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

In the ensuing coverage action, Birmingham argued that the allegations of trespass created a duty to defend because they allege that “the trespasses have caused damage . . . in an amount to be proven at trial” and interference with the right to quiet enjoyment and use of the property. Birmingham argued that the complaint should be liberally construed to include to include a trespass that causes property damage. The court found that the argument “requires the court to go beyond liberal construction . . . because there are no allegations . . . suggesting that the Birminghams caused any physical injury or destruction to tangible property.” Only a bare allegation of trespass was not enough to trigger the definition of “property damage.” The court found that the allegations were not ambiguous simply because some types of trespass could cause property damage. Since there was no actual claim for physical injury, the court denied that there was any ambiguity to construe in favor of a defense. The court rejected the argument that coverage for personal injury applied because there was no allegation that an invasion of a property right was done by or on behalf of the land lord of the property.

In MW Builders, Inc. v. Safeco Ins. Co. of Am. 2010 U.S. App. LEXIS 13960 (9th Cir. Or. July 8, 2010), the Ninth Circuit held that “[t]he district court erred in granting MW Builders the entire arbitration award because that award included uncovered repair costs.”  The plaintiff argued that the entire amount of the underlying arbitration award should be covered because the award amount was less than the total, actual cost to repair damage caused by the insured subcontractor’s defective work.  The Ninth Circuit rejected this argument, explaining:

That the actual repair costs, excluding uncovered repairs, ended up exceeding the $620,000 arbitration award does not justify awarding MW Builders the entire award.  MW Builders was never entitled to recover all the repair costs from Safeco.  It was only entitled to recover a portion of the damage to the hotel caused by Safeco’s insured.

Although the Ninth Circuit’s opinion is unpublished, it can be cited pursuant to FRAP 32.1.  Unless and until Oregon’s Supreme Court or Court of Appeals issues a contrary decision, the Ninth Circuit’s opinion in MW Builders should provide a sound basis for apportionment arguments in Oregon.

In Harris, the plaintiff brought an action for breach of contract and for declaratory relief against its insurer for the insurer’s failure to undertake Harris’ defense in a claim against it under a claims-made and claims-reported policy. The parties filed cross-motions for summary judgment on the coverage issue, which resulted in Judge Papak’s opinion.  After determining that Oregon law applied to the dispute, the District Court determined that Oregon’s appellate courts have not considered whether the “eight-corners” rule must be properly applied to a claims-made, as opposed to occurrence-based, policy.  The District Court noted that with claims-made policies, but not occurrence-based policies, the date that a claimant advises the insured that a claim is being made is material to determining whether there is coverage for the claim.  The District Court found persuasive analysis on this issue from an opinion from the First Circuit, and quoted from that opinion: “the [eight-corners] rule cannot be rigidly applied in the context of claims-made policies where the determinative event is the timing of the claim, a fact that likely will be . . . irrelevant to the merits of the underlying tort suit, and therefore absent from the pleadings.” Edwards v. Lexington Ins. Co., 507 F3d 35, 40-41 (1st Cir 2007).

The District Court held that to bar extrinsic evidence of the date a claim was noticed to an insured when analyzing an insurer’s duty to defend under a claims-made policy would improperly subvert the purpose and terms of the agreement between the insured and its claims-made insurer by requiring the insurer to undertake the insured’s defense under circumstances where it did not agree to do so and where the insured had no contractual right to expect it. The District Court went on to state that the rigid application of the broadest formulation of the “eight-corners” rule to claims-made policies would create circumstances in which the party alleging claims against the insured could, by choosing whether or not to allege the date a claim was first made against the insured, control whether the claims-made insurer would be required to undertake its insured’s defense.  As Oregon acknowledges that “[t]he primary and governing rule of the construction of insurance contracts is to ascertain the intention of the parties,” Totten v. New York Life Ins. Co., 298 Or 765, 770 (1985), and because rigid application of the “eight-corners” rule would systematically subvert intentions of the parties to a claims-made insurance contract and distort the terms of their agreement, the District Court predicted that, if presented with the issue, the Oregon Supreme Court would not apply the “eight-corners” rule to bar consideration of extrinsic evidence of the date a claim was noticed to an insured when analyzing an insurer’s duty to defend under a claims-made policy.

The insurer argued that there could be no “collapse” because the building was still standing even though there was evidence of “a downward movement of several inches in the hotel caused by an abrupt snapping of the trusses.”  The insured responded that the incorporation of a habitability requirement in the definition of “collapse” (“… with the result that the building … cannot be occupied…”) necessarily suggested that something short of a complete falling to the ground could qualify as a collapse.  Because the alleged “collapse” had rendered some rooms unsafe and unusable, the insured argued that there was sufficient evidence for a jury to find that a covered “collapse” had occurred.  The Court agreed with the insured, noting that the habitability requirement “stands as a proxy for a substantial impairment of integrity by adding a life and/or safety element to the definition.”

The Malbco Court distinguished a prior “collapse” decision by the Oregon District Court, Association of Unit Owners of Nestani v. State Farm, 670 F. Supp. 2d 1156 (D Or 2009), wherein summary judgment was granted for the insurer.  The policy at issue in Nestani defined “collapse” as “actually fallen down or fallen into pieces” and, importantly, did not include any habitability requirement.  The dichotomy between these two decisions – Malbco and Nestani – re-affirms the importance, especially in Oregon, of focusing on the particular policy language at issue rather than relying upon general standards for general categories of alleged losses.

In Ironwood, the plaintiffs sought partial relief for environmental response costs under CERCLA.  The dissolved corporation, Linke Enterprises, Inc. (“Linke”), apparently represented by an attorney paid by its liability insurer, moved to dismiss the claims against Linke on the ground that the plaintiffs did not allege that Linke holds any undistributed assets and, accordingly, lacks the capacity to be sued.  Linke asserted that it is a “dead and buried” corporation under Oregon law with no undistributed assets and thus not able to be sued or held liable for environmental response costs.  Noting that Fed. R. Civ. P. 17(b) (2) provides that the capacity of a corporation to sue or to be sued is determined by the law under which it was organized, and also noting that the Ninth Circuit has held that FED. R. Civ. P. 17(b) (2) requires the court to apply state law when deciding whether the dissolved corporation may be sued for damages, the Ironwood court looked to apply Oregon law.

Oregon statutes provide that the dissolution of a corporation does not prevent the commencement of a proceeding against it in its corporate name, and also provide that a claim against a dissolved corporation may be enforced to the extent of its undistributed assets unless the corporation complies with specified notice provisions, which, while not addressed in the opinion, Linke likely did not fulfill.  The Ironwood court noted that the parties did not cite, and the court did not find, any Oregon authorities helpful in addressing the issue as to whether a liability policy is a corporate asset capable of being distributed when a corporation is dissolved, but also noted that courts of other jurisdictions have found that liability policies should be listed as assets of a bankruptcy estate.

In light of the lack of Oregon law on the central issue, the court found it reasonable to infer that Linke’s liability insurance policies are an asset of the company because an attorney paid by the insurer is representing Linke’s interests in this case.  That inference, together with the court’s finding that the plaintiffs were not required to allege that Linke has undistributed assets to satisfy a judgment, resulted in the court’s denial of Linke’s motion to dismiss.

The underlying complaint alleged that the retaining wall was damaged by sewage and effluent that built up behind it.  The court found that the exclusion was ambiguous because “it is unclear whether the overflow/leak from the sewage pipe constitutes” waste materials.  The court noted that although raw sewage can constitute a health hazard, since the sewer line could also include rainwater and other sources, it was an issue of fact as to whether the discharge was “waste materials.”  The court noted that if a storm sewer overflowed and flooded a house, the water that flooded the house could include antifreeze and oil, but that did not mean that the water would constitute “waste materials or other irritants, contaminants or pollutants.”  The court went on to hold that even if the discharge was “waste material” the complaint did not limit its allegations to property damage caused by waste material, but also included property damage resulting from the buildup of pressure from the liquid.  Since the damage could have been caused by the pressure, and not “the hazardous or dangerous nature of what the liquid contained,” the pollution exclusion did not apply to the duty to defend.

However, in Wilson v. TriMet, A138860 (Or. Ct. App. April 14, 2010), Oregon’s Court of Appeals ruled that ORCP 54 E does not apply to cases where an insured seeks recovery of attorney fees pursuant to ORS 742.061. That statute creates an entitlement to attorney fees whenever an insurer fails to settle within six months of receiving proof of loss and the insured’s ultimate recovery exceeds the insurer’s best offer. The Court ruled that this six month deadline was absolute, even in the face of ORCP 54 E.

The Court explained: “If an insurer is allowed to nullify a portion of the attorney fee award required by ORS 742.061 by making an offer of judgment pursuant to ORCP 54 E after six months from proof of loss … the core purposes of ORS 742.061 to reduce litigation and encourage efficient claims settlement would be defeated.” This reasoning is counterintuitive to the extent it would allow an insured to reject a generous offer seven months after providing proof of loss but then still recover all of its attorney fees after failing to beat that offer following many more months of litigation and trial. In that situation, the effect of the Wilson decision may actually be to encourage reckless prosecution of insured’s claims based on the knowledge that attorney fees are all but guaranteed if the insurer fails to make a reasonable offer within six months. The slight disincentive that ORCP 54 E offered is now gone.

The lesson to insurers in Oregon is clear: put your best offer on the table within six months of being provided with a proof of loss. Otherwise, you better be prepared to pay attorney fees regardless of any additional settlement efforts after the six month deadline.

The Court of Appeals reversed, holding that the evidence was “simply to vague and obscure to satisfy the requirement of ORS 742.043(1)” that, in the context of oral binders, any exception to standard coverage must be “clear and express.”  Because the insured’s own expert testified that standard “course of construction” policies would not have covered the loss, the burden was on the insured to prove that the standard terms had clearly and expressly been broadened for purposes of the oral binder.  Viewing the evidence (which consisted almost exclusively of the insured’s own testimony about what had been represented to him) in the light most favorable to the insured, the Court of Appeals nevertheless found “that there is no evidence that the parties agreed to or that [the agent] bound terms that clearly and expressly waived or superseded the usual terms or exclusions of course of construction coverage.”

In American Best Food, Security guards from the insured nightclub escorted George and Michael from the premises.   Once outside, George shot Michael nine times.   Michael struggled to the alcove of the club where security guards then brought him back inside.   A club owner ordered the guards to remove Michael from the club which they did.   Michael later sued the club for its negligence in failing to protect him from criminal conduct.   In his suit, Michael specifically alleged that the club exacerbated his injuries by dumping him onto the sidewalk outside the club.   In other words, Michael alleged negligent conduct, occurring after he was shot, worsened his damages.

