Washington Supreme Court Rules In Favor of Insurer on Exception to Insured Contract Provision

On November 27, 2013, in a 5-4 decision, the Washington Supreme Court ruled that a commercial general liability policy issued to a general partnership, ABCD Marine, LLC (“ABCD”), did not provide coverage for bodily injury suffered by one of its general partners while he was working as an independent contractor for Northland Services Inc. (“NSI”).   Int’l Marine Underwriters v. ABCD Marine, LLC, No. 87231-7, __Wn.2d__, __P.3d __ (Nov. 27, 2013).

ABCD’s liability policy excluded coverage of liability ABCD contractually assumed, but exempted from that exclusion agreements assuming liability for injury to third persons.  The Court ruled the general partner was not a “third person” and therefore not covered for injuries he sustained while doing work for NSI under ABCD’s agreement to indemnity NSI for injuries arising out of the ABDC’s operations or use of NSI’s property.

Once Is Enough: The Washington Court of Appeals Holds Trial Court Was Not Required To Reevaluate the Reasonableness of a Covenant Judgment

In Hidalgo et al. v. Barker et al. ___Wn. App. __, __P.3d__ ;  No. 30544-9-III (Sept. 10, 2013), the Washington Court of Appeals addressed the following issues of first impression in Washington State with regard to the determination of the reasonableness of a covenant judgment: 

1. Is a trial court required to conduct a hearing to determine the reasonableness of a stipulated settlement any time the settling parties modify the terms of their agreement? 
2. Does a trial court have the discretion to provide for prejudgment interest as a component of a reasonableness determination? 

The answer to the first question is “no.”  Absent a material change in one or more reasonableness factors, a court that has already conducted a reasonableness hearing and determined a reasonable settlement amount for those parties is not required to entertain evidence and argument in support of revising that amount.

The answer to the second question is “yes.”  It is within the trial court’s discretion to either include or exclude prejudgment interest for the period between the date of settlement and the date judgment is entered.  

The Hidalgo Court also held that the trial court did not abuse its discretion when it found the parties’ first settlement agreement unreasonable and then multiplied what the court found to be the mid-point of the expected verdict range if the case went to trial by the perceived chance of a favorable verdict to determine the reasonableness of the settlement.

I. Background

Manuel Hidalgo was convicted of a crime and served over four years in prison before his judgment and sentence were reversed on the basis of the newly discovered evidence.  Mr. Hidalgo then brought a malpractice action against his public defenders and their law firm.  Westport Insurance Corporation insured the law firm and its attorneys under a professional liability policy with “wasting” limits (coverage limits included defense costs), meaning that every dollar spent defending the malpractice case reduced available coverage.

Westport appointed counsel to defend the law firm and its attorneys against Mr. Hidalgo’s claim and other related claims.  Efforts at a global settlement proved unsuccessful.   Mr. Hidalgo made several decreasing offers to settle with one of the attorneys, Mr. Stevensen, with a final offer of $75,000.  However, the claims against Mr. Stevensen were not settled.  In May 2005, after the limits of the insurance policy were exhausted, counsel appointed by Westport withdrew from the case.

In May 2007, Mr. Stevensen reached an agreement with Mr. Hidalgo to settle for a $3.8 million covenant judgment. The Hidalgo/Stevensen settlement agreement included a covenant not to execute against Mr. Stevensen  in exchange for  an assignment of Mr. Stevensen’s claims against Westport.  The agreement also provided for prejudgment interest from the date of the agreement until the entry of judgment and for post-judgment interest from date of entry.  In addition, the settlement was contingent on the court approving it as reasonable.

