In Allemand v. State Farm Ins Co., et al, Dkt. no.28954-1 (Div. III, Mar. 03, 2011), Division III of the Washington Court of Appeals ruled that policy provisions in a State Farm Insurance Company homeowners insurance policy unambiguously limited coverage for increased costs of repairs due to changes in the building codes.
In State Farm Fire & Casualty Co. v. Arbor Vineyards Homeowners Association, Cause Number CV-10-504-HU (D. Or.), Federal Judge Hubel authored an opinion filed on January 18, 2011 that dismissed the insured’s counterclaims against its insurer for breach of fiduciary duty and bad faith finding that the filing of a declaratory judgment action alone, while the underlying action is still pending, does not support a claim for breach of fiduciary duty or breach of the covenant of good faith and fair dealing against the insurer. The court reasoned, “. . . without some authority, I am unwilling to conclude that the mere fact of filing the coverage action can constitute a breach of fiduciary duty or a breach of the implied covenant of good faith and fair dealing. That is, plaintiff’s filing a complaint seeking clarification of its coverage obligations while the underlying lawsuit is pending is insufficient, as a matter of law, to support the counterclaims.”
In an unpublished decision issued today, Division One of the Washington Court of Appeals held that policy language authorizing an insurer to be reimbursed for property damage payments from the proceeds of a settlement its insured obtained from a third party tortfeasor insured by the same carrier did not trigger the anti-subrogation rule because the carrier was claiming a right to reimbursement, not a right to proceed directly against the third party. Horner v. Farmers Ins Co., No. 64169-7.
Lenk v. Life Insurance Company of North America, EDWA Docket No. 2:10-cv-05018-LRS, Order on Motion for Partial Summary Judgment (December 13, 2010).
Knowledge Learning Corporation et al v. National Union Fire Insurance Company Of Pittsburgh, PA et al., Dkt No. 3:10-cv-00188-ST, Order of Summary Judgment (D. Or. November 30, 2010)
The issue before the court was whether six separate lawsuits against the insured alleging mental and physical abuse of multiple children in the same facility and the same classroom, by the same two instructors at the insured’s learning centers could be deemed one occurrence under the primary policy language at issue. Significantly, the insured was obligated to pay a $500,000 self-insured retention per occurrence and the primary policy provided $1M per occurrence limits and $5M aggregate limits. The excess insurer, who provided $50M per occurrence/ aggregate limits, argued for a finding of multiple occurrences.
Both the primary and the excess policy define “occurrence” in pertinent part as “an act or threatened act of abuse or molestation. All “bodily injury” and “personal and advertising injury” arising out of the acts of abuse or molestation by one person or two or more persons acting together toward anyone person will be deemed a single “occurrence.” A series of related acts of abuse or molestation will be treated as a single “occurrence.””
Division II explained that the efficient proximate cause of a loss is the predominant cause which sets into motion the chain of events producing the loss—not necessarily the last act in a chain of events. Further, whenever covered and excluded perils combine to cause a loss, the loss will be covered only if the predominant or efficient proximate cause was a covered peril. If multiple causes contribute to cause a loss, the tier of fact must determine which cause was the predominant or efficient proximate cause.
The Court of Appeals then explained where an ensuring loss provision is an exception to an exclusion, the provision applies when an excluded peril causes a separate and independent covered peril. Damage caused by the covered peril is covered under the resulting loss provision, but damage resulting from the excluded peril remains excluded:
For example, following the destruction caused by the 1906 San Francisco earthquake, gasfed fires broke out and caused even more damage across the city. Most property insurance policies excluded earthquake damage but covered fire damage. Because an excluded peril (earthquake) caused an independent covered peril (fire), the resulting fire damage was covered as a “resulting loss.” But earthquake damage remained uncovered.
Accordingly, “assuming faulty workmanship caused the shoring and concrete slab to collapse, faulty workmanship was the initial excluded peril and the collapse was the loss.” Therefore, no independent covered peril (such as fire) caused a covered resulting loss. “The collapse resulted directly from the initial excluded peril of faulty workmanship, and loss resulting directly from the initial excluded peril remains uncovered.”
The court also held that:
1. The efficient proximate cause rule is a rule of policy construction. Failure to cite efficient proximate cause in a denial letter does not prevent the application of efficient proximate cause analysis to determine coverage.
2. Determining the cause of collapse is a question of fact for the jury unless the facts are undisputed.
3. When an insurer denies a tender, it is estopped from claiming that it was released from liability based upon the insured’s subsequent settlement in violation of an impairment of subrogation provision.
In Fred Shearer & Sons, Inc. v. Gemini Ins. Co., 2010 WL 3768022 (Or App Sep. 29, 2010), the court held that an insurance company could consider materials extrinsic to the complaint and the insurance policy to determine the duty to defend based on the facts presented.
Gemini Insurance Company (the “insurer”) issued insurance to TransMineral, a distributor of a stucco product. The policy had a so-called “vendors endorsement” that provided coverage to “all vendors of [TransMineral]” but “only with respect to ‘bodily injury’ or ‘property damage’ arising out of ‘your products’ … which are distributed or sold in the regular course of the vendor’s business,” subject to certain exclusions.
Fred Shearer & Sons (“Shearer”) was a subcontractor on a home repair and installed the stucco product on the exterior of the residence. The product allegedly failed, and the owners of the residence sued their general contractor who, in turn, sued Shearer and TransMineral.
Shearer tendered the defense of the lawsuit to the insurer on the theory that it was an insured as a vendor of TransMineral products. It based the tender on an “Exclusive Applicator Agreement” that it had entered into with TransMineral. That agreement granted Shearer the exclusive right to distribute TransMineral’s products. The insurer rejected the tender.
