Washington Supreme Court Holds Diminished Value Covered by Auto Insurance Policy

Yesterday, a 5-4 majority of the Washington Supreme Court held that certain auto insurance policies issued by Farmers Insurance Company of Washington required the company to pay for post-accident diminished value of repaired vehicles. The case arose out of a November 1998 automobile accident in which David Moeller’s Honda Civic CRX was damaged. Farmers paid the cost to repair the vehicle. Moeller acknowledged that the repairs were complete and acceptable. However, in May 1999, Moeller brought a class action breach of contract lawsuit against Farmers for failing to pay for the vehicle’s diminished value.

Our Supreme Court acknowledged that a majority of other jurisdictions have previously denied coverage for diminished value because an automobile policy’s reference to “repair or replace” unambiguously encompasses only a concept of tangible, physical value. Nevertheless, the Supreme Court disagreed with this view, noting that “the majority view’s framework ignores important presumptions in favor of the insurance consumer that are inherent in the rules of construction regarding insurance contracts.”

The court explained that the policy must be construed as the average person would read it. Through this lens, the majority held, a reasonable consumer looking at the relevant policy language would expect to be placed in the same position he/she was in prior to the accident.

The court also held the class was properly certified despite the difficulty of determining damages.

Washington Court of Appeals holds that insurance company of a condominium association could not subrogate against unit owner's tenant

On September 20, 2011, the Washington Court of Appeals held that the insurer of a condominium association could not subrogate against a tenant of a unit owner to recover funds paid for a fire loss. Community Ass'n Underwriters of America, Inc. v. Kalles, 2011 WL 4357763 (Wash. App. 2011). The court reasoned that the tenant was presumed to be a coinsured of the landlord absent an express agreement to the contrary. In reaching this result, the court rejected the insurer’s argument that the presumption of coinsured status should not attach because the insurer issued its policy to the owners association and not to the unit owner that was in privity with the tenant. The Court of Appeals also held that the tenant was entitled to recovery of the attorney fees it had incurred in defending the lawsuit under Olympic Steamship v. Centennial Insurance Co.

Insurance Coverage and Ligitagation

Bad Faith in Pre-Suit Claims Handling

On July 5, 2011, Division 1 of the Court of Appeals of Washington held there was sufficient evidence for a jury to find that an insurer’s pre-suit claims handling constituted bad faith despite the fact that the insurer subsequently tendered policy limits after the plaintiff filed suit. Moratti v. Farmers Ins. Co. of Washington, 2011 WL 2611763 (2011).

Oregon Supreme Court holds that the terms of an oral binder superseded the standard terms of a first-party property policy.

In Stuart v. Pittman, 2011 WL 2162919 (Or 2011), the insured was a homeowner who contracted with a builder to construct a house at his farm. The insurer’s agent orally agreed to bind first-party course of construction insurance for the insured in August 2003; the policy itself was not delivered until March 2004. In the meantime, the house was damaged: It was framed but not enclosed, and snow and ice built up inside of it, causing the interior sheathing to split, the accumulation of water in the crawl space, and a large amount of mold. The insured had relied on the agent’s oral assurance of coverage and as a result did not require the builder to carry a performance bond or liability insurance. The insured sued the builder for faulty workmanship and obtained a judgment; however, because the builder was insolvent, the insured was unable to collect on the judgment. The insured then sued his own insurer and the insurer’s agent. The insured claimed that the insurer’s agent had issued an oral binder for a course of construction policy that eliminated the usual provisions such as, for example, exclusions for damage caused by mold and by faulty workmanship. The Court of Appeals reversed a verdict in favor of the insured, finding that the insured had failed to prove that the usual policy terms of a course of construction policy were superseded by the “clear and express” terms of the binder as required under ORS 742.043. On further review, the Oregon Supreme Court reversed the Court of Appeals and reinstated the verdict. The Oregon Supreme Court reasoned that the terms of the binder could supersede the usual policy terms under the statute and that the insured had met the statute’s “clear and express” requirement. Separately, the Oregon Supreme Court also held that that the insured could obtain attorney fees under ORS 742.061 based on an oral binder.

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Oregon Supreme Court reinstates $8 million punitive damages award against an insurance company

In Strawn v. Farmers Ins. Co. of Oregon, S057520 (May 19, 2011), the Oregon Supreme Court reinstated an $8 million punitive damages judgment that the Oregon Court of Appeals had overturned.


