Eastern District of Washington federal trial court rules IFCA not Retroactive and Bad Faith Claim Accrues on date of Initial Denial

Lenk v. Life Insurance Company of North America, EDWA Docket No. 2:10-cv-05018-LRS, Order on Motion for Partial Summary Judgment (December 13, 2010).

The Eastern District of Washington trial court ruled that Washington's Insurance Fair Conduct Act ("IFCA") was not retroactive, and would not apply if the initial denial  occurred prior to the enactment of IFCA.  Citing to  Rinehart v. Life Insurance Company of North America, 2009 WL 529524, *1 (W.D. Wash. 2009), the court found that "even where an insurer affirmatively denies an insured’s appeal after IFCA’s effective date, the statute still does not apply so long as the initial denial occurred prior to the effective date of the statute." The Court then went on to conclude that the undisputed facts indicated that plaintiff’s claim for disability benefits was initially denied by letter dated January 18, 2006, before IFCA was enacted . Thereafter, plaintiff’s final appeal was denied by letter dated December 11, 2006. The court concluded that "[c]onsequently, the “precipitating event,” along with all subsequent denials, occurred prior to the December 6, 2007 effective date of IFCA."  And thus the court dismissed the Plaintiff’s IFCA claim.

The Court also addressed when a cause of action for bad faith accrues and when the statute of limitations runs on such a claim.  The Court agreed with the insurer and found that a cause of action for a bad faith denial "accrues as of the date of the denial. "  The court rejected the insured's argument that bad faith was a continuing tort and that accrual should be the date of "final" denial.  The court stressed, "Plaintiff’s cause of action against his insurer accrued at the time his claim for coverage was [initially] denied."  Since more than three years had elapsed between the denial and the filing of suit, the court found that the bad faith claim was barred because the statute of limitations had run.

Div. 1 of WA Court of Appeals Interprets Innocent Purchaser and Domestic Use Defenses under the Washington Model Toxics Control Act

Grey v. Leach, Ct. of Appeals Dkt. No. 63221-3-I (Div. 1, Dec. 13, 2010).

The Court of Appeals was asked to determine whether under the Washington Model Toxics Control Act ("MTCA") , either the “innocent purchaser” defense (RCW 70.105D.040(3)(b)) or the “domestic purpose” defense (RCW 70.105D.040(3)(c)) applies to former owners of a house when the residential heating system operated by them unknowingly leaked oil into the ground and contaminated it during their ownership.  The court found that the former owners, "as operators of the heating system, contributed to the contamination, they are not “innocent purchasers” under MTCA and that releasing fuel oil from leaking return pipes running to an underground storage tank is not a “domestic use” under" MTCA.   

Oregon Federal District Court Rules that Allegations of Abuse to Multiple Children by the Same Alleged Abusers is One Occurrence

Knowledge Learning Corporation et al v. National Union Fire Insurance Company Of Pittsburgh, PA et al., Dkt No. 3:10-cv-00188-ST, Order of Summary Judgment (D. Or. November 30, 2010)

The issue before the court was whether six separate lawsuits against the insured alleging mental and physical abuse of multiple children in the same facility and the same classroom, by the same two instructors at the insured's learning centers could be deemed one occurrence under the primary policy language at issue.   Significantly, the insured was obligated to pay a $500,000 self-insured retention per occurrence and the primary policy provided $1M per occurrence limits and $5M aggregate limits.  The excess insurer, who provided $50M per occurrence/ aggregate limits, argued for a finding of multiple occurrences. 

Both the primary and the excess policy define "occurrence" in pertinent part as "an act or threatened act of abuse or molestation. All "bodily injury" and "personal and advertising injury" arising out of the acts of abuse or molestation by one person or two or more persons acting together toward anyone person will be deemed a single "occurrence." A series of related acts of abuse or molestation will be treated as a single "occurrence.""

