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.

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.