Court Holds Bad Faith Claim Accrues When Final Judgment Is Entered against Insured

Moratti v. Farmers Insurance Co. of Wash. (Wash. Ct. App. Division One, July 5, 2011)

The Court of Appeals held that, for purposes of the statute of limitations, a bad faith claim against an insurer accrues when the underlying judgment against the insured becomes final.  The court held this was true even where the alleged handling of the claim in bad faith occurred more than three years earlier, when the insurer denied the third party claim without investigating, which eventually led the insured to stipulate to a $17 million judgment in exchange for a covenant not to execute. 

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Court Affirms Summary Judgment for Insurer Based on Employer's "Summary Form" UIM Waiver

Humleker v. Gallagher Basset Services, Inc. (Wash. Ct. App. Division Two, January 25, 2011)

In this case on the sufficiency of an underinsured motorist coverage waiver, an employee of Franz Bakery, Thomas Humleker, was injured in an accident while driving a Franz-owned vehicle. Humleker sought underinsured motorist coverage under Franz’s insurance policy with Zurich American. Zurich responded that, although Franz had liability coverage limits of $1 million, Franz had waived UIM coverage in excess of $60,000. Zurich relied upon a “summary form” of waiver executed by Franz that was intended to apply to all 50 states, with certain exceptions. Humleker sued Zurich, alleging that Franz’s waiver was invalid. The trial court granted summary judgment to Zurich, and the Court of Appeals affirmed.

Under Washington law, every automobile insurance policy must include UIM coverage limits equal to the liability coverage limits unless the insured waived UIM coverage or equal limits in writing. The waiver must be “specific and unequivocal” and must be the result of an “affirmative and conscious act.” The Court of Appeals held that the Franz waiver form satisfied Washington law because it was “a specific writing, …signed by the insured, [that] designated $60,000 as the selected limit of UIM coverage in Washington.” The Court rejected several arguments by Humleker, including that recognizing the waiver was against public policy; that the form was invalid because Zurich, rather than Franz, filled it out; and that the trial court had considered extrinsic evidence of intent. On the last point, the Court held that, where a written rejection exists, extrinsic evidence is admissible to demonstrate the parties’ intent.

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Insurer Is Estopped to Invoke Impairment of Recovery Clause after Denying Coverage, But Wins New Trial on Causation Issues that Determine Coverage

Vision One, LLC v. Philadelphia Indemnity Insurance Co. (Wash. Ct. App. Division Two, October 19, 2010)

Shoring equipment supporting a poured concrete slab collapsed during construction of a condominium.  The developer, Vision, made a first-party claim under its insurance policy with Philadelphia Indemnity.  Philadelphia denied the claim under an exclusion for loss caused by defective design or faulty workmanship.  Vision sued Philadelphia alleging breach of contract, bad faith, and violations of the Consumer Protection Act (CPA).  Vision argued there was coverage under an exception to the faulty work exclusion, for loss resulting from a covered cause of loss.  Vision also sued its concrete contactor, D&D Construction, but settled with D&D and also released a shoring equipment subcontractor hired by D&D. 

The trial court denied Philadelphia’s motion to dismiss Vision’s breach of contract claim under a clause in the insurance policy that relieved Philadelphia of any coverage obligation if the insured impaired its right of recovery from others responsible for the loss.  The Court of Appeals affirmed.  Although this was an issue of first impression in Washington, the Court of Appeals agreed with “many other jurisdictions” in holding that “when an insurer denies liability and the insured settles with the tortfeasor, the insurer is estopped from claiming that the insured breached the policy by impairing the insurer’s recovery rights.” 

Regarding coverage, before trial, the trial court ruled that if the loss was caused by a combination of covered and excluded perils, the loss is covered.  The trial court ruled that the shoring equipment and concrete slab were “separate and distinct” and, thus, the collapse was covered under the resulting loss exception to the faulty work exclusion.  The jury determined the amount of damages from the loss and also found bad faith and CPA violations.  The trial court entered a judgment in excess of $3 million, including nearly $2 million in attorney’s fees and costs. 

