Alaska Supreme Court Rules that Insurer Have No Right to Reimbursement of Defense Fees and Costs

By and on April 6, 2016
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For many years, the prevailing view of Alaska law was that an insurer could obtain reimbursement of defense costs from an insured if it specifically reserved the right to seek reimbursement and subsequently obtained a determination of no coverage. This understanding was based on Unionamerica Inc. Co., Ltd. v. General Star Indem. Co., 2005 WL 757386 (D. Alaska 2005), in which the Alaska federal district court predicted that the Alaska Supreme Court would allow insurers to recover defense costs. It turns out, however, that the district court’s prediction was incorrect.

In Attorneys Liability Protection Society, Inc. v. Ingaldson Fitzgerald, P.C., No. 7095 (March 25, 2016), the Alaska Supreme Court ruled that a policy provision entitling an insurer to reimbursement of fees and costs incurred by the insurer defending under a reservation of rights is unenforceable, even if (1) the insurer explicitly reserves the right to seek reimbursement in its offer to provide a defense by an independent counsel, (2) the insured accepts the defense subject to the reservation of rights, and (3) the claims are subsequently determined to be excluded from coverage under the policy.

Attorneys Liability Protection Society, Inc. (“ALPS”) issued a malpractice insurance policy to Ingaldson & Fitzgerald, P.C. (“IF”) from April 29, 2007 to April 29, 2008. The policy contained a provision that entitled ALPS to seek reimbursement for amounts paid by ALPS in defending non-covered claims.

During the policy period, IF reported to ALPS a lawsuit against it alleging, among other things, restitution, disgorgement, and conversion for recovery of a retainer that had been paid to IF. ALPS accepted IF’s tender but reserved rights because the policy excluded coverage for claims arising from conversion or fee disputes. ALPS retained independent counsel to defend IF and paid all defense costs in full, as required by AS 21.96.100.

In the underlying case, summary judgment was rendered against IF on claims of restitution, disgorgement and conversion, all of which were specifically excluded under the malpractice policy. Thereafter, ALPS commenced a declaratory judgment action against IF and moved for partial summary judgment on the reimbursement of defense costs issue. In denying the motion, the district court declined to follow the Unionamerica case and held that Alaska law prohibits the inclusion of a right to reimbursement in insurance policies under AS 21.89.100(d), which states, in part, that in providing independent counsel, an insurer “shall be responsible only for the fees and costs to defend those allegations for which the insurer either reserves its position as to coverage or accepts coverage.”

ALPS appealed to the Ninth Circuit Court of Appeals. The Ninth Circuit noted that while AS 21.96.100(d) requires the insurer to pay defense costs if it either covers the claims against its insured or defends pursuant to a reservation of rights, the statute is not clear as to whether the insurer can later seek reimbursement of fees assumed under a reservation of rights under these circumstances. Therefore, the Ninth Circuit certified two questions to the Alaska Supreme Court:

  1. Does Alaska law prohibit enforcement of a policy provision entitling an insurer to reimbursement of fees and costs incurred by the insurer defending claims under a reservation of rights, where (1) the insurer explicitly reserved the right to seek such reimbursement in its offer to tender a defense provided by independent counsel, (2) the insured accepted the defense subject to the reservation of rights, and (3) the claims are later determined to be excluded from coverage under the policy?
  2. If the answer to Question 1 is “Yes,” does Alaska law prohibit enforcement of a policy provision entitling an insurer to reimbursement of fees and costs incurred by the insurer defending claims under a reservation of rights, where (1) the insurer explicitly reserved the right to seek such reimbursement in its offer to tender a defense provided by independent counsel, (2) the insured accepted the defense subject to the reservation of rights, and (3) it is later determined that the duty to defend never arose under the policy because there was no possibility of coverage?

In answering both questions with “YES,” the Alaska Supreme Court ruled that AS 21.96.100 renders any defense costs reimbursement provisions in insurance policies unenforceable.

