The Ninth Circuit Resolves Split in Authority, Holds that Only Insureds Under First-Party Policies Can Bring Claims Under Washington’s IFCA

Washington’s Insurance Fair Conduct Act (“IFCA”) provides insureds with a statutory cause of action against their insurers for wrongful denials of coverage, in addition to a traditional bad faith cause of action. Unlike a bad faith cause of action, the IFCA allows for enhanced damages under certain circumstances. Under the language of the statute, “any first party claimant to a policy of insurance” may bring a claim under IFCA against its insurer for the unreasonable denial of a claim for coverage or payment of benefits. There has been a split of authority in Washington among both the state appellate courts and federal district courts regarding whether the term “first-party claimant” refers only to first-party policies (i.e., a homeowner’s policy or commercial property policy) or whether it refers to insureds under both first-party and liability policies (e.g., CGL policies which cover the insured’s liability to others). The IFCA expressly defines the phrase “first-party claimant” as “an individual, … or other legal entity asserting a right to payment as a covered person under an insurance policy or insurance contract arising out of the occurrence of the contingency or loss covered by such a policy or contract.”

The Washington Court of Appeals, Division One, held that a “first-party claimant” means an insured under both first-party and liability policies (Trinity Universal Ins. Co. of Kansas v. Ohio Casualty Ins. Co., 176 Wn.App. 185 (2013)), but Division Three held that the IFCA applies exclusively to first-party insurance contracts (Tarasyuk v. Mutual of Enumclaw Insurance Co., 2015 Wash. App. LEXIS 2124 (2015)).

In the federal courts, the majority of decisions from the Western District of Washington have held that an insured with third-party coverage or first-party coverage can be a “first-party claimant” under IFCA. Navigators Specialty Ins. Co. v. Christensen, Inc., 140 F. Supp. 3d 11097 (W.D. Wash. Aug. 3, 2015 ) (Judge Coughenour); City of Bothell v. Berkley Regional Specialty Ins. Co., 2014 U. S. Dist. LEXIS 145644 (W.D. Wash. Oct. 10, 2014) (Judge Lasnik); Cedar Grove Composting, Inc. v. Ironshore Specialty Ins. Co., 2015 U. S. Dist. LEXIS 71256 (W.D. Wash. June 2, 2015) (Judge Jones); Workland & Witherspoon, PLLC v. Evanston Ins. Co., 141 F.Supp.3d 1148 (E.D. Wash. Oct. 29, 2015) (Judge Peterson). These decisions held that any insured who has a right to file a claim under the insurance policy is a “first-party claimant” under the IFCA regardless of whether the policy provides first-party or third-party coverage.

However, Judge Pechman of the Western District of Washington ruled that an insured with third-party coverage is not a “first-party claimant” under IFCA in Cox v. Continental Casualty Co., 2014 U. S. Dist. LEXIS 68081 (W.D. Wash. May 16, 2014) and two subsequent cases. In Cox, Judge Pechman dismissed plaintiff’s IFCA claim on the ground that the insurance policy was a “third-party policy,” i.e. a third-party liability policy, and therefore the insured (who assigned his claim to the plaintiffs) was not a “first-party claimant.” The Ninth Circuit Court of Appeals recently affirmed the Cox decision on appeal, effectively resolving the split of authority in the federal courts in favor of a more limited interpretation of the IFCA. Cox v. Continental Casualty Co., 2017 U.S. App. 11722 (9th Cir. June 30, 2017).

Those watching this issue and looking for a reasoned analysis resolving the split of authority among the federal district courts in Washington will be disappointed, as the Ninth Circuit provided no basis for its holding on the issue, not even a recognition of the split among the courts. On the issue, the Court merely stated “[t]he policy in question is not a first party policy; thus, the Plaintiffs, standing in [the insured’s] shoes, cannot be a first party claimant.” The court’s failure to provide its reasoning for this holding is surprising, given that the parties addressed the split of authority in their briefs. Nonetheless, insurers should take note of this important decision limiting the scope of the IFCA in Washington’s federal courts.

California Appeals Court Rules that Insurer Not Entitled to Rescind Policy Based on Material Misrepresentation Due to Ambiguity of Application Questions

In Duarte v. Pacific Specialty Insurance Company, a California appeals court found that an insurer was not entitled to rescind an insurance policy due to material misrepresentation and/or concealment of material facts as a matter of law. The court held that the insurer could not prove that the insured had made misrepresentations when he applied for the policy because the application questions at issue were ambiguous.

Victor Duarte bought a tenant-occupied rental property in 2001. Sometime thereafter, the daughter of the tenant moved into the rental property with her father, and continued to reside there after her father’s death in 2010. In February 2012, Duarte served the daughter with an eviction notice. The daughter did not leave the rental property and Duarte did not take any further action to remove her.

In April 2012, Duarte electronically submitted an application for a landlord insurance policy with defendant Pacific. Pacific issued a policy to Duarte covering the rental property the same day.