In February 2009, after reviewing “voluminous” briefing from both sides, the trial court conducted a reasonableness hearing lasting about three hours.  At the conclusion of the hearing, the court rejected the $3.8 million settlement figure as unreasonable and ruled that the reasonable settlement amount was $688,875.  The trial court stated that it had considered the nine reasonableness factors set forth in Glover v. Tacoma Gen. Hosp., 98 Wn.2d 708, 717, 658 P.2d 1230 (1983), overruled on other grounds by Crown Controls, Inc. v. Smiley, 110 Wn.2d 695,  756 P.2d 717 (1988), but explained that its conclusion focused on just two Glover factors:  the merits of the plaintiff’s liability theory and the merits of the defense theory.  The trial court found a probable range of damages for a legal malpractice case involving incarceration and the probability of Mr. Hidalgo’s success at trial.  Using these numbers, the trial court multiplied the mid-point of the expected verdict range  by its evaluation of the chance of a favorable verdict to arrive at $688,875 as the reasonable settlement amount.  Because the settlement was contingent on the trial court’s approval of the $3.8 million settlement figure, the settlement was void by its terms.  The litigation continued. 

In May 2010, Mr. Stevensen and Mr. Hidalgo entered into a new settlement agreement. This time, the agreed settlement amount was $2.9 million “or such amount as is found reasonable by the proper court.”  Mr. Hidalgo asked the trial court to rule on the reasonableness of the $2.9 million settlement. The trial court refused.  Instead, the court signed an order on its February 2009 reasonableness determination that included no findings of fact but did append and incorporate a transcript of its oral ruling from the 2009 hearing.   

Before judgment was entered, Mr. Hidalgo argued that he was entitled to prejudgment interest from the date of the agreement.  The trial court agreed and ruled that prejudgment interest of $134,755 was appropriate. The court also awarded post judgment interest at the statutory rate of 12 percent.  Mr. Hidalgo appealed and Westport cross-appealed.  

II. One Reasonableness Determination Is Enough

The Hidalgo Court ruled that that the trial court did not abuse its discretion by refusing to revisit its original reasonableness determination after the parties settled the second time.  The Court of Appeals explained that if a court determines the settlement is unreasonable, RCW 4.22.060(2) has been construed to require the court to then determine a reasonable settlement value.  “That stand-alone reasonable settlement amount will necessarily be independent of other terms of the parties’ agreement.”  Therefore,  if the “parties renegotiate the terms of a settlement agreement after the trial court determines a reasonable settlement amount, then, no further hearing should be required unless a different issue ‘of the reasonableness of the amount to be paid’ is presented.”

A second reasonableness hearing may be necessary if “[d]evelopments in the lawsuit that affect the merits of the claims, the defenses, or other Glover factors might result in a different issue of reasonableness.”  However:

short of a material change in one or more Glover factors, a new settlement agreement entered into by two parties does not require a court that has already conducted a reasonableness hearing and determined a reasonable settlement amount for those parties to entertain evidence and argument in support of revising that amount.

Accordingly, the Court of Appeals found that it was not an abuse of discretion for the trial court to refused to revisit its prior determination when “it saw nothing in the parties’ submissions that would cause it to revisit its prior determination.”

III. The Reasonableness Determination

Next, the Hidalgo Court rejected Mr. Hidalgo’s argument that the trial court abused its discretion when it found the first settlement unreasonable and determined that $688,875 was a reasonable settlement amount.  Mr. Hidalgo argued that the trial court (1) failed to explain how it applied the individual Glover factors; (2) ignored the eighth factor, consideration of the releasing party’s investigation and preparation; and (3) abused its discretion by using a “rigid calculation” and selecting a figure that was the mean of the probable range of recovery rather than a higher figure.

The Hidalgo Court rejected each of these arguments in turn and held that:

1. Washington decisions do not require trial courts to explain their application of the Glover Factors.
2. Absent some showing that an incorrect standard may have been applied, Washington appellate courts do not review a trial court’s reasonableness determination for a sufficient explanation, but for substantial evidence.
3. The trial court did not abuse its discretion by failing to consider or misapplying the eighth Glover Factor—the releasing party’s readiness for trial.  
4. The trial court did not abuse its discretion when it multiplied the mid-point of the expected verdict range by the perceived chance of a favorable verdict to determine the reasonableness of the settlement.

