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

The Court of Appeals agreed with the trial court that it was not necessary, under the terms of Great American's policies, that United Capitol, or anyone else, actually pay United Capitol's policy limits in order for Great American's excess coverage to be triggered. The court found that Great American’s policies stated it would be liable for those sums “in excess" of its underlying insurers' policy limits and thus, regardless of the lack of payment of underlying limits, Great American’s policies were triggered.

As to allocation, the court found that the trial court erred in finding that the insurers were required to be allocated the $2 million United Capitol limits in light of its insolvency as Washington law does not impose liability on insurers for losses they have not contracted for and further, that Great American’s policies specifically provided that they would apply as if the underlying policies were valid and collectible rather than outright replacing the primary policies. Finally, the court concluded that the trial court erred by classifying the "litigation costs" portion of the Polygon settlement as "supplementary payments" payable under Assurance Company of America's primary insurance policy. Therefore, the Court reversed and directed the trial court on remand to include in the reallocation of liability among the excess insurers the "litigation costs" that it previously allocated solely to Assurance.

The insured owned several rental properties that he insured through a “Landlord Protector Package Policy” with Farmers. The insured obtained these policies through an insurance agent that later sold his entire book of insurance business to a different agent. When the new agent took over the accounts, he did not review the insured’s policies nor did the insured request that any changes be made to the policies. In 2002, a fire broke out at one of the rental properties and a tenant was badly injured. The tenants sued and sought damages far in excess of the liability policy limits. The insured thereafter sued Farmers and the agent alleging that they were “negligent in failing to ensure that he had adequate insurance coverage.” The insured specifically alleged that he attempted to speak to the agent on several occasions and sought clarification on his coverage on several occasions but that the agent never returned his calls. Farmers and the agent moved for summary judgment arguing that there was no “special relationship” between the insured and broker that required the agent to ensure there was adequate coverage on the properties.

The Washington Court of Appeals affirmed the trial court’s grant of summary judgment to Farmers and the broker on the basis that there was no special relationship between the parties. The court found that there was no evidence in the record that the broker held himself out as an expert or received extra compensation nor was there any evidence that there was a long-standing relationship between the parties or that they actually discussed the adequacy of the policy limits. While the court acknowledged that the insured attempted to contact the agent on numerous occasions to no avail, these contacts concerned only the insured’s request for copies of his policies and not a specific question on coverage. The court specifically noted that there was no evidence that the insured was told by the agent that he had adequate coverage rather the evidence only showed that the insured asked to verify his current limits. Accordingly, the court affirmed the trial court’s original dismissal of the matter on summary judgment.

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.

In this case, MOE defended its insured, Dan Paulson Construction, Inc. (“DPCI”) under a reservation of rights against construction defect claims brought by the Martinellis related to damages to their personal residence that DPCI constructed. DPCI and the Martinellis proceeded to arbitration on the claims. Shortly before the arbitration hearing, MOE filed a declaratory judgment action in the state court against both DPCI and the Martinellis seeking a declaration that it had no duty to defend or indemnify on the basis of the “Your Work” exclusion. MOE did not serve this action on either DPCI or the Martinellis. 

On December 30, 2003, MOE issued a subpoena duces tecum in the un-served state court declaratory judgment action on the arbitrator seeking documents and the arbitrator’s thoughts regarding the arbitration. With the subpoena, MOE sent the arbitrator an ex parte cover letter explaining its coverage issues with DPCI.  Both DPCI and the Martinellis received the subpoena two business days prior to the arbitration hearing. MOE did not serve the cover letter to the arbitrator on either DPCI or the Martinellis. MOE then sent a second letter to the arbitrator slightly narrowing its original requests and further explaining its coverage dispute with DPCI. Subsequently MOE struck the subpoena and dismissed its first declaratory judgment action. The parties thereafter negotiated a settlement and entered into a stipulated settlement agreement which provided in part that DPCI would assign its coverage and bad faith claims against MOE to the Martinellis. 

MOE subsequently filed the subject coverage action against DPCI and the Martinellis.  On several motions for summary judgment, the trial court found that MOE acted in bad faith but that MOE had successfully rebutted the presumption of harm. The Court of Appeals reversed holding that MOE did not act in bad faith. The Washington Supreme Court reinstated the trial court’s decision that MOE acted in bad faith and further found that MOE failed in rebutting the presumption of harm.  As to bad faith, the court found that through its subpoena and two ex parte letters to the arbitrator, MOE “clearly showed great concern for its monetary interest in establishing which of the Martinellis’ claims were excluded from coverage under DPCI’s policy [while displaying] little to no concern for how its conduct might affect DPCI’s financial risk, which was then being litigated in the arbitration hearing.” The court found that MOE’s actions therefore “conclusively” demonstrated that it had a greater concern for its monetary interest than for DPCI’s financial risk.

The court then determined that MOE did not rebut the presumption of harm arising from its bad faith conduct as it failed to show that its subpoena and ex parte communications did not harm or prejudice DPCI. To the contrary, the court found that the record supported a finding that MOE’s conduct caused significant uncertainly and increased risk for DPCI’s defense. The court rejected the trial court’s initial conclusion that DPCI’s decision to proceed with the arbitration coupled with a subsequent settlement within policy limits effectively rebutted the presumption that MOE’s bad faith harmed DPCI. The court stated that “loss of control of the case is in itself prejudicial to the insured.” 

The court specifically stated that it was not expanding its prior rulings on the presumption of harm to conduct that occurs in connection with an insurer’s coverage duties. Rather, the finding of harm in this case was directly related to conduct during the defense case as, despite the fact that the bad faith conduct was perpetrated by coverage counsel, MOE’s conduct was associated with its underlying defense of DPCI and could not be “reasonably segregated from that defense [as it] interfered directly in that defense.”  

The IFCA became law on May 15, 2007 and was set to go into effect on July 22, 2007. However, a petition was filed on May 16, 2007 for a voter referendum to approve the Act, now referred to as Referendum 67. The IFCA is therefore essentially stayed until the November 2007 election. Should the IFCA survive the referendum, it is unknown whether it will be applied retroactively. 

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.