Defense Cost Recovery: The Federal Court Changes the Landscape in Washington

In 2013, the Washington State Supreme Court handed down the decision in National Surety Corp. v. Immunex that expanded defense cost exposure in Washington for liability insurers. Specifically, the Immunex court found that Washington liability insurers were not entitled to recovery of defense costs and fees which were incurred and paid for by a liability insurer even though there was no coverage for the loss. The court expressly found that even if the insurer reserved its rights as to reimbursement, there still is no right to recovery unless the liability policy expressly allowed for the recovery. National Surety Corp. v. Immunex, 176 Wn.2d 872, 888-889, 297 P.3d 688 (2013).

The Immunex decision caused significant concerns for liability insurers. It also provided a green light for insureds to tender claims where there was clearly no coverage with the expectation that the liability insurer would pay for the defense, (given Washington’s harsh penalties for denying a defense obligation), without any downside risk. Liability insurers, on the other hand, were forced to defend claims which were clearly not covered without any right to seek reimbursement even if it turned out that the claim was not covered. As a result, many insurers made it a practice to file declaratory judgment actions to have their defense obligations decided early on before the defense fees turned out to be more than the indemnity arguably owed under the policy. That option worked well, except of course when the insured files a motion for stay. If the stay is granted, the insurer could be stuck paying hundreds of thousands of dollars, if not more, in defense costs or be forced to try to settle out early and pay an uncovered claim in order to avoid the fees.

On April 17, 2019, the Honorable U.S. Federal Judge James Robart issued a decision in the case of Mass. Bay Ins. Co. v. Walflor Indus. There are several interesting components in regard to Judge Robart’s decision. First, the court addressed coverage under the Advertising Injury portion of a liability policy in a claim involving, in essence, a trademark/trade dress business dispute. These types of intellectual property claims have become more and more frequent in the highly competitive and sophisticated business environment of the Northwest. These claims are routinely tendered to liability insurers by insureds who look for coverage under the Coverage B section of the policy involving Advertising Injury. In states such as Washington, where the rules in regard to defense obligations are broad and the penalties are high, liability insurers have often picked up the defense of these claims.

Based upon the specific allegations and facts of the Massachusetts Bay case, the court found that there was no coverage under the policy in regard to defense or indemnity.

That is when the decision got very interesting. Massachusetts Bay Insurance Company had added an endorsement to their Washington insurance policies allowing for defense cost reimbursement. This Washington endorsement has been adopted by a number of insurers in a direct response to the Immunex decision. In Cross Motions for Summary Judgment, the policyholder requested that Judge Robart certify this specific question to the Washington Supreme Court. Judge Robart, who is never shy about making a tough decision, refused to certify the question. Rather, in a very clear and well written opinion, he addressed the issue of whether the policy language was void as against public policy or enforceable. Judge Robart found the language was not void and enforced the language as written. The court granted the insurer’s motion and held that the insurer was entitled to reimbursement of defense costs. A link to a copy of the decision is below.

Judge Robart’s decision was based primarily on the fact that the Immunex court clearly stated that the only reason it did not allow for reimbursement is because the policy in that case did not provide for such reimbursement. Since the policy in this Massachusetts Bay claim provided clear and unambiguous language allowing for reimbursement, the court enforced the policy language. What is unclear in the decision is whether the issue of ambiguity was ever clearly argued to the court. For example, it does not appear that there was any discussion in regard to whether costs and defense fees are in essence the same thing under Washington law in regard to this endorsement. What is clear, however, is that the court will allow insurers to potentially enforce their right to seek recovery of defense fees and costs. The decision also seems to suggest that there may have been a different result had the insurer not reserved its rights as to this issue.

From a practical standpoint, it is clear that insurers who do not have this Washington specific endorsement will in all likelihood consider adding this endorsement to their policies. Also, insurers who do have the language will need to be careful in reserving their rights as to this issue. They also should consider filing early declaratory judgment actions and have the courts review whether or not the insurer is entitled to reimbursement based upon their policy language and the Massachusetts Bay case. At this point, it is unclear whether the decision will be appealed to the Ninth Circuit. Regardless, this decision may have a chilling effect on insureds who are seeking coverage for defense where they know there is a potential that they may have to pay the money back.