Shearer brought a (new, separate) lawsuit against the insurer seeking a declaration that it was an insured under the vendors endorsement. Before the trial court, shearer moved for partial summary judgment on this question, and the trial court granted the motion. Additional issues regarding the amount of the defense obligation were tried to the court, and the court again ruled in Shearer’s favor. The rulings were reduced to a limited judgment, which the insurer appealed.
The Court of Appeals affirmed the trial court. Before the Court of Appeals, the insurer argued that it was “impossible to tell from the pleadings in the underlying action or the policy language that Shearer sold or distributed the stucco product in the ordinary course of business,” that “the four corners of those documents – that is, the pleadings and the insurance policy – exclusively govern whether [it] owes any duty to defend” and that “nothing in [the underlying] allegations expressly or impliedly connotes that Shearer distributed or sold the TransMineral products.” 2010 WL 3768022 at 3 (internal quotations and some alterations omitted). The Court of Appeals rejected this argument as follows:
“When the question is whether the insured is being held liable for conduct that falls within the scope of a policy, it makes sense to look exclusively to the underlying complaint. …
“The same cannot be said with respect to whether a party seeking coverage is an ‘insured.’ The facts relevant to an insured’s relationship with its insurer may or may not be relevant to the merits of the plaintiff’s case in the underlying litigation. The plaintiff in the underlying case is required to plead facts that establish the defendant’s liability; the plaintiff often is not required to establish the nature of the defendant’s relationship to some other party or to
an insurance company in order to prove a claim….”
Id. at 5. The Court of Appeals also rejected the insurer’s other arguments as to the application of certain exclusions and the calculation and allocation of defense costs.
The claim arose out of a fire to Laura Holden’s apartment, which damaged her personal property. Ms. Holden’s policy provided for settlement at ACV, but included an endorsement that would have allowed her to recover at replacement cost if she replaced the property within 180 days of the loss. Ms. Holden elected not to replace the damaged property. The carrier paid Ms. Holden $1,174, based upon the fair market value (“FMV”) of her loss. (This was apparently a rather small fire.) The loss payment, however, did not include sales tax. Ms. Holden argued that the ACV payment should have included an adjustment based upon sales tax even though she did not replace the damaged property.
In its 6 to 3 decision, the Washington Supreme Court held that the following provision was ambiguous regarding whether Ms Holden was entitled to recover sales tax:
Covered loss to property will be settled at actual cash value. Payments will not exceed the amount necessary to repair or replace the damaged property, or the limit of insurance applying to the property, whichever is less.
The policy defined ACV as FMV but did not define FMV. The Supreme Court acknowledged that in another (non-insurance) context FMV “is the amount of money which a well informed buyer, willing but not obliged to buy the property, would pay, and which a well informed seller, willing but not obligated to sell it, would accept.” However, the court held this definition of FMV did not resolve the sales tax issue and that there is nothing intrinsic in the notion of FMV that necessarily includes or excludes sales tax.
In construing the loss settlement provision, the court considered evidence regarding the insurer’s claims handling practices in unrelated claims including that the insurer sometimes determined ACV by applying depreciation to replacement cost value, and sometimes included sales tax in its determination of replacement cost.
The court noted that the policy’s loss settlement provision does not clearly exclude or include sales tax and does not define FMV. The fact that the loss settlement provision references replacement cost, combined with the carrier’s claims handling practices, and the lack of a definition of FMV, according to the majority, created an ambiguity, which must be resolved in favor of the insured.
Farmers Insurance Company of Washington (“Farmers”) insured Bruce Cedell. After his home was damaged by fire, Cedell made a first party claim under his Farmers policy. The trial court found that the fire department and the fire cause investigator hired by Farmers determined that the cause of the fire was accidental. However, for reasons not explained in the appellate decision, Farmers considered the claim “suspicious.” At some point, Farmers hired an attorney to provide coverage advice regarding Cedell’s claim.
A year after the fire, Cedell filed an insurance bad faith lawsuit against Farmers. In response to discovery requests, Farmers withheld and redacted information based upon attorney-client privilege and the work product doctrine. Cedell then filed a motion to compel arguing that attorney-client privilege and work product did not apply in bad faith litigation.
The trial court determined that in-camera review of the documents withheld was appropriate because (1) Farmers made a one-time offer of $30,000 with an acceptance period that fell when its coverage counsel was out of town; (2) Farmers threatened to deny Cedell coverage without explanation; and (3) the damage to the house was eventually determined to be far more than Farmers’ $30,000 offer. After conducting in-camera review, the trial court held that attorney-client privilege and work product did not apply, and ordered Farmers to produce all documents withheld and/or redacted based on attorney-client privilege and work product, imposed sanctions, and awarded attorney fees for Farmers’ failure to provide the information.
Division II granted Farmers’ motion for discretionary review. The Court of Appeals held that in the first party context insurance companies are entitled to attorney-client privilege despite allegations of bad faith. In addition, “[a]n insurance company does not lose attorney-client privilege protection simply because its litigation opponent raises an issue where advice of counsel may be relevant.”
Next, the court of appeals noted that “[t]he elements of bad faith and fraud are . . . separate and distinct,” and explained that although Farmers’ conduct may have constituted a violation of insurance regulations, the evidence was not adequate to support a finding of fraud. Accordingly, the court reversed and remanded holding that the trial court had abused its discretion in conducting an in-camera review and that discovery sanctions were inappropriate.