Alea London, the club’s liability insurer, denied both defense and indemnity for the suit because of its broad assault and battery exclusion which included the phrase “arising out of”:

This insurance does not apply to any claim arising out of:

A.                 Assault and/or Battery committed by any person whosoever, regardless of degree of culpability or intent and whether the acts are alleged to have been committed by the insured or any officer, agent, servant or employee of the insured or by any other person; or

B.                 Any actual or alleged negligent or omission in the:

1.                  Employment;

2.                  Investigation;

3.                  Supervision;

4.                  Reporting to the proper authorities or failure to so report; or

5.                  Retention;

of a person for whom any insured is or ever was legally responsible, which results in Assault and/or Battery; or

C.        Any actual or alleged negligent act or omission in the                     prevention or suppression of any act of Assault and/or Battery.

(Emphasis added).   Alea argued that this language relieved if of the duty to defend or indemnify because, relying on over 20 years of Washington cases, the phrase “arising out of” broadens the exclusion and encompasses any occurrence with a causal connection to the excluded conduct.   According to Alea, but for the excluded assault, Michael would not have sued the insured club.  

The Supreme Court disagreed pointing out that no Washington decision interpreted an assault and battery exclusion when post assault negligence is alleged, and a split of authority existed on the issue in cases which had addressed the issue.   The Court adopted the reasoning of cases holding that “arising out of” in an assault and battery exclusion did not apply to allegations of post assault negligence.   Since there was no analogous Washington decision, and a split of authority existed, Alea should have given the benefit of the doubt to its insured and picked up the defense.   

Perhaps more surprisingly, the Court held that Alea’s denial of the duty to defend was bad faith as a matter of law.   In Washington, bad faith supposedly means the insurer’s denial was unreasonable, frivolous, or unfounded.   To no avail was Alea’s argument that it did not act in bad faith because it relied on a reasonable interpretation of case law.      The Court disagreed and held that Alea should not have denied the duty to defend when it was arguable – based on conflicting non-Washington cases – whether the assault and battery exclusion applied to post assault negligence.

"For that reason, we conclude that defendants' settlements with Zidell did not operate to extinguish plaintiffs' right to equitable contribution for defense costs paid prior to the settlement. If plaintiffs and defendants had the same obligation to defend Zidell, and plaintiffs discharged a disproportionate share of that obligation, then their right to equitable contribution arose at that point in time. Although Zidell was able to release its own claims against defendants for defense costs, Zidell was not in a position to release plaintiffs' claims against defendants."

The court noted that its decision only applied to defense costs incurred before the date of a settlement between a carrier and the insured. The court expressed no opinion as to the fate of any underlying defense costs incurred after a carrier settles with its insured. The court held that the Oregon statute governing contribution among carriers for an environmental claim does not preclude a contribution action against a settling carrier because it allowed a carrier to at least seek contribution from another carrier who is "liable or potentially liable."

The court also held that because the insurer may only seek contribution based on equity, not contractual obligations, London was not entitled to statutory attorney fees in pursuing the contribution claim. With respect to what constitutes a suit, the court ruled that a letter from the Oregon Department of Environmental Quality that is the equivalent of an "agency ultimatum," asserting that the insured must investigate and remediate its site, qualifies as a "lawsuit." The court held that since the letter from the agency satisfied this requirement. The court held there was a duty to defend because the letter required investigation into the "extent" of third party property damage, rather than "whether" third party property damage had occurred.

-Submitted by Andrew Moses, Gordon & Polscer LLC

Plaintiff then brought a breach of contract and bad faith lawsuit against Illinois Union for its alleged failure to properly settle the underlying suit. After two rounds of summary judgment motions and trip up to the Ninth Circuit, the issues were narrowed for trial and plaintiff grudgingly accepted Illinois Union’s $425,000 Offer of Judgment, exclusive of costs and fees. Plaintiff then filed its motion for $473,930.68 in claimed attorney fees and costs.

Magistrate Judge Papak found that the plaintiff wholly failed to “verify” the $40,137.93 in claimed costs. Id. at *11-12. Although Judge Papak allowed plaintiff leave to file an amended cost bill, he advised plaintiff that it could not “recoup costs for courier, mail, telephone, [] computerized research [,]travel expenses [,] costs of a mediator [,] outside counsel [,]” and many other claimed costs because they were “‘plainly not recoverable.’” Id. at *12-15. Plaintiff did not file an amended cost bill and, therefore, recovered no costs.

On the issue of recoverable attorney fees, Illinois Union’s threshold argument that ORS 742.061 should not apply because it never “denied” coverage, but simply contested the extent of available coverage was rejected. Id. at *19-22. Illinois Union’s argument that the plaintiff’s underlying complaint did not constitute a requisite “proof of loss” under ORS 742.061 sufficient to trigger its indemnity (as opposed to its defense) obligations was also rejected.   Relying on the Oregon Supreme Court’s recent decision in Parks v. Farmers Ins. Co., 347 Or. 374 (2009), Papak found that plaintiff’s underlying complaint, even though for unspecified damages, provided “sufficient information for Illinois Union to estimate its indemnity obligations.” Id. at *17-19. Judge Papak did, however, agree with Illinois Union on the apportionment of fees between the contract and the bad faith claims finding that they did not share “common issues”, reducing recoverable fees by over $104,000. Id. at *22-25. And Papak reduced plaintiff’s recovery by roughly another $60,000 pursuant to several ORS 20.075 “reasonableness” factors, including plaintiff’s unreasonable pursuit of settlement. Id. at *20-37.

The sufficiency of what constitutes a “proof of loss” under ORS 742.061 continues to be diluted.   However, arguing for the apportionment of recoverable fees between the contract claim and (the inevitable) bad faith claim remains a viable weapon in contesting policyholder attorney fee claims. The District Court is also proving to be a better venue for mitigating fees claims based on their overall “reasonableness” relative to the substantive claims at issue, the parties litigation conduct and the sufficiency of the petition.

-Submitted by Lloyd Bernstein, Gordon & Polscer, LLC

State Farm raised several issues at summary judgment, including: (1) whether plaintiff had produced any evidence of a collapse commencing during the policy period; (2) whether a “collapse” caused by decay over many years qualified as “sudden”; and (3) whether substantial decay, and even disintegration, of portions of structural members constituted an “entire collapse” of a “part of a building.”

Chief Judge Ann Aiken ruled for State Farm on all of the above issues. She held that plaintiff failed to establish “specific facts to show loss commencing during the Policy period.” Although plaintiff had elicited testimony from State Farm’s expert that the decay of structural members was progressive and, therefore, portions of some structural members likely fell into pieces during the policy period, the court declined to “assume, based on speculative probability, that a structural member fell into pieces during the Policy period.” Plaintiff’s failure to “identify a specific instance of collapse that occurred during the Policy period” was fatal to the claim. 

Next, the court rejected the insured’s argument that the term “sudden” meant “unintended” pursuant to the Oregon Supreme Court’s interpretation of the phrase “sudden and accidental” in St. Paul Fire & Marine Insurance Co. v. McCormick & Baxter Creosoting, Inc., 324 Or 184, 213, 923 P2d 1200 (1996). Instead, based on the context of the Policy, which included an exclusion for water damage that occurs “over a period of time,” the court held that “sudden” meant “marked by or manifesting abruptness or haste” or “made or brought about in a short time.” Because the decay at the Condominiums had indisputably occurred over many years, the alleged collapse was not “sudden.”

Finally, the Court held that “[i]n the context of this Policy, a ‘part’ is ‘an essential portion or integral element.’” Accordingly, the complete disintegration of portions of structural members did not constitute an “entire collapse” of a “part of a building.” The Court wrote: “[P]laintiff’s interpretation of ‘part’ to include lesser ‘portions’ would render the term ‘entire’ meaningless and be contrary to the mandate that the court give effect to all terms of the Policy.”

- Submitted by Brian Hickman of Gordon & Polscer, LLC.

Averill’s daughter was involved in a car accident with another auto. Averill was insured by Farmers with a $500 deductible for collision coverage. State Farm insured the other driver. Averill’s car was a total loss, so Farmers paid her $16,254 for the car minus her $500 deductible. Farmers then submitted a claim against State Farm via inter-company arbitration, seeking recovery of its $16,254 payment and Averill’s $500 deductible. The arbitrator determined that each driver was 50% at fault for the accident and awarded Farmers one half the value of the car and one half of Averill’s deductible. State Farm paid half the value of the car to Farmers and half the deductible to Averill. Averill took no action relating to recovering the property damage to the car or her deductible from the other driver or its insurer.

Averill sued Farmers for CPA violations, bad faith, negligence, breach of contract and unjust enrichment. Farmers filed a 12(b)(6) motion to dismiss, which the trial court denied. Averill moved for summary judgment, arguing she was entitled to reimbursement for her deductible as a matter of law and contract. The trial court granted Averill’s summary judgment motion, and Farmers successfully moved for an interlocutory appeal.

The issue was whether the “made whole” doctrine (Thiringer v. American Motors Ins. Co., 91 Wn.2d 215 (1978), applies to insurance policy deductibles. Averill argued that until she recovers her deductible, she has not been “made whole” and as a matter of law Farmers may not recover. Farmers conceded that had Averill recovered on her own from the tortfeasor, she would have priority of recovery and would recover her entire deductible; but here, where Farmers pursued recovery of its own subrogation interests, the “made whole” doctrine did not apply. 

In Greenfield v. Western Heritage Ins. Co., 2010 Wash.App. Lexis 467 (March 2, 2010), the court rejected an insured’s attempt to extend his theft coverage to cover funds lost due to the commingling of funds by and subsequent bankruptcy of the debtor. Mr. Greenfield consigned a truck for sale to Ron Medlen. Upon sale of the truck, Medlen was to pay Greenfield $15,000. The truck was sold for $16,550, and the money deposited into Medlen’s business bank account. Mr. Medlen’s bank subsequently seized Medlen’s business bank account and Medlen filed bankruptcy, reducing Greenfield’s rights to that of an unsecured creditor in the bankruptcy and essentially depriving him of the proceeds of the truck sale. 

Under the Physical Damage Coverage section of Greenfield’s commercial garage policy, Greenfield had coverage for loss caused by theft. Theft was not defined in the policy. Greenfield argued that Medlen’s actions in commingling the sales proceeds with the other funds of his business violated a Washington State statute requiring that the proceeds be put into a separate trust account for Greenfield, and thus constituted a theft under the policy. The court found that by its plain language, the policy provided coverage for physical damage “to” a vehicle, and Greenfield’s claim was not for theft of the vehicle, but loss of commingled funds. The court further held that even if the commingling of funds in violation of the State statute could be relied upon to establish theft under the policy, construed broadly, the term “theft” still requires an unlawful or wrongful taking with criminal intent. Because Greenfield failed to show Medlen intended to deprive Greenfield of the truck or the sale proceeds, the argument failed. 