Lether & Associates has addressed the Washington endorsement in a number of separate legal opinions provided to its clients. If you would like to discuss this endorsement with our office, please let us know.

Mass. Bay Ins. Co. v. Walflor Indus.

In 2013, the Washington State Supreme Court handed down the decision in National Surety Corp. v. Immunex that expanded defense cost exposure in Washington for liability insurers. Specifically, the Immunex court found that Washington liability insurers were not entitled to recovery of defense costs and fees which were incurred and paid for by a liability insurer even though there was no coverage for the loss. The court expressly found that even if the insurer reserved its rights as to reimbursement, there still is no right to recovery unless the liability policy expressly allowed for the recovery. National Surety Corp. v. Immunex, 176 Wn.2d 872, 888-889, 297 P.3d 688 (2013).

The Immunex decision caused significant concerns for liability insurers. It also provided a green light for insureds to tender claims where there was clearly no coverage with the expectation that the liability insurer would pay for the defense, (given Washington’s harsh penalties for denying a defense obligation), without any downside risk. Liability insurers, on the other hand, were forced to defend claims which were clearly not covered without any right to seek reimbursement even if it turned out that the claim was not covered. As a result, many insurers made it a practice to file declaratory judgment actions to have their defense obligations decided early on before the defense fees turned out to be more than the indemnity arguably owed under the policy. That option worked well, except of course when the insured files a motion for stay. If the stay is granted, the insurer could be stuck paying hundreds of thousands of dollars, if not more, in defense costs or be forced to try to settle out early and pay an uncovered claim in order to avoid the fees.

On April 17, 2019, the Honorable U.S. Federal Judge James Robart issued a decision in the case of Mass. Bay Ins. Co. v. Walflor Indus. There are several interesting components in regard to Judge Robart’s decision. First, the court addressed coverage under the Advertising Injury portion of a liability policy in a claim involving, in essence, a trademark/trade dress business dispute. These types of intellectual property claims have become more and more frequent in the highly competitive and sophisticated business environment of the Northwest. These claims are routinely tendered to liability insurers by insureds who look for coverage under the Coverage B section of the policy involving Advertising Injury. In states such as Washington, where the rules in regard to defense obligations are broad and the penalties are high, liability insurers have often picked up the defense of these claims.

Based upon the specific allegations and facts of the Massachusetts Bay case, the court found that there was no coverage under the policy in regard to defense or indemnity.

That is when the decision got very interesting. Massachusetts Bay Insurance Company had added an endorsement to their Washington insurance policies allowing for defense cost reimbursement. This Washington endorsement has been adopted by a number of insurers in a direct response to the Immunex decision. In Cross Motions for Summary Judgment, the policyholder requested that Judge Robart certify this specific question to the Washington Supreme Court. Judge Robart, who is never shy about making a tough decision, refused to certify the question. Rather, in a very clear and well written opinion, he addressed the issue of whether the policy language was void as against public policy or enforceable. Judge Robart found the language was not void and enforced the language as written. The court granted the insurer’s motion and held that the insurer was entitled to reimbursement of defense costs. A link to a copy of the decision is below.

Judge Robart’s decision was based primarily on the fact that the Immunex court clearly stated that the only reason it did not allow for reimbursement is because the policy in that case did not provide for such reimbursement. Since the policy in this Massachusetts Bay claim provided clear and unambiguous language allowing for reimbursement, the court enforced the policy language. What is unclear in the decision is whether the issue of ambiguity was ever clearly argued to the court. For example, it does not appear that there was any discussion in regard to whether costs and defense fees are in essence the same thing under Washington law in regard to this endorsement. What is clear, however, is that the court will allow insurers to potentially enforce their right to seek recovery of defense fees and costs. The decision also seems to suggest that there may have been a different result had the insurer not reserved its rights as to this issue.