In June 2012, the tenant/daughter filed a lawsuit against Duarte for habitability defects at the rental property which allegedly existed since 2009. The lawsuit alleged that Duarte had been notified of these defects, and sought various damages arising from the defects. In August 2012, Duarte tendered defense of the lawsuit to Pacific which denied coverage and any duty to defend. Duarte then sued Pacific for breach of contract and other claims on the grounds that Pacific not only failed to defend the tenant lawsuit but also wrongfully cancelled his policy. In responding to the lawsuit, Pacific asserted a right to rescind the policy due to material misrepresentations on the application.

In cross-motions for summary judgment/adjudication, Pacific argued that it was entitled to rescind the policy because Duarte made material misrepresentations when he answered “no” to two questions on the application: (1) whether he knew of any disputes concerning the property; and (2) whether there were any businesses conducted on the property. In support of its position, Pacific submitted records regarding a March 2012 complaint filed by the tenant/daughter against Duarte with a public agency. Pacific also submitted a transcript of Duarte’s deposition in which he testified about his understanding about the complaint filed against him by the tenant/daughter. The trial court granted Pacific’s motion and denied Duarte’s motion. Duarte appealed, and the appeals court reversed.

The court held that Pacific did not meet its initial burden of proving that Duarte made misrepresentations on the insurance application. The court noted that the first application question at issue – “Has damage remained unrepaired from previous claim and/or pending claims, and/or known or potential (a) defects, (b) claim disputes, (c) property disputes, and/or (d) lawsuit?” – had “garbled syntax” and was “utterly ambiguous.” The court found that the evidence submitted by Pacific showed that Duarte knew of claims and/or disputes concerning the property. However, the court rejected Pacific’s position that the question required the answer, “yes” if there was unrepaired damage, any open or pending claims, potential defect, property disputes, or potential lawsuits. Given the question’s ambiguity, the court found that Duarte properly answered, “no” because he reasonably interpreted the question to ask whether the property had unrepaired damage associated in some way with previous or pending claims, defects, claims disputes, property disputes or potential lawsuits.

With regard to the second application question – “Is there any type of business conducted on the premises?” – the court noted that Pacific submitted evidence that showed that Duarte knew the tenant and tenant/daughter occasionally sold motorcycle parts from the rental property. Nonetheless, the court held that Duarte properly answered, “no,” because he reasonably interpreted the question as referring to “regular and ongoing business activity,” of which there was none to his knowledge.

Second Circuit Holds that TCPA Contractual Consent Cannot be Revoked

In Reyes v. Lincoln Auto. Fin. Servs., No.162104-cv, 2017 U.S. App. LEXIS 11057 (2d Cir. June 22, 2017), the Second Circuit affirmed the trial court decision and held that the Telephone Consumer Protection Act (“TCPA”) does not permit a consumer to unilaterally revoke consent to be called when that consent is given as part of a bargained-for exchange.

The facts of the case are brief.  In 2012 Reyes leased a new Lincoln MKZ luxury sedan, which was financed by Lincoln Automotive Financial Services (“Lincoln”). Reyes provided his cell phone number in the lease application and the lease itself contained a number of provisions to which Reyes assented when finalizing the agreement. Specifically, Reyes consented to receive manual or automated telephone calls from Lincoln. When Reyes defaulted on his payments, Lincoln called Reyes on several occasions in an attempt to cure his default. Reyes claimed that he mailed a letter to Lincoln, revoking his consent to be contacted by Lincoln. Nonetheless, Lincoln continued to call Reyes. Reyes subsequently filed a lawsuit in the Eastern District of New York alleging TCPA violations, seeking $720,000 in damages for Lincoln’s 530 calls to him. The trial court granted summary judgment to Lincoln, holding that (1) Reyes failed to produce sufficient evidence from which a reasonable jury could conclude that he had ever revoked his consent to be contacted by Lincoln and (2) that, in any event, the TCPA does not permit a party to a legally binding contract to unilaterally revoke a bargained-for consent to be contacted by telephone.

On appeal, the Second Circuit first addressed whether Reyes introduced sufficient evidence to create a triable issue of fact regarding Lincoln’s alleged notice of Reyes’s revocation of consent. The Court stated that summary judgment on this issue was improper. Reyes submitted his sworn deposition testimony; a copy of the letter revoking his consent; and an affidavit stating that he had revoked consent. Based on these documents, the Court found that the lower court erred in concluding that no reasonable jury could find that Reyes revoked his consent.

Next, the Court addressed the issue of whether the TCPA permits a party to revoke consent, even if that consent was given as part of a contractual agreement. The Court explained that “consent” is not always revocable, and distinguished the instant case from other cases, which held otherwise. In Gage v. Dell Fin. Servs. and Osorio v. State Farm Bank F.S.B., the Third and Eleventh Circuit Courts, respectively, found, as confirmed by a 2015 FCC ruling, that consumers can revoke consent when it is given gratuitously, and is not incorporated into a binding legal agreement. The Second Circuit agreed with that proposition. But in the present case, when consent is provided as consideration to a bargained-for bilateral contract, consent is not revocable. Indeed, the Second Circuit observed that black-letter law dictates that a party cannot alter a bilateral contract by revoking a term without the consent of the counterparty.

