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

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.

In this case, the policyholder had entered into contracts with a general and subcontractor to perform heating and ventilation work. When a pipe separated from a water riser and caused damage to the building, the general contractor claimed the policyholder and subcontractor were solely responsible. The policyholder notified its insurer, who retained counsel to conduct pre-action discovery to preserve evidence in connection with the loss.

Litigation over the property damage did not materialize; however, the general contractor ultimately withheld final payment on the contract for the policyholder’s negligence. The policyholder tendered the claim to its insurer, demanding a defense, but the insurer declined on the basis that the claim did not qualify as a “suit.” Therefore, the policyholder retained its own counsel and sued the general contractor and others to recover the disputed contract balance.

The general contractor responded by asserting as an affirmative defense the right of offset against recovery based on damages caused by the policyholder’s negligence. It subsequently asserted counterclaims to recover for the property damage. The policyholder again demanded a defense, to which the insurer acquiesced, but only as required to defend the counterclaim of negligence; the insurer refused to reimburse for legal fees and expenses incurred in connection with the prosecution of the action, or in connection with the affirmative defense.

The policyholder brought a declaratory judgment action seeking reimbursement of legal expenses incurred in the underlying collection action. In cross-motions for summary judgment, the insurer argued that it was obligated only to defend against the counterclaim because the affirmative defense was not an “occurrence” that triggered coverage. It further argued that because the collection action was ultimately settled, plaintiff's demand for reimbursement did not constitute a claim for property damage and defendant was under no obligation to pay. Plaintiff argued that coverage was triggered because the policy did not differentiate among a pre-suit claim of negligence, an affirmative defense of negligence, and a counterclaim for negligence, arguing further that while the matter initially was not in suit, the insurer should have settled the property damage claim.

The court found in favor of the insurer, concluding that the policy required only the defense of “suits,” not the prosecution of, or reimbursement of costs incurred in connection with, a policyholder’s affirmative claims. In other words, in the courts view, the duty to defend “does not envision affirmative litigation.”

The court also held that the duty to defend was not triggered by the affirmative defense of offset. The court noted a substantive distinction between counterclaims, which it characterized as causes of action seeking affirmative relief, and affirmative defenses, which do not seek affirmative relief but merely dismissal of claims. In the court’s view, to impose a duty to defend such an affirmative defense would eliminate these pleading distinctions, and “would impact the long-established business practices of insurers, and lead to uncertainty in the drafting of insurance contracts.” In so holding, the court declined to follow Construction Protective Services v. TIG Specialty Ins. Co., 29 Cal.4th 189 (2002).

The policyholder would have been entitled to a defense had the general contractor sued the policyholder for property damage, rather than withhold final payment on the contract, and it was the policyholder’s filing of suit that precluded defense for the claim of offset. Could the policyholder have done something different to obtain a defense for the negligence claim given the procedural posture of the case? The court observed that if the policyholder believed the affirmative defense was in fact a counterclaim, it might have moved to dismiss the affirmative defense, thereby forcing the general contractor to assert the counterclaim sooner.
 

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.

In this latest case, the Pennsylvania Superior Court ruled in American & Foreign Ins. Co. v. Jerry’s Sport Center, Inc., 2008 PA Super. 1994 (Pa. Super. May 5, 2008), that a trial court erred in holding  that Royal was entitled to reimbursement for the cost of defending various class action gun cases that it was later held not to have any obligation to defend because the NAACP case did not allege or involve “bodily injury.”

Whereas the trial court had found that an implied contract existed between the parties in light of the fact that the insured had accepted Royal’s defense pursuant to a reservation of rights letter that included an asserted right to recoupment of fees, the Superior Court held that such an analysis undercut the focus of the duty to defend on the possibility of coverage as distinguished from such facts as might ultimately be adjudicated.

The appellate court also took note of the fact that it was Royal’s suggestion that the insured retain independent counsel as opposed to participating in a joint defense involving multiple defendants that would have resulted in substantially lower legal costs to the policyholder. Where the insurer had a contractual duty to defend and had obtained various benefits by exercising that right to defend, the Superior Court refused to find that an implied contractual right to reimbursement existed or that the insured was unjustly enriched by the defense that Royal had provided so as to entitle Royal to reimbursement of attorney’s fees under a theory of quantum meruit.

Plainly the outcome of this case was influenced by its unique facts.  At the same time, the court was clearly persuaded by the Illinois Supreme Court's 2005 opinion in Gainsco (which also involved recoupment claims in the context of the NAACP gun suits).  It will be interesting to see whether the case proceeds to the Pennsylvania Supreme Court.

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.

However, the Second District of the California Court of Appeal has since declared that the Superior Court erred in failing to apply the law of California, which takes a broader view of the duty to defend than Texas. Writing for the court, Justice Croskey declared that Civil Code Section 1646, which requires that a contract be interpreted according to the law and usage of the place where the contract is to be performed, compelled the application of California law, as California was the state where RLI would be obligated to perform its defense obligations under the policies and that the contracting parties knew this at the time that the policy was issued as the RLI policy includes several endorsements reflecting the existence of a covered risk located in California. The court then went on to hold that RLI’s duty to defend was triggered under California law.

This focus on the place of performance is not unheard of. For instance, New Jersey courts have applied different choice of law rules in pollution cases depending on the nature of the underlying issue and have adopted the current domicile of the insured as applying to issues involving the obligation to give timely notice since the insured was located in that jurisdiction at the time that the notice obligation arose. See . Unisys Corp. v. INA, 154 N.J. 217, 712 A.2d 649 (1998). On the other hand, the California court’s approach seems more of a fig leaf for adopting a place of the tort approach since construing the “place of performance” as the jurisdiction where the insurer is required to provide a defense necessarily means that the jurisdiction where the underlying litigation is pending will be the state whose law controls. As far as the author knows, this approach is unprecedented (although hardly the first time that California courts have leaped into the abyss).

The opinion is also worthy of note in that it was written by Justice Croskey, whose views on insurance are often viewed as being close to gospel in California. Of late, however, Croskey has authored several opinions that are far from mainstream.

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.