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.

WASHINGTON SUPREME COURT HOLDS THAT INSURANCE FAIR CONDUCT ACT IS ONLY APPLICABLE WHERE THERE HAS BEEN A DENIAL OF COVERAGE AS OPPOSED TO A VIOLATION OF INSURANCE REGULATIONS

On February 2, 2016, the Washington Supreme Court provided some much needed guidance on what actions by an insurer will support a claim under Washington’s Insurance Fair Conduct Act (“the IFCA”). Perez-Crisantos v. State Farm Casualty Co., ___ P.3d ___ (No. 92267-5, Feb. 2, 2017). Although the IFCA was enacted in 2007 and is generally focused on preventing unreasonable conduct by insurers, the federal district courts in Washington have disagreed on what a plaintiff must show to maintain a cause of action. See Langley v. GEICO Gen. Ins. Co., 2015 U.S. Dist. LEXIS 26079 (E.D. Wash. Feb. 24, 2015); Cardenas, et al. v. Navigators Ins. Co., 2011 U.S. Dist. LEXIS 145194 (W.D. Wash. 2011).  The Washington Supreme Court has not spoken on the issue until now.

Unlike a Washington common law bad faith action, the IFCA allows attorney fees and treble damages for a violation, one of the few instances in Washington where punitive damages are permitted. Unfortunately the language of the primary statute of the IFCA, RCW 48.30.015, is less than clear and has been kindly referred to as “vexing” by a judge in the Eastern District of Washington. Workland & Witherspoon v. Evanston Ins. Co., 141 F. Supp. 3d 1148, 1155 (E.D. Wash 2015).

The dispute centers on whether a violation of certain state insurance regulations, such as where an insurer does not respond to certain communications within 10 days, is enough to support an IFCA cause of action, or whether an insurer must unreasonably deny a claim for coverage or payment of benefits for an IFCA cause of action to exist. In a somewhat rare victory for insurers in the Washington appellate courts, the Washington Supreme Court sided with the insurer and held that there must actually be an actual denial of coverage for the insured to move forward with an IFCA lawsuit.

The case involved an underinsured motorist claim where State Farm paid PIP benefits but balked at paying the additional amounts the plaintiff demanded; an arbitrator subsequently ruled in favor of the plaintiff. The trial court dismissed plaintiff’s IFCA lawsuit on summary judgment and the Washington Supreme Court accepted direct review.

In ruling in State Farm’s favor, the court held that RCW 48.30.015 is ambiguous and therefore turned to its legislative history, including the ballot title that was put before Washington’s voters in 2007. The court concluded that the IFCA was meant to apply to denials of coverage as opposed to violations of the insurance regulations. In doing so it rejected the position of the Washington Pattern Jury Instruction committee, which had developed a jury instruction that contemplated the situation where the IFCA cause of action was based only upon a violation of the insurance regulations.

After Perez-Crisantos, it is now clear that violations of the Washington insurance regulations are relevant to an insured’s claimed damages under the IFCA, but such alleged violations by themselves are insufficient to pursue an IFCA cause of action. For such a cause of action to exist, the insured must show an actual denial of coverage.

Liquor Liability Exclusion Bars Coverage for the Four Loko Bodily Injury Lawsuits

In Phusion Projects, Inc. v. Selective Ins. Co., No. 1-15-0172, 2015 Ill. App. LEXIS 942 (Ill. App. Dec. 18, 2015), the manufacturers of the alcoholic beverage “Four Loko” (collectively “Phusion”) filed a declaratory judgment action seeking a declaration that their commercial liability insurer was required to defend and indemnify Phusion in six underlying bodily injury claims. Selective claimed it was not required to defend Phusion because of the policy’s liquor liability exclusion. The trial court agreed and dismissed Phusion’s complaint. Phusion appealed, and the Appellate Court affirmed the underlying decision.