IV.  Prejudgment and Post Judgment Interest

Next, the Court of Appeals addressed Westport’s cross appeal challenging the trial court’s inclusion of prejudgment interest and its ruling that the 12 percent contract rate applied to post judgment interest, rather than the lower market-based rate for judgments founded on tortious conduct.  As to post judgment interest, Westport argued that the tort interest rate should apply because the underlying claim against Stevensen was a malpractice claim. The Court of Appeals disagreed.  Quoting Jackson v. Fenix Underground, Inc., 142 Wn. App. 141, 146, 173 P.3d 977 (2007), the Hidalgo Court held that the 12 percent contract rate applied because:

Once parties have agreed to settle a tort claim, the foundation for the judgment is their written contract, not the underlying allegations of tortious conduct.

The Hidalgo Court then addressed whether Mr. Hidalgo was entitled to prejudgment interest.  The court acknowledged that in Washington, a party’s entitlement to prejudgment interest as a question of substantive law turns on whether a claim is “liquidated” and found that Mr. Hidalgo’s claim was not liquidated.  Nevertheless, the Court of Appeals held that it was within the trial court’s discretion to either include or exclude prejudgment interest in its reasonableness determination.

Soha & Lang, P.S. attorneys are available to assist insurer clients in understanding and addressing the impact of this decision.

The opinions expressed in in this blog are those of the author and do not necessarily reflect those of Soha & Lang, P.S. or its clients.

 

Washington Supreme Court erodes insurer’s right to attorney-client privilege when insurer is sued for bad faith handling of a first-party claim

In another controversial 5-4 decision, the Washington Supreme Court on 2/21/13 substantially eroded the attorney-client privilege for first party insurers being sued for bad faith claims handling. See Cedell v. Farmers Ins. Co. of Wash., Wash. Supreme Court No. 85366-5 (en banc, Feb. 21, 2013). First, the court held that in cases in which an insured is claiming bad faith in the handling and processing of first-party claims, other than UIM claims, there is a presumption of no attorney-client privilege. Second, the court held that when an insured is suing an insurer for bad-faith handling of a first-party claim, the “civil fraud” exception to attorney-client privilege does not require the insured to show actual fraud. Rather, if after in camera review of the claimed privileged materials the court finds “there is a foundation to permit a claim of bad faith to proceed, the attorney-client privilege shall be deemed to be waived.” The Supreme Court added that an insured’s ability to pierce an insurer’s attorney-client privilege through the assertion of civil fraud in this manner applies to bad faith cases arising from UIM as well as all other first-party claims.

The Cedell case involved a first-party claim on a homeowner’s policy for a house fire, and an allegation that the insurer had violated its duty of good faith claims handling of the fire-loss claim. The insurer retained coverage counsel during the claims process, and that attorney examined witnesses under oath, directly interacted with the insured during the claims process, issued a coverage position letter on behalf of the insurer and made a time-limited settlement offer to the insured. Although Washington courts have long held that normal claims handling functions cannot be shielded with attorney-client privilege by retaining an attorney to perform them, the Cedell court went much further today in creating a “presumption” of no attorney-client privilege whenever an insurer is sued for bad faith handling of a first-party claim (the court excepted UIM claims from this newly created presumption). The insurer may overcome the presumption upon a showing in camera that the attorney was providing legal counsel to the insurer (e.g., a coverage opinion) and was not engaged in the insurer’s quasi-fiduciary functions, such as investigating and evaluating the claim.

The second holding of the Cedell opinion is a more significant departure from prior law and seriously erodes the first-party insurer’s right to protect confidential communications with its counsel. The attorney-client privilege historically has not protected communications in which an attorney and client are actively discussing how to commit fraud—this is known as the “civil fraud exception” to attorney-client privilege. But for first-party insurers (including UIM insurers), the Washington Supreme Court now says fraud need not be established to pierce the insurer’s attorney-client privilege. If the civil fraud exception to attorney-client privilege is asserted, the court must engage in a newly created two-step process. First, upon a showing that “a reasonable person would have a reasonable belief that an act of bad faith has occurred,” the trial court will perform an in camera review of the claimed privileged materials. Second, after in camera review and upon a finding there is “a foundation to permit a claim of bad faith to proceed,” the insurer’s attorney-client privilege “shall be deemed to be waived.” In sum, the Washington Supreme Court has turned the “civil fraud exception” to attorney-client privilege into a “bad faith” exception for first-party insurers.