The Alaska Supreme Court first acknowledged that under Alaska case law, an insured has a right to demand an unconditional defense. To meet this right, the insurer has three options: (1) affirm the policy and defend unconditionally; (2) repudiate the policy and withdraw from the defense; or (3) offer its insured the right to retain independent counsel to conduct the defense and agree to pay all the necessary costs of that defense. CHI of Alaska, Inc. v. Employers Reinsurance Corp., 844 P.2d 1113 (1993); Continental Ins. Co. v. Bayless & Roberts, Inc., 608 P.2d 281 (1980). The Court continued that AS 21.96.100 is the codification of such requirements.

In examining the statutory text, the Alaska Supreme Court noted that the subsections (a) through (d) focus on the mandatory requirement that insurers pay for the cost of independent counsel. The Court noted that the statute clearly allocates to the insurer the responsibility to pay the fees and costs when an insurer provides independent counsel to the insured. Therefore, any effort to shift such expenses to an insured would violate the allocation that the statute requires and would be invalid. In short, there is nothing in AS 21.96.100 that permits reimbursement, so the Court concluded that the statutory scheme prohibits reimbursement. The Court held that “reimbursement is prohibited, and because there is no evidence of contrary legislative purpose or intent, we conclude that the statute prohibits reimbursement provisions.”

In ruling that reimbursement provisions are unenforceable, the Alaska Supreme Court declined to follow the California case of Buss v. Superior Court, 939 P.2d 766 (1997). First, the Court noted that the California statute does not contain language similar to that in AS 21.96.100(d). Second, the California statute actually provides a section on reimbursement, which states that “[t]his subdivision does not invalidate other different or additional policy provisions pertaining to attorney’s fees or providing for methods of settlement of disputes concerning those fees.”

The Court further noted that the legislative history supports its conclusion that the statute allocates responsibility to pay for independent counsel to the insurer when the insurer defends under a reservation of rights. Finally, the Court acknowledged that even though the Division of Insurance had approved the policies containing the reimbursement provision, the Division’s past practice is not dispositive. More importantly, however, the Division had disavowed its past practice in its amicus brief with a more “considered interpretation” that “under AS 21.96.100, if an insurer has a duty to defend and elects to reserve its rights on an issue, it is obligated to provide and pay for independent counsel.”

So insurers beware – reimbursement of defense costs provisions are prohibited and unenforceable in Alaska.

Filed under Duty to Defend, Professional Liability

The Oregon Supreme Court Overrules the Stubblefield Rule Regarding an Insured’s Ability to Assign Insurance Rights

By and on December 8, 2015
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Oregon has long had a very interesting rule called the Stubblefield Rule, derived from the case of Stubblefield v. St. Paul Fire & Marine Ins. Co., 267 Or. 397 (1973). In Stubblefield, the Oregon Supreme Court held that when an insured enters into a stipulated judgment with a covenant not to execute, the insured is no longer “legally obligated to pay” for purposes of triggering coverage under a CGL policy. Under Stubblefield, a stipulated judgment with a covenant not to execute terminates the insurer’s obligations under the policy to the insured, and, in turn, to the assignor/claimant. The Stubblefield Rule has caused parties to a stipulated judgment to be extremely careful to make sure that the insured’s liability was not eliminated.

Earlier this year, in A&T Siding v. Capitol Specialty Ins. Corp., ___ Or. ___ (Oct. 8, 2015), the Oregon Supreme Court also held that parties to a stipulated settlement with an agreement not to execute could not amend the settlement agreement to revive the insured’s liability for purposes of seeking insurance coverage. Our Capitol Specialty discussion can be found here. As we indicated in our A&T Siding blog post, the Stubblefield Rule was alive and well in Oregon, and we recommended that insurers facing a settlement agreement and covenant judgment should examine the settlement documents carefully to determine whether the agreement released the insured from all liability.

Now, however, the Stubblefield Rule is no longer the law in Oregon. In Brownstone Homes Condo. Assoc. v. Brownstone Forest Heights, LLC, et al., the Oregon Supreme Court acknowledged that Stubblefield “was wrongly decided.” The Court noted that its reasoning in Stubblefield was sparse, the decision was “unsupported by any explanation or analysis,” and the Court neglected to examine the policy language. The Court observed that the majority of jurisdictions have held that “when a covenant not to execute is given in the context of a settlement agreement for valuable consideration (specifically, an assignment of claims), it is a contractual promise not to sue the defendant on the judgment, not a release or extinguishment of the defendant’s legal obligation to pay it.” The Oregon Supreme Court concluded that Stubblefield “erred when it concluded that a covenant not to execute obtained in exchange for an assignment of rights, by itself, effects a complete release that extinguishes an insured’s liability and, by extension, the insurer’s liability as well.”

