Dentist Plays Practical Joke, Prevails in Bad Faith Action for Failure to Defend

Woo v. Fireman’s Fund (Wash. S. Ct. 2007)

Dentist Robert Woo played a practical joke while performing a dental procedure on an employee while she was under general anesthesia. The procedure involved the insertion of temporary bridges called “flippers.” Dr. Woo inserted flippers shaped like boar tusks, took photographs, and then concluding the procedure by inserting normal flippers. Upon viewing the photographs, the employee quit her job and sued alleging various torts.

Dr. Woo tendered the defense to his insurer, Fireman’s Fund, under professional liability, employment practices liability, and general liability coverages. Relying in part on a formal legal opinion of counsel, Fireman’s Fund refused to defend. Dr. Woo financed his own defense and settled with the plaintiff shortly before trial for $250,000. Dr. Woo then sued Fireman’s Fund alleging breach of the duty to defend, bad faith, and violation of the Consumer Protection Act. The trial court ruled that the duty to defend was breached, and the jury awarded $750,000 in damages, including damages for Dr. Woo’s emotional distress.

The court of appeals reversed and held there was no duty to defend. 128 Wn. App. 95, 114 P.3d 681 (2005). The Washington Supreme Court accepted review, reversed the court of appeals, and affirmed the judgment entered by the trial court. Four justices dissented.

The supreme court summarized the scope of the duty to defend, emphasizing its breadth and noting that the insurer must “give the insured the benefit of the doubt.” The court observed, “If the insurer is uncertain of its duty to defend, it may defend under a reservation of rights and seek a declaratory judgment that it had no duty to defend.”

The court held that Fireman’s Fund had a duty to defend under the professional liability coverage because Dr. Woo’s conduct conceivably fell within the broad definitions of “dental services” and “practice of dentistry” in the policy and a statute referenced in the policy. The court relied partly on the fact that the procedure involved an employee, which is related to the “ownership, maintenance, or operation of an office for the practice of dentistry,” and partly on the fact that insertion of the boar tusk flippers was “integrated into and inseparable from the overall procedure.” The court held that the legal opinion relied on by Fireman’s Fund did not justify refusing to defend under the professional liability coverage because the opinion was equivocal and acknowledged that the application of case law cited therein was questionable.

The court held there was also a duty to defend under the general liability coverages for bodily injury and personal injury. The court held that, although intentional conduct was excluded under the policy, and Dr. Woo’s conduct was likely intentional, it was conceivable that he did not intend that conduct to result in the alleged injuries.

In contrast, there was no duty to defend under the employment practices liability coverage because the emotional distress alleged by Dr. Woo’s former employee resulted from the practical joke, not from a wrongful discharge.

In summary, the court held that Fireman’s Fund breached its duty to defend and affirmed the jury’s verdict, even though it included damages for Dr. Woo's emotional distress based solely on his own testimony. This permitted Dr. Woo to recover a judgment that included the $750,000 verdict, the $250,000 Dr. Woo paid to settle his former employee’s claim, and Dr. Woo’s attorney’s fees and costs in the trial court. The supreme court also awarded Dr. Woo his attorney's fees and costs for all stages of the appeal.

If Referendum 67 becomes law, it will be asserted as a basis for recovering triple damages in cases similar to the Woo case. A million dollars or more of Dr. Woo's judgment might have been tripled if Referendum 67 were applicable to his case.

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Signed Referendum 67 Petitions Delivered to Secretary of State

This morning, the coalition known as Consumers Against Higher Insurance Rates delivered 155,220 petition signatures to the Washington Secretary of State's office to place Referendum 67 on the ballot.

Although the secretary of state commonly rejects a substantial number of signatures due to duplication or non-registered voters, the coalition submitted 28 percent more than the required 112,440 signatures. Thus, it is almost certain that the public will vote this November on whether to approve or reject the Insurance Fair Conduct Act (ESSB 5726) enacted by the Washington State Legislature in May 2007. That law would permit an award of treble damages for an unreasonable denial of coverage or benefits. Assuming the signatures are validated, the effective date of the Act, which would have been July 21, 2007, is postponed pending the election.

At a press conference in Olympia, Washington, Consumers Against Higher Insurance Rates emphasized its growing membership as demonstrated by a list of 32 individuals and six trade groups including the Association of Washington Business, the Washington Retail Association, the Liability Reform Coalition, the Professional Insurance Agents Western Alliance, and the Independent Business Association. The coalition had been criticized as not including individual consumers.

The spokesperson from Consumers Against Higher Insurance Rates, Dana Childers, said that the Insurance Fair Conduct Act would “raise insurance premiums for virtually every consumer and business in the State of Washington” and “is simply a vehicle to take money out of consumers’ pockets and put it in the pockets of trial lawyers.”

Hundreds of thousands of dollars have already been raised by the campaigns for and against the referendum. The campaign to approve the referendum, which is supported primarily by the Washington State Trial Lawyers’ Association, is called "Approve 67," and its website is http://www.approve67.org/. The campaign against is run by Consumers Against Higher Insurance Rates, and its website is http://www.reject67.org/. Watch for a media blitz by both groups.