Greenfield then made a confusing argument about how the use of the phrase “theft or conversion” in another part of the policy somehow created an ambiguity as to the meaning of theft, and the ambiguity should be read in Greenfield’s favor to establish coverage. The court also rejected this argument. While the court found that the policy should be “construed liberally, in order to provide coverage whenever possible,” it also stated that “we cannot, under the guise of finding an ambiguity, rewrite an insurance policy to provide coverage where the plain language of the policy does not provide coverage.” Lexis pp. 4, 8.

In Black v. National Merit Ins. Co., 2010 Wash.App. Lexis 378 (March 1, 2010), the court rejected an attempt to stretch the auto policy of a passenger to apply to an accident caused by the driver of a vehicle not owned or controlled by the passenger. Norman Black, Janis Warner, Cecilia Black, and Lester Black (“the Blacks”) were severely injured when their car collided with a truck driven by Marissa Goodell, in which Tracey Radcliffe was a passenger. The Blacks argued that Goodell and Radcliffe were joint tortfeasors, although no evidence showed that Radcliffe did anything to affect Goodell’s driving. The Blacks settled with Radcliffe, and Radcliffe assigned her rights under an auto insurance policy issued by National Merit Ins. Co. to Radcliffe’s parents. Radcliffe was insured as a family member. It was undisputed that the vehicle driven by Goodell was not owned by any insured. 

Before proceeding with its analysis, the court pointed out that if a policy’s language is clear and unambiguous, the court must enforce it as written, and a policy is only ambiguous when it is “fairly susceptible to two different interpretations, both of which are reasonable.” Lexis p. 4. [Citations omitted.] The Blacks attempted to establish coverage by asserting that Radcliffe was a covered person under one of two alternative definitions:

1.         You or any family member with respect to the ownership, maintenance or use of any covered auto or trailer.

2.                  Any person using your covered auto.

Lexis p. 6.

Under the first definition, “any covered auto” was not defined in the policy. Using two dictionary definitions of “cover” that equated “covered” with “insured,” the Blacks argued that any auto that has liability insurance qualifies as “any covered auto”. The court rejected this interpretation as unreasonable. Pointing out that dictionary definitions must be used in the context of the policy, the court found the term “covered” was used in several parts of the policy, and referred only to those things that were covered under the subject policy, not any policy. Lexis pp. 9-11. 

The Blacks then attempted to establish coverage under the second definition, arguing the subject vehicle qualified as “your covered auto” under the following policy definition:

  “5.        Any non-owned auto which is a private passenger auto, a pick-up, van or panel truck, motorhome, or trailer not owned by you or a family member or furnished or available for regular use while in your custody, possession, or being operated by you or any family member.

Lexis pp. 13-14.

The Blacks argued the phrase “while in your custody, possession, or being operated by you or any family member,” applied only to the immediately preceding phrase “furnished or available for regular use,” essentially arguing that “your covered auto” thus included any auto not owned by the insureds. The court again emphasized that a policy is only ambiguous when it is susceptible to two different, but reasonable interpretations, and rejected the Blacks’ interpretation as one that no purchaser of insurance would deem reasonable. The Blacks’ interpretation would essentially assert that National Merit “took on risk for a near universe of vehicles,” which is unreasonable. Lexis pp. 15-17.

The Black case is significant for its emphasis on the point that dictionary definitions are not to be applied arbitrarily to interpret words in a policy that are undefined. Dictionary definitions are helpful, but they must be applied reasonably and make sense in the context of the policy, which under Washington law is to be construed as a whole.

The Greenfield and Black cases reemphasize the point that while policies will be construed broadly in Washington in favor of coverage, they are not to be construed to the point of stretching them beyond what is intended to be covered by the clear language of the policies.

American States first argued that it was protected from liability to Providence by Oregon’s workers compensation statute.  The court rejected this argument because the statute does not bar additional insurance being procured that may protect a contractor based on the fault of the employer-subcontractor.  The court also rejected an argument that the Oregon statute voiding construction contracts to the extent they purport to provide indemnity for another’s negligence applied.  The court reasoned that in this case indemnity was allowed under the statute because American States had agreed to indemnify Providence against liability for Woodmaster’s own acts or omissions.  The court used a similar rationale for rejecting an argument that coverage was excluded because no liability could be imposed on Woodmaster.  The exclusion did not apply because Providence only sought to be indemnified to the extent of Woodmaster’s fault.

Even though the court found that Providence was covered under the policy, as applied to the facts of the underlying case, there was no duty to defend.  The court found that because the complaint could not be read to create a possibility that Woodmaster was at fault, American States had no duty to defend Providence.  The court deferred ruling on the duty to indemnify.

Wing Enterprises, Inc. manufactures ladders that it sells through vendors. Wing maintained an insurance policy with Liberty International Underwriters that was not for commercial general liability (“CGL”), but included only products-completed operations coverage that covers injuries or property damage taking place away from Wing’s own premises and “arising out of” Wing’s products or work. The Liberty policy also contains a vendor’s endorsement covering injuries or property damage arising from Wing’s products distributed or sold in the regular course of the vendor’s business.

Advanced Ladders sells Wing’s ladders, and maintains a CGL policy with Allstate. Advanced Ladders’ Allstate policy provides coverage for both premises and operations and products-completed operations. James Colton went to Advanced Ladders to buy a Wing ladder. An Advanced Ladders employee offered Colton a “safe operations training” for the ladder. The employee extended the ladder to its full height and Colton climbed to the top; the ladder then collapsed, injuring Colton severely.

After Colton threatened to sue Advanced Ladders, Advanced Ladders tendered the claim to both Allstate and Liberty. Liberty denied the claim. Allstate determined that Colton’s injuries were caused by the apparent negligence of the Advanced Ladders employee who failed to properly set up the ladder. Allstate determined that the claim was covered under the premises and operations portion of the Advanced Ladders policy, and settled the claim for $1 million. Allstate then filed a declaratory judgment against Liberty, alleging that Liberty had a duty to defend and indemnify Advanced Ladders and that Liberty’s coverage was primary.

Allstate contended the Liberty policy covers Colton’s claim because the injury “arose out of Wing’s ladder,” and relied on cases involving CGL polices that broadly interpret the phrase “arising out of” to find that, in the CGL context, an injury need only arise out of an “occurrence” to be potentially covered. The Court of Appeals noted, however, that in the products-completed operations context, the injury must arise out of a defect in the insured’s product or work.

The Court of Appeals found that as the injury at issue was not caused by a defect in the insured’s product, the ladder, but by the negligent operations of the vendor, the injury did not arise out of a defect in the insured’s product or work. The Court acknowledged Allstate’s argument that but for the ladder Colton would not have been injured, but declined to accept the “but for” test, pointing out that ladder was merely the conveyance through which the vendor’s negligence caused the injury. Products-completed operations policies are not designed or intended to protect against such losses. Because Colton’s injury did not arise out of a defect in Wing’s ladder, the Court of Appeals held that Colton’s claims are not covered by Liberty’s products-completed operations policy.
 

The court rejected the insured’s argument for three, primary reasons. First, the court determined that the absence of the other insurers would not prevent a declaration of the extent of Canal Indemnity’s coverage obligations to Adair Homes. Second, the court cited Ninth Circuit case law for the proposition that “where a party is aware of an action and chooses not to claim an interest, the district court does not err by holding that joinder is unnecessary.” Because the subcontractor was “almost certainly aware of the instant declaratory judgment action and yet ha[d] not asserted” any interest in joining the action, joinder of it “and its insurance carriers” was not necessary. Third, a declaration of coverage obligations under the Canal Indemnity policy, the court found, would have “no bearing on a decision regarding [the subcontractors’] insurance carriers’ obligations under their policies.” Thus, the subcontractor and its insurers had “no independent, legally protected right at stake in this proceeding” and were not necessary or indispensable parties.

The court’s discussion of the necessary and indispensable party rules should be helpful to insurers and their counsel attempting to discern the necessary parties to coverage actions. It should be noted that the court emphasized the fact that the subcontractors’ three insurers were in a fundamentally different position than Canal Indemnity. Whereas Adair could only hope to establish additional insured rights under the subcontractors’ policies, it had a direct coverage relationship with Canal Indemnity. This difference does not appear to be, and likely should not be, critical to the court’s decision, but the emphasis on this difference leaves open the possibility that the court would later decide that other, primary insurers may be necessary parties to a coverage action between an insured and one of its primary insurers.

In 2003, the insureds learned that the police had discovered a methamphetamine lab in their rental property. In April and May of 2003, the insureds telephoned their insurer’s agent seeking help with the cost of the decontamination. The insureds filed an action against their insurer for breach of the insurance contract after the agent informed them that the policy excluded coverage for the contamination damage. In December 2003, the insurer offered to settle all of the insureds’ claims after learning that the property had also sustained damage from vandalism. The insureds accepted the offer and a judgment was entered. The insureds then filed a petition for attorney fees under ORS 742.061, claiming that the April and May 2003 telephone calls constituted “proof of loss” within the meaning of the statute and that they took place more than six months before the insurer’s settlement offer. The insurer contended that the telephone calls did not qualify as “proof of loss” of the claims that were subsequently settled because “proof of loss” must be in writing, and because the information conveyed in the telephone calls pertained only to methamphetamine damage excluded from coverage under the policy.

Addressing the insurer’s first contention, the Court concluded that to hold that “proof of loss” for the purposes of ORS 742.061 must involve a writing was incompatible with the Court’s functional definition of “proof of loss” articulated in its prior opinions as “[a]ny event or submission that would permit an insurer to estimate its obligations (taking into account the insurer’s obligation to investigate and clarify uncertain claims) qualifies as ‘proof of loss’ for purposes of [ORS 742.061].” Addressing the insurer’s second contention, the Court noted that, that the insureds’ complaint against their insurer for breach of the insurance contract included a broad allegation for “accidental physical damage.” The Court found that, while not immediately obvious, that that term could refer to methamphetamine contamination just as easily as it could to vandalism damage. The Court found that as the insurer refused to pay a claim for methamphetamine contamination, but then, more than six months later, agreed to settle “all claims alleged in this matter,” the insurer had, in fact, settled a methamphetamine damage claim for which the insureds’ telephone calls had conveyed sufficient information to constitute proof of loss for the purpose of ORS 742.061, and the insureds were entitled to their attorney fees under the statute.

The scenario presented in the Holloway case is a common one: an insured settles a claim by stipulating to a large judgment and assigning its rights under the insurance policy to the tort victim in exchange for a covenant by the tort victim to not execute directly against the insured. Assuming the insurance policy contains an anti-assignment clause, the question then becomes whether or not the assignment is valid such that the tort victim can pursue a direct action against the insurer.

