Washington Supreme Court Rules on Duty Defend and Discovery

In a unanimous decision[1] on an issue it identified as a matter of first impression in Washington, the Washington Supreme Court held discovery that is potentially prejudicial to an insured in underlying litigation must be stayed until the underlying litigation is fully adjudicated.[2]  The Court also held that the trial court erred when it delayed ruling on a motion for summary judgment filed by the insured, Expedia, regarding its insurer’s duty to defend against numerous underlying lawsuits.[3] 

The underlying litigation involved multiple lawsuits brought against Expedia by state and local taxing authorities.  Expedia tendered most of the suits to Zurich; however, some were tendered late.  Zurich declined Expedia’s tender on several grounds, including late tender and that the underlying suits may be excluded from coverage.

In November 2010, Expedia filed suit against Zurich for declaratory judgment, insurance bad faith, and violation of Washington’s Consumer Protection Act.  Zurich responded with a counterclaim for declaratory judgment regarding its coverage obligations.  Zurich also asserted various defenses, including late tender, known loss, material misrepresentation, and mistake.  The trial court declined to make a determination of Zurich’s duty to defend Expedia and ordered Expedia to produce discovery that Expedia claimed may be prejudicial to it in the underlying actions.

When the matter reached the Washington Supreme Court, the Court rejected Zurich’s argument that under Nat’l Sur. Corp. v. Immunex Corp.,[4] it was entitled to discovery related to its late tender defense, which requires an insurer to prove that it was “actually and substantially prejudiced” by a late tender.[5]  In so holding, the Court stated the following regarding its holding in Immunex:

At most, Immunex indicates that the actual prejudice question is relevant only to the late tender defense and that actual prejudice caused by late tender may relieve the insurer of the duty to pay the cost of defense incurred after the insurer obtains a judicial declaration that it owes no duty to defend. 

The Court held the trial court should have adjudicated the duty to defend issue first.  Then, Zurich could attempt to prove its defenses, including prejudice from late tender.  “In the meantime, however, Zurich should have been required to defend Expedia if the court found that the duty to defend had been triggered.”  The Court also held:

Unless actual prejudice can be established by the insurer as a matter of law, an insurer’s allegations of prejudice cannot preclude a determination that the underlying claim is conceivably covered.

The Court then addressed Zurich’s argument based upon Overton v. Consolidated Insurance Co.,[6] that it should be permitted to discover and present extrinsic evidence to negate its duty to defend.  The Court held that to the extent Overton supported Zurich’s argument “the opinion predates and conflicts with the extrinsic evidence rule as clarified in Truck Insurance Exchange and its progeny.”[7] 

Citing a California Court of Appeal decision, Haskel, Inc. v. Superior Court,[8] the Washington Supreme Court held “an adjudication of the duty to defend cannot be delayed by discovery.”  Therefore, the trial court erred by delaying adjudication of Expedia’s summary judgment motion concerning the duty to defend until Expedia complied with potentially prejudicial discovery.

The Court remanded the case to the trial court to determine Zurich’s duty to defend Expedia in each of the underlying cases subject to Expedia’s motion.  The Court also ordered the trial court “to stay discovery in the coverage action until it can make a factual determination as to which parts of discovery in the coverage action are potentially prejudicial to Expedia in the underlying litigation.”  Finally, the Court instructed that “[a]ll discovery logically related to the underlying claims should be stayed until such claims are fully adjudicated.”

 

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

Disclaimer: 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.

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[1] Expedia, Inc. v. Steadfast Ins. Co., No. 88673-3 (July 3, 2014). 

[2] The Court’s ruling is understandable, and it is curious why the Court even deemed this a matter of first impression in view of its prior ruling in Mut. Of Enumclaw v. Paulsen Construc., 161 Wn.2d 903, 918 (2007) that “[w]hile defending under a reservation of rights, an insurer acts in bad faith if it pursues a declaratory judgment that it has no duty to defend and that ‘action might prejudice the insured’s tort defense.’”  The only distinction between Paulsen and the current case is that the insurer in Paulsen was defending while Zurich had denied a defense. 

[3] The opinion refers to the petitioner insureds collectively as Expedia and refers to respondent insurers collectively as Zurich. 

[4] 176 Wn.2d 872, 297 P.3d 688 (2013) 

[5] Immunex Corp., 176 Wn.2d  at 890. 

[6] 145 Wn.2d 417, 38 P.3d 322 (2002). 

[7] Truck Ins. Exch. v. Vanport Homes, Inc., 147 Wn.2d 751, 58 P.3d 276 (2002) (the duty to defend must be determined from the “eight corners” of the insurance contract and the underlying complaint; the two exceptions to this rule may be used only to trigger the duty to defend, not to foreclose it). 