From a practical standpoint, it is clear that insurers who do not have this Washington specific endorsement will in all likelihood consider adding this endorsement to their policies. Also, insurers who do have the language will need to be careful in reserving their rights as to this issue. They also should consider filing early declaratory judgment actions and have the courts review whether or not the insurer is entitled to reimbursement based upon their policy language and the Massachusetts Bay case. At this point, it is unclear whether the decision will be appealed to the Ninth Circuit. Regardless, this decision may have a chilling effect on insureds who are seeking coverage for defense where they know there is a potential that they may have to pay the money back.

Lether & Associates has addressed the Washington endorsement in a number of separate legal opinions provided to its clients. If you would like to discuss this endorsement with our office, please let us know.

Mass. Bay Ins. Co. v. Walflor Indus.

In 2013, the Washington State Supreme Court handed down the decision in National Surety Corp. v. Immunex that expanded defense cost exposure in Washington for liability insurers. Specifically, the Immunex court found that Washington liability insurers were not entitled to recovery of defense costs and fees which were incurred and paid for by a liability insurer even though there was no coverage for the loss. The court expressly found that even if the insurer reserved its rights as to reimbursement, there still is no right to recovery unless the liability policy expressly allowed for the recovery. National Surety Corp. v. Immunex, 176 Wn.2d 872, 888-889, 297 P.3d 688 (2013).

The Immunex decision caused significant concerns for liability insurers. It also provided a green light for insureds to tender claims where there was clearly no coverage with the expectation that the liability insurer would pay for the defense, (given Washington’s harsh penalties for denying a defense obligation), without any downside risk. Liability insurers, on the other hand, were forced to defend claims which were clearly not covered without any right to seek reimbursement even if it turned out that the claim was not covered. As a result, many insurers made it a practice to file declaratory judgment actions to have their defense obligations decided early on before the defense fees turned out to be more than the indemnity arguably owed under the policy. That option worked well, except of course when the insured files a motion for stay. If the stay is granted, the insurer could be stuck paying hundreds of thousands of dollars, if not more, in defense costs or be forced to try to settle out early and pay an uncovered claim in order to avoid the fees.

On April 17, 2019, the Honorable U.S. Federal Judge James Robart issued a decision in the case of Mass. Bay Ins. Co. v. Walflor Indus. There are several interesting components in regard to Judge Robart’s decision. First, the court addressed coverage under the Advertising Injury portion of a liability policy in a claim involving, in essence, a trademark/trade dress business dispute. These types of intellectual property claims have become more and more frequent in the highly competitive and sophisticated business environment of the Northwest. These claims are routinely tendered to liability insurers by insureds who look for coverage under the Coverage B section of the policy involving Advertising Injury. In states such as Washington, where the rules in regard to defense obligations are broad and the penalties are high, liability insurers have often picked up the defense of these claims.

Based upon the specific allegations and facts of the Massachusetts Bay case, the court found that there was no coverage under the policy in regard to defense or indemnity.

That is when the decision got very interesting. Massachusetts Bay Insurance Company had added an endorsement to their Washington insurance policies allowing for defense cost reimbursement. This Washington endorsement has been adopted by a number of insurers in a direct response to the Immunex decision. In Cross Motions for Summary Judgment, the policyholder requested that Judge Robart certify this specific question to the Washington Supreme Court. Judge Robart, who is never shy about making a tough decision, refused to certify the question. Rather, in a very clear and well written opinion, he addressed the issue of whether the policy language was void as against public policy or enforceable. Judge Robart found the language was not void and enforced the language as written. The court granted the insurer’s motion and held that the insurer was entitled to reimbursement of defense costs. A link to a copy of the decision is below.

Judge Robart’s decision was based primarily on the fact that the Immunex court clearly stated that the only reason it did not allow for reimbursement is because the policy in that case did not provide for such reimbursement. Since the policy in this Massachusetts Bay claim provided clear and unambiguous language allowing for reimbursement, the court enforced the policy language. What is unclear in the decision is whether the issue of ambiguity was ever clearly argued to the court. For example, it does not appear that there was any discussion in regard to whether costs and defense fees are in essence the same thing under Washington law in regard to this endorsement. What is clear, however, is that the court will allow insurers to potentially enforce their right to seek recovery of defense fees and costs. The decision also seems to suggest that there may have been a different result had the insurer not reserved its rights as to this issue.

