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

Many have debated whether the following language from Kirk v. Mount Airy Insurance Co., 134 Wn.2d 558, 563 n.3 (1998), later quoted in Truck Ins. Exch. v. VanPort Homes, Inc., 147 Wn.2d 751, 761 (2002), indicated the Washington Supreme Court’s approval of reimbursement of defense costs, should a court determine there is no duty to defend:         

The insurer can easily avoid all of these issues by defending with a reservation of rights. When that course of action is taken, the insured receives the defense promised and, if coverage is found not to exist, the insurer will not be obligated to pay.

Division II of the Court of Appeals, in dicta, suggested that this language did support a right of reimbursement. Holly Mountain Resources, Ltd. v. Westport Ins. Corp., 130 Wn.App. 635, 652, n. 8 (2005). However, a well respected treatise on Washington insurance law subsequently criticized this aspect of Holly Mountain as being inconsistent with the principles stated in Tank v. State Farm, 105 Wn.2d 381 (1986), arguing that “[a] reservation of rights will never allow an insurer to seek retroactive reimbursement for attorney fees and defense costs already incurred by the insurer.”  Harris, Washington Insurance Law, Third Edition § 17.01 (Matthew Bender, Rev. Ed. 2010). Now, Division I has clearly held that there is no right of recoupment absent a provision in the policy allowing it, relying primarily on Harris and the following dicta in Woo v. Fireman's Fund Ins. Co., 161 Wn.2d 43, 54 (2007):

Although the insurer must bear the expense of defending the insured, by doing so under a reservation of rights and seeking a declaratory judgment, the insurer avoids breaching its duty to defend and incurring the potentially greater expense of defending itself from a claim of breach.

The Immunex Court agreed with the trial court’s holding that “National Surety had a duty to defend until the trial court declared that the duty did not exist.” 2011 Wash.App. Lexis 1695, p. 16. It is significant to note that the Immunex Court held that it did not matter that the insurer had not yet paid any defense costs. The insurer was still responsible for defense costs incurred up to the time the trial court held there was no duty to defend – even pre-tender defense costs – absent a showing of late notice prejudice.  At least for now, in Washington, there is no right of recoupment of defense costs absent a provision in the policy allowing it.

Vision was the general contractor for a new condominium complex being built in Tacoma, Washington. Vision subcontracted with D&D for the concrete work. D&D sub-subcontracted with Berg for shoring equipment to support the poured concrete slabs. The shoring structure collapsed when D&D poured a concrete slab. Vision tendered the claim to Philadelphia, whose investigator determined the collapse was due to faulty design and workmanship, losses expressly excluded under Philadelphia’s policy, so Philadelphia denied. Vision argued the “resulting loss” exception to the policy’s faulty workmanship exclusion applied to restored coverage. Philadelphia maintained its denial.

Vision sued Philadelphia for breach of contract and bad faith. Shortly before trial, Vision settled with Berg, taking a covenant judgment against it and corresponding agreement to execute only against Berg’s insurer, and fully releasing Berg from liability. The trial court approved the settlement as reasonable and rejected Philadelphia’s motion to dismiss Vision’s breach of contract claim against it because Vision had impaired its recovery rights by releasing Berg. The court held: “If Philadelphia prevails on coverage it is not prejudiced by this settlement. If Philadelphia does not prevail, it is in material breach of its insuring obligations and is not entitled to subrogation in light of such breach.” 

The trial court also ruled as a matter of law that the “resulting loss” exception to the faulty work exclusion applied to the claim, and submitted to the jury the issues of causation, bad faith and damages. At trial the jury found Philadelphia breached its insurance contract in bad faith, awarding Vision $1.2 million in breach of contract and bad faith damages and $2 million for attorney’s fees. On appeal, the court affirmed the trial court’s ruling that Philadelphia was estopped from claiming it was released from liability when it denied Vision’s claim and Vision settled with Berg. But it reversed and remanded the trial court’s ruling that the “resulting loss” exception to the faulty workmanship exclusion applied. 

The appellate court found the trial court’s ruling erroneously presupposed faulty workmanship had caused the damage, when the issue should have been a jury question. The appellate court remanded to allow the jury to determine which of the alleged causes – faulty workmanship, faulty design and/or faulty equipment – caused the collapse. For the claim to be covered, the jury must find either that faulty equipment (an independent covered peril under the policy), caused the damage, or that multiple perils, some covered and some excluded, caused the damage, but that faulty equipment was the efficient proximate cause of damage. Because it reversed and remanded for a new jury trial, the court did not reach the issues of damages or attorney’s fees.

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.