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.”

 

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.

Washington Insurers Denied Right To Jury Trial

On October 25, 2012, the Washington Supreme Court ruled that an insurer was not entitled to have the reasonableness of “covenant judgment” determined by a jury. Bird v. Best Plumbing Group, LLC, 86109-9, 2012 WL 5269734 (Wash. Oct. 25, 2012).

  

The insured was a plumbing company that was sued for severing a sewage line on the claimant’s property. When the claimant sued for damages, the insurer defended the insured without a reservation of rights. The claimant made a $2 million policy-limits demand. The demand was rejected. The insured then settled with the claimant for $3.75 million subject to a covenant not to execute against the insured and an assignment of rights to the claimant. The trial court found the $3.75 settlement amount reasonable after a four-day hearing, in part due to a treble-damages provision in Washington’s trespass statute that was never pled.

On appeal, the insurer contended that the reasonableness hearing violated its right to jury trial under Article I, Section 21 of the Washington State Constitution because the hearing set the presumptive damages for the claimant’s soon-to-follow bad faith lawsuit against the insurer. The Court of Appeals rejected the argument, reasoning that the reasonableness hearing was an equitable proceeding with no right to trial by jury. The Court of Appeals then affirmed the trial court’s finding of reasonableness. The insurer appealed to the Washington Supreme Court.

In a six to three opinion, the Washington Supreme Court affirmed the decisions of the trial court and Court of Appeals. The Washington Supreme Court:

•   Approved the application of RCW 4.22.060 reasonableness hearings to settlements involving a covenant judgment (i.e. a settlement between an insured defendant and a plaintiff where the plaintiff agrees to seek recovery only from a specific asset—the proceeds of the defendant’s insurance policy and the rights owed by the insurer to the insured, but do not release the insured from liability);
• Held that determining the reasonableness of a covenant judgment under RCW 4.22.060 is an equitable proceeding to which no jury trial right is afforded;
• Held that the due process rights of the insurer were not violated where the insurer was afforded notice of the reasonableness hearing, allowed to intervene, and given the opportunity to participate in a lengthy and highly contested hearing on the issue of the reasonableness; and
•  Held that the trial court did not abuse its discretion in holding the $3.5 million covenant judgment was reasonable.

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.