Reyes also argued that the TCPA permits a party to revoke consent because “consent” was not an “essential” term of the contract. The Court dismissed Reyes’s claim on the ground that a contractual term does not need to be “essential” in order for it to be enforced. Instead, the Court explained that a fundamental rule of contract law is that parties may bind themselves to terms so long as the principles of contract formation are met. And a party who has agreed to a particular contractual term in a valid contract cannot unilaterally renege at a later time.

Lastly, Reyes contended that because the TCPA is a remedial statute, enacted to protect consumers from unwanted telephone calls, any ambiguities should be construed to further its purpose. Although the Court agreed that a liberal reading of an ambiguous term in the statute might favor a right to revoke consent, the Court ultimately rejected Reyes’s contention because the statute is not ambiguous in the first place.

The Court concluded by noting it was sensitive to the argument that businesses may undermine the effectiveness of the TCPA by inserting “consent” clauses into contracts, thereby making revocation impossible in many instances. The Court properly acknowledged that this hypothetical concern, if valid, is grounded in public policy considerations; an issue for Congress, not the courts, to resolve.

Reyes is a significant decision because it addresses an emerging issue of whether consent can be unilaterally revoked by a consumer under the TCPA. The Second Circuit’s decision is a big win for financial institutions and other defendants that have consent provisions within their binding agreements. Going forward, financial institutions litigating in the Second Circuit will be shielded, or at least have a powerful defense, from TCPA claimants who claim that they revoked consent. In addition, while Reyes is only binding in Connecticut, Vermont and New York, this decision may lend itself as the hallmark to other circuit courts that have yet to address this issue. In the meantime, businesses who are faced with TCPA lawsuits should consider adding a consent provision within their contracts to limit exposure to future TCPA liability and current TCPA defendants should consider dispositive motions if the plaintiff consented to be called.

Big Victory for Debt Buying Industry: Supreme Court Holds That Debt Buyers Are Not “Debt Collectors” Under The FDCPA

The U.S. Supreme Court recently held in Henson v. Santander Consumer USA Inc., 582 U.S. ___ (2017), that a company may collect on debts that it purchased for its own account without triggering the statutory definition of “debt collector” under the Fair Debt Collection Practices Act. The unanimous decision penned by Justice Gorsuch, his first as a Supreme Court Justice, was a resounding victory for the debt buying industry, especially given ever increasing individual and putative class actions alleging violations of the FDCPA in the multibillion dollar debt collection industry.

The FDCPA authorizes private lawsuits and heavy fines to debt collectors who engage in unscrupulous collection practices. Under the Act, “debt collectors” are defined as anyone who “regularly collects or attempts to collect . . . debts owed or due . . . another.” 15 U.S.C. § 1692a(6). But because the practice of buying and managing consumer debt has become more commonplace, the issue of whether consumer finance firms who purchase consumer debt are included within the Act’s coverage was unclear.  While everyone agrees that the term embraced the repo man, the person hired by the creditor to collect an outstanding debt, it was unclear whether the person buying a debt and then trying to collect on it for himself made that person a debt collector. Circuit courts were divided on the issue, with some courts classifying debt buyers as creditors and other courts classifying them as debt collectors. In Henson, the Supreme Court resolved this Circuit split and held that debt buyers attempting to collect on that debt are excluded from the Act’s coverage because they do not qualify as debt collectors.

The complaint filed in the Henson case alleged that CitiFinancial Auto loaned money to the petitioners to finance the purchase of their cars. The petitioners defaulted on their loan and Santander later purchased the defaulted loans from the original lender, CitiFinancial Auto. After purchasing the defaulted loans, Santander engaged in collection practices that petitioners believed violated the FDCPA. The District Court and Fourth Circuit both ruled in favor of Santander on the ground that Santander did not qualify as a debt collector because it did not regularly seek to collect debts “owed . . . another,” but instead sought only to collect debts that it purchased and owned.

The Court explained that debt buyers are not subject to the FDCPA because the Act’s language only focuses on third-party collection agents. In its holding, the Court rejected petitioners’ argument that debt buyers are also debt collectors because of Congress’s use of the past participle of the verb “to owe.” Petitioners claimed that the statute’s definition of a debt collector includes anyone who regularly collects debts previously owed to another. Instead, the Court found that past participles are commonly used as adjectives to describe the present state of things, and that the word “owed” is used to refer to present debt relationships. As a result, the Court observed that the text of the statute indicates that one has to attempt to collect debts owed to another in order to qualify as a debt collector under the Act.

The Court also rejected petitioners’ alternative argument that the FDCPA treats defaulted debt purchasers as traditional debt collectors because doing so best furthers the spirit of the Act. Petitioners contended that if Congress had been aware of the business involving purchasing defaulted debt, then it would have included them as traditional debt collectors because they pose similar risks of abusive collection practices. The Court explained that it was not its job to rewrite a statute under the banner of speculation. Likewise, the Court found that petitioners’ policy arguments were not unassailable, because reasonable legislators could argue both ways on whether debt buyers should be treated as debt collectors under the Act. Certainly, the Court noted that these matters are for Congress to resolve, not the Supreme Court.

