The Washington Supreme Court Issues an Important Decision Regarding Insurance Coverage for Covid-Related Claims

The Washington Supreme Court recently issued an important decision that provides guidance on coverage for Covid-related claims and the application of Washington’s efficient proximate cause rule in Hill & Stout, PLLC v. Mut. of Enumclaw Ins. Co., 515 P.3d 525 (2022). In Hill & Stout, the Washington Supreme Court held that (1) Covid-related damages are not a “direct physical loss” and thus are not subject to property coverage, (2) the Virus Exclusion also precludes coverage, and (3) the efficient proximate cause rule does not mandate coverage.

The Hill & Stout case involved a dentist office (“HS”) that was insured under a property insurance policy (the “Policy”) issued by Mutual of Enumclaw Insurance Company (“MOE”). The Policy covered lost business income caused by a “direct physical loss of or damage to” the dentist office properties. The Policy also contained a Virus Exclusion that barred coverage “for loss or damage caused directly or indirectly by [a]ny virus … that induces or is capable of inducing physical distress, illness or disease.” The Virus Exclusion was amended by the Washington Changes Endorsement which, in relevant part, requires that in order for the exclusion to apply, the virus must “directly and solely result[] in [the] loss or damage,” or “initiate[] a sequence of events that result[] in loss or damage, regardless of the nature of any intermediate or final event in that sequence.”

HS tendered a claim to MOE for lost business income due to Governor Jay Inslee’s proclamation that prohibited non-emergency dental care for several months because of Covid (the “Covid Proclamation”). Notably, HS had actually ceased all non-emergency dental procedures several days before Governor Inslee issued the Covid Proclamation, and HS continued to have receptionists in its offices while the Covid Proclamation was in effect. MOE denied HS’s claim on the grounds that HS had not suffered a “direct physical loss” and that any alleged damages were barred by the Virus Exclusion. HS commenced a declaratory judgment class action lawsuit against MOE, and alleged that HS’s loss of business income due to Covid was covered since it was a “direct physical loss or damage as a result of the [Governor’s] proclamation[.]”

The primary issue in the case involved the meaning of the phrase “direct physical loss of or damage to” the insured properties, and whether HS’s inability to use its dentist offices due to the Covid Proclamation fell within this grant of coverage. Because the terms “physical” and “loss” were not defined in the Policy, the Supreme Court turned to a standard English dictionary to determine their meanings, and concluded that “physical loss of property” means “property that has been physically destroyed or that one is deprived of in that the property is no longer physically in their possession.” Hill & Stout, 515 P.3d at 532. The Supreme Court noted that the Covid Proclamation did not physically prevent HS from using its dental offices, especially given that HS’s offices remained open for emergency services and administrative staff continued to work there. As a result, the Supreme Court held that HS’s claim was not covered because there was no “direct physical loss of or damage to” its dental offices, holding as follows:

Accordingly, under the facts of this case we hold that the claim for loss of intended use and loss of business income is not a physical loss of property. HS was still able to physically use the property at issue. The property was in HS’s possession, the property was still functional and able to be used, and HS was not prevented from entering the property. Under the Proclamation, HS was not able to use the property in the way that it wanted, but this alleged “loss” is not “physical.” It is more akin to an abstract or intangible loss than a “physical” one.

Hill & Stout, 515 P.3d at 532.

The Washington Supreme Court also rejected HS’s request to apply the “loss of functionality test” for determining whether there had been a direct physical loss, as opposed to requiring that there be a physical alteration of the property. The Supreme Court recognized that the loss of functionality test had been applied in asbestos cases where the release of asbestos fibers contaminates property to such a degree “that its function is nearly eliminated or destroyed[.]” Hill & Stout, 515 P.3d at 532-33 (quoting Port Authority of New York & New Jersey v. Affiliated FM Insurance Co., 311 F.3d 226, 236 (3d Cir. 2002)). However, the Washington Supreme Court found that the “loss of functionality test” was inappropriate with respect to the subject claim “because there is no physical loss of functionality to the property.” Id. at 533 (emphasis original). The Washington Supreme Court held that the Covid “Proclamation did not physically cause a loss of functionality of the property because it continued to be functional.” Id. (emphasis original). Moreover, the Supreme Court held that “even under a loss of functionality test there must be some physical effect on the property” in order for there to be coverage under a property insurance policy. Hill & Stout, 515 P.3d at 534 (emphasis original).

