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

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 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.

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.

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.”
 

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.
 

As to the media E&O policy issued by AISLIC, the court rejected Sony argument that the AISLIC Multimedia Professional Liability Policy’s coverage for “negligent publication” could be construed to extend to a communication of information to the public lacking or exhibiting proper care or concern so as to encompass the underlying allegations of false advertising or negligent misrepresentations. The court ruled 2-1 that the dictionary definitions pasted together by Sony conflicted with the context in which “negligent publication” was used in the AISLIC policy where the term appears in juxtaposition to incitement and defective advice and that the definition proposed by Sony would be broad enough to subsume virtually all of the other wrongful acts that receive specific definitions in the policy such as defamation, misappropriation, etc.

The court also took note of the fact that a media liability policy is intended to strictly limit coverage to the types of claims normally faced by publishers such as defamation or copyright infringement.  The Ninth Circuit reviewed various tort cases in which publishes had been held liable for the negligent publication of material that had prompted third parties to commit harmful acts and found this constructioni of the term was consistent with the context of coverage.

As to the American Home CGL policy, the Ninth Circuit refused to find that problems that Playstation II owners experienced with skipping and freezing CDs and DVDs accompanied by “banging or clicking noises” set forth a claim for “loss of use” within the policy’s definition of “property damage.” The cour t distinguished its opinion in Anthem Electronics, noting that although t that although the plaintiffs alleged that CDs and DVDs had not properly played on the PlayStation 2, there was no suggestion that they did not function properly on other devices.

In any event, the court ruled that any finding of property damage reflecting a loss of use would be subject to Exclusion M as involving impaired property that had not suffered physical injury. The court rejected Sony’s suggestion that because the complaints alleged that the freezing and locking of the disks can happen at any time, there was the possibility that this loss of use had resulted from a “sudden and accidental” physical injury to the Playstation IIs. Rather, the court found that these allegations suggested that the devices deteriorated over time.

Writing in dissent, Judge Bybee argued that the majority had given an unduly narrow construction to AiSLIC’s “negligent publication” coverage and that a broader scope was warranted by looking at separate dictionary definitions of “negligent” and “publication.”

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.