Soha & Lang attorneys are available to assist insurer clients in understanding and addressing the impact of this decision both during the claims handling process and after an allegation of bad faith claims handling has been made.

Washington Federal Trial Court Rules That A finding of Bad Faith Is A Prerequisite for Presumptive Damages Outside of Policy Limits

RSUI Indemnity Company, Inc. v. Vision One, LLC, Western District of Washington case number 2:08-cv-01386-RSL, Order on Summary judgment (Dkt. No. 152) (February 21, 2013)

After the state court reasonableness action was litigated and the reasonable settlement value of the udnerlying action was determined to be $2.3M, Vision One, the insured's assignee, then sought summary judgment against  insurer, RSUI, that the presumptive measure of RSUI’s liability was $2.3 million, the value of the settlement between Vision One and the insured in the underlying litigation (that was found reasonable). RSUI opposed Vision One’s motion on the basis that there must be a finding of bad faith before the presumptive value of the damages may exceed the limits of the underlying insurance policy.  In this coverage action, the court had previously ruled that the RSUI policy provided coverage, but that RSUI had not committed a bad faith coverage determination, but left open whether RSUI had committed bad faith in its claims handling.

First, RSUI opposed Vision One’s request for presumptive damages on the basis that presumptive damages were not appropriate in this case because the insured had not been harmed by the underlying litigation.  The court did not find this argument persuasive and reasoned, “Washington courts have repeatedly rejected this argument, finding that “[an] agreement not to execute does not preclude a showing of harm.” Besel, 146 Wn.2d at 737 (alteration in original) (quoting Safeco Ins. Co. of Am. v. Butler, 118 Wn.2d 383, 397 (1992)). “[A] covenant not to execute coupled with an assignment and settlement agreement is not a release permitting the insurer to escape its obligation.” Kagel v. Aetna Life & Cas. Co., 40 Wn. App. 194, 198 (1985).”

Second, RSUI contended that even if presumptive damages were appropriate in this case, the amount of the presumed damages cannot exceed the $1 million limit of the  policy with RSUI, absent a finding of bad faith. Vision One, relying primarily on Mut. Of Enumclaw Ins. Co. v. T&G Const., Inc., 165 Wn.2d 255 (2008), argued that this Court’s earlier finding of coverage under the RSUI policy and the recent appellate court decision affirming the trial court’s reasonableness finding mandated a finding that the presumptive measure of RSUI’s liability in this case is $2.3 million, the reasonable settlement value.

The court found that presumptive damages were appropriate in this case, and having found so, the next issue that court must address is what the amount of the presumptive damages should be.  The court reasoned, “Unlike the present case, T&G Construction did not involve a covenant judgment that exceeded the insured’s policy limits. Vision One concedes that T&G Construction does not expressly address the circumstances presented here, but it concludes that the Washington Supreme Court nevertheless intended its holding in that case to apply to situations in which the covenant judgment is higher than the insured’s policy limits. The Court disagrees.”

The Court reasoned that bad faith needed to be shown to have a presumption of damages in excess of policy limits.  Although the court had earlier ruled that RSUI did not act in bad faith by making an unreasonable coverage determination, the court indicated that Vision One may still be able to establish RSUI’s bad faith based on its failure to investigate, which could enable Vision One to recover more than the policy limits.  That issue was reserved for trial, so in order to get a presumptive measure of damages above policy limits, the court ruled that Vision One must prove RSUI’s bad faith claims handling at trial. 