Four Loko is a fruit-flavored malt beverage which contains 12% alcohol by volume, as well as taurine and guarana. During the relevant time period, Four Loko also contained 135 milligrams of caffeine. The underlying suits alleged that the plaintiffs’ injuries were caused by either their own or another individual’s consumption of Four Loko and subsequent intoxication, mainly due to the inclusion of the stimulants in the Four Loko product.

The CGL policy excluded coverage for “bodily injury…for which any insured may be held liable by reason of (1) causing or contributing to the intoxication of any person.” The exclusion applied only where the insured was “in the business of manufacturing, distributing, selling, serving, or furnishing alcoholic beverages.”

In its initial motion to dismiss the declaratory judgment action, Selective relied on the policy’s liquor liability exclusion. Selective cited to a Federal District Court opinion excluding coverage for Phusion based on an identical liquor liability exclusion. Netherlands Insurance Co. v. Phusion Projects, Inc., 2012 WL 123921 (N.D. Ill. Jan 17, 2012). Phusion argued the underlying lawsuits were not based on liquor liability, but were based on “stimulant liability,” pointing to the allegations that Phusion was liable for adulterating its Four Loko products with caffeine, guarana, and taurine. Phusion pointed to the underlying plaintiffs’ claims that the addition of these stimulants desensitized consumers of Four Loko to the symptoms of intoxication, and caused them to act recklessly. In its reply, Selective relied on the Seventh Circuit’s holding in Netherlands, which recognized that “the presence of energy stimulants in a [sic] alcoholic drink has no legal effect on the applicability of a liquor liability exclusion.” The trial court held the terms of the insurance policy and liquor liability exclusion made it “clear that coverage is excluded when there are claim[s] that an individual sustained bodily injury caused by intoxication,” and therefore Selective had no duty to defend or indemnify Phusion for the lawsuits.

On appeal, Phusion argued that the exclusion did not apply to manufacturers, but rather only to “those in the liquor business to preserve host liquor liability coverage.” Phusion relied on cases establishing that the voluntary consumption of alcohol is the proximate cause of an injury rather than the manufacture of the beverages. The Appellate Court rejected this argument as relevant only to Phusion’s liability in the underlying suits, and not Selective’s duty to defend or indemnify Phusion in those suits. The court instead followed the Seventh Circuit’s interpretation of the exclusion in Netherlands, finding the plain and ordinary meaning of the exclusion applied to “claims of bodily injury…where Phusion may be held liable because it either caused or contributed to the intoxication of any person,” an exclusion which applied specifically to those in the business of manufacturing alcoholic beverages.

Phusion also argued that intoxication was not the “sole and proximate cause” of the injuries asserted in the underlying lawsuits, but that some allegations such as the addition of stimulants to the product fell outside the liquor liability exclusion and were therefore potentially covered by the policy. The court disagreed, finding that Illinois law actually requires an allegation of a proximate cause “wholly independent” from the excluded coverage. The court found that “in order for the underlying lawsuits at issue here to fall within the insurance policy and, thus, outside the liquor liability exclusion, each of the complaints must allege facts that are independent from the event that led to the injury,” requiring that the underlying complaints allege facts “that are independent of ‘causing or contributing to the intoxication of any person.’” Here, it was impossible for anyone to suffer injuries due to the inclusion of stimulants in the product absent consumption of and subsequent intoxication due to Four Loko. It was “[t]he supply of alcohol, regardless of what it is mixed with,” that was “the relevant factor to determine whether an insured caused or contributed to the intoxication of any person.” Quoting the Seventh Circuit, the Court found Phusion’s decision to mix energy stimulants and alcohol “might not have been a very good one,” but did “not amount to tortious conduct that is divorced from the serving of alcohol.” Therefore, the allegations of the underlying complaint fell within the liquor liability exclusion, and Selective had no duty to defend Phusion in the underlying actions.

