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.

Farmers insured Holden under a Broad Form Renters Package Policy, which included coverage for fire damage. A fire damaged or destroyed some of the insured’s personal property. Farmers paid the ACV of the damaged property but declined to pay for sales tax on the items. The insured brought a putative class action seeking a declaration that sales tax should be accounted for in the ACV calculation for her claim and requesting relief for all similarly situated insureds.

The Farmers policy provided that “[c]overed loss to property will be settled at actual cash value.  Payments will not exceed the amount necessary to repair or replace the damaged property, or the limit of insurance applying to the property, whichever is less.” The policy defined ACV as “the fair market value of the property at the time of loss.”  The policy did not, however, define FMV or specify what method Farmers would use to calculate ACV or FMV.  The policy was also silent on whether sales tax is accounted for in calculating ACV or FMV.  With her policy, the insured also purchased a “Contents Replacement Cost Coverage” endorsement (“RCE”).  The RCE provided for “the full cost of repair or replacement without deduction for depreciation.”  “Replacement cost” was defined as “the cost, at the time of loss, of a new article identical to the one damaged, destroyed or stolen.”

The RCE provision required the insured to first pay the cost of repair or replacement out-of-pocket to replace or repair the damaged property, and submit receipts to Farmers for reimbursement under the RCE. Farmers often paid for sales tax under the RCE upon proof that it has been incurred. As the insured could not afford to pay to replace the damaged property and wait for reimbursement she did not make a claim under the RCE but instead made a claim under the ACV provision. Under the ACV provision, however, Farmers included sales tax in replacement cost only when the policyholder had actually replaced the damaged property, and so declined to pay for sales tax.

The court found that the ACV provision makes no distinction between the value of ACV coverage when an insured has the wherewithal to immediately replace all lost or damaged property versus when the insured must instead settle for the cash and replace what he or she can.  Finding the ACV provision in Farmers policy to be ambiguous, and, applying settled Washington law, the court read the provision favorably to insureds to include consideration of sales tax in calculating the FMV of damaged property. The court also noted that coverage of sales tax does not result in a “windfall” to an insured who does not immediately replace damaged property because the sales tax was paid when the damaged property was originally purchased, so the loss is the same regardless of whether the damaged property is actually replaced.  Instead, payment for the sales tax returns the insured to the same financial position the insured enjoyed before suffering a property loss.

In Putnam, the plaintiff filed a lawsuit against the defendant medical center and several of its employees alleging that they negligently failed to diagnose her ovarian cancer in 2001 and 2002. She alleged that the delay in her diagnosis until 2005 caused her to miss the opportunity to undergo early treatment and reduced the likelihood of her survival. The trial court dismissed the plaintiff’s claims because she failed to file a certificate of merit as required by Washington’s medical malpractice litigation statute, RCW 7.70.150. The trial court also held that the certificate of merit requirement was constitutional. The plaintiff appealed the trial court’s rulings directly to the Washington Supreme Court asserting that RCW 7.70.150 is unconstitutional because it unduly burdens the right of access to the courts and violates the separation of powers.

RCW 7.70.150 requires plaintiffs in medical malpractice actions to file a certificate of merit with the pleadings. The certificate must contain a statement from an expert stating that “based on the information known at the time of executing the certificate of merit, . . . there is a reasonable probability that the defendant’s conduct did not follow the accepted standard of care.” RCW 7.70.150(3).

On the first issue, the Washington Supreme Court found that requiring medical malpractice plaintiffs to submit a certificate of merit prior to the opportunity to conduct discovery may not be possible, and results in hindering the right of access to the courts.

In addressing whether RCW 7.70.150 violates the separation of powers, the Washington Supreme Court noted that the certificate of merit requirement was “procedural” rather than “substantive” because it addresses how to file a claim to enforce a right provided by law. The statute does not address the primary rights of either party but deals only with the procedures to effectuate those rights. The Washington Supreme Court concluded that RCW 7.70.150 is a procedural law that changes Washington’s civil rules governing the procedures for filing pleadings in a lawsuit, and thus invades the court’s prerogative to set court procedures, and violates the doctrine of separation of powers.

It is notable that a significant number of medical associations and insurers filed amicus briefs in this appeal. It is likely that both medical associations and insurers will monitor whether the removal of the requirement that plaintiffs file a certificate of merit with medical malpractice lawsuits results in an increase in the filing of such claims.
 