The Henson decision has far reaching implications on the debt collection industry and provides comfort to companies who purchase bad-debt and then go out to collect on it. Because the Henson decision reveals that debt purchasers are not defined as debt collectors under the FDCPA, Congress’s attempt to protect consumers from unfair or deceptive practices as a means to recoup money is severely weakened. The decision also clarifies that purchasers of defaulted debt now face less regulation in their collection process. Whether Congress decides to amend the FDCPA, and further regulate the debt collection industry, is something that the industry will keep a close eye on.

Washington Supreme Court Applies the Efficient Proximate Cause Rule to Third Party Liability Policy to Find a Duty to Defend

The efficient proximate cause rule is one of the more confusing analyses that an insurance company must undertake when investigating certain coverage issues under first party insurance policies. And until now, the efficient proximate cause rule has only been applied to first party insurance policies in Washington. But that has now changed with the Washington Supreme Court’s decision in Xia, et al. v. ProBuilders Specialty Insurance Company, et al., Case No. 92436-8 (April 27, 2017). In Xia, the Washington Supreme Court not only ruled that an insurer must consider the efficient proximate cause rule in determining its duty to defend under a CGL policy, but that ProBuilders acted in bad faith by failing to do so, despite no prior precedent for application of the rule in a CGL coverage analysis.

In Xia, the claimant purchased a new home constructed by Issaquah Highlands 48 LLC (“Issaquah”), which was insured under a CGL policy issued by ProBuilders. The claimant fell ill soon after moving in due to inhalation of carbon monoxide, caused by improper installation of an exhaust vent.

The claimant notified Issaquah about the issue, and Issaquah notified ProBuilders. ProBuilders denied coverage under the pollution exclusion and a townhouse exclusion. The claimant filed a lawsuit, which Issaquah then settled by a stipulated judgment of $2 million with a covenant not to execute and an assignment of rights against ProBuilders. The claimant filed a declaratory judgment action against ProBuilders for breach of contract, bad faith, violation of the Consumer Protection Act and the Insurance Fair Conduct Act.

At the trial court level, ProBuilders won summary judgment on the townhouse exclusion. Division One of the Washington Court of Appeals reversed in part, finding that the pollution exclusion applied, but not the townhouse exclusion.

The Washington Supreme Court accepted review to determine whether the pollution exclusion applied to relieve ProBuilders of its duty to defend. The Court held that even though ProBuilders did not err in determining that the plain language of its pollution exclusion applied to the release of carbon monoxide into Xia’s home, “under the ‘eight corners rule’ of reviewing the complaint and the insurance policy, ProBuilders should have noted that a potential issue of efficient proximate cause existed,” as Xia alleged negligence in her original complaint, i.e. failure to properly install venting for the hot water heater and failure to properly discover the disconnected venting.

Ultimately, the Court concluded that the efficient proximate cause of the claimant’s loss was a covered peril – the negligent installation of a hot water heater. Even though ProBuilders correctly applied the language of its pollution exclusion to the release of carbon monoxide into the house, the Court ruled that ProBuilders breached its duty to defend as it failed to consider an alleged covered occurrence that was the efficient proximate cause of the loss. The Court granted judgment as a matter of law to the claimant with regard to her breach of contract and bad faith claims.

The application of the efficient proximate cause rule to CGL policies in Washington is troublesome for insurers. The Washington courts have long held in cases involving first party policies that under the efficient proximate cause rule, “[i]f the initial event, the “efficient proximate cause,’ is a covered peril, then there is coverage under the policy regardless whether subsequent events within the chain, which may be causes-in-fact of the loss, are excluded by the policy.” Key Tronic Corp., Inc. v. Aetna (CIGNA) Fire Underwriters Insurance Co., 124 Wn.2d 618, 881 P.2d 210 (1994). Also, the efficient proximate cause rule applies only “when two or more perils combine in sequence to cause a loss and a covered peril is the predominant or efficient cause of the loss.” Vision One, LLC v. Philadelphia Indemnity Insurance Co., 174 Wn.2d 501, 276 P.3d 300 (2012).

In Xia, the Court noted that 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.” Xia at *14. The Court stated:

…it is clear that a polluting occurrence happened when the hot water heater spewed forth toxic levels of carbon monoxide into Xia’s home. However, by applying the efficient proximate cause rule, it becomes equally clear that the ProBuilders policy provided coverage for this loss. The polluting occurrence here happened only after an initial covered occurrence, which was the negligent installation of a hot water heater that typically does not pollute when used as intended.

Xia at *17.

Justice Madsen took issue with the majority decision in a dissenting opinion, specifically with respect to a finding of bad faith when no other case prior to this decision had ever applied the efficient proximate cause rule to CGL policies. Justice Madsen also disagreed with the majority in extending the application of the efficient proximate cause rule to CGL policies when this Court specifically declined to do so in the earlier case of Quadrant Corp. v. American States Insurance Co., 154 Wn.2d 165, 110 P.3d 733 (2005).