The court also found that Vision One was entitled to pre-judgment interest on the presumptive measure of damages.  The court reasoned, “Having determined that coverage existed and that the presumptive measure of damages is the policy limit, the Court finds that the amount Vision One seeks to recover is a “liquidated sum,” and therefore, Vision One is entitled to prejudgment interest.”  Vision One argued that it was entitled to a 12% rate for prejudgment interest and RSUI argued that the rate should be set under RCW 4.56.110(3)(b) for tort claims.  The court found that issues of fact regarding the components of the final judgment existed, and that determining how the interest rate would be set was a question to be left for after trial.

Washington Federal Trial Court Finds EIFS Exclusion Unambiguously Precludes Coverage

First Mercury Insurance Company v. Miller Roofing Enterprises, WDWA Case No. 2:11-cv-00105-JCC, Dkt. No. 51, Order on summary Judgment (February 22, 2013)

This coverage action arises out of a construction defect claim alleging water intrusion due to roofing repairs made on an EIFS clad building.  The Roofer’s insurer, First Mercury,  defended the roofer in the underlying construction defect suit under a reservation of rights and then filed a declaratory judgment action seeking a determination of no coverage.  The insurance policy at issue contains the following EIFS exclusion:

This insurance does not apply to . . . “property damage” included in the “products-completed operations hazard” and arising out of “your work” described as . . . [a]ny work or operation with respect to any exterior component, fixture or feature of any structure if any “exterior insulation and finish system” is used on any part of that structure.

 

First Mercury moved for summary judgment that the policy did not cover the breach-of-oral-contracts damages Miller Roofing allegedly owes McClincy Brothers and Tim McClincy in the underlying construction defect action.  The court did not hesitate in finding that the EIFS exclusion applied to bar coverage:

“The EIFS exclusion bars coverage. Defendants do not contest that the alleged breach-of-oral-contracts damages are for “property damage” arising out of Miller Roofing‟s “work” on the roof. They do not contest that “exterior insulation and finish system‟ is used on any part of th[e] [building].” And they do not contest that the roof is “an[] exterior component, fixture or feature of . . . that [building].” Under the plain language of the EIFS exclusion, there is no coverage. See, e.g., Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co., 292 S.W.3d 48, 62–63 (Tex. Ct. App. 2006), reversed in part on other grounds, 279 S.W.3d 650 (Tex. 2009).”

Defendants argued that the EIFS exclusion did not apply because the leak was the result of “defective workmanship to the roof itself,” and “Miller Roofing did not install the EIFS on the building, nor did it undertake to make any repairs to the EIFS itself.”   The court stressed that “[e]ven if that is true, it is irrelevant. The exclusion applies not only to property damage arising from EIFS-related work by the insured; it applies to property damage arising from “any” work by the insured on an exterior component, fixture, or feature of a structure, as long as “exterior insulation and finish system‟ is used on any part of that structure.” Those conditions are met here.”

Oregon District Court Finds No Continuing Duty to Defend When Insurer Has Exhausted Its Limits

Siltronic Corp. v. Employers Insurance Co. of Wausau, Oregon Federal District Court Cause No. 3:11-cv-01493, Opinion and Order on Summary Judgment (February 4, 2013) (Dkt. No. 62)

In this environmental coverage action, the insured, Siltronic, moved for summary judgment requesting the trial court to find that one of its primary insurers, Wausau, who had issued six years of primary coverage, had a continuing duty to defend even after its indemnity coverage had been exhausted by payment of claims.

Each of the six Wausau policies provided $1 million in liability limits, for a total of $6 million of available liability coverage.  Each policy also provides separate coverage for defense costs. The provision at issue is the same in each of the Wausau policies and provides the following coverage for property damage:

The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of . . . property damage to which this insurance applies, caused by an occurrence, and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such . . . property damage, even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient, but the company shall not be obligated to pay any claim or judgment or to defend any suit after the applicable limit of the company’s liability has been exhausted by payment of judgments or settlements.