Courts often struggle with whether to apply policy exclusions in the face of alternative theories of liability in the underlying case, especially when one of those theories arguably falls outside the scope of the exclusion. Here, however, the court appropriately relied on the broad scope of the exclusion and rejected the insured’s efforts to circumvent the exclusion by parsing the allegations of the underlying complaint.

General Liability Insurer Entitled to Subrogate Against its Insured’s Indemnitor

In Valley Crest Landscape Development, Inc. v. Mission Pools of Escondido, Inc., the California Court of Appeal for the Fourth Appellate District held that an insurer was entitled to equitably subrogate a breach of express indemnity claim against its insured’s indemnitor.

Valley Crest was a general contractor for exterior improvements at the St. Regis resort and subcontracted with Mission Pools to install a swimming pool. The subcontract provided that Mission Pools would defend and indemnify Valley Crest. Jeffrey Epp suffered a severe spinal cord injury diving into the pool and he subsequently sued Valley Crest and Mission Pools. The Epps alleged that Mission Pools was liable because the vertical tile depth markers were illegible and the use of “French gray” plaster in the pool made it difficult to determine depth.

Valley Crest’s general liability insurer, National Union, defended and indemnified Valley Crest, but Mission Pools did not. Valley Crest cross complained against Mission Pools for breach of the subcontract’s indemnity provision. National Union subsequently intervened as a cross-complainant asserting an equitable subrogation claim against Mission Pools.

The trial court found that Missions Pools was liable to National Union for all amounts it incurred on Valley Crest’s behalf. The court of appeal affirmed, rejecting Mission Pools’ argument that National Union was not entitled to be equitably subrogated to Valley Crest’s claims because National Union’s equitable position was, on balance, inferior to that of Mission Pools. In considering this argument, the court recognized that in order to succeed on an equitable subrogation claim, the plaintiff must establish that justice requires the loss be borne by the party with the inferior equitable position.

The court considered a number of equitable factors. It ultimately found that the factor which tipped the scale in favor of National Union was compliance with contractual obligations. It determined that because National Union had honored its contractual obligations to Valley Crest by agreeing to provide a defense, while Mission Pools had not, National Union was entitled to equitably subrogate.

Indiana Supreme Court Refuses to Hear Insured’s Challenge to Pro Rata Allocation Ruling

Indiana has traditionally been thought of as an “all sums” jurisdiction. Allstate Ins. Co. v. Dana Corp., 759 N.E.2d 1049, 1060 (Ind. 2001) (“whether or not the damaging effects of an occurrence continue beyond the end of the policy period, if coverage is triggered by an occurrence, it is triggered for ‘all sums’ related to that occurrence.”) However, the Indiana Supreme Court – over the strident dissent of its Chief Justice and one other Justice of the five Justice court – recently refused to hear an appeal from an intermediate appellate court decision which applied pro rata allocation in an insurance coverage action involving long-tail toxic exposure claims asserted by former employees against the insured. Thomson Inc. v. Ins. Co. of N. Am., 2015 Ind. LEXIS 397 (Ind. May 15, 2015).

In Thomson, the insured was sued by former Taiwanese employees who were allegedly exposed to industrial solvents from 1970 through 1992. These employees claimed that this exposure caused cancer, or increased their risk of developing cancer in the future.  The insured sought defense and indemnity under commercial general liability policies issued to it between 1991 and 2007. The insured contended that an all sums allocation method applied under the Indiana Supreme Court’s holding in Dana. The trial court agreed and issued an “all sums” ruling.

The appellate court reversed the trial court’s allocation holding. The appellate court distinguished Dana based on differences in the applicable policy language. Specifically, the insuring agreements at issue in Dana required the insured to “indemnify the insured for all sums. . .” the insured became obligated to pay because of an occurrence. Id. at n. 3-4. In contrast, the insuring agreements in the Thomson policies required the insured to “pay those sums. . .” the insured became obligated to pay “during the policy period.” Id. at 1003. The Thomson court held that this different, “limiting” policy language merited a departure from Dana: “the plain meaning of the limiting phrases ‘those sums’ and ‘during the policy period’ and does not render any of the remaining language meaningless.” Id. at 1020. In other words, the Thomson insurers only were required to cover damages occurring during the policy period and not all damages resulting from any occurrence during the policy period.