The State of Washington unfortunately has been historically unkind to insurers on the duty to defend, and the Xia decision only further cements that reputation.

If you would like more information on the efficient proximate cause rule in Washington, please feel free to contact Sally S. Kim at or (206) 695-5147.

Minnesota Bankruptcy Court Applies Injury-in-Fact Trigger to Obligate Multiple Policies to Provide Coverage for Sexual Molestation Claims

In Diocese of Duluth v. Liberty Mutual Group, et al., case no. 16-05012 (Mar. 30, 2017), the Bankruptcy Court for the District Court for Minnesota was faced with determining trigger and the number of “occurrences” related to negligence claims asserted against the Diocese of Duluth by victims of priest sexual abuse. These negligence claims drove the Diocese to file for bankruptcy, and as part of that Bankruptcy proceeding, the Diocese filed an adversary proceeding seeking coverage from five of its insurers. These insurers had issued policies covering several decades. The Court ruled in favor of the Diocese, finding that multiple years of coverage could be triggered and that multiple “occurrences” could be found in each policy year as each victim was a separate “occurrence.”

The Diocese successfully argued that each alleged act of abuse constituted a separate “occurrence” under all insurer’s policies, while conceding that the “occurrence” language in the policies (“arising out of continuous or repeated exposure to substantially the same general conditions shall be considered as arising out of one occurrence”) consolidated multiple instances of abuse of the same victim by the same priest in the same year into one “occurrence” for that year.

Most of the insurers argued for the interpretation that there was only one “occurrence” – the ongoing act of negligent supervision by the Diocese in allowing the continuous and repeated exposure of the victims to the abusive priests – regardless of the number of victims or perpetrators involved. The Continental Insurance Company also argued for one occurrence, or at most, one occurrence per priest or per bishop abuser because all the injuries arose from the Diocese’s decision to allow the abusers access to the children.

The policies provided coverage for damages for personal injury caused by an “occurrence” and included similar definitions of “occurrence.” The Court noted that “the word ‘occurrence’ in occurrence based insurance policies ‘is one of the least understood and most misunderstood word in today’s insurance language[.]”

The Court’s decision focused on Minnesota’s use of the actual injury or injury-in-fact trigger rule, which provides that an “occurrence” take place at the time the complaining party as actually injured, not when the wrongful act was committed. Minnesota courts have also held that “an injury can occur even though the injury is not ‘diagnosable,’ ‘compensable’ or manifest during the policy period as long as it can be determined, even retroactively, that some injury did occur during the policy period.”

Considering these precedents, the Court noted that the underlying facts of the cases were not in dispute – numerous victims were abused by several different priests. As the sexual abuse was what caused the victims damage, “under the actual-injury rule, the occurrence is the time when the victims were sexually abused by the priests. “ The Court further determined that the number of occurrences could be both per victim and per priest – “There are separate occurrences for each separate sexual abuse for each victim and each priest. The victims each suffered separate abuse and it is this occurrence that triggers an insurance policy that is at risk at that time.” The Court also clarified if a victim was injured by two priests during one policy period, that would be two occurrences, although if injured repeatedly by the same priest during one policy period, that would be one occurrence.

It’s not evident from the decision what impact the Court’s decision had on each insurer’s coverage obligations, but certainly determining that multiple policies might be triggered and that there might be multiple occurrences in each year broadened the obligation significantly from what the insurers were arguing for.

A Pennsylvania court also recently faced this issue in connection with the Sandusky scandal at Penn State University, but came to the opposite conclusion while discussing many of the same concerns. Pennsylvania utilizes the “manifestation” trigger outside of the asbestos context, and while this trigger led to a similar conclusion as to when the bodily injury first occurred, the court did not permit Penn State to trigger multiple policy periods for subsequent acts of abuse against the same victim. In Pa. State Univ. v. Pa. Manufacturers’ Ass’n Ins. Co., 2016 Phila. Ct. Com. Pl. LEXIS 158 (Pa. Ct. Com. Pl. May 4, 2016), the court noted that:

Unlike environmental pollution or asbestos damage, which can remain hidden for many years before it manifests, the physical violation (bodily injury) arising from child sexual abuse is experienced immediately by the victim, although the harm often continues to be felt long thereafter. To the extent that PSU’s negligence enabled Sandusky to abuse his victims, such bodily injury manifested when the first abuse of each victim occurred.

The court also followed prior Pennsylvania Superior Court authority which held that each victim constitutes only one occurrence, no matter how many separate instances of sexual abuse took place. General Accident Ins. Co. v. Allen, 708 A.2d 828, 834-835 (Pa. Super. 1998) (one occurrence for each child where three children were sexually abused from 1986 to 1988). Pennsylvania does not appear to have addressed a situation with multiple abusers.

Unfortunately this will likely continue to be an area to watch as courts around the country continue to grapple with trigger and number of occurrences in these sexual abuse cases.