In this case, the insurer used cost-containment software to evaluate its insureds’ medical expenses for personal injury protection (PIP) claims. If the insurer determined that the charge submitted by an insured’s provider exceeded a set percentage of the normal range, the insurer refused to pay the excess on the ground that it was “unreasonable.” Plaintiff filed a class action as the representative of a class who alleged that the insurer’s review process set an arbitrarily low percentage (initially, 80 percent) that resulted in the denial of claims for reasonable medical expenses. Following a jury trial, the trial court entered a judgment against the insurer for approximately $900,000 in compensatory damages and $8 million in punitive damages. The Court of Appeals reduced the punitive damages award, holding that it violated Due Process. The Supreme Court then accepted review.


Before the Supreme Court, the insurer contended that the trial court had court “cut off” its ability to rebut the reasonableness of the plaintiff’s medical expenses by excluding evidence that it, e.g., reimbursed plaintiffs in an amount that represented their reasonable medical expenses. The Supreme Court declined to reach the merits of the argument, holding that the insurer had failed to raise it below. Next, the insurer contended that it was entitled to a directed verdict on the plaintiffs’ fraud claim, contending that the plaintiffs had failed to offer direct proof of individualized reliance. The Supreme Court rejected the argument, holding that, on the facts presented, reliance could be inferred from circumstantial evidence. In particular, reliance could be inferred because the claims were based on a uniform provision in motor vehicle insurance required for drivers under Oregon’s financial responsibility laws. Finally, the Supreme Court reversed the Court of Appeals and reinstated the $8 million punitive damages claim, holding that the insurer had failed to properly preserve error. Following the verdict, the insurer had moved for a remittitur and for new trial. The trial court declined to reduce the punitive damages award on both procedural grounds (because the insurer’s motions were insufficient to challenge the verdict) and substantive grounds. The Supreme Court held that while the insurer had properly appealed the substantive basis for the trial court’s ruling, the insurer had failed to appeal from the trial court’s procedural basis and, therefore, had had waived any error.


Justice Balmer dissented.

Oregon Court of Appeals rules that an insured is not entitled to attorney fees under ORS 742.061 where the policy was issued outside of the state

In Morgan v. Amex Assur. Co., 2011 WL 1878607 (Or App 2011), the insured obtained automobile insurance when she was living in Vancouver, Washington. The insurer issued a Washington insurance policy and delivered it to the insured’s Vancouver address. The insured made an underinsured motorist claim under her policy. After the insurer failed to accept coverage or tender payment, the insured filed suit. The insured accepted a pretrial offer of judgment that included “any costs and attorney fees to which plaintiff may be entitled.” The Court of Appeals held that the insured was not entitled to any attorney fees under ORS 742.061. It reasoned that attorney fees were unavailable based on a second statute, ORS 742.001, that limits the scope of Chapter 742, including ORS 742.061, to “insurance policies delivered or issued for delivery in this state.” The insured’s policy did not satisfy this second statute because it was issued and delivered in Washington.

Study Finds Insurance Fair Conduct Act May Have Increased Claims Costs by $190 Millon

The Insurance Research Counsel ("IRC"), a division of the American Institute for CPCU, which is an independent, nonprofit organization dedicated to providing educational programs, reports that the Washington Insurance Fair Conduct Act (“IFCA”) may have caused an increase in homeowners insurance claims cost in the state by as much as $190 million. The IRC report is available at http://www.ircweb.org/News/IRCWABadFaith_033011.pdf

Oregon Court of Appeals: No Duty to Defend When Complaint Alleged No Resulting Damage

On April 6, 2011, the Oregon Court of Appeals ruled that American Family Mutual Insurance Company (“American Family”) had no duty to defend its insured where the underlying complaint alleged only damage to the insured’s work and did not allege resulting property damage, such as water damage to other building components, that would have been covered by the policy. State Farm Fire and Cas. Co. v. Am. Family Mut. Ins. Co., 2011 WL 1262760, 4 (Or App, 2011). The opinion acknowledged that water damage to other components or contents could have been a natural result of the insured’s alleged negligent performance of the work identified in the complaint. However, the court considered only the policy and the allegations in the complaint in evaluating American Family's duty to defend:

[T]he allegations in the [underlying] complaint are unambiguous. None of the allegations … allege damage to property other than the EIFS system identified in the particular specification, and none of the identified allegations allege water damage to other components or contents of the residence. Although water damage to other components or contents could have been a natural result from [the insured’s] alleged negligent performance of the work identified in the [underlying] complaint, such damage was not a necessary result of [the insured’s] … alleged negligence. Because that water damage was not a necessary result of [the insured’s] alleged negligence and was collateral in nature, the [underlying plaintiffs] were required to specially plead allegations of such water damage before evidence of it could be properly admitted. It follows that defendant had no duty to defend against the [underlying] negligence claim because the allegations of their complaint did not allege injury to property covered by defendant's policy. Thus, the trial court erred in granting summary judgment for plaintiff and denying defendant's motion for summary judgment.