Nevertheless, insurers should remain mindful of ORS 31.825, which sets forth precise timing requirements to effect a proper assignment of rights against an insurer. Under ORS 31.825, the underlying parties must first reach a settlement, then facilitate entry of judgment, and only then can a valid assignment take place. Insurers should take care to confirm the insured’s compliance with the statute when evaluating an assignment of rights to insurance proceeds.

Filed under Consent to Assignment, Covenant Judgments

Oregon’s Safe-Harbor Provision in the Insurance Fee-Shifting Statute Not as Safe as it Seems

By and on September 30, 2015
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The Oregon insurance fee-shifting statute, ORS 742.061, continues to be a popular topic in the Oregon courts. Our last entry on this subject discussed whether the statute’s reference to “any court of this state” included federal court actions. More recently, the Oregon Court of Appeals strictly construed the safe-harbor provision of ORS 742.061 in holding that an insured could recover attorney’s fees in a UIM arbitration because the insurer had pled – although it did not pursue – other policy-based defenses. Kiryuta v. Country Preferred Insurance Company, 273 Or. App. 469 (2015)

Subsection (3) of the statute states that an insured is not entitled to attorney’s fees under subsection (1) in actions to recover uninsured or underinsured motorist benefits “if, in writing, not later than six months from the date proof of loss is filed with the insurer:

(a) The insurer has accepted coverage and the only issues are the liability of the uninsured or underinsured motorist and the damages due the insured; and

(b) The insurer has consented to submit the case to binding arbitration.”

A letter issued by an insurance company under ORS 742.061(3) is referred to as a “safe-harbor” letter. In Kiryuta, the Court of Appeals addressed whether a safe-harbor letter is effective when an insurance company’s responsive pleading sets forth affirmative defenses that are not litigated but raise issues other than the liability of the uninsured or underinsured driver and the damages to which the insured is entitled. After an injured motorist made a claim for underinsured motorist benefits to Country Preferred, the insurer denied the claim and issued a safe-harbor letter that complied with the requirements of ORS 742.061(3). The insured filed a civil action and the matter was arbitrated. Despite the safe-harbor letter, the arbitrator awarded attorney’s fees to the insured. On review, the trial court reversed the award of attorney’s fees based on the safe-harbor letter.

In its subsequent appeal, the insured argued that Country Preferred’s affirmative defenses of “Contractual Compliance” and “Offset” raised issues other than liability of the driver and the damages due to him, rendering the safe harbor-letter ineffective. Country Preferred argued that because it only litigated the issue of damages owed in the arbitration, the safe-harbor letter was effective. The Court of Appeals agreed with the insured.

In Oregon, a party’s pleadings “declare and control the issues to be determined and the relations that the parties bear to each other.” The Court of Appeals noted that because Country Preferred’s pleading provided a foundation to litigate issues other than the amount of plaintiff’s damages or liability of the underinsured driver, Country Preferred’s litigation strategy was potentially broader than that contemplated by the legislature in ORS 742.061(3). Consequently, the insured had to be prepared at the arbitration to meet any proof that Country Preferred might offer consistent with its pleadings. Therefore, Country Preferred’s conduct was inconsistent with the safe-harbor provision; it was immaterial that Country Preferred did not follow through with its potential litigation strategy. The Court of Appeals reversed the trial court and held that the insured is entitled to reasonable attorney’s fees under ORS 742.061.

In its opinion, the Court of Appeals noted that Country Preferred was in control of its pleading and could have conformed its pleading to the limitations the safe-harbor provision. However, in a footnote, the Court of Appeals sent mixed messages by hinting that insurer could retain the protection of the safe-harbor provision by timely amending its pleading to conform to the requirements of ORS 742.061(3). Accordingly, in uninsured or underinsured claims involving safe-harbor letters in Oregon, insurance companies should consider amending responsive pleadings to reflect only those affirmative defenses that pertain to the liability of the uninsured or underinsured driver and the damages to which the insured is entitled.

