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.

Insurer Not Required to Show Prejudice from an Insured’s Late Notice When the Parties Contract for a Specific Reporting Period

The Fifth Circuit Court of Appeals recently affirmed an order granting summary judgment in favor of the Firm’s insurer client on an issue of first impression in Texas. The issue before the trial court was whether, under Texas law, an insurer is required to demonstrate prejudice resulting from an insured’s failure to comply with an agreed term set in an endorsement to the parties’ insurance contract establishing a specific time limit for an insured to give the insurer notice of a claim.

The case involved alleged damage to an insured’s commercial property from a hailstorm. The insured did not report the alleged loss to its insurer until approximately 17 months after the date of loss. The insurer denied the claim based on a one-year notice requirement in a policy endorsement. The Texas Windstorm or Hail Loss Conditions Amendment Endorsement stated that:

In addition to your obligation to provide us with prompt notice of loss or damage, with respect to any claim where notice of the claim is reported to us more than one year after the reported date of loss or damage, this policy shall not provide coverage for such claims.

The insured sued the insurer in Houston federal court, alleging causes of action for breach of contract and violations of the Texas Insurance Code. The insured argued the insurer was required to show prejudice from the insured’s late notice; the insurer argued that a showing of prejudice was not required. The trial court recognized that this issue had not been decided by the Texas Supreme Court of the Fifth Circuit Court of Appeals.

The Firm moved for summary judgment on behalf of the insurer based on the policy’s endorsement. The trial court granted summary judgment in favor of the insurer and dismissed the insured’s claims.

The Fifth Circuit Court of Appeals affirmed the trial court’s order and held that while insurers are required to show prejudice following the insured’s breach of general provisions requiring notice of loss or damage “as soon as practicable” (and variations thereof), that shifting burden was not required in this case where the parties signed a very specific endorsement that required the insured to submit claims for wind or hail losses within one year.

The Fifth Circuit’s decision is a significant victory for insurers which are often faced with the heavy evidentiary burden of establishing prejudice from an insured’s late notice of property damage claims.

Large Insurer Overturns $12M Arbitration Award in New York Appellate Court

Gordon Rees Scully Mansukhani partners Dennis O. Brown and Greil Roberts obtained a significant appeal win in a complex insurance coverage case for a major insurer on October 25, 2018, when a New York state appeals court vacated a nearly $12 Million arbitration award to Allied Capital Corporation.

The appeal arose out of an arbitration that began in 2010.  Allied Capital sought coverage from its insurer for a $10.1 million payment made to settle claims by the federal government arising out of the False Claims Act. The insurer denied coverage, and Allied filed for arbitration under its insurance policies, seeking to be compensated for the $10.1 million settlement payment plus defense costs.

In March 2016, in a 2-1 decision, the arbitration panel said the $10.1 million settlement was not a “Loss” under the policy; thus, Allied could not recover that amount. However, the arbitration panel decided that Allied was entitled to its defense costs, though the arbitration panel reserved the amount of defense costs to be awarded for a subsequent proceeding.

Not long thereafter, Allied sought reconsideration of the March 2016 award on the basis that the majority of the arbitration panel erred in finding that Allied did not suffer a “Loss” under the policy. The arbitration panel, in another 2-1 decision, determined that it was permitted to reconsider the March 2016 award and reversed itself, finding that the $10.1 million amount was a “Loss” under the policy.

The insurance company petitioned in New York state court for an order vacating the reconsidered award as having been rendered in excess of the powers and authority available to the arbitration panel. Specifically, the insurance company argued that the panel exceeded its authority based on the common law doctrine of functus officio. Under functus officio, an arbitrator cannot alter its final award except in limited circumstances.

The insurer argued that the March 2016 partial final award was final in the sense that it determined the extent of the insurer’s liability for Allied’s claim.  The insurance company argued that Allied’s counsel agreed to bifurcation of two issues: (1) the issue of coverage for Allied’s claim to be indemnified for the $10.1 million, and (2) whether Allied was entitled to recover defense costs and, if so, the amount of such recovery. Since the arbitration panel had resolved the first issue completely in the March 2016 award, the arbitration panel had no authority to subsequently alter that award. For its part, Allied argued that there had been no bifurcation, and since the issue of defense costs had not been fully resolved, there was no final award and the arbitration panel was permitted to reconsider its decision.