From a practical standpoint, it is clear that insurers who do not have this Washington specific endorsement will in all likelihood consider adding this endorsement to their policies. Also, insurers who do have the language will need to be careful in reserving their rights as to this issue. They also should consider filing early declaratory judgment actions and have the courts review whether or not the insurer is entitled to reimbursement based upon their policy language and the Massachusetts Bay case. At this point, it is unclear whether the decision will be appealed to the Ninth Circuit. Regardless, this decision may have a chilling effect on insureds who are seeking coverage for defense where they know there is a potential that they may have to pay the money back.

Lether & Associates has addressed the Washington endorsement in a number of separate legal opinions provided to its clients. If you would like to discuss this endorsement with our office, please let us know.

Mass. Bay Ins. Co. v. Walflor Indus.

Case Law Update – Washington

Several of our recent updates have involved the Washington State Supreme Court’s ruling in Zhaoyun Xia v. ProBuilders Specialty Ins. Co. RRG, 188 Wn.2d 171, 393 P.3d 748 (2017). In Xia, the Supreme Court held that a pollution exclusion did not bar coverage for injuries due to carbon monoxide emissions because the efficient proximate cause of the loss was an underlying act of negligence. The Xiadecision was the first Washington appellate decision applying the efficient proximate cause rule to a third party liability claim. Our updates relating to the Xia decision have expressed concern as to how lower Courts might apply that decision in future matters.

A new decision issued out of the Eastern District of Washington, The Dolsen Companies, et al. v. Bedivere Ins. Co., et al., 1:16-cv-03141 (E.D. Wash. Sept. 11, 2017), sheds light on how Courts may handle the Xia ruling and efficient proximate cause issues going forward.

In Dolsen, several insureds (“The Dolsen Companies”) operated a farming operation that produced large amounts of manure as byproduct. The Dolsen Companies stored the manure in holding ponds and spread it on crops as fertilizer. The holding ponds leaked and caused seepage into the groundwater. In addition, The Dolsen Companies applied far too much manure on their land, which also resulted in seepage.

The Dolsen Companies were sued for the resulting groundwater contamination, and tendered a claim to their insurance carriers (collectively, the “Insurance Carriers”). The Insurance Carriers denied coverage based on their policies’ absolute pollution exclusion, and The Dolsen Companies sued the Insurance Carriers for breach of contract.

On summary judgment, the District Court held that the absolute pollution exclusion barred coverage, and that the Insurance Carriers’ denials were proper.  The Court found that the absolute pollution exclusion applied because the seepage of manure into groundwater was a contaminate that met the policies’ definition of “pollution.” Moreover, the manure was “acting as a pollutant” because its contaminating attributes directly polluted the groundwater.

More interesting was the Dolsen Court’s treatment of the efficient proximate cause rule. The Court addressed the rule by applying the following analytical framework:

The distinguishing feature … is the relation between the initial act and the pollutant causing harm—viz., whether the initial peril was the polluting act (i.e., whether the incident involved pollutants in the first place) or whether the initial peril was some other act that incidentally led to a polluting harm. Although subtle, this framework is workable and leads to a clear result in this case: the initial act was intimately tied to the pollutant and thus the initial peril was the polluting act.

Applying this framework, the Dolsen Court found that the absolute pollution exclusion applied because “the initial act giving rise to the peril was an excluded harm and there is no other covered occurrence that otherwise led to the harm.” Specifically, with respect to the excess manure that was applied as fertilizer, only one relevant event led to the contamination; namely, the dispersal of manure directly onto the land. This dispersal was the polluting event and was the sole cause of the harm. Therefore, the pollution exclusion applied.

With respect to the seepage from the holding pond, the Court reasoned that the inadequate storage of the manure directly caused the seepage. The inadequate storage of manure was a polluting event and was the efficient proximate cause of the harm. There was also no other negligent act which preceded this polluting event. In contrast, in Xia the negligent installation of the water heater had preceded the polluting event of carbon monoxide emissions.

The Dolsen case presents an interesting example of how the Courts may handle the Xia decision and apply the efficient proximate cause rule going forward. It will interesting to see if other Courts adopt the analysis set forth in Dolsen when addressing the efficient proximate cause rule in the context of liability insurance coverage analysis.