Oregon’s Court of Appeals surveyed the law of insurance policy anti-assignment clauses and noted that the majority of states hold that anti-assignment clauses only prohibit the assignment of “pre-loss rights or duties.” In other words, the anti-assignment clause prohibits an insured from substituting another insured in its place prior to any loss, but the clause does not prohibit the insured from assigning any rights that may accrue to it following a loss. This makes sense, the Court of Appeals noted, because it is perfectly reasonable that an insurer would want to “protect itself from the unknown risks to which an assignee insured might expose it.” Id. at 648. However, after a loss the parties’ rights are already fixed, so an assignment does not expose the insurer to any greater liability. Because the subject anti-assignment clause did not specify whether it applied to pre-loss rights, post-loss rights or both, the Court of Appeals found an ambiguity which it construed in favor of the insured.

The Oregon Supreme Court found that the Court of Appeals’ ruling stretched logic too far because “[t]he anti-assignment clause … is worded broadly; it contains no exceptions or qualifications.” Id. at 651. It was “unreasonable” to read “an exclusion into a broadly worded anti-assignment clause based upon the clause’s silence regarding its application to a particular situation.” Id. at 652. Because the clause was unambiguous, the attempted assignment was void. Accordingly, the tort victim could not proceed directly against the insurer.

The lesson from Holloway, in our opinion, is that even the most clearly worded policy provisions will be found ambiguous by a sufficiently motivated court. However, in Oregon, the trend is to reject manufactured ambiguities and to interpret insurance policies as they are actually written. Because the Holloway decision granted a degree of certainty to a traditionally uncertain area of the law, we recognize that case as the most significant insurance ruling in Oregon over the past decade. In our opinion, other states’ courts would be wise to follow its course.

The case turned on the interpretation of the undefined term, “policyholder.” The court first noted that the policy defined “you” and “your” as the policyholder and the policyholder’s spouse. The definition of “your” is relevant because the policy covered persons using the vehicle with “your permission.” Plaintiff asserted that the term “policyholder” must mean something different from “named insured” because both terms were used in the policy. The court rejected this argument. Applying common dictionary meanings, the court determined that “policyholder” means the “person who purchases and has the right to control the policy.” The court supported this position by concluding that the terms “you” and “your” refer to the named insureds and not other listed drivers, like permissive users. Since the daughter of the named insureds was not herself a named insured, she did not qualify as someone who could give permission for another person to use the vehicle. The court concluded that since the driver was not an insured, the insurer was entitled to a directed verdict regarding its duties under the policy.

The exclusion on which American Family relied provided that the insurance does not apply to “property damage” arising out of “your work” or “your product” in connection with any “multi-unit residential building.” The policies at issue defined “multi-use residential building” as “a condominium, townhouse, apartment or similar structure, each of which has greater than eight units built for the purpose of residential occupancy.” While there was no dispute whether the exclusion did or did not apply to certain of the buildings at FountainCourt, the plaintiffs took the position that the exclusion did not apply to certain of the remaining buildings because they were “mixed use,” meaning the buildings contained condominiums and townhomes. The plaintiffs asserted that the exclusion’s phrase “similar structure” did not include the mixed-use buildings at issue, and also argued that the exclusion was ambiguous because it was as reasonable to include mixed-use buildings in the definition of “multi-unit residential building” as it would be to include them.

The court found that the exclusion precluded coverage for any building having greater than eight units regardless of which type of unit it contains. Important to the court’s finding was the exclusion’s requirement that the structure be “built or used for the purpose of residential occupancy.” As each unit was built to be used as a residence, the fact that the units were “mixed ownership,” that is, some being townhomes and some condominiums, did not affect the application of the multi-unit exclusion.

The court also rejected the plaintiffs’ argument that the exclusion’s application depended on whether the owners of at least nine residential units in a building have the same rights, or incidents of ownership. The court pointed out that, if such an interpretation were correct, it would be possible for owners of units within a multi-unit structure to avoid the application of the exclusion simply by changing the incidents of ownership to reduce the total number of residential units that share common incidents of ownership in order to fall below the nine unit threshold of the multi-unit exclusion. The court found that the exclusion unambiguously applied to units that are “built or used for residential occupancy” and a that structure that contained more than eight residential units when built triggers the exclusion even if some units are later converted to other uses or modes of ownership. Thus, the court found that the exclusion applies to any building that is similar in structure to a condominium, townhouse or apartment that is built to include more than eight residential units no matter how the individual units in the structure are legally owned.
 

On appeal, the Ninth Circuit, considered two questions in determining whether the insurance contract should cover the loss: first, which single act or event is the efficient proximate cause of the loss; and second whether the efficient proximate cause of the loss is a covered peril, noting that the efficient proximate cause is the predominant cause which sets into motion the chain of events producing the loss. The Ninth Circuit agreed with the district court’s conclusion that, based on an expert’s undisputed finding that “the excessive ice formation . . . [was] the result of a poorly installed vapor retarder,” and the policy, which precluded coverage for “loss or damage caused by or resulting from . . . [f]aulty, inadequate or defective . . . workmanship,” the faulty workmanship was the efficient proximate cause of the facility’s excessive ice formation, and that faulty workmanship is not a “covered peril” under the policy.

The policy did provide coverage, however, if faulty workmanship led to a “covered cause of loss.” Thus, even though the efficient proximate cause of Terminal Freezers’ loss was a poorly installed vapor retarder, Terminal Freezers could recover if the policy covered whatever resulted from the faulty vapor retarder--in this case, ice. While the policy specifically excludes ice as a covered cause of loss, it does not define the term. Terminal Freezers argued, relying on the canon of noscitur a sociis, a rule of interpretation that states that the meaning of unclear language in a contract or other legal document should be construed in light of the language surrounding it, that the policy only precludes ice in its “natural” form because the words surrounding “ice” in the policy - rain, snow, sleet, sand, and dust - are “natural” elements.

Following Washington’s rules to interpret the terms of an insurance contract, the Ninth Circuit declined to resort to canons of construction when the language of a contract is clear. If a term is undefined, Washington courts rely on the term’s ordinary meaning, and may look to dictionary definitions to determine that ordinary meaning. The Ninth Circuit determined that, as commonly used, and as defined in a dictionary, ice is “water reduced to the solid state by cooling . . . .” Apparently finding no support for Terminal Freezers’ contention, the Ninth Circuit noted that “[t]hat is the end of the inquiry.” Declining to modify the insurance contract to create ambiguity where none exists, the Ninth Circuit affirmed the district court’s finding of no coverage and grant of summary judgment to U.S. Fire.
 

The case arose after the insureds noticed a musty odor and a “mushy” floor in a bathroom of their home. The insureds hired a contractor to remodel the bathroom who later testified at trial that a leak had occurred in the bathroom shower that permitted water to penetrate the area under the shower, causing the sub-floor to sustain dry rot. The insureds made a claim under their homeowners’ policy to recover the cost of repairs to the bathroom; the insurer denied the claim on the basis that the damage was not covered under the terms of the policy. The insureds then filed an action against the insurer for breach of the policy.

Relying on evidence that the structure under the shower membrane had deteriorated to the point that it did not provide structural support, the trial court concluded that the damage caused to the structure was so severe that it constituted a “collapse” covered under the terms of the Supplementary Coverages – Section I of the policy. Having made that finding, the trial court then determined that a provision of the “Losses Not Covered” section for “continuous or repeated seepage or leakage of water” excluded coverage. However, the trial court determined that there was coverage under an endorsement regarding fungi, wet or dry rot, or bacteria that was not subject to any exclusion, but limited the insureds’ recovery under the coverage to $5,000 in accordance with the supplemental coverage limits.

After addressing the relevant policy terms, and employing Oregon’s rules to interpret the terms of an insurance contract, the appellate court held that the trial court, based on the circumstances that it found, correctly ruled that the exclusion for “continuous or repeated seepage or leakage of water” excluded coverage under Section I of the policy. The appellate court also held, however, that the trial court had ruled incorrectly in finding coverage under the endorsement.

The appellate court found that language in the Endorsement - Supplemental Coverage section of the policy predicates coverage on whether the loss covered by the supplemental coverage is a “covered cause of loss.” The appellate court held that the cause of loss in this case was not a covered cause but an excluded cause, and reversed the trial court’s ruling by holding that the endorsement regarding fungi, etc., was also subject to the exclusion for “continuous or repeated seepage or leakage of water.”
 

Shilo had contracted with the insured, James Grant, to install various granite components in its hotel. However, Shilo initiated arbitration proceedings after it determined that the granite tub surrounds had not been properly installed. The arbitrator agreed that much of Grant’s work was “defective and faulty” and that water intrusion had occurred, but he also found the evidence insufficient with respect to the scope of water intrusion. The arbitrator awarded Shilo damages for the cost to remove and replace the improperly installed granite.

After converting the arbitration award into a judgment, Shilo filed a Writ of Garnishment in an attempt to collect insurance proceeds from Maryland Casualty Company, which had insured Grant. However, upon Maryland Casualty’s Motion for Summary Judgment, the Court agreed that the only damages awarded to Shilo in the arbitration fit within the exclusion for property damage to “[t]hat particular part of any property that must be restored, repaired, or replaced because ‘your work’ was incorrectly performed on it.”

Although Shilo has filed a notice of appeal to the Ninth Circuit and, therefore, the ultimate result in this case could change, the District Court’s decision serves as a reminder of the importance of distinguishing between mere construction defects on one hand and actual damage caused by construction defects on the other. Where no resulting damage is proven, the coverage terms and exclusions of many general liability policies may be sufficient to defeat coverage. Moreover, even when resulting damage is proven, coverage may be limited to the cost to repair the resulting damages. Because correcting defects is often more expensive than repairing damages, this limitation can be significant and should not be overlooked.

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 this case, the insurer appealed a supplemental judgment awarding attorney fees to the plaintiff, its insured, after the plaintiff prevailed in an action for payment of uninsured motorist (UM) benefits. The plaintiff had sustained personal injuries in an automobile accident caused by a hit-and-run driver and sought UM benefits under her policy with the insurer. The insurer paid her $800 in exchange for her signing a “Trust Agreement and Release in Full,” which released and discharged the insurer from all rights, claims, demands and damages of any kind resulting from bodily injury arising from the accident. The plaintiff, however, did not speak or read English, and was not represented by counsel at the time.

More than a year later, the plaintiff retained counsel who sent the insurer a letter rescinding any previously executed release forms and requesting additional UM benefits under the plaintiff's policy. The insurer responded by letter that that there were no issues as to the existence of UM coverage, the only issues being the liability of the uninsured driver, the insured’s damages, or both, and that the insurer agreed to binding arbitration. The plaintiff also ultimately agreed to arbitration.

