Washington Supreme Court Rules Federal Arbitration Act Preempts Washington Condominium Act

On December 24, 2009, the Washington Supreme Court held that the Washington Condominium Act’s judicial enforcement provision was preempted by the Federal Arbitration Act (“FAA”). Satomi Owners Ass'n v. Satomi, LLC, _Wn.2d_, _P.3d_, 2009 WL 4985689, 1 (2009). In three consolidated construction defect cases brought by homeowners associations, condominium developers sought to enforce arbitration clauses incorporated into unit owner purchase and sale agreements. The court held that the FAA requires it to enforce such arbitration agreements, including the terms providing for binding arbitration.

The court rejected arguments by one of the homeowners associations that it was not bound by the arbitration provision because the unit owners rather than the association had signed the purchase and sale agreements. The court stated that the property in question, the condominium project’s units, common elements, and limited common elements are owned by the unit owners, not the homeowners association.

The court explained that where the arbitration clause provides that disputes regarding the arbitrability of particular claims must be arbitrated, it is for the arbitrator, rather than the courts, to decide whether a particular claim is subject to arbitration. Accordingly, the court did not determine which of the homeowners associations’ claims were subject to arbitration.

District Court of Oregon Rules for Insurer on First Party Collapse Coverage in Condo Policy

Association of Unit Owners of Nestani, a Grecian Villa v. State Farm Fire and Casualty Company, District of Or, Dkt No. 6:08-cv-00790-AA, Opinion and Order Dated November 2, 2009, Judge Ann Aiken

The insured Association alleged that the loss was covered under the Policy as a collapse caused by hidden decay of weight-bearing structural members and sought benefits of $5,078,320.25, costs and disbursements, and attorneys' fees. State Farm denied that the Policy covered the alleged conditions at Nestani and moved for summary judgment on the grounds that the claimed loss did not occur during the Policy period, and that any loss did not arise from a collapse caused by hidden decay as defined in the Policy.

The court reasoned that under Oregon law, the insured had the initial burden of establishing conditions of coverage, then the insurer has the burden of proving that the policy excludes coverage, and finally the burden to show an exception to an exclusion falls back upon the insured. The court found that the Association failed to establish that it met the conditions of coverage under the Policy, or that its loss was covered as an exception to the exclusion for decay.
The court found that the term "commencing" during the policy period in relation to collapse coverage was ambiguous, finding that ""commencing" may be reasonably read to include each identifiable instance of collapse, regardless of whether similar loss occurred prior to the Policy period. However, plaintiff fails to prove that any identifiable loss commenced during the effective Policy period, January 1, 2005 through January 1, 2007. Repeatedly, plaintiff's experts denied that it was possible to prove when the purported collapse of structural members occurred."

The court stressed further:

Here, plaintiff has the burden to set forth specific facts to show loss commencing during the Policy period. Plaintiff does not, and, according to its own experts, cannot identify a specific instance of collapse that occurred during the Policy period; thus, I would have to assume, based on speculative probability, that a structural member fell into pieces during the Policy period. The court cannot take such a leap. For the same reasons, plaintiff fails to show that it brought legal action within two years after the date on which the property loss occurred. Under the statutorily mandated language of the Policy, actions brought more than two years after occurrence of the loss are barred. . . . Defendant argues that any loss was caused by severe decay that began decades ago, and that plaintiff cannot prove that the loss occurred after June 4, 2006. Plaintiff again maintains that the inception of loss is each instance of collapse, and that Perrault's testimony creates a genuine issue of fact that instances of collapse occurred after June 4, 2006. Plaintiff is correct that the inception of loss begins at the point of collapse, not the point of decay, . . . However, Perrault's speculative deposition testimony does not create a genuine issue of fact for summary judgment. Plaintiff fails to present specific facts showing that an instance of loss occurred after June 4, 2006. Accordingly, plaintiff cannot show that it brought suit within two years after occurrence of the loss to meet that condition of coverage.

The court additionally refused to follow the Malbco case regarding the definition of collapse, but instead looked to the express definition of collapse in the policy requiring "actual falling down." The court further found that the term "sudden" as used in the policy contained a temporal element and refused to follow the reasoning in McCormick and Baxter in this regard.