[8] 33 Cal. App. 4th 963,  39 Cal. Rptr. 2d 520 (1995).

No Duty to Defend an Insured’s Remediation of Contaminated Property Where the Insured Did Not Face the Functional Equivalent of a Suit

On June 2, 2013, the Washington Court of Appeals held that there is no duty to defend an insured’s remediation of contaminated property when the insured does not face the “functional equivalent” of a lawsuit.  In Gull Industries, Inc. v. State Farm Fire and Casualty Company, et al, No. 69569-0-1 (Wash. App. 2014), the insured, Gull Industries (“Gull”), notified Washington State Department of Ecology (“DOE”) that there had been a release of petroleum product at its gas station.  DOE sent Gull a letter acknowledging Gull’s notice of the suspected contamination.  Gull tendered defense and indemnity of the cleanup to its insurers, including State Farm and Transamerica Insurance Group (“TIG”), both of whom denied the tender.  Gull sued various insurers, including State Farm and TIG.  The policies in question provided a duty to defend for “any suit.”  Gull contended that the insurers had a duty defend because it faced strict liability under the Model Toxics Control Act (“MTCA”, chapter 70.105D RCW, thus satisfying the “any suit” requirement of the policies.  The Court of Appeals rejected Gull’s argument.  Instead, the court held that the duty to defend may incept where the insured faces the functional equivalent of a suit, following Ryan v. Royal Ins. Co. of Am., 916 F.2d 731, 741 (1st Cir. 1990).  The court concluded that Gull failed to make this showing:

We conclude that the undefined term “suit” is ambiguous in the environmental liability context and may include administrative enforcement acts that are the functional equivalent of a suit….

We do not agree with Gull’s contention that liability under the MTCA alone, without any direct enforcement action by DOE, is the functional equivalent of a suit for the purposes of the duty to defend.  Instead, we adopt the analysis outlined in Ryan and hold that an agency action must be adversarial or coercive in nature in order to qualify as the functional equivalent of a “suit.”

Here, the only communication Gull received was a letter from DOE acknowledging receipt of Gull’s notice that the property was contaminated and that it intended to pursue an independent voluntary cleanup.  DOE gave notice to Gull that Gull’s report reveals the soil and groundwater are above the MTCA “Method A Cleanup levels” and that DOE placed the property on the leaking underground storage tank list with an “Awaiting Cleanup” status.  The letter also advised Gull to “be aware that there are requirements in state law which must be adhered to” but did not advise of any consequences that might attach to the failure to adhere to those requirements.  The letter expressly indicated DOE has not determined that Gull is a PLP and does not imply that DOE “has formally reviewed and approved of the remedial action” planned by Gull….  The letter did not present an express or implied threat of immediate and severe consequences by reason of the contamination.  Therefore, consistent with Ryan, Gull has not met its burden on summary judgment to establish there is the functional equivalent of a “suit” here, triggering the duty to defend.

Slip op. at 13-14 (footnotes omitted).

Link to Court of Appeals Decision;

Reasonable Stipulated Settlement Sets the Floor, Not the Ceiling, for Bad Faith Damages

On Monday, the Washington State Court of Appeals held that a stipulated covenant judgment settlement that is found “reasonable” by the court “sets a floor, not a ceiling, on the damages a jury may award” in an assigned bad faith case.  So in Miller v. Safeco Ins. Co. et. al, a $4.15 million stipulated judgment became a $13 million bad faith verdict, to which the court added $7 million in prejudgment interest, approximately $1.6 million in attorneys’ fees plus an additional appellate fee award, and remanded for a proper calculation of court costs and post-judgment interest. 

 

The underlying case involved an auto accident in which three passengers of the at-fault driver who rear-ended a truck were claiming bodily injuries.  The auto was insured by Safeco, under a $500,000 liability policy and a $1 million umbrella policy.  Safeco defended without reservation, and eventually offered its policy limits.  Safeco’s alleged bad faith was primarily related to its failure to advise a claimant pre-suit of its policy limits (Safeco claimed the insured did not consent to disclosure, but this was disputed), a dispute over the underinsured motorist limit in the policy, and Safeco’s failure to offer its umbrella policy limits fast enough.  Safeco first offered its $500,000 liability limits, and then a few months later in the litigation offered the additional $1,000,000 umbrella policy limits.  But the claimants were not willing to settle all three claims for policy limits when offered.  Instead, the parties stipulated to covenant judgments totaling $4.15 million (on top of the $1.5 million that Safeco contributed and $300,000 that another carrier contributed to the settlement). 