Filed under Attorneys’ Fees, Auto

East Versus West: Washington Federal District Courts Offer Differing Views on IFCA Claims

By and on August 3, 2015
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The Washington Insurance Fair Conduct Act (“IFCA”) is generating some interesting divisions in the Washington Federal District Courts. As previously reported, Judge Marsha J. Pechman recently ruled in May, 2015 that an IFCA cause of action is only available to insureds under first party insurance policies, but not third party liability policies. This post discusses how cases brought under the IFCA are being examined differently between the Eastern and Western Federal District Courts of Washington.

As a brief background, IFCA (RCW 48.30.015) states, in part, as follows:

(1) Any first party claimant to a policy of insurance who is unreasonably denied a claim for coverage or payment of benefits by an insurer may bring an action in the superior court of this state to recover the actual damages sustained, together with the costs of the action, including reasonable attorneys’ fees and litigation costs, as set forth in subsection (3) of this section.

(2) The superior court may, after finding that an insurer has acted unreasonably in denying a claim for coverage or payment of benefits or has violated a rule in subsection (5) of this section, increase the total award of damages to an amount not to exceed three times the actual damages.

(3) The superior court shall, after a finding of unreasonable denial of a claim for coverage or payment of benefits, or after a finding of a violation of a rule in subsection (5) of this section, award reasonable attorneys’ fees and actual and statutory litigation costs, including expert witness fees, to the first party claimant of an insurance contract who is the prevailing party in such an action.

…

(5) A violation of any of the following is a violation for the purposes of subsections (2) and (3) of this section:

(a) WAC 284-30-330, captioned “specific unfair claims settlement practices defined”;

(b) WAC 284-30-350, captioned “misrepresentation of policy provisions”;

(c) WAC 284-30-360, captioned “failure to acknowledge pertinent communications”;

(d) WAC 284-30-370, captioned “standards for prompt investigation of claims”;

(e) WAC 284-30-380, captioned “standards for prompt, fair and equitable settlements applicable to all insurers”; or

(f) An unfair claims settlement practice rule adopted under RCW 48.30.010 by the insurance commissioner intending to implement this section. The rule must be codified in chapter 284-30 of the Washington Administrative Code.

The Western Federal District Courts have held that an IFCA cause of action is only available if the insured shows that the insurer unreasonably denied a claim for coverage or that the insurer unreasonably denied payment of benefits, but not if the insurer only violated the Washington Administrative Code (“WAC”) provisions. Lease Crutcher Lewis WA, LLC v. National Union Fire Ins. Co. of Pittsburgh, Pa., 2010 U.S. Dist. LEXIS 110866 (W.D. Wash. October 15, 2010); Weinstein & Riley, P.S. v. Westport Ins. Corp., 2011 U.S. Dist. LEXIS 26369 (W.D. Wash. March 14, 2011); Phinney v. American Family Mut. Ins. Co., 2012 U.S. Dist. LEXIS 22328 (W.D. Wash. February 22, 2012); Cardenas v. Navigators Ins. Co., 2011 U.S. Dist. LEXIS 145194 (W.D. Wash. December 16, 2011).

However, the Eastern Federal District Courts have rejected the precedent set by the Western Federal District Courts and have held that a violation of the enumerated WAC provisions is an independent basis for a cause of action, regardless of coverage or benefits. Merrill v. Crown Life Ins. Co., 22 F. Supp.3d 1137 (E.D. Wash. 2014); Hell Yeah Cycles v. Ohio Sec. Ins. Co., 16 F. Supp.3d 1224 (E.D. Wash. 2014); Hover v. State Farm Mut. Auto. Ins. Co., 2014 U.S. Dist. LEXIS 119162 (E.D. Wash. September 12, 2014).