The Washington Supreme Court further held that coverage was barred by the Policy’s Virus Exclusion and that the efficient proximate cause rule did not restore coverage. The Supreme Court noted that “the efficient proximate cause rule applies to mandate coverage when an initial covered peril sets a causal chain in motion and that causal chain includes later excluded perils.” Hill & Stout, 515 P.3d at 535. However, the rule does not operate in reverse, such that it does not “mandate exclusion [of coverage] when the casual chain is initiated by an excluded peril.” Id. Nonetheless, the Supreme Court noted that in its prior decisions “[w]e have left open the possibility that an insurer may draft policy language to deny coverage when an excluded peril initiates an unbroken causal chain.” Id. (quoting Vision One, LLC v. Phila. Indem. Ins. Co., 276 P.3d 300, 309 (2012)). The Washington Supreme Court found that the Virus Exclusion did in fact contain policy language that barred coverage when an excluded peril initiated the loss, because the Virus Exclusion had been amended by the Washington Changes Endorsement which, in relevant part, stated as follows:

We will not pay for loss or damage caused by any of the excluded events described below. Loss or damage will be considered to have been caused by an excluded event if the occurrence of that event:

b. Initiates a sequence of events that results in loss or damage, regardless of the nature of any intermediate or final event in that sequence.

Hill & Stout, 515 P.3d at 536.

The Washington Supreme Court held that “insurers can [include language in the insurance policy] contract to say that coverage is excluded for a causal chain initiated by an excluded peril. The exclusionary language in the policy does just that.” Id. The Supreme Court further found that it could not be reasonably disputed that Covid-19 caused Governor Inslee to issue the Covid Proclamation and HS’s loss. Accordingly, the Supreme Court held that the Virus Exclusion barred coverage, and reasoned as follows:

There is no issue of material fact needed to determine that COVID-19, an excluded peril, initiated the causal chain in this case and that the policy excludes the causal chain of losses initiated by an excluded peril. As the causal chain is initiated by an excluded peril, the efficient proximate cause rule does not apply to mandate coverage, and, under the language of this policy, the virus exclusion applies.

Hill & Stout, 515 P.3d at 537.

The Hill & Stout decision provides important guidance on coverage for Covid-related claims. However, the Washington Supreme Court’s holding regarding the efficient proximate cause rule is of even greater significance beyond just Covid-related claims because as the Supreme Court stated, “this issue will likely repeat in other cases regarding the interpretation of similar insurance policies[.]” Id. at 535. To the extent you have any questions regarding the Hill & Stout case or other issues involving insurance coverage, please feel free to contact the attorneys in the insurance coverage group at Gordon Rees Scully Mansukhani in Seattle.

Recent Developments Involving Cedell v. Farmers Insurance Company of Washington

Ever since the Washington Supreme Court’s 2013 decision in Cedell v. Farmers Insurance Company of Washington, 176 Wn.2d 686, 295 P.3d 239 (2013), insurance coverage attorneys have been struggling to define the exact parameters of the Cedell ruling in order to safeguard the attorney-client privilege as to the communications between the insurer and its counsel.  As a brief background, the Washington Supreme Court held in Cedell that there is a presumption of no attorney-client privilege in a lawsuit involving bad faith claims handling.  However, an insurer can overcome the presumption of no attorney-client privilege by showing that its counsel provided legal advice regarding the insurer’s potential liability under the policy and law, and did not engage in any quasi-fiduciary activities, i.e. claims handling activities, such as investigating, evaluating, adjusting or processing the insured’s claim.

