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

In this case, Chugach Support Services, Inc. (“Chugach”), a general contractor, entered into a subcontract with Security Resources International (“SRI”) for SRI to provide certain services.  The subcontract required SRI to secure, maintain, and file proper and acceptable evidence of insurance with Chugach.

SRI did not obtain the required insurance, but subsequently SRI signed and accepted a proposal for work by Ohio Casualty’s insured, R-Custom Excavation (“R-Custom”).  That proposal did not contain insurance requirements.  After executing the SRI/R-Custom agreement, SRI requested R-Custom to provide certificates of insurance naming SRI and Chugach as additional insureds on R-Custom’s Ohio Casualty CGL policy, which it appears R-Custom did.

In response to an underlying lawsuit, Chugach took the position that it was an additional insured under R-Custom’s Ohio Casualty policy and entitled to a defense and indemnity under that policy as to the underlying lawsuit.  Ohio Casualty then brought this action for a declaratory judgment that under its policy issued to R-Custom, Ohio Casualty had no duty to defend Chugach and SRI or indemnify them for the money they paid as a result of the underlying suit.

After considering and disregarding Chugach’s assertions that the Ohio Casualty policy’s additional insured provisions were ambiguous, the District Court found that for Chugach to be an additional insured under that policy, “you,” meaning the named insured R-Custom, not someone else, would have had to be “required” to name Chugach as an additional insured in a written contract or written agreement.  R-Custom had no written agreement with Chugach (and no written agreement with SRI that contained any insurance requirement). The District Court then found Chugach’s further argument that the certificate of insurance issued by a broker can be the “written agreement” required under the policy to be manifestly unreasonable.  The District Court held that a certificate of insurance does not contain all the elements of a “written contract” or “written agreement” under Washington law.  Instead, the certificate of insurance expressly disclaimed any promise of coverage.  On its face, the certificate stated that it is issued as a matter of information only and confers no rights upon the certificate holder, and does not amend, extend, or alter the coverage afforded by the policy.  By its own terms, it does not “agree” to anything except the existence of a policy. An insurance certificate, under Washington law, therefore, is only evidence of the existence of a policy, and it follows that, as a matter of law, it cannot satisfy the requirements of a written contract or written agreement.

The District Court thus granted summary judgment in favor of Ohio Casualty, entitling it to a declaratory judgment that under its policy issued to R-Custom, Ohio Casualty had no duty to defend or indemnify Chugach and SRI for the money they paid as a result of the underlying suit.

The plaintiffs in the underlying case alleged that Schorno engaged in a pattern of intentional, non-accidental conduct, including sexual abuse of a child and intentional infliction of emotional distress, as well as negligent infliction of emotional distress and negligent supervision of a minor.  The insurer denied the tender of Schorno’s defense under Schorno’s homeowner’s policy on the basis that the policy covers only claims for “bodily injury” caused by an “accident” and excludes coverage for “bodily injury” that is “expected or intended by the insured.”  Because Washington courts infer an intent to inflict harm in cases involving sexual abuse, the Ninth Circuit found that the alleged conduct was neither accidental nor unintentional, and the insurer properly denied Schorno’s tender.

The Ninth Circuit determined that the fact that the allegedly abused individual reached the age of majority during the period of alleged sexual contact did not make the claimed abuse any more of an “accident.”  As Schorno’s insurance policy provides that “[r]epeated or continuous exposure to the same general conditions is considered to be one occurrence,” and because the underlying plaintiffs alleged that Schorno engaged in a continuous pattern of abuse from the allegedly abused individual’s childhood to his age of majority, the Ninth Circuit found the abuse must be treated as a single, non-accidental occurrence.

Similarly, while the underlying plaintiffs also brought claims against Schorno sounding in negligence, the Ninth Circuit affirmed that these claims are likewise excluded from coverage because Schorno’s insurance policy specifically excludes coverage for claims of “emotional distress,” and also because where “an abuser’s allegedly negligent acts toward a victim are close in space and time, or inextricably linked, to a continuous pattern of sexual abuse of the victim, an intent to injure can be inferred as a matter of law.”  Am. Economy Ins. Co. v. Estate of Wilker, 96 Wn App 87, 977 P2d 677, 681 (1999).  In addition, the Ninth Circuit held that the insurer’s defense of Schorno’s husband against negligence claims brought by the underlying plaintiffs did not create an obligation to defend the intentional misconduct claims against Schorno, stating that an insurance policy can indemnify one insured for negligent conduct while excluding coverage for the intentional conduct of another insured under the same policy.

Finally, the Ninth Circuit held that the district court did not abuse its discretion in denying Schorno’s motions to compel discovery from the insurer as Schorno had failed to show how the additional sought-after evidence would be relevant to the issue of the insurer’s duty to defend, and that the purported evidence of bad faith actually existed and was not the object of pure speculation.

Landmark and Axis’ first party policies provided coverage to developer Western & Clay for “one loss or series of losses arising out of one occurrence” and insured against “all perils.” “Weather,” although not defined, was a covered peril. 

In spring 2008 Western & Clay submitted a proof of loss for a claim that the winter of 2006 – 2007 caused substantial delay and costs in a large construction project. It argued the cause of the damage was a combination of events involving wind and rain storms, that the weather affected the critical path of the project and caused substantial delays. It asserted its weather claim was one “occurrence” so would be subject to just one deductible and one 30 day waiting period. It submitted no expert reports in support of its position. 

Landmark and Axis argued the alleged losses constituted multiple “occurrences” because the term “occurrence” with regard to weather has an implicit temporal, spatial and causal limitation under the policies. They submitted two expert reports on 2006 – 2007 winter weather patterns purporting to show there were multiple storms and weather patterns that winter. 

The court noted Western & Clay’s theory of its weather related claim changed from one brief to the next, first arguing the “occurrence” was the continual bad weather, then later arguing it was the fact that weather-related delays caused the building to be unenclosed due to continual inundation of water, ice and snow. The court found the insured’s shifting position highlighted the lack of clarity as to the legal and factual issues before it. Moreover, it dismissed as circular defendants’ expert reports because they assumed storms and weather patters could not be one “occurrence” under the policies.

Rejecting the insured’s reliance on cases construing “occurrence” under third party policies in which “occurrence” was a defined term, the court used a dictionary to find an “occurrence” was “something that takes place or comes about.” It also refused to find a temporal limitation on weather related losses, noting the policies had temporal limitations for windstorms, earthquakes and lightening but not weather. 

Given the inadequate record on number of occurrences, the court was unable to rule as a matter of law how many occurrences constituted Western & Clay’s weather related claims. Citing approvingly to Newmont Mines v. Hanover, 784 F.2d 127 (2nd Cir. 1986), in which the court sent to the jury the question of whether two roof collapses on the same building covered in snow on different days were one or more occurrences, the court held a fact finder had to resolve the issue. 

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.