At arbitration, the issue was the enforceability of the release and, if it was determined not to be enforceable, the amount of additional damages owed to plaintiff. The arbitrator ruled that the release was unenforceable, and awarded the plaintiff damages in excess of $800, but declined to award attorney fees ruling that the defendant had qualified under ORS 742.061(3). That statute entitles an insured to attorney fees if he or she brings an action on a policy and recovers more than the insurer offers in settlement, but provides the insurer a “safe harbor” by insulating it against having to pay attorney fees in personal injury protection and UM cases if the insurer meets the statutory requirements. The arbitrator ruled that the insurer met all of the requirements for avoiding fees including the provision that the only disputed issues at arbitration were liability and damages.

The plaintiff filed an exception to the arbitrator's denial of attorney fees and requested a hearing de novo in circuit court. She contended that, in addition to damages and liability, the parties also disagreed on the enforceability of the release. The trial court agreed with the plaintiff and, in a supplemental judgment, awarded her $16,036.83 in attorney fees and costs.

The Court of Appeals examined the language and legislative history of the statute at issue and concluded that only after the arbitrator had resolved the preliminary issue of the release’s enforceability could the arbitrator address the issue of the damages that plaintiff should receive under the policy. Damages and liability, then, were not the only issues submitted to binding arbitration, and the insurer was therefore not eligible for the attorney fee “safe harbor” in ORS 742.061(3).
 

The policy at issue contains a “Designated Work Exclusion” that bars coverage for “A. Condominiums, multi-unit homes, townhouses, or apartment buildings which contain 5 or more single family units. B. Any building or structure in excess of three (3) stories or any building or structure in excess of forty (40) feet in height.” The plaintiff contended that the undefined term “condominium” is ambiguous because the term is susceptible to more than one meaning, and when properly interpreted does not exclude coverage for plaintiff’s claims.

Employing Oregon’s rules to interpret the terms of an insurance contract, the court first determined whether the term has a plain meaning. Oregon courts may look to dictionary definitions to determine whether a term has a plain meaning. The plaintiff had provided a dictionary definition that “condominium” means either a building or complex containing a number of individually owned units, or the individual units. The court concluded that the dictionary definition established that “condominium” has more than one plausible meaning, and so the court examined the term in light of the context in which the term is used in the policy.

After examining the policy, the court rejected the plaintiff’s argument that the “Designated Work Exclusion” excludes only condominiums that “contain 5 or more single family units,” which the plaintiff argued demonstrates the insurer’s intent to exclude coverage of condominiums that are comparatively large buildings containing more than five single family units. The court also rejected plaintiff’s argument to apply the ejusdem generis principle of contract interpretation to the “Designated Work Exclusion.” In agreeing with the insurer, the court found that while the exclusion contains an enumeration of specific things (i.e., condominiums, multi-family homes, townhouses, and apartment buildings), that enumeration is followed by an even more specific description (i.e., “which contain 5 or more single family units.”). The court found that the application of the ejusdem generis doctrine does not establish either ambiguity in the “Designated Work Exclusion” nor indicate that the “Designated Work Exclusion” does not apply.

By applying Oregon’s rules to interpret the terms of an insurance contract, the district court concluded that both the plain meaning of “condominium” in the policy’s “Designated Work Exclusion,” and its meaning within the policy as a whole indicate that the “Designated Work Exclusion” applies to the project at issue, and the particular policy excludes coverage for the project.

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 Ninth Circuit stated that summary judgment was properly granted in favor of Stonebridge because Mr. Woodworth was at least acting as a “crew member” during the entire flight, whether or not he was controlling the plane at the time of the crash. Although the term “crew member” was not defined, the court noted that a reasonable layperson’s definition of the term comported with the federal regulatory definition under 14 C.F.R. § 1.1, which defines crewmember as “a person assigned to perform duty in an aircraft during flight time.” The court went on to state, “[a]s the flight instructor and the only pilot certified to fly the twin-engine aircraft, Mr. Woodworth had duties related to the operation of the aircraft and was a “crew member” for purposes of the exclusion.” Thus, the insurance company was not required to prove that Mr. Woodworth was actually controlling the airplane at the time of the crash in order to apply the exclusion.

In Evanston, the insured, OEA, Inc., obtained a commercial general liability policy with an effective period of May 1, 1998 through May 1, 1999. The policy provided coverage for “CLAIMS FIRST MADE…DURING THE POLICY PERIOD,” defining a claim as “a notice received by the insured of an intention to hold the insured responsible for an Occurrence involving the policy and shall include service of suit or institution of arbitration proceedings against the insured.” Id. at *4.

In 1996 and 1997, two employees of OEA’s wholly-owned subsidiary, Aerospace, were injured in an accident and filed separate lawsuits against OEA and Aerospace. Their complaints alleged liability under theories of negligence, products liability, premises liability, and strict liability. Aerospace, which was not an insured under the Evanston policy, was served with the first complaint on June 10, 1997, and forwarded the complaint immediately to OEA. OEA was served with the second complaint on November 3, 1997. Upon receipt of both complaints, OEA claimed that it decided that the claims were exclusively workers compensation claims and notified its workers compensation carrier.

OEA settled both suits. Under a full reservation of rights, Evanston paid $1,544,924.32 in defense and settlement costs. Evanston then filed suit against OEA to recover the amounts paid. The U.S. District Court for the Eastern District of California granted Evanston’s motion for partial summary judgment, holding that the claims were not covered because they were first made in 1997, before the Evanston policy period began. The court also granted Evanston’s subsequent summary judgment motion, awarding Evanston reimbursement of the amounts it paid for settlement and defense of the claims plus prejudgment interest.

On appeal, OEA asserted that the district court wrongly decided a disputed fact. OEA asserted that OEA did not have notice of the complaints until the policy period began because it did not realize that the plaintiffs intended to hold OEA liable for their injuries until October 1998. OEA presented evidence that OEA and Aerospace were frequently confused as corporate entities, that the plaintiffs did not seek to serve OEA and Aerospace as separate entities in 1997, and that various individuals at OEA held subjective beliefs that the complaints did not state a cause of action against OEA. Relying on the district court’s statement that the policy’s definition of “claim” as a “notice” “incorporates a reasonable person standard,” OEA argued that the issue of “whether it was reasonable for OEA to read the complaints as not evincing an intent to hold OEA liable for injures” was a disputed fact, making summary judgment improper. Id. at * 8.

Based on the undisputed content of the complaints, along with the undisputed fact that OEA received both complaints before the policy period began, the Ninth Circuit held that there was no genuine dispute as to when OEA received notice of the plaintiffs’ intent to hold OEA responsible for their injuries. The court noted in particular that both OEA and Aerospace were clearly named as defendants and that the products liability claim “alleged that OEA alone sold the gunpowder, storage bins, and trays, protective gear, and other products that contributed to their injuries.” Id. at *10. OEA’s subjective beliefs were unreasonable, and the Ninth Circuit determined that summary judgment on the issue was proper because there was no room for a reasonable difference of opinion on the issue.

The Ninth Circuit also upheld the award of reimbursement of the defense and settlement costs that Evanston paid, stating that because the claims were made prior to the policy period, OEA received more than its bargained-for coverage. The Ninth Circuit rejected OEA’s argument that prejudgment interest should not apply in the insurer-insured context, holding, under Levy-Zentner Co. v. Southern Pac. Trans. Co., 74 Cal. App. 3d 762 (1977), “prejudgment interest is available to every person who is entitled to recover damages that are certain.” Evanston, supra, at * 15.

In affirming Evanston decision, the Ninth Circuit emphasized that “a foolish or overly sophisticated failure or refusal to realize that one is the intended object of suit would be of no assistance to an insured.” Id. at * 9. Conversely, notifications that are vague, confusing, or indefinite to a reasonable insured do not amount to a claim.
 

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.
 

MW Builders, the general contractor for the construction of the Candlewood Suites Hotel in Hillsboro Oregon, tendered the defense to and sought indemnity from subcontractor Portland Plastering and its insurer, Safeco, for claims for water damage caused by faulty work on the hotel’s exterior siding (EIFS). Safeco denied the tender and refused to defend or indemnify MW Builders. MW Builders settled with the hotel owner for $2 million, then filed a separate demand for arbitration against Portland Plastering. Safeco defended Portland Plastering at the arbitration, where the arbitrator determined that Portland Plastering was 31% at fault for the damages sustained by the hotel, awarding MW Builders $620,000 in damages, plus defense costs and attorney fees.

In the subsequent coverage action, the district court initially awarded MW Builders the full $620,000 arbitration award. On appeal, the Ninth Circuit held that Safeco was obligated to provide coverage for damage to the hotel, but not for the costs associated with replacing the EIFS. 267 Fed. Appx. 552, 555 (9th Cir. 2008). Because the arbitration award was not partitioned into costs associated with repair of the EIFS and other damages to the hotel, the Ninth Circuit remanded the issue to the district court for a determination of this issue. Id.

On remand, Magistrate Judge Acosta interpreted the Ninth Circuit’s instructions as requiring him to “calculate what portion of the $620,000 award is attributed to the hotel damage claim, excluding the EIFS repair claim.” Based on information submitted by the parties, the Magistrate Judge issued a Findings and Recommendation that MW Builders was entitled to recover 60% of the arbitration award, or $372,000.

Reviewing MW Builders’ objections to the Findings and Recommendation, the district court held that the Ninth Circuit’s instructions were ambiguous. Instead of relying on the Magistrate Judge’s interpretation of the instructions, the court adopted MW Builders’ proposed alternative interpretation, “that the Ninth Circuit remanded the case ‘for this court to conduct a factual inquiry into the extent of the covered damages sustained by the hotel to ensure that these damages were equal to or greater than $620,000.’”

Relying on this alternative interpretation of the Ninth Circuit’s instructions, the court concluded that the Magistrate Judge’s partition of the arbitration award unfairly rewarded Safeco. While the insured generally bears the burden of establishing what portion of a settlement is reasonably allocable to covered claims, there are exceptions to the rule that will shift the burden to the insurer. Shifting the burden of proof is appropriate where “circumstances in the underlying action should have compelled the insurer to seek an allocated verdict or advise the insured of the need for one, or the insurer failed to adequately apprise the insured of the importance of apportionment.”

The court concluded that this exception applied here, citing Safeco’s refusal to defend MW Builders, which compelled MW Builders to negotiate settlement of the claims against it, and noting, “[d]efendant Safeco subsequently retained counsel to defend Portland Plastering in the subsequent arbitration and neglected to seek an allocation of damages in the resulting Knoll award.”