Since Cedell, various trial courts have held that the following activities by an insurer’s counsel constitute quasi-fiduciary conduct that do not overcome the presumption of no attorney-client privilege, resulting in an order to produce documents and/or to permit the deposition of the insurer’s counsel:

  • Insurer’s attorney being the primary or sole point of contact with the insured for the insurer;
  • Insurer’s attorney requesting documents from the insured that are relevant to the investigation of the claim;
  • Insurer’s attorney communicating directly with the insured or the insured’s counsel regarding claims handling issues or payments;
  • Insurer’s attorney interviewing witnesses for purposes of the investigation of the claim;
  • Insurer’s attorney conducting an examination under oath of the insured;
  • Insurer’s attorney drafting proposed or final reservation of rights letter or denial letter to the insured; and
  • Insurer’s attorney conducting settlement negotiations in an underlying litigation.

Conversely, some trial courts have held that the following activities by an insurer’s counsel are not quasi-fiduciary activities, in that insurer’s counsel is providing legal advice and opinion, resulting in a valid assertion of the attorney-client privilege:

  • Insurer’s attorney drafting a coverage opinion on the insurer’s own potential liability, such as whether or not the insured is entitled to coverage under the policy and law;
  • Insurer’s attorney drafting a response to an insured’s Insurance Fair Conduct Act (“IFCA”) Notice.

With respect to drafting a response to an insured’s IFCA Notice, however, there are cases that have held that such an activity is a quasi-fiduciary one, to the extent the insurer’s counsel was also involved in claims-handling activities, such as drafting a proposed denial letter and/or coverage position/Reservation of Rights letter to the insured. 

Recently, in Young v. Safeco Ins. Co. of America, 2022 WL 1404650 (W.D. Wash. May 4, 2022), the Western District Court of Washington provided additional clarification on what qualifies as a quasi-fiduciary activity in terms of an IFCA Notice response drafted by insurer’s counsel.  In Young, the insured made a claim to Safeco under a Landlord Protection Policy as a result of the tenant, who was found deceased in the insured’s rental property, making modifications to the property without the insured’s permission.  The insured sought coverage for renovations due to the tenant’s vandalism and for biohazard damage from the decomposition of the deceased tenant’s body.  Safeco initially denied coverage.  Subsequently, however, in the IFCA Notice response, Safeco’s coverage counsel advised the insured’s counsel that Safeco would like “to cure” its breach by accepting coverage, that the two losses appeared to be “two separate claims”, that Safeco would “set up a second claim to address the renovations[,]” and asked the insured to provide an estimate to repair the renovations to the rental property at issue.  Id. at *3.  The Court further noted that the insurer’s coverage counsel wrote to insured’s counsel to dispute whether the estimate provided by the insured included damage to the rental property not covered by the policy, outlined the coverage and exclusions contained in that policy (similar to what would be in a Reservation of Rights letter or coverage position letter sent to the insured), and requested a second inspection of the rental property, none of which pertained to the provision of legal advice or counsel to the insurer.  Id.  Rather, the Court characterized such tasks as the insurer’s renewed attempts to evaluate and process the insured’s vandalism claim.  Id.  The Court ordered the production of documents that had originally been redacted as attorney-client privilege.

In light of the Young case, it appears that an IFCA Notice response drafted by insurer’s counsel should not include anything that could be construed as pertaining to claims-handling, i.e. a reversal of coverage position and a request for additional information related to a claim.  Moreover, it is recommended that any communications with the insured about the claim, i.e. a dispute the insured’s estimate including non-covered damage or to request an inspection, should be done by the adjuster, not the insurer’s counsel, in order to protect the attorney-client privilege as to the communications between the insurer and its counsel.

Another recent case that deserves attention is Water’s Edge, A Condominium Owners Association v. Affiliated FM Insurance Company, 2022 WL 3054209 (W.D. Wash. August 2, 2022).  In Water’s Edge, the Federal District Court for the Western District of Washington ordered the deposition of the insurer’s counsel as the Court found that the counsel had engaged in claims processing and handling (quasi-fiduciary) tasks by reviewing, on behalf of the insurer, the documents that Water’s Edge submitted to the insurer in support of its claim; participating in the investigation into the nature and extent of the property damage; and drafting the denial letter on behalf of the insurer. Id. at *3.  The deposition of insurer’s counsel was limited to those three categories. 