The state court denied the petition, and the insurance company appealed.  On October 25, 2018, in a 4-1 decision, the Appellate Division of the Supreme Court of New York, First Department, agreed with the insurance company’s position that the panel exceeded its authority and improperly reconsidered the original partial final award:

There is nothing in the record that remotely suggests that the parties or the panel believed that the [March 2016 award] would be anything less than a final determination of such issues and under the functus officio doctrine, it would be improper and in excess of the panel’s authority for such final determination to be revisited.

The mere fact that the amount of defense costs had not been decided, the Court found, did not permit the panel’s reconsideration of the award: “In this case, the panel was functus officio with respect to the [partial final award] and thus, the panel’s reconsideration of the [partial final award] on substantive grounds was improper and exceeded its authority.”

The Court rejected Allied’s argument that, since the arbitration panel itself had found that it was not functus officio, it was entitled to reconsider the March 2016 award. The Court reasoned that, by Allied’s arguments, an arbitrator could avoid exceeding its authority when reconsidering a partial final award as long as the arbitrator stated that the parties did not bifurcate the proceedings or that the arbitrator did not intend for the award to be final as to a particular issue. However, “there is no support for such theory in the relevant case law,” the Court concluded.

Colorado Supreme Court Issues Decisions on Statute of Limitations for Statutory Bad Faith Claims and the Implied Waiver of Attorney-Client Privilege

The Colorado Supreme Court has been busy the past two weeks, issuing a couple rulings that should be of interest to the insurance industry:

Statute of Limitations for Bad Faith Statute: In Rooftop Restoration, Inc. v. American Family Mutual Insurance Co., 2018 CO 44 (May 29, 2018), the Colorado Supreme Court held that the one-year statute of limitations that applies to penalties, does not apply to claims brought under C.R.S. 10-3-1116, Colorado’s statutory cause of action for unreasonable delay or denial of benefits. Section 10-3-1116 provides that a first-party claimant whose claim for payment of benefits has been unreasonably delayed or denied may seek to recover attorney fees, costs, and two times the covered benefit, in addition to the covered benefit. A separate Colorado statute, CRS 13-80-103(1)(d) provides a one-year statute of limitations for “any penalty or forfeiture of any penal statutes.” To arrive at the conclusion that the double damages available under section 10-3-1116 is not a penalty, the Court looked at yet another statutory provision, governing accrual of causes of action for penalties, which provides that a penalty cause of action accrues when “the determination of overpayment or delinquency . . . is no longer subject to appeal.” The Court stated that because a cause of action under 10-3-1116 “never leads to a determination of overpayment or delinquency . . . the claim would never accrue, and the statute of limitations would be rendered meaningless.” Para. 15. Presumably, the default two-year statute of limitations, provided by CRS 13-80-102(1)(i), will now be found to apply to causes of action seeking damages for undue delay or denial of insurance benefits.

Implied Waiver of Attorney Client Privilege: On June 4, 2018, the Court held that the attorney-client privilege was not impliedly waived when former counsel for State Farm submitted an affidavit refuting factual allegations of plaintiff. In In re Plaintiff: State Farm Fire & Cas. Co. v. Defendants: Gary J. Griggs & Susan A. Goddard, 2018 CO 50, a State Farm adjuster had testified that a medical lien was in the amount of $264,075. State Farm’s attorney at the time then discovered that the lien was actually in the amount of $264.75. While the attorney was investigating the source of the error, plaintiff’s counsel moved to disqualify State Farm’s counsel (based on the attorney’s previous attorney-client relationship with the firm representing the plaintiff). The court disqualified the attorney. The new attorney for State Farm then disclosed the correct lien amount to plaintiff, and noted that the service provider was the source of the error. Plaintiff then sought sanctions against State Farm, in the form of a directed verdict on her bad faith claim, alleging that State Farm deliberately and intentionally concealed the correct lien information. In response, State Farm submitted an affidavit from the former attorney, which stated that at the time of his disqualification, he was still investigating the source of the lien error. Plaintiff argued that by submitting the attorney affidavit, State Farm put at issue the attorney’s advice. The Supreme Court disagreed, explaining that the mere possibility that privileged information may become relevant in a lawsuit is not enough to imply a waiver. Rather, the party asserting waiver “must show that the client asserted a claim or defense that depends on privileged information.” Para. 18. The Supreme Court found that the attorney affidavit did not refer to any claims or defenses, did not refer to advice provided by the attorney to State Farm, and was not offered in support of a claim or defense, but rather to rebut plaintiff’s factual argument. As such, the Court concluded that “State Farm’s submission of the [attorney] affidavit did not place privileged communications at issue and, therefore, did not result in an implied waiver of the attorney-client privilege.” Para. 24.

