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

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.

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.