In Langley v. GEICO Gen. Ins. Co., 2015 U.S. Dist. LEXIS 26079 (E.D. Wash. February 24, 2015), the Court noted that it is “not persuaded that an IFCA cause of action requires a denial of coverage or benefit… The opinions [from the Western District] do not provide any analysis of the statutory construction they utilized to reach their conclusions, and appear to only be looking for express causes of action without determining whether the IFCA creates an implied cause of action for violation of an enumerated WAC.” The Court in Langley then continued by reviewing the elements for an implied cause of action, i.e. whether the plaintiff is “within the class for whose ‘especial’ benefit the statute was enacted”; whether “legislative intent, explicitly or implicitly, supports creating or denying a remedy”; and “whether implying a remedy is consistent with the underlying purpose of the legislation.” The Court determined that the plaintiff, as first party claimant under an insurance policy, was within the class of those that the legislature sought to protect; that the legislative intent was to create a claim for violating the enumerated WACs in both the language in the statute and the explanation of that language provided to the voters; and that implying a remedy is consistent with the IFCA’s purpose. As a result, the Court concluded that “at a minimum, an independent implied cause of action exists under the IFCA for a first party claimant to bring a suit for a violation of the enumerated WAC provisions.” The Court rejected “the progeny of cases from the Western District of Washington which reached a different conclusion.”

In light of the inconsistencies in the Washington Federal District Courts, it is important for insurers to understand the jurisdictional differences when evaluating an IFCA claim. In addition, insurers should be particularly sensitive to efforts by policyholders to establish jurisdiction in the more favorable Eastern Federal District Courts.

Filed under Bad Faith, Commercial General Liability, Unfair Insurance Practices

Washington Supreme Court Defines Collapse in a Property Policy

By , and on June 25, 2015
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Until recently, Washington law on what constitutes “collapse” in a first-party property insurance policy has been unsettled. But that issue has now been resolved with the Washington Supreme Court’s answer to the Ninth Circuit Court of Appeals certified question on the definition of “collapse” as “substantial impairment of structural integrity.”

The Queen Anne Park Condominium in Seattle, Washington, was originally constructed in the 1980’s. In 2009, the Queen Anne Park Homeowners Association (“HOA”) discovered that the siding on the buildings was leaking, which caused hidden decay. The building was insured by State Farm Fire and Casualty Company (“State Farm”) from October 18, 1992 to October 18, 1998 (“Policy”). The Policy included a collapse coverage form, which provided coverage for “any accidental direct physical loss to covered property involving collapse of a building or any part of a building caused only by one or more of the following: …(2) hidden decay.” The collapse coverage form further stated that “[c]ollapse does not include settling, cracking, shrinking, bulging or expansion.” The term “collapse” was not defined in the State Farm Policy.

5-25The Washington Supreme Court held that the undefined term “collapse” is ambiguous because it is susceptible to more than one reasonable interpretation. In support of its holding, the Court noted that in Sprague v. Safeco Ins. Co. of America, 174 Wn.2d 524, 276 P.3d 1270 (2012), different definitions of “collapse” were proposed by the dissent (“to break down completely: fall apart in confused disorganization: crumble into insignificance or nothingness…fall into a jumbled or flattened mass”) and by the concurrence (“a breakdown of vital energy, strength, or stamina”). The Court also noted that courts throughout the country have adopted different but reasonable definitions of “collapse” in insurance policies, i.e. Olmstead v. Lumbermens Mut. Ins. Co., 22 Ohio St. 2d 212,259 N.E.2d 123, 126 (1970) (“collapse” defined as “a falling down, falling together, or caving into an unorganized mass”); Am. Concept Ins. Co. v. Jones, 935 F. Supp. 1220, 1227 (D. Utah 1996) (collapse” defined as substantial impairment of structural integrity); Buczek v. Cont’l Cas. Ins. Co., 378 F.3d 284, 290 (3d Cir. 2004) (“collapse” defined as substantial impairment of structural integrity that “’connotes imminent collapse threatening the preservation of the building as a structure or…health and safety”). In particular, the Court observed that in at least one other case, State Farm had agreed with the insured that the term “collapse” meant “substantial impairment of structural integrity.” Mercer Place Condominium Assoc. v. State Farm Fire & Cas. Co., 104 Wn. App. 597, 17 P.3d 626 (2000).