On competing cross-motions for summary judgment on the application of the various Mold Exclusions, the Court expressly rejected the claimant’s argument that if the efficient proximate cause of the loss is a covered peril, then the efficient proximate cause doctrine per se requires coverage regardless of any other potentially applicable exclusions. The Court was “persuaded” by the Insurers argument that a properly worded Mold Exclusion can operate to exclude “mold damage” irrespective of the application of the “efficient proximate cause” doctrine, even if the efficient proximate cause is a covered peril. At the Insurers urging, the court adopted the holding from the California Court of Appeals decision in DeBruyn v. Super. Ct. , 70 Cal. Rptr. 3d 652, 658-659 (2008) that when a policy “‘plainly and precisely communicates an excluded risk to a reasonable insured’ * * * the efficient proximate cause doctrine [does] not operate to cover the loss. * * * [I]nsurers ‘may limit coverage to some, but not all, manifestations of a given peril, as long as a reasonable insured would readily understand from the policy language which perils are covered and which are not.’” In so holding, the District Court went on to note that the “efficient proximate cause” rule “merely brings about ‘a fair result’ within the reasonable expectations of the parties.”

With respect to the language at issue in this case, the District Court held, in relevant part, that the “[mold] however caused” language in one of the insurers Mold Exclusions “is clear. It communicates to a reasonable insured that mold damage is excluded, even if it was caused by a covered peril.” With respect to the other insurers Mold Exclusion, the Court agreed (ostensibly based upon the “anti-current causation” language), under the same rationale, that it applied irrespective of the “efficient proximate cause” doctrine as well, but found that the Exclusion’s “resulting loss” exception potentially had application, and that was “an issue not before the Court.” The Court’s holding with respect to the later Exclusion is not a model of clarity.

As we all know, the “efficient proximate cause” rule is a very insured friendly doctrine. Washington Courts have not been shy to apply the rule ad nauseam to find coverage regardless of the express policy language. Having the District Court put the brakes on its application and look to the particular language of an exclusion that has application later in the chain of causation is a step in the right direction, and an encouraging result for property insurers in Washington. That being said, it is hard to predict what Washington State Court’s or the Ninth Circuit might do with the decision.

In Campbell v. Ticor Title Ins. Co., 2009 Wash. Lexis 624 (Supreme Court of Washington, June 18, 2009), a parcel of land was divided into three lots, designated lots A, B, and C. In 1996, a pedestrian easement was granted, benefiting Lot C and burdening Lot B, for access to a lake. In 2001, the Campbells purchased Lot A. A 2002 survey revealed that the easement for lot C actually ran through a house on Lot B. When Edwards purchased Lot C in 2004 or 2005, the problem was discovered, and Edwards initiated a suit against the Campbells seeking a reformation re-drawing the easement so as to burden Lot A and be usable. The Campbells tendered defense of the Edwards suit to Ticor Title Insurance Company (“Ticor”), and Ticor denied coverage. The Court ruled that two exclusions, one for easements not disclosed by the public records, and another for “[d]efects, liens, encumbrances, adverse claims or other matters . . . attaching or created subsequent to Date of Policy,” clearly excluded coverage and there was no duty to defend.

What we find interesting about this case is not so much the unanimous decision on no duty to defend, as unusual as that might be, but the Court’s analysis and use of evidence apparently outside the complaint in reaching its conclusion. It is further interesting that the Court would accept review of an obscure title insurance case to reinforce or restate its duty to defend analysis, including the seemingly more stringent standard established in Woo v. Fireman’s Fund Ins. Co., 161 Wn.2d 43, 164 P.3d 454 (2007): “’[T]he duty to defend is triggered if the insurance policy conceivably covers the allegations in the complaint, whereas the duty to indemnify exists only if the policy actually covers the insured’s liability.’ Id. at 53. An insurer must defend unless it is clear from the face of the complaint that the claim is not covered by the applicable policy. Id. ‘[I]f it is not clear from the face of the complaint that the policy provides coverage, but coverage could exist, the insurer must investigate and give the insured the benefit of the doubt that the insurer has a duty to defend.’ Id.” (Emphasis in original.)

Curiously, the Court does not reference much of the language of the complaint itself, and it seems to rely on matters determined by further investigation to deny the duty to defend. Regarding the first exclusion at issue, the Court states: “Reading the plain language of the title policy’s exclusions, the fact that no record here showed any easement affecting Lot A undermines the Campbells’s duty to defend claim.” The Court then states that the second exclusion is “relevant because the easement dispute arose after the date of the policy, once a survey revealed that the property line between lots A and B ran through the Gromo house and the easement was intended to run along that property line.”

The rule in Washington is essentially that if the complaint is ambiguous, the insurer is required to investigate further to determine whether there is a duty to defend. It also appears clear, however, e.g., Truck Ins. Exch. v. VanPort Homes, Inc. 147 Wn.2d 751, 58 P.3d 276 (2002), that an insurer is not allowed to use further investigation to deny the duty to defend. It appears when a complaint is ambiguous, and further investigation establishes no coverage, under this case analysis, an insurer should be able to deny the duty to defend. That is not, however, explicitly stated.