The insured argued that the definition of "occurrence" breaks down as follows: "Sentence 1: A single "act" or "threatened act" of abuse is a single "occurrence" --without limitation as to the number of victims.  Sentence 2: Multiple acts of "abuse" (whether a "series" or "related acts" or not) by [a.] one person or [b.] two persons or more acting together, "toward any one person," is a single "occurrence." Sentence 3: Any "series of related acts of abuse" are a single "occurrence" --without limitation as to the number of victims."  While the excess insurer argued that the policy language means: "[S]eries of related acts" is not defined and there is no mention of multiple claimants anywhere in the definition. Thus, the reasonable interpretation of this provision is that it relates back to the prior sentence ... and attempts to address sexual abuse claims from an alternative direction. The definition of "occurrence" first addresses "bodily injury" arising from the abuse by one or more persons. Second, the definition addresses multiple acts of abuse against that same person. In other words, the definition addresses both the act(s) and the injury. Significantly, it does not reference multiple claimants, which would have been relatively simple to include in the definition. Importing multiple claimants into the definition of "occurrence" is not reasonable and not consistent with the language of the definition."

The trial court agreed with the insured and ruled,  "the best reading of the definition of "occurrence" is that the first sentence sets forth the general rule that one "act" = one "occurrence" and the latter two sentences set forth two different exceptions to the general rule. Accordingly, although the second and third sentences may overlap (for example, two perpetrators jointly engage in a series of related acts of abuse against the same victim), there are scenarios where the second sentence would apply and the third would not (one perpetrator abuses one victim in two very different ways). Furthermore, I find it notable that the second sentence specifically limits coverage for "bodily injury" caused by actions made "toward anyone person" whereas the third sentence grants broad coverage without limitation to the number of victims affected by the abusive acts.  See ORS 42.230 (the court may not insert words into a contract)."

Washington Appellate Court Explains Efficient Proximate Cause and Ensuing Loss.

In a decision issued today, Vision One, LLC et al. v. RSUI, No. 38411-6 (10/19/2010), Division II of the Washington Court of Appeals explained the efficient proximate cause rule. The case arose out of the collapse of a concrete slab during the construction of a condominium. The developer’s policy excluded loss caused by faulty workmanship, but the exclusion contained an exception for ensuing loss caused by a covered cause.

Division II explained that the efficient proximate cause of a loss is the predominant cause which sets into motion the chain of events producing the loss—not necessarily the last act in a chain of events. Further, whenever covered and excluded perils combine to cause a loss, the loss will be covered only if the predominant or efficient proximate cause was a covered peril. If multiple causes contribute to cause a loss, the tier of fact must determine which cause was the predominant or efficient proximate cause.

The Court of Appeals then explained where an ensuring loss provision is an exception to an exclusion, the provision applies when an excluded peril causes a separate and independent covered peril. Damage caused by the covered peril is covered under the resulting loss provision, but damage resulting from the excluded peril remains excluded:

For example, following the destruction caused by the 1906 San Francisco earthquake, gasfed fires broke out and caused even more damage across the city. Most property insurance policies excluded earthquake damage but covered fire damage. Because an excluded peril (earthquake) caused an independent covered peril (fire), the resulting fire damage was covered as a “resulting loss.” But earthquake damage remained uncovered.

Accordingly, “assuming faulty workmanship caused the shoring and concrete slab to collapse, faulty workmanship was the initial excluded peril and the collapse was the loss.” Therefore, no independent covered peril (such as fire) caused a covered resulting loss. “The collapse resulted directly from the initial excluded peril of faulty workmanship, and loss resulting directly from the initial excluded peril remains uncovered.”

The court also held that:

1. The efficient proximate cause rule is a rule of policy construction. Failure to cite efficient proximate cause in a denial letter does not prevent the application of efficient proximate cause analysis to determine coverage.
2. Determining the cause of collapse is a question of fact for the jury unless the facts are undisputed.
3. When an insurer denies a tender, it is estopped from claiming that it was released from liability based upon the insured's subsequent settlement in violation of an impairment of subrogation provision.