Having placed the burden on Safeco to prove allocation of the arbitration award, the court relied on its alternate interpretation of the Ninth Circuit’s instructions to hold that Safeco could not meet its burden because “such an apportionment at this point in the litigation is unavoidably and unfairly speculative and arbitrary.” Finding no dispute that the total property damaged incurred by the hotel exceeded $620,000, the court awarded MW Builders the full arbitration award amount.

The MW Builders decision appears alarming at first glance, but its applicability may be limited. The outcome springs from the district court’s conclusion that the Ninth Circuit’s remand instructions were ambiguous. That conclusion allowed the district court to bypass Safeco’s evidence of how the arbitration award should have been allocated because the court had already concluded that the only remaining question was whether the hotel sustained covered damages greater than $620,000. Because of this, the district court’s foray into the question of burden of proof is puzzling, and may constitute mere dicta.

Despite the opinion’s questionable general applicability, the court’s decision does raise questions about burden of proof in allocation cases. The district court’s conclusion that Safeco should bear the burden of proof because it should have sought an allocated verdict or advised the insured of the need for one relies mainly on an unpublished Delaware case, Premier Parks, Inc. v. TIG Ins. Co., C.A. No. 02C-04-126, 2006 Del. Super. LEXIS 383 (September 21, 2006). Assuming that Safeco appeals the decision, the Ninth Circuit could resolve the issue by simply clarifying its instructions and remanding the case again.

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.
 

Because the lawsuit did not allege that Mt. Hood was a board member or subsidiary of the HOA, Travelers argued that Mt. Hood did not qualify as an insured. Mt. Hood claimed that since the complaint alleged that Mt. Hood controlled the board and the HOA for a period of time, Mt. Hood was effectively on the board. The court rejected this argument. Following Oregon law, the court determined that it could only consider the complaint and the policy when analyzing the duty to defend. The court found that in reviewing the complaint, it was clear that there was no allegation that Mt. Hood itself was a member of the board, even if it did control the actions of the board. The court focused on the allegation in the complaint that Hanna had been elected as the sole board member. The court granted Travelers motion to dismiss as to Mt. Hood’s claims.

With respect to Hanna, Travelers argued he was not an insured because the claims were filed against Hanna outside the policy period as required by the policy. Travelers argued that because the suit was not brought within the policy period, there was no coverage. The court found, however, that because the policy only required that a “claim” for monetary damages be brought against the board member within the policy period, the demand for money damages prior to the complaint qualified as a “claim” under the policy. Travelers also argued that an exclusion for damages arising out of construction defects applied. The court found that the policy’s coverage for “breach of duty,” and the allegations in the complaint, were broad enough, such that claims for damages other than solely construction defects could be recovered. The court, therefore, rejected Travelers motion to dismiss the claim for breach of the duty to defend Hanna.
 

The sole question at issue in the parties’ cross-motions for summary judgment was whether the assignment of policy rights was valid in light of the policy’s anti-assignment clause stating: “[a]ssignment of interest under this Policy shall not bind Insurer unless their consent is endorsed hereon.” The district court and the Ninth Circuit both agreed that only three major Oregon Supreme Court cases were relevant to the analysis: Groce v. Fid. Gen. Ins. Co, 252 Or. 296, 448 P.2d 554 (1968); and Holloway v. Republic Indem. Co. of Am., 341 Or. 642, 147 P.3d 329 (2006), which addressed anti-assignment clauses, and Hoffman Const. Co. of Alaska v. Fred S. James & Co., 313 Or. 464, 836 P.2d 703 (1992), which laid out the analytical approach for interpreting insurance contracts.

In Groce, the Oregon Supreme Court held that a virtually identical anti-assignment clause did not prohibit assignment of a cause of action that has accrued under the policy, such as breach of contract. Groce, however, was decided before Hoffman provided the analytical framework for interpreting insurance policies. In Holloway, on the other hand, the Oregon Supreme Court employed the analytical approach set forth in Hoffman to find that an anti-assignment clause that stated: “Your rights or duties under this policy may not be transferred without our written consent,” prevented assignment of both pre- and post-loss rights and duties. Holloway, 341 Or. at 331.

Ultimately, the District Court determined that neither Groce nor Holloway should control, and applied the Hoffman framework to the anti-assignment clause, determining that it was not ambiguous, and applied to bar both pre- and post-loss assignments. The Ninth Circuit reversed, holding that Groce “was not undercut by the Hoffman methodology.” Even if Groce were no longer binding, the Ninth Circuit concluded, the anti-assignment clause at issue was ambiguous under the Hoffman framework because “interest” could plausibly refer to either a purely pre-loss financial stake in the policy, or to both pre- and post-loss rights. The Ninth Circuit observed that the presumption against the drafter applied here “with particular force” in light of the decision in Groce, as Illinois Union “chose a nearly identical anti-assignment clause with constructive knowledge of its meaning.”
 

In making its decision, the Court noted that some jurisdictions have held that an insurer is not vicariously liable for the actions of insurer retained defense counsel, while other jurisdictions have held that the insurer is so liable. The Court then noted that where an insurer is defending under a reservation of rights, as here, the Court had previously adopted the enhanced good faith standard that the insurer and retained defense counsel must follow, as established by the Washington Supreme Court in Tank v. State Farm Fire & Casualty Co., 105 Wn.2d 381, 715 P.2d 1133 (1986). In this context, defense counsel represents only the insured, and not the insurer. Furthermore, Admiral would not control counsel’s professional judgment as that would be prevented by the attorney’s ethical obligation to the client, Lifestar. The Court further adopted the reasoning of Feliberty v. Damon, 72 N.Y.2d 112, 120, 527 N.E.2d 261, 265 (1988) that 1) the duty to defend is delegable by its very nature because insurers are not attorneys, 2) the paramount interest counsel represents is the insured’s, not the insurer’s, and 3) the insured’s remedy for defense counsel malpractice is an action against defense counsel. The Court then held that Admiral could not be vicariously liable for defense counsel’s alleged negligence or wantonness, further pointing out that “an insurance company is prohibited from practicing law and must rely on independent counsel to conduct litigation.”

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.

In May of 2002, the insureds sought coverage under a policy’s “collapse” provision after they learned that “hidden decay” had progressed to such a point that their home was in danger of an imminent collapse. Fabozzi, 2009 U.S. Dist. LEXIS 1109, at *7. Lexington sent a representative to investigate the claim, and the insureds alleged that the representative had assured them that the claim was covered and would be paid. Id., at *8. However, about two weeks later, Lexington sent a letter to the insureds advising them that an investigation was being conducted and that the company was reserving all of its rights under the policy. Id. at **8-9. The insureds asserted that over the next two-and-a-half years they repeatedly contacted their insurance broker who continued to reassure them that “Lexington is a good company,” and the claim would be paid. Id., at **10-11.

In October of 2004, the insureds filed suit against Lexington, alleging that it breached the insurance contract by failing to pay the claim. Id., at *13. In response to Lexington’s argument that the suit was barred by the policy’s two-year limitation on suits clause, the insureds argued that the “two-year limitation period did not begin to run until July 2003, after the cause of damage was determined.” Id., at *14. The Court reviewed case law from 1856 through 2008 in an attempt to determine when the two-year period commenced running. The review included a 1992 case wherein a New York court had held that a similar limitation of suits clause “did not begin to run until the full extent of the loss was known.” Id., at *20. However, the Court found that in more recent cases, “New York courts appear to have abandoned the rigid approach that underlay the ancient cases … in favor of a more flexible approach that considers the plain meaning of the contractual language.” Id., at *21. Accordingly, the Court applied the limitation of suits clause according to its plain language and held that the claim was time-barred. Id., at *22.

With respect to the insureds’ estoppel argument, the Court held that the letter Lexington sent to its insureds about two weeks after the Lexington representative visited the insureds’ home, “undercut any assurances that [the insureds] may have previously received.” Id., at *8. Moreover, due in part to the insurance broker’s reference to Lexington as a third-party, the Court held that the insureds “either knew or should have known that [they] could not rely on assurances” from the broker. Id., at *25. At the very least, the Court noted, the insureds should have realized that the claim would not likely be paid when Lexington took one of the insured’s depositions, prior to the litigation and prior to expiration of the two-year limitation period, that included several questions “which suggested Lexington’s belief that [the insured] had not given prompt notification of the damage.” Id., at *26.

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.
 

Earlier in the district court litigation, St. Paul had obtained a declaration on summary judgment that (1) it “had no duty to defend, indemnify, or settle the underlying action against Onvia” and (2) it did not ”commit bad faith when it refused to defend Onvia.” Id. at *6. Given that the underlying case had settled for $17.515 million, Id. at *5, these were important rulings for St. Paul. However, the rulings did not end the matter because claims remained for bad faith and violation of the CPA, both of which were premised on several alleged violations of Washington regulations governing the handling of insurance claims. Principally, the plaintiff argued that St. Paul “fail[ed] to timely acknowledge and act upon the notice of the claim and tender of defense” and “fail[ed] to promptly or reasonably investigate the claim.” Id. at *6.

The Court’s decision includes some good news for insureds and some good news for insurers. On the one hand, the Court ruled that “a third-party insured has a cause of action for bad faith claims handling [and for violation of Washington’s CPA] that is not dependent on the duty to indemnify, settle, or defend.” Id. a **14, 16. In other words, an insurer can be held liable to its insured even when the insurer possessed no duty to indemnify, settle or defend in the first place. On the other hand, the Court held that “coverage by estoppel is not recognized in this context,” and the insured is not entitled to a presumption of harm. Id. at *15. Rather, the insured “must prove actual harm” and its damages are limited to “the amount it has incurred as a result of the bad faith … as well as general tort damages” for a bad faith claim.  Id.  With respect to the CPA claim, damages are limited to “the statutory remedies available to any successful CPA claimant.” Id. at *16. These statutory remedies consist of “actual damages … together with the costs of the suit, including a reasonable attorney’s fee” plus, in the discretion of the court, the possibility of treble damages in an amount not to exceed $10,000. RCW 19.86.090. Significantly, this standard would generally preclude an award of damages for the underlying claim amount (here, $17,515,000) where the insurer did not breach the duty to defend, settle or indemnify.

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.