Because the term “collapse” was ambiguous, the Court adopted a definition that is reasonable and most favorable to the insured, i.e. “substantial impairment of structural integrity.” The Court explained that the “structural integrity” of a building means a building’s ability to remain upright and that “substantial impairment” means a severe impairment. The Court stated that, “[t]aken together, ‘substantial impairment’ of ‘structural integrity’ means an impairment so severe as to materially impair a building’s ability to remain upright. Considering the Policy as a whole, we conclude that ‘substantial impairment of structural integrity’ means the substantial impairment of the structural integrity of all or part of a building that renders all or part of the building unfit for its function or unsafe and, in this case, means more than mere settling, cracking, shrinkage, bulging, or expansion.”

Because the newer collapse coverage forms usually define the term “collapse” as an actual falling down or caving in of a building or any part of a building, the Washington Supreme Court’s clarification on the definition of “collapse” will not be an issue. However, when the term “collapse” is undefined, the parties will likely engage in an expensive and prolonged battle of the experts as to what constitutes a building or part of a building to be “unfit for its function or unsafe,” and when such condition occurred.

 

Image courtesy of Flickr by Paul Sableman

Filed under Collapse, First Party Policy

Cedell v. Farmers – Where Are We Now?

By , and on January 27, 2015
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In Cedell v. Farmers Insurance Company of Washington, 176 Wn.2d 686 (2013), the Washington Supreme Court significantly restricted an insurer’s ability to assert the attorney-client privilege over communications with counsel by ruling that there is a presumption of no attorney-client privilege in first-party bad faith claims handling lawsuits.  The insurer may, however, overcome the presumption by showing that its attorney was “not engaged in the quasi-fiduciary tasks of investigating and evaluating or processing the claim, but instead in providing the insurer with counsel as to its own potential liability; for example, whether or not coverage exists under the law.”

As one Washington federal district court noted, while it is difficult to assess when a particular communication involves an attorney performing quasi-fiduciary duties, “as a general matter, there will likely be no privilege for a lawyer investigating facts to reach a coverage decision, but there likely will be a privilege for a lawyer giving an insurer strictly legal advice about potential liability that could result from a coverage decision or some other course of action.”  Anderson v. Country Mut. Ins. Co., 2014 U.S. Dist. LEXIS 112360 (W.D. Wash. August 13, 2014).  However, the attorney-client privilege can still be overcome if the insured asserts that the insurer engaged “in an act of bad faith tantamount to civil fraud” and makes a showing that “a reasonable person would have a reasonable belief that an act of bad faith has occurred” or that an insurer engaged in a “bad faith attempt to defeat a meritorious claim.”  Such analysis would, however, require something more than an honest disagreement between the insured and the insurer about coverage under the policy. For a prior G&R Insurance Bulletin on Cedell, click here.

Unfortunately, the Cedell Court caused some confusion regarding the process through which an insurer can overcome the presumption.  In short, it is unclear if there is a two-step process which requires the insurer to show that its attorney was not performing quasi-fiduciary (investigating and evaluating or processing the claim), followed by an in camera review of the allegedly privileged documents, or if the in camera review is part of the initial showing.  As one federal district court noted, “the opinion creates rather than alleviates confusion about what must be produced, and under what circumstances.”  Phil. Indem. Ins. Co. v. Olympia Early Learning Center, 2013 U.S. Dist. LEXIS 93067, at *3 (W.D. Wash. July 2, 2013).  There has been no Washington state court decision that explains the process identified in Cedell, but recent Washington federal district court decisions applying Cedell may shed some light on this confusion, at least in federal court practice. MKB Constructors v. Am. Zurich Ins. Co., 2014 U.S. Dist. LEXIS 78883 (W.D. Wash. May 27, 2014)