If there are any questions about either of the above cases or if you assistance with any insurance coverage, bad faith, or mountain states litigation issues, please contact jarnett-roehrich@grsm.com.

San Diego Team Prevails with Motion to Dismiss First Amended Complaint without Leave to Amend on behalf of Multi-National Insurance Company

On March 6, 2018, the United States District Court for the Southern District of California granted the firm’s client, a multi-national insurance company, the motion to dismiss the plaintiff’s first amended complaint without leave to amend. The motion was filed by Gordon Rees Scully Mansukhani San Diego partner Matthew G. Kleiner and senior counsel Jordan S. Derringer.

The plaintiff originally filed her complaint alleging causes of action for breach of contract, bad faith, breach of fiduciary duty and fraud based upon negligent misrepresentation and concealment. The plaintiff’s claims arose out of the insurer’s denial of a claim for accidental death benefits in connection with the death of her husband resulting from a plane crash. The plaintiff alleged that the insurer client provided inadequate notice of an aviation exclusion that was present in a replacement insurance policy and allegedly broader than an aviation exclusion in her prior policy issued by another insurer. According to the plaintiff, the exclusion was not clear and conspicuous and was unconscionable. The plaintiff further stated that the client’s letter advising that her policy was similar to her previous insurance policy was incorrect and therefore, Gordon & Rees’s client breached its fiduciary duty to the plaintiff. The plaintiff’s contention regarding the letter also formed the basis of the negligent misrepresentation and concealment causes of actions.

After Gordon & Rees’s attorneys were successful in filing a motion to dismiss, the plaintiff filed a first amended complaint setting forth identical causes of action but alleging that Gordon & Rees’s client’s policy included a sickness exclusion that was not present in her previous insurance company’s policy and that this policy contained a non-contributory benefit that was not available under the current policy. Gordon & Rees attorneys again filed a motion to dismiss the first amended complaint arguing that the plaintiff failed to correct the defects from the original complaint and that the additional allegations regarding the presence of a sickness exclusion and the lack of a non-contributory benefit were irrelevant as the plaintiff’s claim was not denied on the sickness exclusion and she failed to prove entitlement to any benefits under the her previous policy.

The trial court granted Gordon & Rees’s motion to dismiss the amended complaint without leave to amend and held that the aviation exclusion in the policy was plain, clear and conspicuous. The court also found that the exclusion was not unconscionable and that the notice of change of insurance was plain, clear and conspicuous because the aviation exclusion in the client’s policy was not a reduction in coverage because the plaintiff was not entitled to benefits under her current or previous policy. As the plaintiff’s breach of contract cause of action failed, the plaintiff was unable to state a cause of action for bad faith. The court held that the plaintiff failed to state a cause of action for breach of fiduciary duty because generally, an insurer is not a fiduciary of the insured and the plaintiff failed to demonstrate that the insurer assumed a higher duty of care or knowingly undertook to act on behalf of or for the benefit of the plaintiff. With respect to the plaintiff’s fraud claims, the court held that the insurer’s statement that the policies were similar was not a misrepresentation and, even if it were, the plaintiff’s reliance thereon was not justified. The court also held that the plaintiff did not sustain any damages in connection with these claims because she could not prove an entitlement to benefits under the previous insurance company’s policy. Finding that leave to amend would be futile, the court dismissed the first amended complaint with prejudice and ordered judgment in favor of Gordon & Rees’s client.

To read the court’s full decision, please click here.

Insurance Adjuster Employed by an Insurance Company May Be Liable for Bad Faith in Washington

As a general proposition, an adjuster working for an insurance company is not subject to personal liability under the common law or under state insurance laws for conduct within the scope of his/her employment. Recently, however, the Washington Court of Appeals, Division One, in Keodalah v. Allstate Ins. Co., 2018 Wash. App. LEXIS 685 (2018), held that an individual adjuster, employed by an insurance company, may be held liable for bad faith and violation of the Washington Consumer Protection Act (“CPA”).