At first glance, this decision seems to indicate that reviewing materials submitted by the insured would qualify as a quasi-fiduciary task.  However, we believe that context is important in this regard – in Water’s Edge, the documents were reviewed presumably to draft the denial letter, which has already been established as a quasi-fiduciary activity.  As a result, to the extent the insurer’s counsel is reviewing insured’s documents in order to draft anything other than a coverage opinion that outlines and evaluates the insurer’s potential legal liability under the policy, then such activity could presumably be deemed as claims-handling.  If insurer’s counsel is reviewing the insured’s documents for purposes of coverage assessment and drafting a coverage opinion, such conduct and all documents related to that conduct would be protected by the attorney-client privilege. 

There is some ambiguity in the Water’s Edge decision with respect to the Court’s identification of insurer’s counsel’s participation in the investigation into the nature and extent of the damage as a quasi-fiduciary task.  Generally, an analysis of the “nature” of damage is conducted in order to assess coverage under the policy, i.e. is the damage covered property damage or precluded under an exclusion?  An analysis of the “extent” of damage, though, would presumably involve some aspect of claims handling in that it generally addresses the repair costs of damage.  We can only hope that other decisions will eventually shed some light on the issue of “nature” versus “extent” of damage.

This area of the law is ever-evolving and complex.  If you have questions about the implications of Cedell or any of the cases discussed herein, or have any general questions in regard to pending insurance claims and compliance with Washington insurance law, please feel free to contact our office.

McLaughlin v. Travelers

The Washington State Supreme Court recently issued a decision that clarified whether a bicyclist is a “pedestrian” for purposes of personal injury protection (“PIP”) coverage. McLaughlin v. Travelers Commercial Ins. Co., 476 P.3d 1032 (2020).

The case involved an accident whereby a parked motorist opened his car door and hit McLaughlin while he was riding a bicycle, resulting in injury. Travelers insured McLaughlin under an auto policy that provided up to $5,000 in MedPay coverage, which provides payments for injuries to an insured similar to PIP. Travelers issued the policy to McLaughlin when he lived in California, and continued to insure him after he moved to Washington. However, the MedPay coverage only applied to an “insured,” which was defined in the policy as “a pedestrian when struck by[] a motor vehicle.” The policy did not define the term “pedestrian.” Thus, the pertinent coverage issue in the case was whether McLaughlin could be considered a “pedestrian” while riding a bicycle.

Travelers denied coverage on the grounds that the vehicle codes of Washington and California excluded bicyclists from the respective State’s statutory definition of “pedestrian.” The Washington State Supreme Court disagreed and held that the applicable definition of “pedestrian” was found in the Washington statutes that apply to casualty insurance (RCW 48.22 et seq.), and not in Washington’s general motor vehicle code (RCW 46, et seq.) or the statutory title that applies to public highways or transportation (RCW 47, et seq.).

Specifically, the Supreme Court reasoned that RCW 48.22.005(11) defines “pedestrian” for purposes of casualty insurance as “a natural person not occupying a motor vehicle as defined in RCW 46.04.320.” In relevant part, RCW 46.04.320 defines “motor vehicle” as “a vehicle that is self-propelled[.]” The Supreme Court further noted that Washington case law has previously interpreted RCW 46.04.320 to mean that “a bicycle is not a motor vehicle.” City of Montesano v. Wells, 79 Wn. App. 529, 532, 902 P.2d 1266 (1995). The Supreme Court therefore concluded that because McLaughlin was not occupying a motor vehicle at the time of the accident, he qualifies as a “pedestrian” under RCW 46.04.320. McLaughlin, 476 P.3d at 1036.

The Supreme Court further supported its finding of coverage by acknowledging the public policy implications of insurance contracts and “Washington’s strong public policy in favor of the full compensation of medical benefits for victims of road accidents.” McLaughlin, 476 P.3d at 1037. The Supreme Court explained that “applying RCW 48.22.005(11)’s definition of pedestrian affords the insured the maximum protection provided by the insurance policy and is not unfair to the insurer.” Id.