At the trial court level, the insurer successfully moved for summary judgment, contending that “the plain and ordinary meaning of the word ‘repair’ in the policy did not incorporate a duty to pay diminished value.”  Id. at 5.  At issue was the policy provision limiting the insurer’s liability to “[t]he amount which it would cost to repair or replace damaged or stolen property with other of like kind and quality…”  Id. at 6.  Naturally, the parties offered competing definitions for the term ‘repair.’  The insured argued that the term “includes restoration of the preloss condition and value of the insured property,” but the insurer argued that the term “refers only to the restoration of the function and appearance of the insured property.”  Id. at 8.  The Supreme Court found that the sixty-seven year old case of Dunmire Co. v. Ore. Mut. Fire Ins. Co., 166 Or 690 (1941) controlled – and dictated a decision in favor of the insured – because Dunmire interpreted the word “repair” in a “virtually identical” policy provision. Gonzales, 2008 Ore. LEXIS at 17.

The Gonzales Court held: “[U]nder the policy at issue, if an attempted ‘repair’ does not or cannot result in a complete restoration of the vehicle’s preloss condition, the vehicles is not ‘repair[ed],’ and the resulting diminution of value of the vehicle remains a ‘loss to [the] insured car caused by collision’ for which defendants are liable under their policy.”  Id. at 18.  However, the Supreme Court limited its holding by noting that the decision was based on the subject policy’s terms rather than upon “principles applicable generally to diminished value claims in property damage disputes of all kinds.”  Id. at 6.  In fact, the Court explicitly stated that nothing in the current decision or in Dunmire “prevents insurers from including a definition of repair in automobile policies that excludes diminished value from coverage.”  Id. at 18-19.

The Gonzales decision sets the stage for further litigation over what qualifies as a compensable diminution in value.  In Gonzales, the insurer asserted that the insured’s argument “reduced to its essence” would require an insurer “to pay for diminished value that results only from stigma attached to that vehicle because the vehicle has been involved in a collision.”  Id. at 20-21.  The Court declined to address that argument because the insured had asserted more than just stigma but actual physical problems that did not exist prior to the collision.  The Court wrote: “[W]e need not decide whether the policy requires payment for a claim based solely on ‘stigma.’”  Id. at 21. Accordingly, a decision on that issue will have to await another day.

The court noted the trial court had reduced the insured’s non-economic compensatory damages from $4 million to $1.2 million, and agreed that a $3 million punitive damages award was more in line with Supreme Court precedent on punitive damages. While the Supreme Court has deliberately chosen not to impose a bright line ratio which a punitive damages award cannot exceed (State Farm v. Campbell, 538 U.S. 408, 426 (2003)), it recently held that “few awards exceeding a single digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process.” Exxon Shipping v. Baker, 554 U.S. ___, 128 Ct. 2605 (2008).

Further, the Ninth Circuit found that the jury’s $1 million award for the insured’s emotional distress, while “generous,” did not shock the conscience of the court; nor did the $200,000 awarded for the insured’s self-inflicted hand injury and relapse.

The insured in Leavey, a prescription drug addict attempting to rehabilitate himself, cut his hand to get prescription drugs and otherwise went into a downward spiral after the insurer wrote him terminating his benefits. He testified he was “devastated” upon receiving that letter, and for six months was anxious, confused and depressed, moving to a cheaper apartment to save money and looking without success for a new job. When the insurer said it was reinstating the insured’s benefits, the insured remained anxious because he thought the insurer might once again change its mind.

There was evidence the insurer knew the insured could not perform the duties of his occupation, but still subjected the insured to a roundtable review, for the sole purpose of closing his expensive claim; that the insurer sought to influence the opinions of the independent medical examiners hired to examine the insured; that it misrepresented the opinions of those independent medical examiners when it announced it was closing the insured’s claim; and that it knew the insured was a vulnerable individual who suffered from anxiety and depression and was recovering from a serious drug addiction and was at a high risk of relapse. Knowing all this, the insured still sent a letter to the insured wrongfully terminating his benefits. The court ruled a jury could have found the insurer acted to serve its own interests and consciously disregarded a substantial risk its conduct might significantly affect the rights of the insured, and that it acted not only in bad faith but also with an “evil mind,” such that punitive damages were appropriate.
 

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.

National Union denied coverage under an express exclusion for any claim “… alleging fraud, dishonesty, or criminal acts or omissions …”. New Fed responded with an argument that in order to rely on the fraud exclusion, the insurer must first prove that the insured intended to harm the injured party. The First Circuit rejected this argument, finding there was no legal basis for New Fed’s proposed rule and, moreover, found that even if there were such a requirement “it would likely be satisfied here” because the broker who falsified the credit reports “had to know that a false credit report was likely to lead to overpayment and loss.” The final conclusion: New Fed’s claim fit squarely within the fraud and dishonesty exclusion, so the insurer had no duty to defend or indemnify New Fed.
 

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.

The insurers argued as a threshold matter they could not be held liable for bad faith because their policies did not cover the claims against the general contractor. While acknowledging the insurers’ coverage position was correct, the court disagreed with their position on bad faith. Citing to Coventry v. American States, 136 Wn.2d 269 (1998) which holds that an insured may maintain a bad faith claim against an insurer even if the insurer owes no duty to defend or indemnify against the claim, the court held Aecon could maintain its bad faith claim against the insurers even in the absence of coverage. 

Aecon tendered to the first insurer on May 3, 2006. That insurer requested and reviewed information from the insured and denied the claim seven weeks later on the grounds that its subcontractor insured’s work at the project, and the project itself, was complete before any property damage occurred. The court pointed out that the insurer knew there was water intrusion at the project but assumed it happened after the subcontractor completed its work on the project and did not attempt to determine whether the subcontractor may have performed deficient work that led to water intrusion while it was still working at the site. A year after this insurer denied another claim handler reviewed the file and determined Aecon was potentially covered as an additional insured. The insurer did not notify Aecon of the second claim handler’s conclusion.

Aecon also tendered to the second insurer, who denied coverage six months later. The second insurer denied coverage because (1) its subcontractor insured finished work on the project after its policy ended so the claim was barred under the “products completed operations hazard” and (2) the units were not turned over to Quinault during the policy period so Quinault had no claim damage during the policy period. This insurer’s denial letter did not explain how the “products completed operations hazard” applied to the claim or its position that Quinalt did not own the property during the policy period and so had no standing to make the claim.

Before denying coverage this insurer’s claim handler requested and received information from the insured and the broker, reviewed the claim file and hired an independent adjuster to determine certificates of occupancy dates for the project. He had a certificate of occupancy dated October 14, 2000 as well as a notation in his claim file showing the project was completed instead in June 2000. In his deposition the claim handler could not identify where he got the June 2000 date or whether it referred to the subcontractor or Aecon’s completion of work. Other than requesting pleadings from Aecon, this insurer did not investigate when property damage attributable to its subcontractor first occurred.

The court held the first insurer’s investigation before denying coverage was not adequate, but declined to rule on whether it had also acted in bad faith by failing to tell Aecon that a second claim handler had determined there was potential coverage. The court found the second insurer failed to establish why, even if its subcontractor’s work was completed after the policy ended and Quinalt did not own the property during the policy period, those facts precluded coverage. Because the insurers acted in bad faith and did not rebut the presumption of harm, the court applied the remedy of coverage by estoppel. The court also found the insurers violated the state Consumer Protection Act by failing to conduct the reasonable investigation required by Wash. Admin. Code § 284-30-330(4) before denying Aecon’s tender.
 

Based on the “selective tender” rule, which states that “where an insured has not tendered a claim to an insurer, that insurer is excused from its duty to perform under the policy or to contribute to a settlement of the claim,” the Court ruled that “if the insured has not tendered a claim to an insurer prior to settlement or the end of trial, other insurers cannot recover in equitable contribution against that insurer.” The Court further reasoned that because equitable contribution is a claim an insurer has of its own right to recover from another insurer that is independently obligated to cover the same loss, “the insurer who seeks contribution does not sit in the place of the insured and cannot tender a claim to the other insurer.”

Unlike the equitable contribution claim, the Court held that the “selective tender” rule did not apply to bar the conventional subrogation claim, which MOE and CUIC took by reason of assignment from the insured.  (The Court distinguishes “conventional subrogation” from “equitable subrogation” and expressly states that its analysis does not apply to equitable subrogation.)  By taking the assignment, the insurers were able to stand in the shoes of the insured and exercise the insured’s rights to tender the claim to the additional insurer. MOE and CUIC were then also able to assert the “late tender” rule to raise an issue of fact as to USF’s late notice defense. That rule provides that “even where an insured fails to give an insurer timely notice of a claim, the insurer is not relieved of its obligation to perform on the policy unless it can show that the late notice actually and substantially prejudiced it.” Significantly, the Court found that “While we need not decide whether conventional subrogation and assignment are equivalent in all respects, this court recognizes that an insurer who receives full contractual assignment of an insured’s rights may bring a conventional subrogation claim to enforce those rights.” This leaves open the question of whether an insurer’s subrogation claim against other insurers would be safe from the “selective tender” rule without a full assignment of the insured’s rights against those insurers.

The Court also provides insight as to what it will take to prove that an insurer was prejudiced by late notice under the “late tender” rule. The Court held that “in order to show prejudice, the insurer must prove that an insured’s breach of a notice provision had an identifiable and material detrimental effect on its ability to defend its interests.” The Court also provides a nonexhaustive list of factors to be considered. It also found that, contrary to a prior Washington Court of Appeals decision, a lost opportunity to conduct a meaningful investigation alone will not be enough.

Oregon Rule of Civil Procedure 36B provides, in part, that the scope of discovery is that:



[P]arties may inquire regarding any matter, not privileged, which is relevant to the claim or defense of the party seeking discovery or to the claim or defense of any other party, including the existence, description, nature, custody, condition, and location of any books, documents, or other tangible things, and the identity and location of persons having knowledge of any discoverable matter. It is not ground for objection that the information sought will be inadmissible at the trial if the information sought appears reasonably calculated to lead to discovery of admissible evidence.



The court stated that, on its face, this rule “would appear to extend a right to depose or otherwise to obtain discovery from all potential witnesses (whose testimony is not privileged) . . . including expert witnesses.” However, the court noted that it had previously held that “the scope of the rule was not intended to extend to expert witnesses.” However, the court stated that nothing in the wording of the rule “suggests that a witness who has been personally or directly involved in events relevant to a case may not be deposed as to facts of which the witness has personal knowledge, simply because that person will be, as to other matters, an expert witness at trial.” The court stated that counsel for the plaintiff would have every opportunity at the expert’s deposition to object to any questions that sought expert opinions to thus stay within the spirit of the rules and the court’s holding.

The case involved the sale of two properties by Robert Goodstein, a receiver appointed by the King County Superior Court to wind up the dissolved partnerships of the owners of the properties. The owners operated a scrap metal salvage yard for forty-five years at one of the properties which caused ground pollution. At the other site the owners recycled scrap metal and electrical equipment for approximately twenty years resulting in hazardous waste byproducts containing high concentrations of soluble lead. In 1996 and 1998 Goldstein sold the properties. The sales agreements for both properties disclosed the lands were polluted and required that the purchasers take over the responsibility for any cleanup required by the government. The agreements did not however require the purchasers to remediate the property on their own.