In Keodalah, Moun Keodalah (“Keodalah”) was involved in an accident with a motorcycle, after which Keodalah sought uninsured/underinsured motorist (“UIM”) benefits of $25,000 under his auto policy issued by Allstate. Allstate offered $1,600 based on an assessment that Keodalah was 70 percent at fault, even though the Seattle Police Department and the accident reconstruction firm hired by Allstate concluded that the accident was caused by the excessive speed of the motorcyclist. When Keodalah questioned Allstate’s evaluation, Allstate increased its offer to $5,000. Thereafter, Keodalah sued Allstate for UIM benefits.  Despite having the police investigation report, its own accident reconstruction firm’s findings, and the 30(b)(6) deposition testimony of the Allstate adjuster, who acknowledged that Keodalah had not run a stop sign and had not been on his cell phone at the time of the accident, Allstate maintained its position that Keodalah was 70 percent at fault. At trial, the jury determined that the motorcyclist was 100 percent at fault and awarded Keodalah $108,868.20 for his injuries, lost wages, and medical expenses.

Keodalah then filed a second lawsuit against Allstate and the adjuster, including claims under the Insurance Fair Conduct Act (“IFCA”), the CPA, as well as for insurance bad faith. The adjuster moved to dismiss the claims against her under Rule 12(b)(6). The trial court granted the motion but certified the case for discretionary review. First, the court held that there was no private cause of action for violation of a regulation under the IFCA, following the recent Washington Supreme Court decision in Perez-Cristantos v. State Farm Fire & Cas. Ins. Co., 187 Wn.2d 669 (2017).

The Court of Appeals then addressed whether an individual insurance adjuster may be liable for bad faith and for violation of the CPA. The court looked to the Revised Code of Washington (“RCW”) 48.01.030, which serves as the basis for the tort of bad faith. RCW 48.01.030 imposes a duty of good faith on “all persons” involved in insurance, including the insurer and its representatives, and a breach of such duty renders a person liable for the tort of bad faith. The term “person” is defined as “any individual, company, insurer, association, organization, reciprocal or interinsurance exchange, partnership, business trust, or corporation.” RCW 48.01.070.  Because the adjuster was engaged in the business of insurance and was acting as an Allstate representative, she had the duty to act in good faith under the plain language of the statute. As a result, the Court of Appeals held that the adjuster can be sued for bad faith.

With respect to the CPA claim, the court noted that the CPA prohibits “[u]nfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce.” RCW 19.86.020. The Court of Appeals, Division One, previously ruled that under “settled law,” the “CPA does not contemplate suits against employees of insurers.” International Ultimate, Inc. v. St. Paul Fire & Marine Ins. Co., 122 Wn. App. 736, 87 P.3d 774 (Wash. App. 2004). There, the court held that to be liable under the CPA, there must be a contractual relationship between the parties and because there is no such relationship between an employee of the insurer and the insured, the employee cannot be liable for a CPA violation. The court in Keodalah, however, rejected the adjuster’s reliance on International Ultimate, holding that the prior decision was without any supporting authority, and it was inconsistent and irreconcilable with the Washington Supreme Court case of Panag v. Farmers Ins. Co. of Wash., 166 Wn.2d 27, 208 P.3d 885 (2009) (Washington Supreme Court declined to add a sixth element to the Hangman Ridge elements that would require proof of a consumer transaction between the parties). It appears that the holding in International Ultimate may be losing ground, as at least two federal district court cases have questioned the validity of that case. Lease Crutcher Lewis WA, LLC v. National Union Fire Ins. Co. of Pittsburgh, Pa., 2009 U.S. Dist. LEXIS 97899, *15 (W.D. Wash. Oct. 20, 2009), (statement at issue in International Ultimate “is unsupported by any citation or analysis); Zuniga v. Std. Guar. Ins. Co., 2017 U.S. Dist. LEXIS 79821, *5-6 (W.D. Wash. May 24, 2017) (pointing out at least two problems with the statement at issue in International Ultimate).

While the adjuster’s actions in Keodalah appear to have been extreme, presumably policyholders in Washington will rely on this case to sue an insurance company’s adjusters in their individual capacities for bad faith and CPA violations. The court’s holding may have far reaching consequences. For example, will insurers need to appoint separate counsel for their adjusters when the adjusters are personally named in litigation? How will this affect the practice of removing cases from state to federal court? To the extent an insured wants to destroy diversity jurisdiction for its out-of-state insurer, it may choose to name an in-state adjuster, which would limit the insurer to Washington State Court when litigating coverage issues. This is an extremely alarming development for insurers and their employee adjusters in Washington State, who should take this as a reminder to be vigilant in ensuring good faith claims handling and the aggressive defense of bad faith claims.