For additional information regarding this or other insurance coverage issues, please feel free to contact the attorneys at Lether & Associates, PLLC.

Oregon Supreme Court Expands Availability of Attorney Fee Awards under ORS 742.061

For years, Oregon’s primary legislative device for compelling prompt settlement of insurance claims has been the availability of an attorney fee award for insureds who recover more than the amount tendered by an insurer within six months of the proof of loss in a lawsuit seeking coverage under ORS 742.061. Prior to the decision in Long v. Farmers Ins. Co. of Oregon, 360 Or 791 (2017), most believed that an insured had to actually obtain a judgment awarding monetary damages in the suit seeking coverage to be entitled attorney fees.  However, in Long, the Oregon Supreme Court identified a new way that an insured can obtain an attorney fee award under ORS 742.061, which can apply even if the insured does not prevail in the suit seeking additional coverage.

In Long, the insured submitted a claim under a homeowner’s policy due to a water leak. Farmers promptly paid about $3,000 to the insured for the actual cash value of the claim. Shortly thereafter, the insured submitted estimates indicating that his ACV claim was worth more than $3,000.  However, no further payments were made at that time.

About two years later, the insured filed suit against Farmers seeking additional ACV coverage. Farmers subsequently issued two voluntary ACV claim payments following a court-ordered appraisal. On the eve of trial, the insured submitted a proof of loss for his replacement cost claims. Farmers adjusted and paid the RCV claim three days later.

The verdict rendered by the court after trial found that the insured was owed less for his claim than what he received from Farmers before the suit was filed. Accordingly, judgment in favor of Farmers was entered. Nevertheless, the insured filed a petition seeking an award of attorney fees under ORS 742.061. In that petition, the insured argued that he was entitled to an attorney fee award because he “recovered” more than was timely tendered by Farmers based on the voluntary payments issued after the suit was filed. The trial court denied the insured’s petition because it believed that the insured had to obtain a judgment awarding monetary damages to be entitled to attorney fees under ORS 742.061.

On review, the Oregon Supreme Court decided that the “recovery” which must exceed the amount of any timely tenders made by an insurer does not need to be based on a judgment entered in favor of the insured. Accordingly, the Court held that voluntary payments given during litigation can qualify as a “recovery” which triggers entitlement to an attorney fee award under ORS 742.061.

In this case, the Court held that the insured was entitled to an attorney fee award for the work performed by his attorneys up until the time he received the additional ACV claim payments. However, the Court also ruled that the insured was not entitled to any further attorney fees because Farmers paid the RCV claim just days after that claim was submitted and the insured did not recover any more at trial than was timely tendered by Farmers.

The Long case reiterates the importance of determining and paying the full value of a claim within six months of the claim submission because it establishes that subsequent claim payments made during litigation will result in at least some attorney fee exposure. See also Jones v. Nava, 264 Or App 235, 240-241 (2014) (confirming that tenders must be made within six months of proof of loss to avoid attorney fee exposure, even if untimely tender exceeding ultimate recovery is given prior to filing of action). However, the decision is not completely adverse to insurers because it also confirms that the requirements for an attorney fee award must be separately met for each claim submitted, even if claims arise from the same loss.

If you have any questions about this case or how it may affect any of your pending or future claims, do not hesitate to contact our office.

New Oregon Decision Will Affect Insurers in Many Ways

The Court of Appeals of the State of Oregon issued a decision on May 10, 2017 in the matter titled Hunters Ridge Condominium Assoc. v. Sherwood Cross, LLC, et al. that could potentially impact future Construction Defect cases in Oregon.

The Hunters Ridge appeal arose out of construction defect lawsuit.  The Plaintiff Condo Association filed suit against the developer and general contractor.  The general contractor then filed third-party claims against several subcontractors.

One subcontractor, Walter George Construction (“WGC”), was insured by American Family (“AmFam”).  WGC tendered the claim to AmFam, who denied coverage based upon a Multi-Unit New Residential Construction Exclusion. Thereafter, WGC failed to appear or answer the Complaint.