In Fred Shearer & Sons, Inc. v. Gemini Ins. Co., 2010 WL 3768022 (Or App Sep. 29, 2010), the court held that an insurance company could consider materials extrinsic to the complaint and the insurance policy to determine the duty to defend based on the facts presented.

Gemini Insurance Company (the “insurer”) issued insurance to TransMineral, a distributor of a stucco product. The policy had a so-called “vendors endorsement” that provided coverage to “all vendors of [TransMineral]” but “only with respect to ‘bodily injury’ or ‘property damage’ arising out of ‘your products’ … which are distributed or sold in the regular course of the vendor's business,” subject to certain exclusions.

Fred Shearer & Sons (“Shearer”) was a subcontractor on a home repair and installed the stucco product on the exterior of the residence. The product allegedly failed, and the owners of the residence sued their general contractor who, in turn, sued Shearer and TransMineral.

Shearer tendered the defense of the lawsuit to the insurer on the theory that it was an insured as a vendor of TransMineral products. It based the tender on an “Exclusive Applicator Agreement” that it had entered into with TransMineral. That agreement granted Shearer the exclusive right to distribute TransMineral’s products. The insurer rejected the tender.

Shearer brought a (new, separate) lawsuit against the insurer seeking a declaration that it was an insured under the vendors endorsement. Before the trial court, shearer moved for partial summary judgment on this question, and the trial court granted the motion. Additional issues regarding the amount of the defense obligation were tried to the court, and the court again ruled in Shearer's favor. The rulings were reduced to a limited judgment, which the insurer appealed.

The Court of Appeals affirmed the trial court. Before the Court of Appeals, the insurer argued that it was “impossible to tell from the pleadings in the underlying action or the policy language that Shearer sold or distributed the stucco product in the ordinary course of business,” that “the four corners of those documents - that is, the pleadings and the insurance policy - exclusively govern whether [it] owes any duty to defend” and that “nothing in [the underlying] allegations expressly or impliedly connotes that Shearer distributed or sold the TransMineral products.” 2010 WL 3768022 at 3 (internal quotations and some alterations omitted). The Court of Appeals rejected this argument as follows:

“When the question is whether the insured is being held liable for conduct that falls within the scope of a policy, it makes sense to look exclusively to the underlying complaint. …

“The same cannot be said with respect to whether a party seeking coverage is an ‘insured.’ The facts relevant to an insured’s relationship with its insurer may or may not be relevant to the merits of the plaintiff’s case in the underlying litigation. The plaintiff in the underlying case is required to plead facts that establish the defendant’s liability; the plaintiff often is not required to establish the nature of the defendant’s relationship to some other party or to
an insurance company in order to prove a claim….”

Id. at 5. The Court of Appeals also rejected the insurer’s other arguments as to the application of certain exclusions and the calculation and allocation of defense costs.

Ambiguity Found by Washington Supreme Court in ACV Settlement Provision

The Washington Supreme Court held today in Holden v. Farmers Ins. Co. that an insured was entitled to recover sales tax under an actual cash value (“ACV”) loss settlement provision in her renter's insurance policy because of ambiguity regarding whether ACV includes sales tax.

The claim arose out of a fire to Laura Holden’s apartment, which damaged her personal property. Ms. Holden’s policy provided for settlement at ACV, but included an endorsement that would have allowed her to recover at replacement cost if she replaced the property within 180 days of the loss. Ms. Holden elected not to replace the damaged property. The carrier paid Ms. Holden $1,174, based upon the fair market value (“FMV”) of her loss. (This was apparently a rather small fire.) The loss payment, however, did not include sales tax. Ms. Holden argued that the ACV payment should have included an adjustment based upon sales tax even though she did not replace the damaged property.

In its 6 to 3 decision, the Washington Supreme Court held that the following provision was ambiguous regarding whether Ms Holden was entitled to recover sales tax:

Covered 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 FMV but did not define FMV. The Supreme Court acknowledged that in another (non-insurance) context FMV “is the amount of money which a well informed buyer, willing but not obliged to buy the property, would pay, and which a well informed seller, willing but not obligated to sell it, would accept.” However, the court held this definition of FMV did not resolve the sales tax issue and that there is nothing intrinsic in the notion of FMV that necessarily includes or excludes sales tax.