 Over approximately ten years, the Oregon Department of Environmental Quality ("ODEQ") and the United States Environmental Protection Agency ("EPA") required Siltronic to perform various remediation and removal actions, as well as pay for liability for natural resource damage,  related to  the Portland Harbor Superfund site.  In September 2009, Wausau declared that its indemnity limits had been exhausted and refused to pay additional defense costs.  Wausau claimed that it had paid $6M in indemnity in addition to $7.699M in defense costs. 

Upon Wausau's declaration of exhaustion, Siltronic tendered to its excess carrier, Granite State, who agreed to defend under reservation of rights.  significantly, Granite State claims that its policy is a "wasting policy" where payment of defense costs erodes limits.  At some point, Granite State determined that Wausau had not properly exhausted and that it had no current obligation to pay defense or indemnity.  Siltronic retendered to Wausau and Wausau rejected the tender.  Siltronic then filed this coverage action.

The court found that "[r]esolution of the issue of whether Wausau has a continuing duty to defend turns on how to interpret the policy provision which states that Wausau "shall not be obligated to pay any claim or judgment or to defend any suit after the applicable limit of the company’s liability has been exhausted by payment of judgments or settlements." Siltronic took the position that the phrase "judgments and settlements" is not ambiguous and that Wausau must continue to defend Siltronic in the ongoing proceedings with DEQ and EPA until those proceedings are finally resolved though "judgments and settlements." Given the large number of PRPs involved in the Portland Harbor Superfund Site, the parties predict that such a resolution may take years. Wausau contended that the language at issue is unambiguous, and arguied that Wausau’s payment of environmental cleanup costs mandated by DEQ.

The court reasoned:

Because the phrase "exhausted by payment of judgments or settlements" is not defined by the policies, the court must look to its plain meaning.  Though this phrase may seem straightforward at first glance, the fact cannot be overlooked that this is not an ordinary insurance coverage case, but instead involves an environmental action by DEQ and EPA. As summarized by another court: 

In the typical coverage case, a primary insurer validly exhausts its indemnity limits when it pays a settlement or judgment resolving third party claims . . . In an environmental action like this one where the insured is faced an RAO (Remedial Action Order), however, there is no settlement or judgment in the usual sense of the words. For these reasons, it is difficult to ascertain precisely at which point indemnity limits may be validly exhausted. Consequently, in the context of an environmental action, the phrase "exhausted by payment of judgments or settlements" is ambiguous because it is subject to more than one reasonable interpretation. The court must therefore consider the context in which the term is used in the policy as well as the "broader context of the policy as a whole." 

The court found persuasive that for the purposes of compelling coverage for environmental claims, ORS 465.480 treats environmental claims as if they were lawsuits.  The court further concluded that the DEQ and EPA orders and agreements with Siltronic included language of finality and an intent to create legally enforceable rights and responsibilities to a third party.  The court found that there was no evidence that Wausau’s payment of the indemnity limits was anything other than in good faith. The underlying environmental action had been ongoing for nine years before Wausau declared exhaustion of the coverage limits. Additionally, and perhaps most importantly, Wausau accepted tender for coverage at the time that Siltronic gave notice of the environmental contamination actions against it. Within two months, it began paying the costs Siltronic incurred in response to DEQ’s and EPA’s various demands. and it continued to pay those costs for six years.

The court found that the facts before it at the summary judgment proceeding were not sufficient to determine whether Wausau had indeed paid $6M in indemnity, but that assuming it had, then it had indeed exhausted its indemnity liability by payment of "judgments or settlements" and had no continuing duty to defend Siltronic.

Washington Supreme Court Weighs in on the Cooperation Clause

Staples v. Allstate Insurance Co., __ Wn.2d __, __P.3d ___,  2013 WL 25887 (January 24, 2013)

The insured, whose insurance claim was denied for failure to cooperate, brought action against his homeowners' insurer, alleging breach of contract, bad faith, and violation of the Insurance Fair Conduct Act (IFCA).  In the trial court, summary judgment was entered for the insurer, and the insured appealed. The Court of Appeals affirmed, and appeal was taken to the Washington Supreme court who then reversed.

