrete breach of the obligation to pay benefits under the policy.”

The effect of the Pritchard ruling extends beyond the health insurance context. Take, for example, a coverage dispute over pollution clean-up costs. If the insurer denies a claim outright, that denial date should control for purposes of calculating the statute of limitations. Because, as the Pritchard court commented, “an ongoing accrual of economic damages does not extend the statute of limitations to revive a stale claim,” it should not matter if the insured continues tendering new bills related to the same clean-up claim: the original denial date will continue to control. However, if the insurer accepts coverage but disputes the amount that should be paid, there will be a new statute of limitations date for each time the insured tenders an invoice and the insurer pays less than what the insured claims is due. According to the Pritchard court’s reasoning, it would not matter if the insurer clearly stated more than six years ago that it would only pay a certain portion of any invoices submitted. Instead, each disputed payment would trigger a new statute of limitations date.
 

Under Oregon law, IIED and Outrageous Conduct are not separate torts. To prevail on a claim for IIED, a party must show that the defendant intended to cause emotional distress, the defendant engaged in outrageous conduct, and the action did result in severe emotional distress. The Court focused on the second element, noting that the claim required conduct “outrageous in the extreme.” In reviewing the facts, the Court noted that there was no outrageous conduct, only “an ordinary investigation of an extraordinary insurance claim.” The Court noted that even if the allegations could be considered deceit by the insurer, this was not outrageous conduct because the investigator did not misrepresent his role, threaten criminal action, or induce Mancuso to take any action to his detriment. The Court also rejected the defamation claim because the investigator did not actually accuse Mancuso of fraud when the investigator spoke to Mancuso’s ex-wife.

Plaintiff’s primary argument was that the policy was “irremediably ambiguous” because the retroactive date was meaningless to the property at issue, one of 17 properties, because the tanks at that location were installed after the retroactive date. Plaintiff argued this created an ambiguity because there was a potential for coverage based on a leak from before the tanks were installed. Plaintiff argued that because of this ambiguity the policy should be interpreted to cover tanks and prior tanks at a scheduled location so long as the release happened after the retroactive date.

The Oregon Court of Appeals rejected this argument. Following Oregon’s interpretative rules, the Court found that the policy was not ambiguous. The Court found that Plaintiff’s proposed interpretation was not plausible because it is directly contradictory to policy language that the policy was location and storage tank specific. Since Plaintiff’s proposed interpretation contradicted specific policy language, it was by definition not reasonable.

The Court also rejected an argument that the insurer was barred from taking its position by the doctrine of judicial estoppel. Plaintiff argued that because the insurer had taken a contrary position in a case in Alaska, that it should be estopped from asserting that the policy does not apply to older tanks at a scheduled location. The Court found that since the insurer did not prevail in the Alaska case, that judicial estoppel does not apply.
 

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.

Despite somewhat equivocal testimony provided by Geico as to whether the disputed endorsement was sent with the renewal policy, the court accepted the endorsement as established, relying primarily on Wells Fargo Bus. Credit v. Ben Kozloff, Inc., 695 F.2d 940, 944 (5th Cir. 1982) (“Placing letters in the mail may be proved by circumstantial evidence, including customary mailing practices used in the sender’s business.”).  Citing Ben Kozloff, the court found that its decision was justified because no evidence was presented to rebut the legal presumption that “Once properly mailed, the endorsement is presumed to have been received by the insureds.” The court therefore allowed Geico to substitute what the court deemed to be the actual policy at issue for the one Geico had originally presented, and limited Geico’s liability to $25,000.

In remanding for a new trial, the Court of Appeals also commented on several other issues, including that the definition of “fixed and moveable things” in a protection and indemnity policy does not include soil and river sediment.  The Court declined, however, to comment on allocation.  On cross-appeal, Zidell argued that the court applied the wrong allocation method based on Oregon statute and the Court’s decision in Cascade Corp. v. American Home Ins. Co., 206 Or. App. 1 (2006). The Court of Appeals declined to address the argument, waiting to see if it returned after remand. The Court of Appeals also reversed the trial court’s decision that led to the award of declaratory judgment attorney fees to Zidell.