In construing the loss settlement provision, the court considered evidence regarding the insurer’s claims handling practices in unrelated claims including that the insurer sometimes determined ACV by applying depreciation to replacement cost value, and sometimes included sales tax in its determination of replacement cost.

The court noted that the policy’s loss settlement provision does not clearly exclude or include sales tax and does not define FMV. The fact that the loss settlement provision references replacement cost, combined with the carrier’s claims handling practices, and the lack of a definition of FMV, according to the majority, created an ambiguity, which must be resolved in favor of the insured.

Insurance Companies Entitled to Attorney-Client Privilege in Bad Faith Actions

On August 3, 2010, Division II of the Washington Court of Appeals held that allegations that an insurer acted in bad faith are not sufficient to defeat attorney-client privilege. Rather, the plaintiff must show an exception, such as the fraud exception. Moreover, this exception requires a showing of actual fraud, not just bad faith. Cedell v. Farmers Ins. Co., No. 38921-5-II, __ Wn. App.__, __P.2d__ (2010).

Farmers Insurance Company of Washington (“Farmers”) insured Bruce Cedell. After his home was damaged by fire, Cedell made a first party claim under his Farmers policy. The trial court found that the fire department and the fire cause investigator hired by Farmers determined that the cause of the fire was accidental. However, for reasons not explained in the appellate decision, Farmers considered the claim “suspicious.” At some point, Farmers hired an attorney to provide coverage advice regarding Cedell’s claim.

A year after the fire, Cedell filed an insurance bad faith lawsuit against Farmers. In response to discovery requests, Farmers withheld and redacted information based upon attorney-client privilege and the work product doctrine. Cedell then filed a motion to compel arguing that attorney-client privilege and work product did not apply in bad faith litigation.

The trial court determined that in-camera review of the documents withheld was appropriate because (1) Farmers made a one-time offer of $30,000 with an acceptance period that fell when its coverage counsel was out of town; (2) Farmers threatened to deny Cedell coverage without explanation; and (3) the damage to the house was eventually determined to be far more than Farmers’ $30,000 offer. After conducting in-camera review, the trial court held that attorney-client privilege and work product did not apply, and ordered Farmers to produce all documents withheld and/or redacted based on attorney-client privilege and work product, imposed sanctions, and awarded attorney fees for Farmers’ failure to provide the information.

Division II granted Farmers’ motion for discretionary review. The Court of Appeals held that in the first party context insurance companies are entitled to attorney-client privilege despite allegations of bad faith. In addition, “[a]n insurance company does not lose attorney-client privilege protection simply because its litigation opponent raises an issue where advice of counsel may be relevant.”

Next, the court of appeals noted that “[t]he elements of bad faith and fraud are . . . separate and distinct,” and explained that although Farmers’ conduct may have constituted a violation of insurance regulations, the evidence was not adequate to support a finding of fraud. Accordingly, the court reversed and remanded holding that the trial court had abused its discretion in conducting an in-camera review and that discovery sanctions were inappropriate.

Anti-Stacking Provision Applies to Limit Coverage to One Policy Limit

In Certain Underwriters at Lloyd’s London v. Valiant Ins. Co., 2010 WL 1427571, 5 (April 12, 2010) (published) the Washington Court of Appeals held that an anti-stacking provision applied to limit affiliated insurers’ exposures to the limits of one insurance policy.

Two affiliated insurers, Valiant Insurance Company (“Valiant”) and Northern Insurance Company of New York (“Northern”), insured Stratford Construction, LLC (“Stratford”) under three successive primary policies. Valiant and Northern are both Zurich-affiliated companies. Certain Underwriters at Lloyd’s London (“Underwriters”) insured Stratford during two subsequent policy periods, and Great American provided excess coverage for several policy periods. The Valiant and Northern policies limit recovery to one policy limit per “occurrence” when the insured holds two or more policies issued by companies affiliated with Zurich.