The insured, John Staples ("Staples") had his van stolen from a parking lot.  In the van, Staples had stored a large collection of tools.  When staples reported the theft to the police, he stated that the tools were worth approximately $15,000, and that his van was a "work truck" that was absically a "mobile workshop" for his business.  Two weeks later, Staples submitted a claim for the theft loss under his homeowner's policy issued by Allstate.  Staples told Allstate that the tools were worth between $20,000 and $25,000 and were for his personal use although they could be used for work.

Based on Staples' inconsistent statements to the police and the insurer, Allstate transferred staples claim tot he special investigation unit, which in turn requested that Staples provide information proving ownership of the tools, a sworn proof of loss and other documents.  Allstate also recorded two statements from staples, neither of which was under oath.  Over the next couple of months Staples failed to provide the requested information  despite repeated written requests from Allstate.  Three months later, Staples submitted a sworn proof of loss, and in response, Allstate requested an examination under oath ("EUO") and further documents.  When the documents were not provided, Allstate cancelled the EUO and stated that it would reschedule the EUO and requested that Staples contact Allstate to reschedule the EUO.

Staples hired an attorney that began making allegations of IFCA violations and accusing Allstate of making burdensome and vexatious requests.  Staples did not attempt to reschedule his EUO or provide the documents that Allstate had requested.  After giving Staples several extensions in which to comply with the EUO and document demands, and staples failure to do so, Allstate denied the claim.  Staples instituted coverage litigation and Allstate moved for summary judgment based on Staples' failure to cooperate.

The Washington Supreme Court reiterated that most insurance policies contain cooperation clauses requiring the insured to cooperate with the insurer's handling of claims. Id. at *6, citing Thomas V. Harris, Washington Insurance Law § 13.02, at 13–11, 13–12 (3d ed.2010). Typically, an insured that “substantially and materially” breaches a cooperation clause is contractually barred from bringing suit under the policy if the insurer can show it has been actually prejudiced. Id.  The burden of proving noncooperation is on the insurer. Oregon Auto. Ins. Co. v. Salzberg, 85 Wn.2d 372, 375–76, 535 P.2d 816 (1975). 

Staples' homeowner's policy with Allstate provided specific, enumerated cooperation duties including the requirement that Staples submit to an EUO:

3. What You Must Do After A Loss

In the event of a loss to any property that may be covered by this policy, you must:

....

d) give us all accounting records, bills, invoices and other vouchers, or certified copies, which we may reasonably request to examine and permit us to make copies.

....

       f) as often as we reasonably require:

....

2) at our request, submit to examinations under oath, separately and apart from any other person defined as you or insured person and sign a transcript of the same.

 

The Court found that this language did not give Allstate an absolute right to conduct an EUO, but rather, "[g]iven the quasi-fiduciary nature of the insurance relationship, . . . . if an EUO is not material to the investigation or handling of a claim, an insurer cannot demand it."  Id. at *7.   While the Court found that under the facts of the case it appeared that Allstate would have been justified in requesting an EUO, it found that genuine issues of material fact may have precluded summary judgment in this regard, but declined to decide the issue, and instead resolved the case on the following two issues.

The Court instead found that genuine issues of material fact precluded summary judgment because there was an issue of fact regarding whether  (1) Staples substantially complied with Allstate's request for an EUO; and (2) Allstate was actually prejudiced by Staples failure to cooperate.  The Court reiterated that whether there has been a breach of the cooperation clause in measured by the yardstick of  "substantial compliance" and further found that an insurer must supply affirmative proof that it was prejudiced by an insured's non-cooperation in order to deny coverage based on a  failure to cooperate.  Finding issues of fact in these regards, the Court reversed and remanded to the trial court.

Washington Law Prohibits Binding Arbitration Provisions in Insurance Policies

In a unanimous decision, The Washington Supreme Court held that Washington law prohibits binding arbitration clauses in insurance contracts. Dep't of Transp. v. James River Ins. Co., __Wn.2d. __, _P.3d.__ (2013).