Western District of Washington Finds That An Independent Adjuster Can Be Sued For Bad Faith

In Lease Crutcher Lewis WA LLC v. National Union Fire Co. of Pittsburgh, Western District of WA, Dkt No. 2:08-cv-01862-RSL, Order on Motion to Dismiss dated October 20, 2009, Judge Robert Lasnik ruled that an independent adjuster could be liable for bad faith claim handling, but could not be independently sued under Washington's Insurance Fair C onduct Act ("IFCA").

Bad Faith

The independent adjuster filed a motion to dismiss based on the theory that an independent adjuster, hired by an insurance company to handle a claim, owes no duty and has no personal liability to an insured for actions taken on behalf of the insurer. The court found that this proposition was completely unsupported by authority. Citing to agency law Washington's insurance code, the court found that the independent adjuster "had a statutory duty to act in good faith toward [the insured], [and that] the Court need not determine whether the parties had a fiduciary relationship or whether a common law duty of good faith also existed in these circumstances."

IFCA

After considering the IFCA statute and legislative history, the Court concluded "that the legislature intended to create a private cause of action for damages and attorney’s fees against only the insurer, not its employees or agents."

By Misty Edmundson

Division II affirmed that an $8.75 Million stipulated judgment amount was unreasonable.

Water's Edge Homeowners Ass'n v. Water's Edge Associates, Dkt. No. 37415-3-II, __ P.3d __, 2009 WL 3087495 (2009).

Division Two of the Washington Court of Appeals affirmed a Clark County trial court’s ruling that an $8.75 Million stipulated judgment amount was unreasonable, and further found that the trial court did not abuse its discretion when it found that $400,000 would have been a reasonable settlement amount.

This was a construction defect action arising out of a condominium conversion project in Clark County, WA. After a failed mediation, the defendants and the plaintiff in the case stipulated to a covenant judgment and assignment of bad faith claims and then moved for a reasonableness hearing. The defendants’ insurers, Farmer’s Insurance Exchange, Truck Insurance Exchange and Mid-Century Insurance Company then intervened to participate in the reasonableness hearing and to conduct limited discovery.

After hearing a full day of argument at the reasonableness hearing and taking the case under advisement for five months, the trial court ruled that $8.75 million was not a reasonable stipulated judgment amount. Instead, the court found that a $400,000 settlement would have been reasonable.

The court of appeals affirmed and found that the trial court did not abuse its discretion. Additionally the court stressed that the trial court correctly found that expectation or remediation damages were not appropriate because the it had dismissed all the contractual warranty claims and thus, the normal cost of repair damages under the Association’s warranty claims were unavailable.

Furthermore, the court of appeals found that when disputing the reasonableness of a settlement, the insurer does not have the burden to prove fraud or collusion, rather “after the parties establish reasonableness, the Chaussee factor is merely whether there is any evidence of bad faith, collusion, or fraud . . . . Nor does any "evidence of bad faith, collusion, or fraud" appear to invoke the typical standard for proof of fraud, which must be proved by evidence that is clear, cogent, and convincing. The burden here was not on Farmers but, rather, on the HOA to prove its settlement was reasonable.”

Finally, the court also held that the trial court properly dismissed the case, as opposed to entering a final judgment in an amount it had already deemed unreasonable or in an amount that the parties’ had not stipulated to.

Farmers Insurance Exchange, Truck Insurance Exchange and Mid-Century Insurance Company were represented by Tyna Ek and Misty Edmundson of Soha & Lang, P.S.

By Misty Edmundson

Federal District Court Confirms that Notice Prejudice Rule Does Not Apply to Claims-Made Policies

In Manufactured Housing Communities v. St. Paul Mercury Ins. Co., 2009 WL 3193157, (W.D.Wash. 2009), Judge Benjamin Settle confirmed that Washington law regarding claims-made policy notice requirements has not changed in 20 years since Safeco Title Ins. Co. v. Gannon, 54 Wn. App. 330, 774 P.2d 30 (1989), review denied, 113 Wn.2d 1026, 782 P.2d 1069 (1989). Judge Settle held that the notice requirement in St. Paul’s policy was not ambiguous and that the “notice prejudice rule” does not apply to claims-made policies. The decision recognizes the distinction between “claims-made” and “occurrence” policies in Washington, and rejects the argument that there has been a shift in Washington regarding the application of the “notice/prejudice rule” since the Gannon decision.

By Paul Rosner