Ninth Circuit Clarifies Excess Insurer’s Options Under For Proposed Settlements That Invades Excess Layer Of Coverage

A recent decision from the Ninth Circuit Court of Appeals clarified an excess insurer’s options under California law when it is presented with a proposed settlement that invades its excess layer and has been approved by the insured and primary insurer. See  Teleflex Medical Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 2017 U.S.App.LEXIS 4996 (9th Cir. March 21, 2017). In Teleflex, the court applied the rule set forth in Diamond Heights Homeowners Ass’n v. Nat’l Am. Ins. Co. (1991) 227 Cal.App.3d 563 (“Diamond Heights”) stating that the excess insurer can: (1) approve the settlement; (2) reject the settlement and assume the defense of the insured; or (3) reject the settlement, decline the defense, and face a potential lawsuit by the insured seeking contribution.

In Teleflex, LMA became involved in a lawsuit with a competitor. LMA filed suit seeking recovery of damages for patent infringement and the competitor filed counterclaims for trade disparagement and false advertising. After several years of litigation, the parties agreed to settle their respective claims. As part of the settlement, LMA agreed to pay $4.75 million for the disparagement claims and LMA’s competitor agreed to pay $8.75 million for the patent claims. The settlement was contingent upon LMA obtaining approval and funding from its primary and excess insurers.

LMA’s primary carrier agreed to the settlement, but its excess insurer, National Union requested additional information which was provided by LMA, along with a demand that National Union could accept the settlement, reject the settlement and take over the defense, or reject the settlement, refuse to defend, and face a reimbursement claim. National Union ultimately rejected the settlement without offering to take over the defense.

LMA then brought suit against National Union for breach of contract and bad faith, where a jury awarded LMA damages for both. On appeal, National Union argued, among other things, that the district court erred in applying the rule articulated in Diamond Heights, asserting that it had effectively been overruled by Waller v. Truck Ins. Exch. (1995) 11 Cal.4th 1. National Union argued that under Waller, an insurer can only waive a policy provision through an intentional relinquishment of a known right. Accordingly, National Union asserted that LMA’s claims failed as matter of law because the “no voluntary payments” and “no action” clauses gave National Union the absolute right to reject the settlement. Disagreeing, the Ninth Circuit held that Waller did not mention Diamond Heights and reasoned that it simply reiterated general waiver principles that existed prior to and were not in conflict with Diamond Heights. In so holding, the Ninth Circuit reasoned that regardless of Diamond Heights use of the term “waiver” its rule is really about an insurer’s breach of its obligations under the policy and/or the implied covenant of good faith and fair dealing – not the waiver or expansion of a policy provision addressed by the Waller court.

Of note, the Ninth Circuit also expressed skepticism regarding the application of the “genuine dispute doctrine” to third party claims and held that an insurer was not entitled to a specific jury instruction regarding that defense. The court also affirmed the district court’s ruling that an insured was not entitled to Brandt fees associated solely to the insured’s bad faith and related punitive damages claims.

Based upon this decision, excess insurers should be cognizant of the pitfalls of withholding consents to settlements and should ensure that they have been afforded a reasonable opportunity to analyze the reasonableness of the settlement and adequate time to consider whether to participate or undertake the defense of the insured.

District Court Holds That Pollution Exclusion Bars Coverage For Carbon Monoxide Poisoning

On March 9, 2017, the U.S. District Court for the District of Oregon issued its opinion and order in Colony Ins. Co. v. Victory Constr. LLC, et al., holding that carbon monoxide is a “pollutant” and, therefore, the pollution exclusion unambiguously bars coverage for harm caused by carbon monoxide. 2017 U.S. Dist. LEXIS 34368 (D. Or. Mar. 9, 2017).

In Victory, the underlying plaintiffs brought two lawsuits against Victory Construction (“Victory”) after carbon monoxide from a natural gas swimming pool heater filled their home, resulting in carbon monoxide poisoning. The plaintiffs alleged that Victory was negligent in the installation and ventilation of the heater and negligent in failing to warn of the risks of carbon monoxide poisoning associated with operating the heater in an insufficiently ventilated area.

The policy contained a “Hazardous Materials Exclusion,” barring coverage for “’[b]odily injury,’ … which would not have occurred in whole or in part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘hazardous materials’ at any time.” The policy’s definition of “hazardous materials” included “pollutants,” which was defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”

The parties brought cross-motions for summary judgment on the issue of whether Colony Insurance (“Colony”) had a duty to defend and indemnify Victory in the personal injury lawsuits. In granting Colony’s motion and denying Victory’s motion, the Court found that “the only plausible interpretation of the Policy’s terms results in the conclusion that carbon monoxide is a pollutant.”

The Court recognized the wide array of conflicting judicial decisions throughout the country regarding the scope of the pollution exclusion, but found that most decisions fall into “one of two broad camps.” Quoting the Ninth Circuit, the Court noted that some courts apply the pollution exclusion literally because they find the terms to be clear and unambiguous, but other courts have limited the exclusion to situations involving “traditional environmental pollution.” Since the parties did not cite, and the Court did not find, any Oregon case law providing guidance on the scope of the pollution exclusion or its application to carbon monoxide, the Court attempted to predict whether the Oregon Supreme Court would conclude that carbon monoxide is an “irritant” or “contaminant,” and, thus, a “pollutant” under the policy.