RCW 48.18.200(1)(b) prohibits insurance contracts from “depriving the courts of this state of the jurisdiction of action against the insurer.” The court found that this statue prohibits binding arbitration agreements in insurance contracts. The court also held that the statue was not preempted by the Federal Arbitration Act because of an exception in the act for state law regulating the business of insurance.

Oregon Federal District Court Addresses Insured Status and Owned Property Exclusion

Clarendon America Insurance Company v. State Farm Fire and Casualty Company,  Oregon District Court Cause No. 3:11-CV-01344-BR, Order on Cross-Motions for Summary Judgment (Dkt. No. 34), January 3, 2013 

This coverage action arises out of an underlying construction defect case.  Plaintiff Clarendon issued an insurance policy to its named insured, Curtom, who was a defendant in the construction defect case.   Curtom also tendered a defense to State Farm under an Apartment Policy issued to a different entity.  State Farm denied defense on the basis that Curtom did not qualify as an insured under the Apartment Policy (because the complaint did not allege that Curtom was  a real estate manager or partner of the named insured -- the two provisions of the Who Is An Insured Section at issue in the case).  Clarendon sued State Farm for defense costs.  On summary judgment, State Farm additionally argued that the owned property exclusion precluded coverage, whether or not Curtom qualified as an insured.

As to the “insured status” question, the district court narrowly construed the extrinsic evidence "exception" for insured status questions as laid out in Fred Shearer (237 Or App 468), and found, “[t]he court in Fred Shearer merely carved out an exception to the general rule announced in Ledford to apply only in the particular circumstances that occurred in Fred Shearer; i.e., the insurer specifically alleged it was impossible to determine Fred Shearer's status from the face of the complaint, and the court agreed. Accordingly, the court concluded a limited exception to [the 8 corners rule in] Ledford is permissible in instances when courts are attempting to determine whether an organization or individual was an insured under a policy.”  The court found that the rule in Fred Shearer, that an insurer can consider extrinsic evidence on the threshold issue of insured status, did not apply, when from the face of the Complaint and the policy, there is no question that the alleged insured does not qualify as an insured.

As to the “real estate manager” issue, the court found that because the term "real estate manager" was not defined in the policy, it must be given its plain meaning.   The court stressed,  “Although there is not any Oregon authority specifically on point, the Court notes courts in other jurisdictions have addressed this issue. For example, in Savoy v. Action Products Company the court held "a 'real estate

manager' is simply one who manages real estate for another. A manager is one who 'conducts, directs or supervises something.' He is a person who has the conduct or direction of a thing." 324 So.2d 921, 923 (La. App. 1975). Similarly, in Insurance Company of North America v. Hilton Hotels the court adopted the reasoning of Savoy and "join[ed] several other courts in finding that the term 'real estate manager' is not ambiguous. Accordingly, the Court will consider the term in its usual and ordinary meaning." 908 F. Supp. 809, 815 (D. Nev. 1995)(citations omitted).” The Court concluded, “the analysis in Savoy, Hilton Hotels, and City of Portland is helpful and, applying it here, concludes "real estate manager" has a plain meaning: One who conducts, directs or supervises another's real estate as distinct from a construction manager who conducts, directs, or supervises another's construction.”

The court thus concluded that allegations in the Complaint alleging that Curtom was the “construction manager” were insufficient to find that Curtom qualified as an insured as a real estate manager under the State Farm policy.  The court also found persuasive that the third party complaint differentiated between the terms construction manager and real estate manager.

As to the owned property exclusion, the court rejected Clarendon’s invitation to apply the exclusion as if the alleged insured was the “you,” who owned the property, rather than the named insured as the “you,” as provided by the policy definitions.  The court found that the term “you” was not ambiguous as to whether it applied to an entity that qualified as an insured, but was not a named insured (or additional insured). The court adopted the reasoning of Baumann (152 Or App 181) and rejected the reasoning in Triad (2007 WL 2713842 (D. Or. 2007)).