Default Judgments were entered against WGC by the developer and general contractor, which included damages, attorneys’ fees, and costs.  The remaining parties settled.  The developer and general contractor, as part of their settlements, assigned claims against WGC to the Plaintiff Condo Association.

A Garnishment Proceeding followed, during which the Condo Association sought to obtain the proceeds of the applicable AmFam policy. Several Motions for Summary Judgment were filed.  Those orders formed the basis of the appeal.

The Trial Court had granted AmFam’s Motion for Summary Judgment on the application of the Multi-Unit New Residential Construction Exclusion.  On appeal, the Condo Association argued the exclusion was ambiguous and therefore could not be construed in favor of coverage.

The subject condo was mixed use – each of the three buildings had dedicated commercial space on the ground floor with residential units above them.  The exclusion defined “multi-unit residential building” as “a condominium, townhouse, apartment or similar structure, each of which was greater than eight units built or used for the purpose of residential occupancy.”

AmFam argued that the condos, which contained more than eight residential units, were subject to the exclusion.  On appeal, the Condo Association argued the exclusion was unenforceable for ambiguity.  It claimed the exclusion could be read to either include or exclude multi-purpose buildings. The Court of Appeals agreed. Specifically, the Court determined the term “residential building” could be interpreted as either a multi-use building, or one that is purely residential.  In light of the ambiguity, the Court reversed the Trial Court’s grant of summary judgment on that issue.

The Court of Appeals also reviewed the Trial Court’s denial of AmFam’s Motion which argued there was no coverage for attorneys’ fees and costs awarded in the underlying judgments.

The awards of fees were based upon the contractual indemnity provisions in the subcontracts, which obligated WGC to indemnify both developer and general contractor.  The Trial Court held that the term “costs taxed against the insured” was ambiguous with respect to whether it included attorneys’ fees.  AmFam appealed.

The Court of Appeals reviewed the fees in two ways.  First, whether the fees were part of the “obligation to pay damages because of ‘property damage’ which the insurance applie[d].”  Second, whether the fees constitute “costs” under the “Supplementary Payments” provision.

The Court determined that attorneys’ fees and costs can potentially constitute covered damages.  The Court recognized that, under Oregon common law, when attorneys’ fees are claimed as consequential damages as a result of tortious or wrongful conduct by a defendant which causes a plaintiff to litigate with a third party, the standard American Rule does not apply.

The Court found that since the claims against the developer and general contractor arose in part from the WGC’s defective work, the insured was therefore liable for some portion of the fees incurred in defending those claims by the Condo Association. The Court concluded that such fees could qualify as consequential damages recoverable against the insured, even in the absence of a contractual indemnity provision.  As consequential damages, the Court reasons, they could be considered “damages because of property damage” within the meaning of the policy.

The Court notes, however, that fees incurred by the developer and general contractor in litigating claims directly against the insured would not qualify as such “damages.” Such fees are not subject to the third-party litigation rule set forth above.

The Court did, however, determine that the fees incurred by the developer and general contractor in pursuing the insured directly may qualify as “costs” under the “Supplementary Payments” provision.  The Court reasoned that since “costs” was not defined, it was required to interpret that term with the use of dictionary definitions.  The Court found that the common definitions of the term “costs” could be construed to either include or exclude attorneys’ fees.  Therefore, the Court held that the term was ambiguous, and ruled in favor of coverage. As a result, the term “costs” was construed to include attorneys’ fees, as well as expert expends, and the Trial Court’s denial of AFM’s Motion for Summary Judgment was upheld.

In addition the issues discussed above, the Court of Appeals reviewed the constitutionality of denying an insurer the right to a jury trial in the context of a Garnishment Proceeding. ORS 18.782 provides that, in a contested garnishment hearing at which the garnishee’s liability is determined, “[t]he proceedings against a garnishee shall be tried by the court as upon the trial of an issue of law between a plaintiff and defendant.” AmFam contended that this statute violated its constitutional right to a jury trial, pursuant to Article 1, Section 17 of the Oregon Constitution.

