On Thursday, April 27, 2017, the Washington Supreme Court issued a new decision that may have a significant impact on the business of insurance in the State of Washington. The new decision, Xia v. Probuilders Specialty Ins. Co., is the first Washington appellate court decision to apply the “efficient proximate cause” rule to third-party liability insurance claims.
The facts of Xia are relatively straight-forward. The XiaPlaintiff purchased a home built by Issaquah Highlands 48, LLC. Soon after moving in, the Plaintiff began feeling ill and it was determined that an improperly installed exhaust vent had been allowing carbon monoxide into the residence. The XiaPlaintiff filed a personal injury lawsuit against Issaquah Highlands, which tendered the lawsuit to its liability insurer, ProBuilders Specialty Insurance Company.
ProBuilders denied coverage, including any defense obligation, on the basis of two exclusions – the “townhouse” exclusion and the “pollution” exclusion. The Xia Plaintiff and Issaquah Highlands entered into a consent judgment settlement in the amount of $2 million with a covenant not to execute and an assignment of Issaquah Highland’s rights against ProBuilders to the Plaintiff. The Plaintiff then brought a bad faith lawsuit against ProBuilders seeking a finding that ProBuilders acted in bad faith in denying the duty to defend.
The King County Superior Court entered summary judgment in favor of ProBuilders based on the townhouse exclusion. The Washington State Court of Appeals reversed that ruling, but found that the pollution exclusion nonetheless operated to preclude coverage. The pollution exclusion at issue specifically excludes coverage for any injury:
Caused by, resulting from, attributable to, contributed to, or aggravated by the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants, or from the presence of, or exposure to, pollution of any form whatsoever, and regardless of the cause of the pollution or pollutants.
The Washington Supreme Court accepted review and reversed the Court of Appeals, finding that the “efficient proximate cause” rule applies to the analysis of third-party liability coverage. The “EPC” rule has been applied for years in first-party property claims. The rule has never been applied to a liability claim.
The Supreme Court’s analysis begins with a discussion of its historic treatment of pollution exclusions and concluded that the loss at issue was in fact caused by a “pollutant” as that term is defined in the policy and by Washington law. However, the Supreme Court’s analysis did not stop with that conclusion.
Yet even if the court applies the exclusionary language correctly to the facts at hand, the analysis does not end. Courts must next consider, whether pursuant to established Washington law, the excluded occurrence is in fact the efficient proximate cause of the claimed loss.
Based on a review of the briefing submitted to the Supreme Court, it does not appear as though any party, nor any of theamici, argued that the efficient proximate cause rule was implicated by the subject claim. Nonetheless, the Supreme Court discussed the efficient proximate cause rule at length and ultimately concluded that the efficient proximate cause of the loss was not the pollution, but the initial negligent installation of the exhaust vent. Thus, the Court concluded that the pollution exclusion did not apply.
Like any other covered peril under a general liability policy, an act of negligence may be the efficient proximate cause of a particular loss. Having received valuable premiums for protection against harm caused by negligence, an insurer may not avoid liability merely because an excluded peril resulted from the initial covered peril.
Having concluded that the loss was not excluded, the Court further found that ProBuilder’s denial was made in bad faith because it had failed to consider the efficient proximate cause rule or the Washington Supreme Court’s prior precedent admonishing insurers against attempting to include policy language that would potentially circumvent the rule.
As a result of these finding, ProBuilders is now facing a substantial judgment that not only includes the $2 million consent judgment, but also potential additional extra-contractual damages, interest, and attorney’s fees.
The impact of the Xia decision beyond the specific context of the application of the pollution exclusion may be significant. The decision also begs the question of whether pollution exclusions are ever enforceable in this jurisdiction. After all, nearly all “property damage” or “bodily injury” caused by pollution can be traced back to some prior act of negligence. These issues will no doubt by the subject of litigation in the lower courts for years to come.
The most immediate lesson that may be gleaned from the Xiadecision, however, is the importance of defending under a reservation of rights and bringing a declaratory judgment action where coverage is questionable for a liability insurance claim. Had ProBuilders defended it could have substantially minimized its exposure while also maintaining the right to seek a judicial determination of its coverage obligations.
If you would like to discuss the Xia matter in further detail, please feel free to contact us at any time.