As an additional, independent basis for finding coverage, the Supreme Court also concluded that the undefined term “pedestrian,” as used in the subject policy, was ambiguous. The Court noted that where there is ambiguity, “[a]ny legal ambiguity must be resolved in favor of the insured.” Id. Given the ambiguity surrounding the term “pedestrian,” the Court concluded that the term should be construed to encompass bicyclists because “[t]he average purchaser of insurance would expect to be covered by this policy when injured by an automobile.” Id. at 1038.

In contrast, the dissent objected to interpreting the policy pursuant to a Washington statutory scheme. It reasoned that the parties had not considered Washington law at the time they entered into the policy while the insured lived in California. Instead, the dissent would have applied the normal rules of contract interpretation to evaluate what the parties intended “pedestrian” to mean when they entered into the insurance contract in California. According to the dissent, the plain, ordinary meaning of “pedestrian” as provided for in a standard English dictionary does not include bicyclists. As a result, the dissent would not have found coverage in this instance, without any consideration as to Washington’s insurance statutes. McLaughlin, 476 P.3d at 1040-42 (dissent).

This case demonstrates the technical nature of interpreting legal terms in an insurance policy, and the Washington Court’s inclination to find coverage when it supports Washington’s public policy to provide full compensation for auto accident victims.

If you have questions regarding policy interpretation or insurance coverage generally, please feel free to reach out to a member of the insurance team at Gordon Rees Scully Mansukhani, LLP.

New Washington Regulation Requires Mandatory Language in an Insurer’s Denial Letter

The Washington State Office of the Insurance Commissioner (the “OIC”) has issued a new regulation, WAC 284-30-770, which mandates that insurers include specific advisory language in “adverse notifications” sent to insureds. Beginning on August 1, 2020, insurers will be required to include the mandatory language in any notice, statement, or document, wherein the insurer denies a claim, issues final payment for less than the amount of the claim submitted, makes an adverse benefit determination, or rescinds, terminates, cancels, or does not renew a policy. In any such notice, the insurer must include the following language:

“If you have questions or concerns about the actions of your insurance company or agent, or would like information on your rights to file an appeal, contact the Washington state Office of the Insurance Commissioner’s consumer protection hotline at 1-800-562-6900 or visit The insurance commissioner protects and educates insurance consumers, advances the public interest, and provides fair and efficient regulation of the insurance industry.”

This language must appear on either the first page or at the end of the adverse notification, and must be in the same font and font size as used in the majority of the notification. The OIC has advised that the purpose of the new rule is to “increase consumer awareness of available agency assistance and to help consumers with their insurance questions by requiring contact information for the Office of the Insurance Commissioner on adverse notifications.”

Many insurers already include similar language in claims correspondences sent to insureds in states other than Washington. Please be advised that beginning on August 1, 2020, insurers will also be required to include the above-stated language in certain adverse correspondences regarding insurance matters in Washington.

To the extent you have questions regarding this new regulation or another insurance-related issue, please do not hesitate to contact the insurance coverage team at Gordon Rees Scully Mansukhani, LLP.

The Washington State Supreme Court Rules that Claims Adjusters May Not Be Held Personally Liable for Insurance Bad Faith

In 2018, the Washington Court of Appeals, Division 1, issued a ruling which rippled through the insurance community by finding that a claims adjuster may be held personally liable for the tort of insurance bad faith. However, in October 2019, the Washington State Supreme Court held that a claims adjuster may not be personally sued for insurance bad faith or for alleged violations of Washington’s Consumer Protection Act, RCW 19.86 et seq. (“CPA”). Keodalah v. Allstate Ins. Co., Slip. Op. No. 95867-0, 2019 WL 4877438 (Wash. Oct. 3, 2019).

In Keodalah v. Allstate Ins. Co., the Supreme Court ruled there is no statutory basis for a bad faith claim against an adjuster under RCW 48.01.030 because this statute does not create an implied cause of action. The Supreme Court also re-affirmed that a bad faith claim premised upon the common law may not be pursued against an adjuster, since an adjuster is outside the quasi-fiduciary relationship between the insurer and its insured. Further, the Supreme Court held that a CPA claim may not proceed against a claims adjuster as a matter of law, regardless of whether it is premised upon a per se regulatory violation or upon alleged bad faith.

