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

The court rejected the insured’s argument for three, primary reasons. First, the court determined that the absence of the other insurers would not prevent a declaration of the extent of Canal Indemnity’s coverage obligations to Adair Homes. Second, the court cited Ninth Circuit case law for the proposition that “where a party is aware of an action and chooses not to claim an interest, the district court does not err by holding that joinder is unnecessary.” Because the subcontractor was “almost certainly aware of the instant declaratory judgment action and yet ha[d] not asserted” any interest in joining the action, joinder of it “and its insurance carriers” was not necessary. Third, a declaration of coverage obligations under the Canal Indemnity policy, the court found, would have “no bearing on a decision regarding [the subcontractors’] insurance carriers’ obligations under their policies.” Thus, the subcontractor and its insurers had “no independent, legally protected right at stake in this proceeding” and were not necessary or indispensable parties.

The court’s discussion of the necessary and indispensable party rules should be helpful to insurers and their counsel attempting to discern the necessary parties to coverage actions. It should be noted that the court emphasized the fact that the subcontractors’ three insurers were in a fundamentally different position than Canal Indemnity. Whereas Adair could only hope to establish additional insured rights under the subcontractors’ policies, it had a direct coverage relationship with Canal Indemnity. This difference does not appear to be, and likely should not be, critical to the court’s decision, but the emphasis on this difference leaves open the possibility that the court would later decide that other, primary insurers may be necessary parties to a coverage action between an insured and one of its primary insurers.

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.