In MKB Constructors, Judge James L. Robart held that because state substantive law applies to the attorney-client privilege, an insurer must demonstrate that the attorney was not engaged in the “quasi-fiduciary tasks of investigating and evaluating or processing” a claim under Cedell.  However, federal law applies to the manner in which the court determines the existence of the privilege because the process through which an insurer can overcome the presumption is procedural in nature.  As a result, the court may use its discretion and utilize mechanisms other than an in camera review, i.e. privilege log, affidavit, declaration, to determine the applicability of Cedell in the specific context of the case.  Even so, most of the federal court decisions since MKB Constructors utilized in camera review to assess whether the insurer’s counsel engaged in quasi-fiduciary tasks.  See MKB Constructors v. Am. Zurich Ins. Co., 2014 U.S. Dist. LEXIS 102759 (W.D. Wash. July 28, 2014); Anderson v. Country Mut. Ins. Co., 2014 U.S. Dist. LEXIS 112360 (W.D. Wash. August 13, 2014); Johnson v. Allstate Prop. & Cas. Ins. Co., 2014 U.S. Dist. LEXIS 121342 (W.D. Wash. August 29, 2014); Collazo v. Balboa Ins. Co., 2014 U.S. Dist. LEXIS 109336 (W.D. Wash. August 7, 2014); Palmer v. Sentinel Ins. Co., 2013 U.S. Dist. LEXIS 103079 (W.D. Wash. July 23, 2013).

Another important aspect of the MKB Constructors decision is the holding by Judge Robart that Cedell is inapplicable in federal court when the work-product doctrine is invoked.  The work product doctrine is governed by Federal Rules of Civil Procedure Rule 26(b)(3); thus, Cedell is inapplicable when an insurer withholds documents under the work product doctrine in federal court.  It is important to keep in mind, however, that in the Ninth Circuit, a document is eligible for work product protection only if the document was prepared or obtained because of the prospect of litigation.  In re Grand Jury Subpoena (Mark Torf), 357 F.3d 900, 907 (9th Cir. 2004).  If a document would have been created in substantially similar form in the normal course of business, however, the fact that litigation is afoot will not protect it from discovery.  Id. at 908.  Under this analysis, Washington federal courts have held that draft denial letters prepared by the insurer’s coverage counsel are discoverable.  See Anderson v. Country Mut. Ins. Co., 2014 U.S. Dist. LEXIS 118400 (W.D. Wash. August 25, 2014); Tilden-Coil Constructors, Inc. v. Landmark Am. Ins. Co., 2010 U.S. Dist. LEXIS 106369 (W.D. Wash. September 23, 2010).

Finally, as predicted, the federal district court in Carolina Cas. Ins. Co. v. Omeros Corp., 2013 U.S. Dist. LEXIS 53225 (W.D. Wash. April 12, 2013), rejected the insurer’s argument that Cedell only applies to first-party claims, not to third-party liability claims.  The federal district court reasoned that the Cedell court based its ruling on the quasi-fiduciary duty of an insurer to its insured, which exists in both first-party and third-party claims.  Id. at *6-7.

Cedell is still very much alive and well in Washington and insurers should continue to pay close attention to how it impacts reliance on the attorney-client privilege in discovery in both first and third-party bad faith litigation.

Filed under Attorney-Client Privilege, Bad Faith

Washington’s Insurance Fair Conduct Act Only Applies to First-Party Claims

By , and on January 20, 2015
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Ever since the Washington Insurance Fair Conduct Act (“IFCA”) took effect on December 6, 2007, insureds have asserted a claim for IFCA violation in lawsuits against an insurance company.  While IFCA specifies that “[a]ny first party claimant to a policy of insurance who is unreasonably denied a claim for coverage or payment of benefits by an insurer may bring an action,” insureds under both first-party policies and third-party liability policies have asserted IFCA claims in light of Washington courts’ very pro-policyholder attitude.  An IFCA claim is very attractive to the insureds because if a court finds that an insurer acted unreasonably in denying a claim for coverage or payment of benefits, an insured is entitled to actual damages (not limited to the benefits that were unreasonably denied), treble of those damages, and attorneys’ fees and costs.

Earlier this year, however, Judge Marsha Pechman dismissed plaintiffs’ IFCA claim against Continental Casualty Company (Continental), ruling that IFCA does not apply to third-party liability claims.  Cox v. Cont’l Cas. Co., 2014 U.S. Dist. LEXIS 68081 (W.D. Wash. May 15, 2014). Judge Pechman explained that only a “first party claimant to a policy of insurance” has a right of action under IFCA.