The Court strictly adhered to the rules of policy interpretation as set forth in Hoffman Constr. Co. of Alaska v. Fred S. James & Co. of Oregon, 313 Or. 464 (1992). The intention of the parties is determined by the terms and conditions of the policy, beginning with the wording of the policy, applying policy definitions and otherwise presuming that words have their plain and ordinary meaning. If the court finds only one plausible interpretation of the disputed terms, that interpretation controls.

Since the policy did not define “irritant” or “contaminant,” the Court ascertained their plain and ordinary meanings, relying on dictionary definitions. Based on its plain meaning analysis, the Court concluded that carbon monoxide is either an “irritant” (substance that irritates or stimulates an organ) or “contaminant” (undesirable element whose introduction makes an environment unfit for use) and, therefore, is a “pollutant” under the policy.

The Court declined to address Victory’s contentions that the pollution exclusion should apply only to “traditional environmental pollution,” or that the Court should consider the reasonable expectations of the policyholder. “The Policy, as written, does not create any ambiguity that would lead this Court to believe that the Oregon Supreme Court would look outside the plain meaning of the Policy’s terms.”

This is the first reported decision to predict whether the Oregon Supreme Court would apply the absolute pollution exclusion outside the context of “traditional environmental pollution.” It remains to be seen whether Oregon state courts will follow the District Court’s lead.

Texas Supreme Court Interprets “Insured vs. Insured” Exclusion in Insurer’s Favor

The Texas Supreme Court recently reversed a divided Texas appellate court in resolving a dispute over the meaning of an “insured vs. insured” exclusion in a Directors and Officers policy issued by Great American Insurance Company. Great American Insurance Co. v. Primo, 60 Tex. Sup. J. 489 (2017).

The issue was whether an assignee of the insured’s rights under the policy “succeeded to the interest” of the insured for the purposes of triggering the exclusion. The Texas Supreme Court ultimately ruled in favor of Great American, holding that the insured vs. insured exclusion was applicable and that Great American was not required to pay another insured’s defense costs.

The case arose when Named Insured Briar Green, a condominium association, discovered what it believed to be financial improprieties on the part of former Briar Green director and treasurer, Robert Primo. Briar Green claimed Primo misappropriated funds, and it submitted a claim for the loss to its fidelity insurer, Travelers. Travelers paid the claim in exchange for an assignment of Briar Green’s rights and claims against Primo.

Travelers then sued Primo and a litigation explosion ensued. The opinion is somewhat unclear factually, but it appears that Primo may have ultimately been vindicated vis-à-vis the allegation of misappropriation of funds.

Primo, a former director and therefore an insured under the Great American policy, sought defense costs from Great American in the Travelers lawsuit. Because Travelers succeeded to Briar Green’s interest in the lawsuit, Great American denied coverage under the insured vs. insured exclusion, which excluded coverage for claims made by an insured against an insured and those made “by, or for the benefit of, or at the behest of [Briar Green] or . . . any person or entity which succeeds to the interest of [Briar Green].”

Primo sued Great American for breach of contract and bad faith, among other things. The trial court granted summary judgment to Great American, but the appellate court concluded an entity that “succeeds to the interest” of another in the insurance context was equivalent to being a “successor in interest” in the construction context, where a successor in interest is one who inherits the assignor’s liabilities as well as its rights. The court therefore held that the exclusion was inapplicable and that Great American must pay Primo’s defense costs.

The dissenting judge, Judge McCally, pointed out that equating “successor in interest” with an entity that “succeeds to the interest” re-writes the exclusion and narrows it considerably. She also noted that one of the purposes of the insured vs. insured exclusion is to prevent collusive lawsuits by insureds, and that if all an insured had to do to avoid the exclusion was to assign its rights under the policy to a third party, collusive lawsuits would actually be encouraged.

The Texas Supreme Court agreed with Judge McCally and reversed the appellate court. Utilizing the plain meaning rule of insurance policy interpretation, it refused to insert language into the policy that was not there and held that Travelers succeeded to Briar Green’s interest in the lawsuit, making the exclusion applicable.

It also analyzed the context surrounding the purpose of the exclusion, which is generally understood to be intended to preclude coverage for lawsuits between directors, officers, and the companies they serve. As happened in this case, such lawsuits can often become highly emotional and expensive, which is why the intent is usually to exclude them from coverage. The Court also agreed that the appellate court’s decision would have the effect of encouraging collusive lawsuits instead of discouraging them. Accordingly, Great American had no duty to pay for Primo’s defense costs based upon the insured v. insured exclusion.