Oregon Court of Appeals addressed an alleged third-party beneficiary’s claim for coverage

In Smith v. Truck Ins. Exchange, Inc., No. A142954 (Or App Apr 20, 2011), the Oregon Court of Appeals addressed an alleged third-party beneficiary’s claim for underinsured motorist (“UIM”) coverage. Plaintiff was injured while driving a vehicle owned by MD&D Construction (“MD&D”). She made a claim for UIM coverage to the insurer, Truck Insurance Exchange, alleging that it had issued insurance on the vehicle. When the insurer denied the claim, plaintiff sued the insurer, asserting claims for breach of contract and declaratory relief alleging that she was a third-party beneficiary on the policy. In addition she sued the broker, alleging that the broker had negligently failed to obtain the insurance. The trial court dismissed the suit on the pleadings, holding that she was not the real party in interest and that she had failed to state facts sufficient to constitute claims for relief in the complaint.

The Court of Appeals reversed on the claims against the insurer and affirmed on the claim against the broker. It first held that the complaint alleged that plaintiff was a permissive user of the vehicle and therefore adequately alleged that she was a third-party beneficiary for the purpose of the breach of contract theory. Next, the court held that plaintiff had no claim against the broker because nothing indicated that she was an intended beneficiary of the broker’s promise to obtain insurance. Finally, the court held that plaintiff’s declaratory judgment claim was insufficient because she had failed to name the insured, MD&D, as a party in the suit. Nonetheless, the court declined to affirm the dismissal but instead gave plaintiff the opportunity on remand to add MD&D.

Eastern District of Washington Federal Trial Court finds CERCLA claims may be subject to PIL coverage

Newmont USA Limited v. All American Home Assurance Co., United States District Court for the Eastern District of Washington, Cause No. CV-09-0033-JLQ, March 3, 2011 Order on PIL Motion for Partial Summary Judgment

 

The insurer sought a declaration by the court that the scope of the personal injury liability coverage did not encompass Newmont and Dawn's liability declared in a CERCLA cost recovery action brought by the United States, which only included claims under CERCLA and no common law claims for trespass or nuisance.  The court disagreed and ruled, "the claims filed against the Plaintiffs herein by the United States are analogous to trespass, nuisance, and interference with the use of private occupancy and encompassed with the stated Coverage P for claims of "wrongful entry" or "invasion of the right of private occupancy."

 

Despite the fact the underlying case was resolved at the trial court level and is on appeal, the court found that there was an issue of fact regarding "whether the Plaintiffs in fact committed covered offenses for which [the insurer] is obligated to provide indemnity." 

Code Upgrade Limits Held Unambiguous By Washington Court of Appeals

In Allemand v. State Farm Ins Co., et al, Dkt. no.28954-1 (Div. III, Mar. 03, 2011), Division III of the Washington Court of Appeals ruled that policy provisions in a State Farm Insurance Company homeowners insurance policy unambiguously limited coverage for increased costs of repairs due to changes in the building codes.

District of Oregon Court Finds that Filing a Declaratory Judgment Action While an Underlying case is Pending is not Bad Faith

In State Farm Fire & Casualty Co. v. Arbor Vineyards Homeowners Association, Cause Number CV-10-504-HU (D. Or.), Federal Judge Hubel authored an opinion filed on January 18, 2011 that dismissed the insured's counterclaims against its insurer for breach of fiduciary duty and bad faith finding that the filing of a declaratory judgment action alone, while the underlying action is still pending, does not support a claim for breach of fiduciary duty or breach of the covenant of good faith and fair dealing against the insurer.  The court reasoned, ". . . without some authority, I am unwilling to conclude that the mere fact of filing the coverage action can constitute a breach of fiduciary duty or a breach of the implied covenant of good faith and fair dealing. That is, plaintiff's filing a complaint seeking clarification of its coverage obligations while the underlying lawsuit is pending is insufficient, as a matter of law, to support the counterclaims."

Insurer's Right to Reimbursement and the Anti-Subrogation Rule

In an unpublished decision issued today, Division One of the Washington Court of Appeals held that policy language authorizing an insurer to be reimbursed for property damage payments from the proceeds of a settlement its insured obtained from a third party tortfeasor insured by the same carrier did not trigger the anti-subrogation rule because the carrier was claiming a right to reimbursement, not a right to proceed directly against the third party. Horner v. Farmers Ins Co., No. 64169-7.