In Keodalah, an insured brought suit against their insurer and its claims adjuster for the tort of insurance bad faith and the alleged violation of the CPA in connection with the insured’s claim for underinsured motorist (“UIM”) benefits. The insured alleged that the adjuster had improperly undervalued the UIM claim by relying on incorrect information regarding the subject auto accident. Id. In part, the insured premised his bad faith claim against the adjuster on RCW 48.01.030, which broadly provides “that all persons be actuated by good faith . . . in all insurance matters.” The Supreme Court thus evaluated whether RCW 48.01.030 created an implied cause of action for bad faith against a claims adjuster.

After analyzing the issue under the 3-prong “Bennett test”, the Supreme Court held that “RCW 48.01.030 does not create an implied cause of action for insurance bad faith.” This is because RCW 48.01.030 benefits the general public interest, rather than a specific, identifiable class of persons. RCW 48.01.030 also does not contain a specific enforcement mechanism which, the Supreme Court found, “suggests that the legislature did not intend to imply a cause of action based on violations of RCW 48.01.030.” Moreover, the Supreme Court reasoned that “[i]f we were to read the statute to imply a cause of action, by the statute’s plain language, such implied cause of action would apply against insureds as well. That is, insurers would be empowered to sue their insured … [which] would not be consistent with the legislature’s purpose in enacting the statute[.]” Accordingly, the Supreme Court held that a bad faith claim may not be pursued against a claims adjuster based upon a statutory violation of RCW 48.01.030.

Notably, the Keodalah decision also re-affirmed the Supreme Court’s prior rulings that a bad faith claim premised upon the common law may not be brought against anyone other than an insurer. In citing its ruling in Tank v. State Farm Fire & Casualty Co., 105 Wn.2d 381, 715 P.2d 1333 (1986), the Supreme Court in Keodalah stated that “this court has limited bad-faith tort claims to the context of the insurer-insured relationship[.]” This is because such claims are premised upon “the fiduciary relationship existing between the insurer and insured.” Keodalah, at *15 – 16, n. 6 (quoting Tank, 105 Wn.2d at 385). The Supreme Court found that no such fiduciary relationship exists with respect to a claims adjuster, and that limiting common law bad faith claims to actions against an insurer was consistent with a long line of Washington precedent. See, e.g., St. Paul Fire & Marine Ins. Co. v Onvia, Inc., 165 Wn.2d 122, 130 n.3, 196 P.3d 664 (2008).

Finally, the Supreme Court held that a CPA claim may not be pursued against a claims adjuster, regardless of whether the claim is premised upon alleged bad faith or upon a per se violation of Washington’s regulation concerning unfair claims settlement practices, WAC 284-30-330. By its terms, WAC 284-30-330 only applies to “unfair or deceptive acts or practices of the insurer.” Keodalah, at *14 (citing WAC 284-30-330) (emphasis original). Moreover, because “RCW 48.01.030 does not itself provide an actionable duty” for bad faith, it cannot form the basis for CPA liability against an adjuster. The Supreme Court explained that it has “limited CPA claims based on breach of the statutory duty of good faith” to the insurer because it is the insurer – not the adjuster – who owes a quasi-fiduciary duty to the insured. As a result, the Supreme Court held that “[b]ecause Keodalah claims a breach of the duty of good faith by someone outside the quasi-fiduciary relationship, his CPA claim based on RCW 48.01.030 was properly dismissed.”

The Washington Supreme Court Rules that a Holder of a Certificate of Insurance Is Entitled to Coverage

The Washington courts have historically found that the purpose of a certificate of insurance is to advise others as to the existence of insurance, but that a certificate is not the equivalent of an insurance policy. However, the Washington State Supreme Court recently held that, under certain circumstances, an insurer may be bound by the representations that its insurance agent makes in a certificate of insurance as to the additional insured (“AI”) status of a third party. Specifically, in T-Mobile USA, Inc. v. Selective Ins. Co. of America, the Supreme Court found that where an insurance agent had erroneously indicated in a certificate of insurance that an entity was an AI under a liability policy, that entity would be considered as an AI based upon the agent’s apparent authority, despite boilerplate disclaimer language contained in the certificate. T-Mobile USA, Inc. v. Selective Ins. Co. of America, Slip. Op. No. 96500-5, 2019 WL 5076647 (Wash. Oct. 10, 2019).