However, the Thomson court did not provide any guidance to the trial court as to the proper pro rata allocation method: it did not indicate whether “time on the risk,” “years and limits,” or some other method was advisable. Rather, the court remanded the allocation issue to the trial court:

The trial court will be best situated to select (and customize, if necessary) the fairest method of apportioning liability among the insurers in light of the factual complexities of the case at the appropriate time. And for that reason, we believe that the trial court should be afforded broad discretion in selecting and applying an apportionment method.

Id. at 1022-23.

There is no “one-size-fits-all” approach to allocation in Indiana in light of Thomson. Rather, as the Supreme Court dissenters recognized, courts applying Indiana law must engage in careful scrutiny of policy language to determine proper allocation in long-tail exposure cases. See Thomson Inc. v. Ins. Co. of N. Am., 2015 Ind. LEXIS 397, *2 (Ind. May 15, 2015) (Rush, C.J., dissenting) (“We should not burden trial courts with that task [of determining allocation] based on policy language that is ambiguous at best.”)

Intellectual Property Exclusion Bars Coverage for Right of Publicity Claims

In Alterra Excess and Surplus Insurance Company v. Jaime Snyder (2015) 234 Cal.App.4th 1390, Gordon & Rees Partner Arthur Schwartz and Senior Counsel Randall Berdan obtained affirmance of a trial court judgment in the California Court of Appeal, First Appellate District. The court held an exclusion for “Infringement of Copyright, Patent, Trademark or Trade Secret” applied to preclude coverage for claims based on the right of publicity. While the court’s ruling absolved Alterra of its alleged duty to defend or indemnify, the procedural wrangling behind the scenes provides a cautionary tale for insurers.

In 2009, Maxfield & Oberton Holdings, LLC began manufacturing and distributing a desk toy, “Buckyballs”, and similar products. They all incorporated the name “Bucky” which was based on the architectural engineer and inventor, R. Buckminster Fuller. Fuller died in 1983 and, in 1985, Fuller’s Estate registered its claim as Fuller’s successor with the California Secretary of State. The Estate licensed the right to use Fuller’s name and likeness on numerous occasions, including to Apple Computer which used Fuller’s image, and others, in its “Think Different” advertising campaign. In 2004, the U.S. Postal Service licensed the rights to Fuller’s image for a postage stamp.

The Estate sued Maxfield in federal district court in Northern California alleging Maxfield had been using the Bucky name without the Estate’s consent or paying royalties to the Estate. The Estate alleged claims for (1) Unfair Competition, (2) Invasion of Privacy (Misappropriation of Name and Likeness), (3) Unauthorized Use of Name and Likeness in Violation of § 3344.1, and (4) Violation of various Business and Professions Code statutes.

Alterra’s predecessor issued a CGL insurance policy to Maxfield in 2010. Alterra provided a defense to Maxfield in the federal action under a reservation of rights and filed a declaratory relief action in San Francisco Superior Court seeking a declaration of non-coverage. Alterra named the Estate in the coverage action but later stipulated to dismiss it in return for the Estate’s agreement to be bound by the outcome.

While the federal action was pending, Maxfield dissolved. This was precipitated by the United States Consumer Product Safety Commission’s filing of an administrative complaint due to safety concerns over Buckyballs. The dissolution created several issues.