The Oregon Supreme Court Again Offers Expansive View of the Fee-Shifting Statute But Provides Clarity to Insurers on Minimizing Fee Awards

In Oregon, ORS 742.061 authorizes an award of attorney fees to an insured that prevails in an action against an insurer. While there have been several Court of Appeals cases addressing this statute in the UIM context, the Oregon Supreme Court last ruled on ORS 742.061 in 2012, holding that the statute is not limited to actions on policies issued in Oregon, but that it applies broadly, to “any policy of insurance of any kind or nature.” Morgan v. Amex Assurance Co., 287 P.3d 1038 (Or. 2012).

Under a similar analysis, consisting of an examination of the statute’s text and context, along with any useful legislative history, the Oregon Supreme Court addressed another aspect of ORS 742.061 in Long v. Farmers Ins. Co. of Oregon, 360 Or. 791 (2017).  Specifically, the Oregon Supreme Court addressed whether an insurer’s voluntary mid-litigation payments can eliminate the right to attorneys’ fees under the fee-shifting statute.

In Long, Plaintiff discovered a leak under her kitchen sink that caused extensive damage to her home. She filed a claim with Farmers, and on January 17, 2012, and Farmers voluntarily paid $3,300.45 to Plaintiff for the actual cash value of the loss. Around that time, Farmers also paid $2,169.22 to Plaintiff for mitigation expenses. However, the Plaintiff submitted a proof of loss that exceeded the sum that Farmers had paid. The parties had not resolved Plaintiff’s claims a year later, so she commenced a lawsuit against Farmers. After appraisal, Farmers made two additional voluntary payments to Plaintiff – one payment in the amount of $2,467.09 on July 11, 2013 and another payment in the amount of $4,766.80 on August 14, 2013 – for the actual cash value that the appraisers had assigned to certain of Plaintiff’s claimed losses and mitigation costs.

Six months later, in February 2014, shortly before trial, Plaintiff submitted proof of loss for the replacement cost of her losses. Three days later, Farmers voluntarily paid $4,214.18 to Plaintiff for the replacement cost of Plaintiff’s undisputed losses. Farmers subsequently prevailed at trial. Nonetheless, Plaintiff filed a petition for attorney fees under ORS 742.061.

Under ORS 742.061, an insurer must pay the insured’s attorney fees if, in the insured’s action against the insurer, the insured obtains a recovery that exceeds the amount of any tender made by the insurer within six months from the date that the insured first filed proof of a loss. In Long, the issue before the Court was the meaning of the word “recovery.” The insured argued that the word “recovery” means any kind of restoration of a loss, i.e. judgment, settlement, voluntary payment or some other means, after an action on an insurance policy has been filed. Accordingly, any post-complaint payments made by an insurer would support an insured’s claim for fees under the statute. On the other hand, Farmers argued that the word “recovery” means a money judgment in the action in which attorney fees are sought. Farmers argued that attorney fees may be awarded only if the insured obtains a money judgment that exceeds any tender made by the insurer within the first six months after proof of loss.

Because this dispute is a matter of statutory interpretation, the Oregon Supreme Court examined ORS 742.061’s text and context, as well as any useful legislative history. The Court noted that it has repeatedly instructed that the terms of ORS 742.061 and its predecessors should be interpreted in light of their function within the statute’s overall purpose, and if it heeded that instruction in this case, “it becomes evident that the term ’recovery‘ must be read to include mid-litigation payments such as the ones that Farmers made.”

The Oregon Supreme ultimately concluded that the fact that Plaintiff did not obtain a “judgment” memorializing Farmers’ mid-litigation payments did not make ORS 742.061 inapplicable. The Court further clarified that a “declaration of coverage is not sufficient to make ORS 742.061 applicable; an insured must obtain a monetary recovery after filing an action, although that recovery need not be memorialized in a judgment.” Id. at 805.

Based upon that clarification, the Court held that Plaintiff was entitled to attorney fees for the work performed by her attorney up until the time that Farmers made voluntary payments to Plaintiff in July and August of 2013. This is because by then, Plaintiff had brought an action on her insurance policy and, by virtue of Farmers’ July and August payments, Plaintiff had “recovered” more in that action than Farmers had tendered in the first six months after proof of loss.

The Court continued, however, that Plaintiff was not entitled to her attorney fees that accrued after the July and August 2013 payments. First, the voluntary payments made by Farmers in February 2014 were payments for the replacement value of Plaintiff’s loss, for which Plaintiff filed her proof of loss. That proof of loss for replacement value triggered the six-month period for settlement of Plaintiff’s claim for the replacement value of her losses under ORS 742.061, and Farmers made payments for the replacement cost within the six-month period, as mandated by the statute.

Second, except for the two replacement cost payments that Farmers made in February 2014, Plaintiff did not recover, after August 2013, any amount over and above what Farmers had already paid. At trial, Plaintiff sought but was unsuccessful in obtaining any greater sum. Thus, because Plaintiff’s recovery after Farmers’ August 2013 payment did not exceed Farmers’ timely tender, Plaintiff was not entitled to attorney fees under ORS 742.061 for work performed by her attorney after that date.

This case demonstrates how important it is for insurance companies to keep track of when voluntary payments are made and the potential impact of those payments on their ability to minimize an insured’s entitlement to attorney’s fees under ORS 742.061.