Court Enforces Automatic Additional Insured Provision’s Pre-Condition Requiring Underlying Contract to Be Fully Executed Pre-Loss

Many liability policies contain provisions, typically in endorsements, automatically bestowing additional insured status on third parties when called for in certain types of contracts. These endorsements usually require that such contracts be in writing and signed by both parties prior to the date of the event for which coverage is sought. In Selective Ins. Co. of Am. v. BSA, No. 15-0299, 2018 U.S. Dist. LEXIS 56178 (E.D. Pa. April 2, 2018), a Philadelphia federal judge recently enforced the signed written agreement requirement as an unambiguous condition precedent to coverage, denying additional insured status where the underlying contract had not been signed by the named insured.

At issue was a Blanket Additional Insured clause which provided coverage to any organization that the insured, Keystone College, agreed to add to the policy in a written contract, so long as the contract was signed by both the named insured and the additional insured before any loss. The Boy Scouts of America (“BSA”) sought coverage under this provision after a Keystone student was injured on campgrounds owned by BSA. The campground rental agreement required that Keystone add the BSA as an additional insured. Crucially, however, Keystone never signed it.

Rejecting the BSA’s argument that Keystone’s post-accident ratification of the contract sufficed to make BSA an additional insured, the Court held that Selective was entitled to insist upon true compliance with policy’s express requirement of “a written agreement signed by both parties.” The Court thus distinguished the legally-irrelevant issue of whether the policy holder and the BSA had entered a binding agreement among themselves from the distinct, and controlling, issue of whether the policy’s express conditions for automatic coverage had been satisfied. Because they were not, the court refused to find that the third-party agreement expanded the insurer’s coverage obligations under the policy.

The takeaway from this decision is that insurers are entitled to insist that unambiguous conditional language of policies be enforced as written. The relevant inquiry was not whether the parties to the incompletely-executed underlying contract considered themselves bound to it, but whether those conditions had been complied with. As is should be, the insurer was only bound by the terms it had agreed to in the policy, and the policyholder’s failure to comply with this unambiguous condition precedent precluded automatic additional insured status under the policy for its contractual counterparty.

New York High Court Reconfirms That Pure Pro Rata Allocation Remains the Rule in Continuous Trigger Situations, Rejecting Attempt to Shift Allocation to Insurers for Periods Where Insurance Was Commercially Unavailable

Rejecting policyholder arguments that losses during periods where pollution liability insurance was commercially unavailable should be allocated to insurers of other periods, the New York Court of Appeals recently confirmed that New York remains a pure pro rata/time on the risk allocation state. In Keyspan Gas East Corporation v. Munich Reinsurance America, Inc., the policyholder, Keyspan Gas East Corporation (Keyspan), sought coverage to clean up environmental contamination at a site that began in the 1890s and continued for decades. Century Indemnity Company (Century) issued eight excess insurance policies between 1953 and 1969, and the trial court found that environmental liability insurance was unavailable prior to 1925 and after 1970.

The Court of Appeals previously adopted the pro rata approach to allocating responsibility for coverage for progressive injury claims spanning across multiple policy periods in Consolidated Edison Co. of N.Y. v Allstate Ins. Co., 98 NY2d 208 (2002). Keyspan, however, argued that an equitable exception should be created for periods where insurance was commercially unavailable, and that liability for such periods should be allocated to insurers of other time periods. Rejecting this so-called “unavailability rule,” the Court found Keyspan’s arguments irreconcilable with the unambiguous language of Century’s policies, which like nearly all general liability policies, limits the insurer’s liability to property damage that occurs “during the policy period.” Losses sustained outside that period – such as years insurance was unavailable – are not within the scope of coverage.

Importantly, the Court took pains to emphasize that its recent decision in Matter of Viking Pump, Inc., 27 NY3d 244 (2016), that “all sums” allocation is appropriately applied to policies containing “anti-stacking” or “noncumulation” clauses that collapse coverage across multiple policy periods into a single period, did not presage a retreat from the Court’s prior adoption of pro rata allocation. Instead, the Court emphasized that its fundamental rule is that policies must be enforced according to their contractual language and that so-called “public policy” or “equity” concerns cannot serve to permit New York’s Courts to rewrite the bargain between an insurer and its insured.