Industrial issued primary and excess policies to the owners between 1980 and 1986. On September 28, 1990 Goodstein wrote Industrial advising that the Washington State Department of Energy had identified both properties as contaminated. The letter stated, “We write to notify you that [the owners] may make a claim for cleanup and related costs under the insurance policies you issued” and that Goodstein “may make a more formal claim for coverage and cleanup costs.” In a letter dated October 22, 1990 replying to Industrial’s acknowledgment that it had received the September 28, 1990 letter, Goodstein wrote “we are not presently making any claims under these policies.” Industrial heard nothing more about the claim and closed its file in December 1992. Some eight years later Goodstein wrote Industrial indicating that the properties had been sold and demanded Industrial pay the difference between the appraised contaminated value of the properties and the value of the sites in an uncontaminated state which he calculated as totaling about $5.3 million. Industrial denied coverage and, four years later, Goodstein filed suit seeking a declaration that Industrial breached both its duties to defend and indemnify under the subject policies.



The Ninth Circuit first determined that the district court did not abuse its discretion by declining to consider additional evidence submitted at the summary judgment level by Goodstein that he had entered into an oral agreement with the purchaser of one of the properties to cross-assign rights to insurance coverage that created a damages claim “since [the buyer] paid the costs to remediate the property.” Finding the evidence Goodstein submitted concerning this issue did not indicate a definitive agreement had been reached, the Ninth Circuit found that it was insufficient to prove the existence of an enforceable contract under Washington law.



As to the duty to indemnify, the Ninth Circuit found that Industrial did not have a duty to indemnify Goodstein for several reasons. First, it found that while Goodstein likely received a significantly reduced price for the sale of the properties, a Washington court would not find that loss covered under the policy as Goodstein failed to ensure that the polluted properties would be cleaned up promptly as the purchase agreements contained no cleanup condition. Thus, Goodstein was essentially seeking compensation from Industrial when he had not taken any action to ensure “either by procuring cleanup services himself or by requiring the buyer of the contaminated land to do so” that the harm caused by the owners polluting activities had been remedied. Indeed, the court pointed out that one of the properties had been cleaned up by the purchaser while the other property remained polluted “almost ten years after the sale and over fifteen years after the government first identified the land as containing hazardous waste.” Second, the policy language did not support a finding that the claim for diminution in value constituted “property damage” as Washington State courts had previously found that diminution in property value does not constitute “physical injury to tangible property” under language identical to that of the Industrial policy. The court similarly found that diminution in value did not fall within the realm of “damages” that the “insured shall become legally obligated to pay” because of “property damage” as Goodstein did not expend, constructively or otherwise, any money for remediation because “the sale was not conditioned on remediation that the buyer would perform with the money saved from the reduced purchase price.”



As to the duty to defend, the court reversed the district court’s grant of summary judgment to Industrial rejecting Industrial’s argument that Goodstein never invoked the duty to defend. The court found that under Washington law, the “filing of a lawsuit itself constitutes a request for payment of defense costs under the policy” and thus Goodstein invoked the duty to defend by filing the lawsuit. Because Industrial failed to demonstrate actual and substantial prejudice, it failed to support any finding of late notice under Washington law.

The Sixth Circuit first affirmed the district court’s grant of summary judgment to PMA as to the 1967 to 1972 policies, finding that the policyholder failed to establish by clear and convincing evidence the existence and terms of the lost policies under Pennsylvania law. Relying only on a document filed with the district court by PMA which indicated the policyholder had coverage in 1967 (which PMA disputed as a typo in its filings), PMA’s computer records which indicate the 1972 policy was a "renewal" and the testimony of a former PMA employee that stated the pollution exclusion was not approved by the Pennsylvania Commissioner of Insurance until 1970, the court found the policyholder failed to meet its burden of proving the terms and conditions of the policies under Pennsylvania law.

As to the 1972 to 1978 policies, the policyholder argued that the underlying lawsuit fell within the “sudden and accidental” exception to the pollution exclusion. Agreeing with PMA that under Pennsylvania law “sudden and accidental” encompasses discharges which are both unexpected and "abrupt in time," the court affirmed the district court’s grant of summary judgment to PMA as the evidence produced by the policyholder could only be interpreted by a reasonable jury that discharges were “frequent, continuous and highly predictable.” As to the bad faith claim, the Sixth Circuit similarly affirmed the district court judgment finding that, under Pennsylvania law a bad faith claim may not be stated unless the “insurer lacked a reasonable basis for denying benefits.” Because the court affirmed the finding that the underlying lawsuit did not fall within the scope of the policies, PMA had a reasonable basis for denying benefits and did not act in bad faith. 

The eight-year old insured, Daniel Egan, was covered under a homeowners’ policy issued by Safeco.  The policy indemnified Daniel against liability for “damages because of bodily injury or property damage caused by an occurrence.”  The policy defined “occurrence” as “an accident, including conditions which result in: bodily injury; or property damage.”  Daniel testified that he intended to hit the injured claimant, Caleb, on the shoulder pad with his hockey stick after Caleb made fun of Daniel’s “inferior” hockey skills and that he had no intention of actually hurting Caleb.  The Supreme Court, in reversing the district court’s grant of summary judgment to Safeco, found that Daniel’s age was relevant in determining if Caleb’s injury was an “accident” under Utah law as “eight-year-old children lack the experience, maturity and reasoning skills of adults.”  The court found that focusing on the accidental nature of the injury and taking Daniel’s age into consideration, an average eight-year-old would not have expected to inflict substantial injury by swinging a hockey stick into the upper body of another child that was wearing hockey pads.  Accordingly, the court reversed the district court finding that an issue of material fact existed as to Daniel’s actual intent to cause nontrivial injury to Caleb. 

In this case, MOE defended its insured, Dan Paulson Construction, Inc. (“DPCI”) under a reservation of rights against construction defect claims brought by the Martinellis related to damages to their personal residence that DPCI constructed. DPCI and the Martinellis proceeded to arbitration on the claims. Shortly before the arbitration hearing, MOE filed a declaratory judgment action in the state court against both DPCI and the Martinellis seeking a declaration that it had no duty to defend or indemnify on the basis of the “Your Work” exclusion. MOE did not serve this action on either DPCI or the Martinellis. 

On December 30, 2003, MOE issued a subpoena duces tecum in the un-served state court declaratory judgment action on the arbitrator seeking documents and the arbitrator’s thoughts regarding the arbitration. With the subpoena, MOE sent the arbitrator an ex parte cover letter explaining its coverage issues with DPCI.  Both DPCI and the Martinellis received the subpoena two business days prior to the arbitration hearing. MOE did not serve the cover letter to the arbitrator on either DPCI or the Martinellis. MOE then sent a second letter to the arbitrator slightly narrowing its original requests and further explaining its coverage dispute with DPCI. Subsequently MOE struck the subpoena and dismissed its first declaratory judgment action. The parties thereafter negotiated a settlement and entered into a stipulated settlement agreement which provided in part that DPCI would assign its coverage and bad faith claims against MOE to the Martinellis. 

MOE subsequently filed the subject coverage action against DPCI and the Martinellis.  On several motions for summary judgment, the trial court found that MOE acted in bad faith but that MOE had successfully rebutted the presumption of harm. The Court of Appeals reversed holding that MOE did not act in bad faith. The Washington Supreme Court reinstated the trial court’s decision that MOE acted in bad faith and further found that MOE failed in rebutting the presumption of harm.  As to bad faith, the court found that through its subpoena and two ex parte letters to the arbitrator, MOE “clearly showed great concern for its monetary interest in establishing which of the Martinellis’ claims were excluded from coverage under DPCI’s policy [while displaying] little to no concern for how its conduct might affect DPCI’s financial risk, which was then being litigated in the arbitration hearing.” The court found that MOE’s actions therefore “conclusively” demonstrated that it had a greater concern for its monetary interest than for DPCI’s financial risk.

The court then determined that MOE did not rebut the presumption of harm arising from its bad faith conduct as it failed to show that its subpoena and ex parte communications did not harm or prejudice DPCI. To the contrary, the court found that the record supported a finding that MOE’s conduct caused significant uncertainly and increased risk for DPCI’s defense. The court rejected the trial court’s initial conclusion that DPCI’s decision to proceed with the arbitration coupled with a subsequent settlement within policy limits effectively rebutted the presumption that MOE’s bad faith harmed DPCI. The court stated that “loss of control of the case is in itself prejudicial to the insured.” 

The court specifically stated that it was not expanding its prior rulings on the presumption of harm to conduct that occurs in connection with an insurer’s coverage duties. Rather, the finding of harm in this case was directly related to conduct during the defense case as, despite the fact that the bad faith conduct was perpetrated by coverage counsel, MOE’s conduct was associated with its underlying defense of DPCI and could not be “reasonably segregated from that defense [as it] interfered directly in that defense.”  

The Wall Street Journal article focuses primarily on the background of the race to get “friend of the court” briefs prepared and filed with the Court by numerous prominent names in politics and the economy. The plaintiffs have obtained support from “two House committee chairmen, 18 pension funds, 32 state attorneys general, and the SEC itself. Backing big business: the U.S. Chamber of Commerce; the Nasdaq and NYSE Euronext exchanges; seven high-profile New York lawyers; and the Justice Department's solicitor general, who represents the views of the White House.”  

According to the SCOTUS blog summary of the oral argument, despite the plaintiffs’ rush to obtain support by amicus, it does not appear that the Court was receptive to the possibility of providing investors with a broad new category of liability to investors. A decision on this case is expected by the spring. 

The IFCA became law on May 15, 2007 and was set to go into effect on July 22, 2007. However, a petition was filed on May 16, 2007 for a voter referendum to approve the Act, now referred to as Referendum 67. The IFCA is therefore essentially stayed until the November 2007 election. Should the IFCA survive the referendum, it is unknown whether it will be applied retroactively. 

Alberts eventually sued Dr. Woo for outrage, battery, nonpayment of overtime wages, and negligent infliction of emotional distress. Woo tendered the claim to his insurance carrier, Fireman’s Fund, who provided professional liability, employment practices liability, and general liability insurance. Fireman’s Fund refused to defend, among other reasons, on the basis that the acts alleged in the underlying complaint did not arise out of the provision of dental services. 

Construing the duty to defend broadly, the Washington Supreme Court held that Fireman’s Fund owed a duty to defend Dr. Woo under its professional liability coverage because inserting fake boar tusks in a patient’s mouth during a dental procedure “conceivably fell within” both the state dental statute’s and policy’s broad definition of the practice of dentistry.