The Court of Appeals reversed the judgment, reasoning that the trial court’s rulings on coverage contradicted the efficient proximate cause rule by enforcing coverage as long as one of the contributing causes was a covered peril.  Under the efficient proximate cause rule, when loss resulted from both covered and excluded perils, the loss is covered only if the predominate or efficient proximate cause was a covered peril. 

In addition, the Court of Appeals held that, because the resulting loss exception is an exception to the faulty work exclusion, the trial court’s ruling that the collapse was covered under the resulting loss exception was essentially a ruling that it was caused by faulty workmanship.  But determining the cause of the collapse was a question for the jury because the facts were disputed.  The Court of Appeals went on to hold that, assuming the collapse was caused by faulty workmanship, “faulty workmanship was the initial excluded peril and the collapse was the loss.”  As such, “[t]here was no independent covered peril…that caused a covered resulting loss,” and the resulting loss exception would not apply. 

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“Actual Cash Value” of Unreplaced Property Includes Sales Tax

Holden v. Farmers Insurance Co. (Wash. Supreme Court, September 9, 2010)

Reversing a Court of Appeals decision, the Washington Supreme Court held that, under a provision for coverage of the “actual cash value” of damaged property, the insured was entitled to coverage for sales tax even though she had not actually replaced the property when she submitted her claim.

A fire in Laura Holden’s rented home damaged some of her personal property. Her renter’s insurance policy with Farmers provided coverage under the following provision: “Covered loss to property will be settled at actual cash value. Payments will not exceed the amount necessary to repair or replace the damaged property, or the limit of insurance applying to the property, whichever is less.” The policy defined “actual cash value” as “the fair market value of the property at the time of loss,” but did not define “fair market value” or specify how the value would be determined.

For additional premium, Ms. Holden had purchased an endorsement for “replacement cost” coverage, which provided for “the full cost of repair or replacement without deduction for depreciation” and defined “replacement cost” as “the cost, at the time of loss, of a new article identical to the one damaged, destroyed or stolen.”

Farmers paid Ms. Holden’s an amount it determined to be the fair market value of her property, which did not include sales tax. Ms. Holden requested that sales tax be included, even though she had not yet replaced the property. She later explained that she was unable to afford to pay for replacement items and wait for reimbursement from Farmers. Farmers refused additional payment, explaining that it would pay sales tax only if Ms. Holden submitted receipts for coverage under the replacement cost endorsement.

Ms. Holden brought a putative class action. The trial court granted summary judgment to Ms. Holden on interpretation of the insurance policy. The Court of Appeals granted discretionary review and reversed. But the Washington Supreme Court accepted review and reversed the Court of Appeals, reinstating the summary judgment in Ms. Holden’s favor.

In a 6-3 split decision, a majority of the Supreme Court ruled that the policy provision on actual cash value was ambiguous, meaning it was subject to more than one reasonable interpretation. The majority reasoned that an “average insurance consumer” reading the policy would conclude that his or her loss would “be determined according to what it would cost to replace the property, less depreciation.” Rejecting Farmers’ arguments regarding the ordinary meaning of “fair market value,” the majority concluded “there is nothing intrinsic in the notion of [fair market value] that necessarily includes or excludes sales tax.” Because ambiguities are resolved in the insured’s favor under established case law, the majority ruled in favor of Ms. Holden.

The three dissenting justices focused on the ordinary meaning of “fair market value” as being “what a willing buyer under no obligation to buy would pay a willing seller under no obligation to sell.” The dissent concluded that the only reasonable interpretation of “fair market value” is to exclude taxes, as a willing seller is unlikely to include taxes in the amount he would accept for an item, given that the state receives the taxes. The dissent also reasoned that the majority’s decision negated any independent meaning of the replacement cost coverage, for which Ms. Holden paid additional premium, as both coverages would result in payment of replacement cost including sales tax.

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