The Court’s holding is a significant win for insurers in New York involved in “long-tail” insurance claims, particularly those stretching across several decades. The holding reaffirms strict compliance with the pro-rata approach to allocation, and holds insurer’s liable only for their time on the risk. Emphasizing the importance of permitting insurers to select for themselves the risks they choose to underwrite, the Court rejected Keyspan’s bid to rewrite the policy for “public policy” reasons, and refused to find coverage that was never underwritten and never contemplated by the parties. While this case involved environmental contamination, it also can be expected to have important repercussions for long-tail personal injury claims such as asbestos, where coverage for asbestos claims has been commercially unavailable to most commercial insureds since the mid-1980s.

Why Insurers and Their Attorneys Need to Pay Close Attention to Their Discovery Burden in Washington

As previously reported in this blog, Washington case law generally affords insureds a broad right to the discovery of claim file materials, including information that should be protected from disclosure by attorney/client privilege or the work product doctrine. Cedell v. Farmers Ins. Co. of Washington, 176 Wn.2d 686, 295 P. 3d 239 (2013). The discovery pitfalls created by Cedell were on full display in a recent Western District of Washington decision that granted an insured’s motion to compel production of work product and attorney/client communications from an insurer’s claims file. Westridge Townhomes Owners Ass’n v. Great American Assur. Co., 2018 U.S. Dist. LEXIS 27960 (W.D. Wash. February 21, 2018)

The background facts are somewhat unclear, but it appears that the insured in this case made a claim for coverage under two insurance policies and there was an allegedly inadequate response from the insurers. The insured sued its insurers for coverage in 2016 before the insurers issued a declination of coverage letter. The two insurers retained the same attorney to represent them, and that attorney subsequently wrote a declination letter on behalf of the insurers, which was sent to the insured on April 12, 2017. The insured ultimately sought production of the entire claim file, which had not been split between the claim investigation and the coverage litigation. The insurers argued, among other things, that the insured was not entitled to anything after the litigation commenced in 2016 on work product grounds, and certainly was not entitled to communications with their attorney.

In ruling on the insured’s motion to compel, the Court concluded that the insurers failed to satisfy their burden of showing that communications with their attorney up to the date of the declination letter were protected, even though the parties were in litigation, because the Court was convinced that their attorney acted as an investigator and evaluator of the claim while the litigation was proceeding. The Court stated that “nothing in Cedell limits the discoverability presumption to pre-litigation evidence…” Furthermore, the insurers failed to show that their communications with their attorney took place because of litigation as opposed to being created in the normal scope of their insurance business. The Court ordered production of all attorney/client communication and work product up to the date the declination letter was sent, ruling that “documents containing [the insurers’ attorney’s] mental impressions regarding the insurers’ quasi-fiduciary duties to the insured, including his liability assessments and coverage advice, are subject to production.”

The Court did not do an in camera review of the documents at issue, as requested by the insurers and authorized by Cedell, writing that the insurers had failed to meet their threshold burden to justify such a review. In this regard, the Court was critical of the insurers’ privilege logs and conclusory explanations in the briefing of why the documents should be protected. “The Court finds that it is insufficient for the parties to rely on a request for in camera review to avoid their responsibility to explain why such documents should be withheld.”

Additionally, one of the insurers moved that if it had to produce such information, the plaintiff should be compelled to produce the same. The Court denied that motion, noting that an insured does not owe a quasi-fiduciary duty to its insurer and that Cedell is not a two-way street.

This ruling should serve as an important reminder to insurers and their counsel about the dangers of discovery in Washington following Cedell. For insurers to chip away at the scope of Cedell, they must take their discovery obligations seriously and lodge specific, well-supported objections in order to protect certain categories of privileged information. Insurers must not only be aware of Cedell, but also be aware that they will often have the burden of convincing the Court that an attorney/client communication or work product document should be protected from discovery. Specifically, insurers should be prepared to argue that the privileged information was not related to the evaluation of the claim, but rather for the specific purpose of rendering legal advice.

What is certainly clear is that an insurer cannot make a blanket assertion that documents are protected and expect the Court to review the documents in camera, which appears to have happened in this case. An insurer should instead be prepared to address each document individually and explain why it is not related to the evaluation of the insured’s claim. Finally, when a claim has been pending and litigation is commenced, the file should always be split so that a new litigation file is created and claim evaluation materials are kept separate from litigation materials.