 

Safeco did not challenge the reasonableness of the stipulated judgment amounts.  Rather, Safeco denied it had acted in bad faith, and argued that if found to have acted in bad faith, then damages were set at $4.15 million.  The primary dispute on appeal was whether Washington case law saying a reasonable stipulated judgment amount sets the “presumptive measure of damages” in the subsequent bad faith case means the $4.15 million stipulated judgment was a damage floor or ceiling.  The appellate court ruled it was a floor, upholding the following instruction to the jury:

 

 

If you find for the plaintiff on Patrick Kenny's claim for failure to act in good faith your verdict must include the following undisputed items:

 

The net amount of the Stipulated Order Re: Reasonableness of Settlements for $4,150,000. 

In addition, you should consider the following past and future elements of damages: 

1.              Lost or diminished assets or property, including value of money;

2.                 Lost control of the case or settlement;

3.               Reasonable value of expert or other costs or reasonable attorney fees  incurred for the private counsel retained by Patrick Kenny;

4.                 Damage to credit or credit worthiness;

5.               Effects on driving or business insurance or insurability;

6.                 Emotional distress or anxiety.

The burden of proving Patrick Kenny did not suffer damages rests upon Safeco. It is for you to determine, based upon the evidence, whether any particular element has been proved by a preponderance of the evidence. 

 

The jury awarded $13 million in damages.  Because the stipulated settlement agreement called for a 12% interest rate, the court added $7 million in prejudgment interest, but held that post-judgment interest should be calculated at the much lower statutory tort rate.  In calculating the $1.6 million attorney fee award, the court permitted plaintiff attorneys to reconstruct their billable hours for the several years the case was in litigation (3,229.8 hours) since plaintiff’s counsel had not kept contemporaneous time records, and held that a $400-450/hr. attorney fee with a 1.5% multiplier was reasonable. 

 

Soha & Lang, P.S.  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.

Disclaimer: 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.

Not So Fast: Insurer Has No Duty to Defend Road Rage Claims

On January 28, 2014, the Washington Court of Appeals ruled that USAA did not act in bad faith when it declined to defend its insured, Dennis Geyer, under his homeowners and auto insurance policies for claims arising out of an assault at traffic light.  United States Auto. Assoc. v. Speed, No 43728-7-II.

In March 2009, Geyer assaulted Robert Speed at a traffic signal.  Apparently, Geyer was angry over something Speed had done while driving in front of him.  In an August 2009 letter, Speed’s attorney demanded Geyer pay $650,000 to compensate Speed for his injuries.  The letter alleged that Geyer followed Speed, pulled him out of his vehicle at a stop light, beat him, and then drove away leaving Speed bleeding and unconscious in the street.  The demand letter stated that if this were a negligence case that was covered by insurance, Speed’s attorneys would have sought seven-figures.   

Geyer tendered under his USAA homeowners and auto insurance policies.  Unlike most standard policies, the USAA policies provided that USAA’s duty to defend arose not only when a “suit” was brought against the insured, but also when any “claim” was made for damages arising from acts covered under the policies.  After investigating the claim, USAA reserved rights as to whether the incident involved an “occurrence” under Geyer’s homeowner’s policy, an accident under his auto policy, and whether the claims fell within the policies’ intentional acts exclusions.  USAA continued to monitor the claim, but did not retain counsel to defend Geyer. 

Geyer and Speed later stipulated to a $1.4 million covenant judgment, which included an assignment to Speed of Geyer’s potential contractual and bad faith claims against USAA.  USAA then filed a complaint for declaratory relief against Speed.   USAA moved for summary judgment asking the trial court to declare as a matter of law that (1) there was no coverage under either policy, (2) USAA had no duty to defend Geyer, (3) USAA’s failure to defend was not in bad faith, and (4) USAA was not estopped from denying coverage.  The trial court granted USAA’s motion and a second (unopposed) motion to dismiss Speed’s statutory and regulatory bad faith claims.   Speed appealed.

In affirming the trial court’s finding that USAA had no duty to defend as a matter of law, the Speed Court explained that unlike cases where standard policy language regarding the duty to defend is determined by allegations in the complaint, non-standard language of the USAA policies, discussed above, required that the duty to defend depend upon the allegations in the demand letter.  Then, noting that Washington courts have repeatedly held that an insured’s deliberate conduct does not constitute an accident, the Speed Court held that “[e]ven interpreting the allegations liberally and resolving doubts in favor of a duty to defend,”  the USAA  policies did not conceivably cover the claims alleged in Speed’s demand letter. 

In reaching its holding, the Court of Appeals rejected Speed’s argument that USAA was obligated to defend because USAA expressed uncertainty regarding coverage.  (For example, USAA had advised Geyer that coverage was “questionable" and that “[ c]overage may be precluded.”)  The Speed Court held: “What the insurer believes about the duty to defend or policy coverage is immaterial to the court’s duty to defend determination.”  Further, “to allow an insurer’s conduct to give rise to the duty to defend would conflict with the rule that insurance coverage cannot be created by equitable estoppel.”