GCG Associates, LP (“GCG”), hired Stratford to construct a four-story retirement center in Lynnwood, Washington. Stratford completed construction in 2000. In 2006, GCG filed two suits against Stratford related to the construction, which were later consolidated. Expert reports indicated that water damage resulted from a variety of construction defects including improper installation of roofing or stucco by one subcontractor and improper installation of windows by another.

Stratford settled the consolidated construction defect lawsuit for $5 million. Valiant contributed the $1 million limits of its policy, but Northern did not contribute to the settlement. Underwriters, Great American, and subcontractors apparently made up the difference. Underwriters sued Valiant and Northern for contribution and subrogation.

The Court of Appeals agreed with the trial court’s determination that the continuing water intrusion damage to the building was caused by one “occurrence” even though the damage occurred at different locations and at different times. The Court of Appeals found that the “key to the present case is the Zurich policy definition of ‘occurrence’ as an ‘accident, including continuous and repeated exposure to substantially the same general harmful conditions.’ The continuous and repeated exposure of Chateau Pacific to harmful moisture that gradually intruded through the building envelope over a five year period from different sources fits this definition.” The Court of Appeals also held that the anti-stacking provision did not conflict with the stated policy limits and did not violate public policy. The Court then concluded that “[b]ecause the policies issued by Zurich’s affiliated companies all applied to the same occurrence, the anti-stacking provision limited coverage to the highest applicable policy limit under any one of those policies.”

Washington Supreme Court Holds Insurer Breached Duty to Defend in Bad Faith as a Matter of Law

On March 18, 2010, the Washington Supreme Court held that an “assault and battery” exclusion did not apply to allegations that post-assault negligence enhanced a claimant’s injuries. Am. Best Food, Inc. v. Alea London, Ltd. (Wash. S. Ct., March 18, 2010). Moreover, the insurer’s refusal to defend “based upon an arguable interpretation of its policy was unreasonable and therefore in bad faith.”

American Best Food, Inc. operates Cafe Arizona, a Federal Way nightclub. Michael Dorsey was shot outside the club. After he was shot, the club’s security guards carried him inside. The club owner, however, instructed the security guards to remove Dorsey from the club. Dorsey sued Cafe Arizona alleging that security guards “dumped him on the sidewalk.” In an amended complaint, he contended that they exacerbated his injuries by dumping him on the sidewalk after he was shot.

Cafe Arizona tendered defense to its insurance carrier, Alea London, LTD (“Alea”). Alea declined the tender, citing an exclusion in its policy for injuries or damages “arising out of” assault or battery. Cafe Arizona then sued Alea for breach of contract, bad faith, and violation of the Washington Consumer Protection Act. The trial court dismissed Cafe Arizona’s claims on summary judgment. The Court of Appeals partially reversed, holding that Alea breached its duty to defend and that summary dismissal of the bad faith and indemnification claims was inappropriate. Our Supreme Court accepted review.

After distinguishing Washington precedent regarding the meaning of “arising out of,” and considering out of state authority, the Washington Supreme Court held that “arising out of” did not include the alleged post-assault negligence:

We find persuasive precedent from other states that have found claims that the insured acted negligently after an excluded event are covered. Further, a balanced analysis of the case law should have revealed at least a legal ambiguity as to the application of an “assault and battery” clause with regard to post-assault negligence at the time Cafe Arizona sought the protection of its insurer, and ambiguities in insurance policies are resolved in favor of the insured.

The Washington Supreme Court concluded that Alea had breached its duty to defend. Moreover, by a five-to-four majority, the court held that Alea acted in bad faith as a matter of law when it declined to defend. Writing for the majority, Justice Tom Chambers explained, “if there is any reasonable interpretation of the facts or the law that could result in coverage, the insurer must defend.” Moreover, Alea “put its own interest ahead of its insured when it denied a defense based on an arguable legal interpretation of its own policy.” Accordingly, “Alea’ s failure to defend based upon a questionable interpretation of law was unreasonable and Alea acted in bad faith as a matter of law.”