Although U.S. Supreme Court appearances are few and far between, Tom Lether has now been officially licensed to practice in the highest court in the land. Effective the spring of 2017, Mr. Lether has been fully licensed as a practicing attorney before the United States Supreme Court. This licensing will allow Tom to assist his national and international client base in appeals pending before the Supreme Court. In addition, Mr. Lether is licensed to practice in the Appellate Courts in a number of other State Court jurisdictions as well as in the Ninth Circuit Court of Appeals. Lether & Associates and Mr. Lether have handled a number of high profile appeals over the past 29 years in a number of jurisdictions. These appeals have established controlling case law on insurance and extra contractual legal issues.
As an aside, Mr. Lether has for a number of years been active in the United States Supreme Court Historical Society. He is only one of a few lawyers in Washington State to be part of that organization which actively promotes research and writing on historical issues involving the U.S. Supreme Court.
Congratulations to Tom on his new admission. If you have any appellate issues you would like to discuss please feel free to contact Mr. Lether or Lether & Associates.
Washington Supreme Court Addresses the Insurance Fair Conduct Act
Perez-Crisantos v. State Farm et al., Wash. Sup. Ct., No. 92267-5, (February 2, 2017), is perhaps the most favorable ruling for insurers from the Washington Supreme Court in the past several years. The Perez-Crisantos Court was asked to decide whether, in the absence of an unreasonable denial of coverage or benefits, the Insurance Fair Conduct Act (IFCA) creates an independent and private cause of action for an alleged violation of Washington’s Unfair Claims Settlement Practices Regulations. Definitively, the Court held that it does not.
In Perez-Crisantos, the insured was involved in car accident and sustained injuries. The insured was not at-fault and ultimately settled with the at-fault party’s insurance carrier for its policy limits. The insured then tendered a claim for underinsured motorist (UIM) benefits to his insurance carrier, State Farm. State Farm paid its personal injury protection (PIP) limit of $10,000 in medical benefits and $400 in lost wages, but did not pay benefits under the UIM policy, taking the position that the insured had already been made whole. Arguing that State Farm unreasonably denied benefits, the insured sued State Farm alleging violations of IFCA, the Consumer Protection Act (CPA), chapter 19.86 RCW, bad faith and negligence. This lawsuit was stayed while the UIM claim was sent to arbitration.
The arbitrator found that the insured’s damages from the accident totaled $51,000. After adjusting for settlement with the at-fault party, PIP payments, and attorneys’ fees, the insured received $24,000 of new money from State Farm. The stay in the bad faith lawsuit was then lifted. State Farm moved for summary judgment arguing that it had acted reasonably and that the parties had simply had a reasonable disagreement about the value of the claim. The insured moved for partial-summary judgment arguing that State Farm had violated WAC 284-30-330(7)’s prohibition of forcing first party claimants to litigation to recover “amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in such actions.” The Spokane County Superior Court ruled in State Farm’s favor, finding no evidence that State Farm’s actions were unreasonable, and dismissed the case with prejudice.
The insured appealed directly to the Washington Supreme Court, seeking a determination as to whether IFCA creates an independent and private cause of action for an insurer’s technical violation of the Unfair Claims Settlement Practices Regulations in the absence of an unreasonable denial of coverage or benefits.
Like many of the federal courts before it, the Washington Supreme Court struggled with the interplay of paragraphs 2, 3, and 5 of the statute, and ultimately found that the statute was ambiguous. The Court further admitted that the result of an isolated regulatory violation was not clear. [G]iven that the trier of fact must find that an insurer acted unreasonably under subsection (1), and that such a finding mandates attorneys’ fees under subsection (3) and gives the trial court discretion to award treble damages under subsection (2), it is not clear what a finding of a regulatory violation accomplishes. (emphasis added).
. . .
IFCA explicitly creates a cause of action for first party insureds who were “unreasonably denied a claim for coverage or payment of benefits.” IFCA does not state it creates a cause of action for first party insureds who were unreasonably denied a claim for coverage or payment of benefits or “whose claims were processed in violation of the insurance regulations listed in (5),” which strongly suggests that IFCA was not meant to create a cause of action for regulatory violations.” (Internal citations omitted) (emphasis added).
In finding IFCA ambiguous, the Court then analyzed IFCA’s official ballot title and determined that it was not the legislature’s intent to create a private cause of action for mere technical violations.
This language does not suggest an intent to create a private cause of action for regulatory violations. Quite the opposite: it suggests that IFCA creates a case of action for unreasonable denials of coverage and also permits treble damages in some circumstances. On balance, we conclude that the legislative history suggests that IFCA does not create a cause of action for regulatory violations. (emphasis added).