In this case, Selective Insurance Company of America (“Selective”) issued a liability policy to a contractor who had been retained by T-Mobile Northeast (“T-Mobile NE”) to construct a cell tower. The policy conferred AI status to a third party if the insured-contractor had agreed in a written contract to add the third party as an AI to the policy. Under the terms of the subject construction contract, the contractor was required to name T-Mobile NE as an AI under the policy. T-Mobile NE was therefore properly considered as an AI because the contractor was required to provide AI coverage to T-Mobile NE under the terms of their contract.

However, over the course of approximately seven years, Selective’s own insurance agent issued a series of certificates of insurance that erroneously identified a different company, “T-Mobile USA”, as an AI under the policy. This was in error because there was no contractual requirement that T-Mobile USA be added as an AI. Nonetheless, the certificates stated that T-Mobile USA was an AI, and they were signed by the agent as Selective’s “authorized representative.”

In the ensuing coverage action, a question arose as to whether T-Mobile USA could be considered as an AI given the representations in the certificates. Significantly, the Washington State Supreme Court heard the matter pursuant to a certified question from the Ninth Circuit Court of Appeals, which had previously made several important findings that guided the Supreme Court’s treatment of the case. Chief among them, the Ninth Circuit had already concluded that Selective’s “agent [had] acted with apparent authority in issuing the certificate at issue[.]”

Based upon that predicate, the Supreme Court found that Selective was bound by the representations made by its authorized insurance agent in the certificate of insurance. The Supreme Court noted the general rule in Washington that an “insurance company is bound by all acts, contracts or representations of its agent … which are within the scope of [the agent’s] real or apparent authority[.]” Because the Ninth Circuit had already found that Selective’s insurance “agent acted with apparent authority when it issued the certificate to T-Mobile USA,” pursuant to this general rule in Washington, the Supreme Court concluded that “Selective [was] bound by the representations its agent made in the certificate of insurance.”

Selective sought to argue that T-Mobile USA’s reliance on the agent’s representations was unreasonable because T-Mobile USA knew it was not a party to the construction contract, and therefore knew it was not an AI. However, the Supreme Court found this argument was foreclosed by the fact that the Ninth Circuit had already “rul[ed] that the agent acted with apparent authority[.]” As a result, the Supreme Court reasoned that “the Ninth Circuit necessarily decided that T-Mobile USA’s belief that the agent was authorized to issue a certificate naming it as an additional insured was ‘objectively reasonable’ … [and thus] its reliance on that certificate [was] reasonable.”

The Supreme Court also rejected Selective’s argument that boilerplate disclaimer language in the certificate negated the grant of AI coverage to T-Mobile USA. For example, the boilerplate language stated that the certificate “confers no rights” and “does not affirmatively or negatively amend, extend or alter the coverage afforded by the [policy].” The Supreme Court noted, however, that these disclaimers conflicted with the apparent grant of AI coverage to T-Mobile USA, which had been specifically written into the certificate by the insurer’s agent. Applying a canon of contract interpretation, the Supreme Court held that, in this instance, the “specific written-in additional insured statement [in the certificate] … prevails over the preprinted general disclaimers.”

It is questionable whether this finding can be applied more broadly. The Supreme Court was careful to note that “we do not hold that all disclaimers are ineffective. We hold that the disclaimers at issue here are ineffective because they completely and absolutely contradict the other, more specific promises in that same certificate.” Had the disclaimers not been so directly contradicted by the specific representations in the certificates, or if the Ninth Circuit had not previously held that Selective’s agent acted with apparent authority, this case may have been decided differently.

In any event, the T-Mobile USA case is a stark reminder of the significance that representations by an insurer’s authorized agents may have on coverage issues.