First, as a dissolved entity, Maxfield could no longer defend itself in the federal infringement action and its retained defense counsel filed a motion to withdraw. Second, following the appointment of a Trustee to administer pending and future claims against Maxfield, the Fuller Estate entered into an agreement with the Trustee that released Maxfield from liability in the federal action. But, it also purported to allow the Estate to continue to pursue the infringement action so that the Estate could obtain a judgment against Maxfield for collection from Alterra. The Estate also obtained an assignment from the Trustee to allow the Estate to pursue Maxfield’s rights against Alterra.

So the stage was set. The Estate had made it clear that, despite its release of Maxfield in the federal action, it would pursue a judgment against Maxfield, an unrepresented party that could not defend itself, for eventual collection against Alterra. Although Alterra continued to believe no coverage existed, the stakes had now increased substantially by the possible exposure to Maxfield on an uncontested judgment.

To protect itself, Alterra intervened in the federal action and asserted defenses on the merits, including the very real defense the Estate had settled and released all claims against Maxfield and the infringement action had become a sham proceeding.

The Estate then sought to re-insert itself into the San Francisco coverage action despite its prior agreement to be dismissed. The court allowed the Estate to join after which the Estate attempted to prove Alterra owed coverage to Maxfield for the federal action. In the meantime, the federal action was stayed to allow the coverage issues to be resolved. Of course, if Alterra were to prevail on coverage, the Estate’s plan would collapse.

Alterra moved for judgment on the pleadings in the coverage action on three grounds: the policy’s Intellectual Property and First Publication Exclusions, and the Estate’s settlement with the Trustee. As to the latter, Alterra contended the Estate’s deal with Maxfield’s trustee, made without Alterra’s consent, violated the policy’s “no action clause” barring any coverage obligation. Alterra cited the fundamental principle, recognized by the California Supreme Court, that a claimant may not manufacture a payday by entering into an agreement with an insured to the defending insurer’s detriment or without its consent.

The trial court granted Alterra’s motion for judgment finding the Intellectual Property Exclusion barred all coverage as a matter of law. It did not reach Alterra’s other issues. The Court of Appeal subsequently affirmed on this ground.

On appeal, the Estate contended the exclusion could not reasonably be understood to apply to “intellectual property rights” because it is not conspicuous, plain and clear. Coverage exclusions and limitations must meet two separate tests, (1) “the limitation must be ‘conspicuous’ with regard to placement and visibility,” and (2) the language must be “plain and clear.” The court explained the Intellectual Property Exclusion is on an Insurance Services Office (ISO) industry form, appears under a bold-faced heading “Exclusions,” with each exclusion’s title also bold-faced. The court found these factors satisfy the first test.

The court also concluded the Intellectual Property Exclusion plainly and clearly applies to bar coverage. The Estate argued the exclusion entitled “Infringement of Copyright, Patent, Trademark or Trade Secret” shouldn’t even be called the Intellectual Property Exclusion. But the court noted that, not only have prior courts uniformly referred to this exclusion as the “Intellectual Property Exclusion,” the Estate repeatedly referred to it in just this manner in trial court filings.

Alterra’s exclusion encompasses not only copyright, patent, trademark and trade secrets but also “other intellectual property rights,” sufficient to extend to invasion of privacy and right of publicity claims. A similar exclusion was addressed by a 2011 California appellate ruling, Aroa Marketing, Inc. v. Hartford Ins. Co. of the Midwest (2011) 198 Cal.App.4th 781. In Aroa, the court held the exclusion there barred claims based on the unauthorized use of a model’s image and likeness.

The Alterra court found the “other intellectual property rights” language in Alterra’s policy is effectively identical to the Hartford policy’s “any intellectual property rights” in Aroa. These nonexclusive listings are broad enough to encompass invasion of privacy or right of publicity claims. Even if Aroa were not on the books, the Alterra court added, it would apply the exclusion to the Estate’s claims.

The tale is not yet over. The federal action must now be dismissed. Also, the Court of Appeal’s opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. But, as things stand, Alterra’s rights have been vindicated and the Estate’s plan to collect an uncontested judgment thwarted.