The Washington Supreme Court then advised that Washington’s current pattern jury instruction on IFCA is a misstatement of the law. The current pattern instruction concludes that IFCA creates a cause of action if an insurer “unreasonably denied a claim for coverage” or “unreasonably denied payment of benefits,” or “violated a statute or regulation governing the business of insurance claims handling.” Based on the foregoing, this instruction is clearly incorrect.
The Perez-Crisantos decision is a rare win for insurers in what has become a very difficult jurisdiction. This decision should prove extremely important as IFCA claims, and IFCA claims premised solely on technical violations of Washington’s insurance regulations, are becoming more and more prominent. To the extent that you have detailed questions about this case or how it may affect any of your pending or future claims or litigation, do not hesitate to contact our office.
Crowthers v. Travelers: The Federal Court Gets It Right Again on IFCA
The Washington State Insurance Fair Conduct Act, commonly referred to as “IFCA”, continues to cause significant concern among insurers conducting business in the State of Washington. The lack of any decisions from the Washington State Appellate Courts interpreting or applying the statute has further compounded the uncertainty relating to IFCA.
The Federal Courts, however, have continued to issue rulings on the application of IFCA in a number of scenarios. The trend of these decisions indicates that the Federal Courts are obtaining a better grasp on how IFCA is to be applied. These decisions provide better direction to all insurers and insureds in regard to these claims.
The most recent decision from the Federal Courts is Crowthers v. The Travelers Indemnity Company, United States District Court for the Western District of Washington, 2:16-cv-00606-RSL. In Crowthers, the Honorable Robert S. Lasnik again held that a technical violation of a regulatory provision under the Washington Administrative does not necessarily constitute an IFCA violation. In issuing this holding, the Court referenced the same result reached by Judge Robart in Schreib v. American Family Mut. Ins. Co., 2015 U.S. Dist. LEXIS 118189 (W.D. Wa.). As a result, it appears that the trend in at least the Western District is that an IFCA violation requires an actual unreasonable denial benefits or of coverage, and not simply a technical violation of the regulations.
Judge Lasnik then went on to address the fact that the Plaintiff in the Crowthers case had failed to establish any “actual damages” under IFCA, as well as a lack of any damage claims asserted as to the remaining extra-contractual claims asserted by Plaintiff. The Court held that a failure to establish actual damages as to these extra-contractual causes of action also warranted dismissal of the claims on a summary judgment motion. This decision again underscores the fact that in order to prosecute an IFCA claim, a party must prove actual damages or injuries. This ruling is again consistent with the ruling in Schreib.
The Crowthers case provides excellent legal precedent for insurers to utilize in defending IFCA claims. In fact, at least one court in King County, Washington (Seattle) utilized the Crowthers decision in dismissing an IFCA claim in a separate, highly contested consent judgment case arising from an underlying commercial construction defect matter.
Lether & Associates proudly represented Travelers in the Crowthers matter. If you have any questions in regard to this case, please let us know. In the meantime, a copy of this decision is attached.
On a different note, Lether & Associates is proud to add three new attorneys to the office. Congratulations to Nicole Morrow, Matt Erickson and Ben Miller. Each of our new rising stars brings a great attitude and experience to our team. This includes adjusting experience and defense experience. Our recent growth also means we have added an attorney licensed in the State of California to better service our California client base. Welcome aboard, everyone.
As most insurers and lawyers in the Northwest know, construction in the Northwest region of the United States is at a record level. What many people do not understand, however, is just how dramatic this increase is. If you are not from the Northwest, you may not realize that at this time there is more high-rise and commercial construction in the Seattle market than arguably anywhere else in the United States.
According to the attached link, there are currently 58 active projects utilizing construction cranes in the Seattle area. Most of these are high-rise developments. As set forth in the attached article, this puts Seattle at the top of all cities in the United States with ongoing construction cranes in place. This also represents a 38% increase in construction crane activity in the last year in Seattle. New York City, who has traditionally had the largest number of construction towers in operation at any given time, has only 28 cranes currently in operation. In fact, Seattle has twice as many construction cranes as any other city in the United States except Los Angeles which only has 40 operating cranes.
Obviously, this level of construction brings with it tremendous problems – traffic issues, congestion, increases in cost of living, etc. It also forecasts a potential for a significant increase in construction defect claims in the next 3 – 7 years in the Seattle market. Good news potentially for lawyers, but not so good news for insurers.
Lether & Associates is involved in a number of construction projects around the United States and particularly in the Northwest region. If you have questions in regard to the status of any construction related issues on the west coast, please contact our office.