Cox arises out of a malpractice action against retired dentist, Dr. Henri Duyzend.  In the malpractice action, a group of Dr. Duyzend’s former patients secured a judgment totaling $35,212,000 against Dr. Duyzend for their malpractice claims.  Thereafter, on an assignment of claims from Dr. Duyzend, the dental patients sued Continental, alleging in part that Continental acted in bad faith and violated the IFCA by not pursing a global settlement with them and risking an excess judgment against Dr. Duyzend.  Continental had issued a professional liability policy to Dr. Duyzend.

With regard to the plaintiffs’ IFCA claim, Judge Pechman explained that “[a]n IFCA claim arises when ‘any first party claimant’ to a policy of insurance … is unreasonably denied a claim for coverage or payment of benefits by an insurer.”  Judge Pechman noted that a third-party insurance policy “indemnif[ies] an insured for covered claims which others [third-party claimants] file against him.”  The professional liability policy at issue in Cox was a third-party liability policy, not a first-party insurance policy.  As a result, Dr. Duyzend was never a first-party claimant under the IFCA and could not assign an IFCA claim to the plaintiffs.  Therefore, Judge Pechman dismissed the plaintiffs’ IFCA claim.

In one subsequent case, Judge Pechman held consistently with her decision in Cox.  Judge Pechman denied a plaintiff’s motion to amend the complaint to assert an IFCA violation against an insurer under a third-party liability policy, holding that such claims are not permitted under the rule.  Judge Pechman refused to certify to the Washington Supreme Court the question of whether an insured under a third-party liability policy may have an IFCA claim.  In so holding, the court affirmed that under Washington law, coverage which “indemnif[ies] an insured for covered claims which others [third-party claimants] file against him is third-party coverage.  As discussed in Cox, the IFCA defines ‘first party claimant’ in a narrow way that applies only to first-party insurance.”

Filed under Bad Faith, Commercial General Liability, First Party Policy, Unfair Insurance Practices

Washington Court Finds Stipulated Judgment Against Insured Is Minimum Measure of Damages in Failure to Settle Case

By , and on May 16, 2014

It is a general principle that insurers face liability beyond their policy limit when they fail to settle a claim against an insured that presents an exposure beyond the limit.  States approach the rule in different ways. As demonstrated recently in a Washington appellate decision, Miller v. SAFECO Ins. Co., 2014 Wash. App. LEXIS 1030 (April 28, 2014), insurers need to be very careful there because the ultimate judgment against the insured, even if reached by stipulation between the insured and underlying plaintiff, presents the minimum measure of damages for the nonsettling insurer.

Miller involved an automobile accident in which Patrick Kenny hit a cement truck while driving a vehicle owned by one of his passengers.  Safeco Insurance Co. wrote a $500,000 per person and accident primary and $1 million umbrella policies.  Despite severe injuries, Safeco did not settle with passenger Miller for policy limits.

Kenny settled with Miller, which included a covenant not to execute with an assignment of Kenny’s rights against Safeco.  Safeco later agreed $4.15 million was a reasonable judgment amount. Interestingly, Washington does not require the action be tried to establish its value despite a “no action” policy condition, contrary to many states.

Miller sued Safeco and the jury rendered a verdict for Miller of $13 million, of which $11.9 million was on the assignment.  The $11.9 million included the $4.15 million judgment and $7.75 million for other damages such as lost or diminished assets or property; lost control of the case or settlement; damage to credit; effects on insurability; and emotional distress or anxiety.  The judgment against Safeco ultimately totaled $21,837,286.73 after interest was added.

The Court of Appeals affirmed, essentially ruling against Safeco on every contested issue.  The court rejected Safeco’s argument the stipulated judgment was the only measure of damage.  It noted an insured’s damages may also include other damages such as the jury found here.

Another important lesson is that the Court of Appeals agreed Safeco’s reserve information was admissible because it indicates whether the insurer adjusted the claim in good faith.  There was evidence Safeco set its reserve at $1.5 million and repeatedly concluded that Kenny was exposed to liability in excess of policy limits.  Yet it did not offer that amount to settle.

The Court of Appeals remanded to recalculate the post-judgment interest and it is possible further proceedings could occur.  We will report further as they do.

Filed under Bad Faith

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