The Court agreed, and held that the insurer must be given the right to a jury trial as part of a full opportunity to litigate any coverage issues. As a result, the Court found that ORS 18.782 is unconstitutional to the extent it compels parties to a garnishment action to litigate coverage issues to the Court without the ability to elect a jury trial.

This decision obviously impacts several areas of law concerning insurance in the State of Oregon.  If you have any questions or concerns about how this decision may impact any pending or future claims, please feel free to contact our office at any time.

Washington Caselaw Update

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.  

About Lether & Associates

Lether & Associates, PLLC is a boutique insurance law firm located on the shores of Lake Union in Seattle, Washington. Our focus is on complex insurance coverage matters in a number of jurisdictions across the United States and internationally. Our attorneys are licensed in Washington State, Idaho, Oregon, Alaska, Ohio, the Federal Courts in all of those jurisdictions, the 9th Circuit Court of Appeals, and the Federal Court for Colorado. The firm also handles cases from all over the United States on a pro hac vice basis. The firm specializes in all types of insurance litigation as well as the litigation of extra-contractual claims.

Thomas Lether our Founder, has been involved in the insurance industry for approximately 30 years. In addition to being an attorney, he acts as a mediator, lecturer, arbitrator, and expert witness on insurance related matters.

Although the firm focuses on complex insurance disputes, Lether & Associates enjoys a healthy sense of humor and outside activities which focus on our waterfront location.

L&A – Leading the way in insurance law through experience, collaboration, and results.

Case Law Update – Washington

A reasonable denial of coverage.  Based on the weight of legal authority, insurers might wonder if such a thing even exists in Washington.  A new decision from the Western District of Washington demonstrates that insurers will not always find themselves in peril after a denial.  In Trofimovich v. Progressive Direct Insurance Company, 2017 U.S. Dist. LEXIS 125328 (W.D. Wa.), Honorable John Coughenour ruled that Progressive’s denial of an auto physical damage claim based on an exclusion for operation of the vehicle for hire was reasonable.  The Court dismissed all contractual and extra-contractual causes of action based on that finding.

Trofimovich involved an accident occurring on June 17, 2016.  After the accident, the insured contacted Progressive and gave a recorded statement.  During that statement, the insured stated that he was working for Lyft, a ride share company, and that he had a passenger at the time of the accident.  The insured further declined Progressive’s offer to arrange towing services based on his belief that Lyft would provide a tow.

The next day, the insured gave a second statement.  In this statement, the insured indicated that the passenger in his vehicle at the time of the loss was not a paying customer.  He claimed that he had given that passenger a ride earlier in the day, but that the ride at issue was being given for free due to a financial hardship on the part of the passenger.

On June 30, 2016, Progressive issued a letter denying coverage based on an exclusion that precluded coverage for damage occurring while operating the vehicle to transport passengers for a fee.

In July, the insured retained counsel, who issued an Insurance Fair Conduct Act Notice alleging that the denial was in violation of the statute.  On July 29, 2016, without amending its coverage position, Progressive agreed to pay the claim.  On August 26, 2016, the insured filed suit alleging breach of contract, bad faith, and violations of IFCA and the Washington Consumer Protection Act.

On Cross-Motions for Summary Judgment on all causes of action, the Court ruled that Progressive’s interpretation of the insured’s initial statement was reasonable.  The Court further held as follows:
Progressive made the choice to reject one of two apparently conflicting statements, something that cannot be uncommon in claims adjusting. This alone does not render Progressive’s denial unreasonable. . .
Thus, the Court concludes as a matter of law that Progressive’s initial denial of coverage was reasonable.

2017 U.S. Dist. LEXIS 125328 at 7-8.

Based on this finding, the Court proceeded to grant Summary Judgment in favor of Progressive dismissing the insured’s causes of action for breach of contract, bad faith, violation of the Consumer Protection Act, and violation of the Washington Insurance Fair Conduct Act.

The Court’s decision in Trofimovich demonstrates that insurers can secure good results in Washington when they play by the rules and act reasonably, basing their decisions on sound reasoning and a straight-forward assessment of the facts.

Lether & Associates proudly represented Progressive in the Trofimovichcase.  A copy of the decision is attached.  If you would like to discuss the case, or any other matter, in further detail, please feel free to contact us at any time.