At the instance of Governor Christine Gregoire, negotiations had been underway between representatives of the plaintiff lawyers and the insurance industry to explore the possibility of a compromise amendment to the statute. However, no agreement was reached.

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Bad Faith Absent a Contractual Duty? Federal District Court Certifies Questions to Washington Supreme Court

On July 9, 2007, Judge Robert S. Lasnik of the United States District Court for the Western District of Washington certified the following questions to the Washington Supreme Court:

(1) Under Washington law, does an insured have a cause of action against its liability insurer for common law procedural bad faith for violation of the Washington Administrative Code and/or for violation of the Washington Consumer Protection Act, even though a court has held that the insurer had no contractual duty to defend, settle, or indemnify the insured?

(2) If the answer to the first question is “yes,” then:

(a) Should the court require the insured to prove that the insurer’s conduct caused actual harm, or should the court apply a presumption of harm? and

(b) How should the insured’s damages be measured?

These questions arise in a case involving alleged “fax blasting” in violation of the Telephone Consumer Protection Act of 1991 (TCPA), 47 U.S.C. § 227, the Washington Unsolicited Telefacsimile Act (WUTA), RCW 80.36.540, and the Washington Consumer Protection Act (CPA), chapter 19.86 RCW. Onvia, the fax sender, had liability insurance with St. Paul Fire & Marine. St. Paul allegedly delayed nine months before responding to a notice of claim and tender of defense by Onvia, and then denied coverage and defense.

The plaintiff and Onvia entered into a covenant judgment in the amount of $17.515 million, and the plaintiff sought coverage and alleged bad faith against St. Paul based on an assignment of Onvia’s rights. The federal district court ruled that St. Paul had no duty to defend, indemnify, or settle the underlying action against Onvia and that St. Paul’s refusal to defend was not in bad faith. The certified questions relate to St. Paul’s alleged violations of state insurance claims handling regulations, including failing to timely acknowledge the notice of claim and tender of defense, failing to investigate, and failing to regularly report developments to the insured. The plaintiff alleges common law bad faith and violations of the CPA.

Although the Washington Supreme Court is not required to answer the certified questions, it likely will.

The federal case is St. Paul Fire & Marine Insurance Co. v. Onvia, Inc., No. C06-1056RSL.

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Insurer Acted in Bad Faith in Refusing to Disclose Underwriting File to Policyholder Attempting to Settle Liability Claim Where Coverage Was Disputed

Sharbono v. Universal Underwriters Ins. Co. (Div. 2, June 26, 2007)

The Sharbonos’ daughter lost control of her vehicle, causing the death of another driver, Cynthia Tomyn. The Sharbonos believed they had $3 million of personal umbrella coverage with Universal Underwriters. They contended they had asked their insurance agent to add $1 million of personal umbrella coverage to each of three commercial policies issued to their three automobile transmission shops. Universal and the insurance agent contended that the Sharbonos requested and had only $1 million of umbrella coverage under a single policy. Universal offered to pay that amount toward any settlement.

In the context of attempting to settle at mediation before suit was filed, the Sharbonos requested that Universal produce its underwriting file. Universal refused on trade secret grounds, but offered to produce any documents the Sharbonos signed or submitted. After two unsuccessful mediations, the Tomyns sued the Sharbonos and subpoenaed the underwriting file. Universal’s motion to quash was denied. While discretionary review of that ruling was pending, the parties settled for a covenant judgment of $4,525,000, which the trial court held was reasonable. Then, the Sharbonos sued Universal for coverage and alleged various claims including common law bad faith for refusing to produce the underwriting file and a per se violation of the Consumer Protection Act (CPA) based on WAC 284-30-330(7) (“compelling insureds to institute or submit to litigation, arbitration, or appraisal to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in such actions or proceedings”).

The trial court granted summary judgment in the Sharbonos’ favor on coverage, bad faith, and the per se CPA violation. The jury awarded $4.5 million. Universal appealed.

The court of appeals affirmed the trial court’s ruling that refusing to provide the underwriting file to the policyholders was bad faith as a matter of law. The court viewed Universal’s argument that underwriting file may contain trade secret information as “plausible,” but observed that Universal failed to point to a single document containing such information. Also, Universal offered the entire underwriting file as evidence in the trial court. The court concluded: “Based on the Sharbonos’ repeated requests for the underwriting file, together with their reasons for needing the documents, a reasonable person could conclude that disclosure was in the Sharbonos’ best interest. And more importantly, Universal failed to demonstrate any significant need to protect the contents of its underwriting files and that such need weighed as heavily as the Sharbonos’ interests.”

The court reversed the coverage ruling and held that the Sharbonos had only $1 million of umbrella coverage under a single policy, a decision that turned on the definition of “You” in the policies as referring to the Sharbonos’ businesses as opposed to them individually. The court affirmed the reasonableness of the Sharbono-Tomyn settlement based on the Glover/Chausee factors. The court reversed the ruling that Universal committed a per se violation of the CPA, holding that WAC 284-30-330(7) did not apply because the Sharbonos did not prevail in establishing the coverage limits they claimed they had. The court left open the possibility that the Sharbonos could establish a non-per se CPA violation based on the five elements of a CPA claim. The court remanded for a new trial on that issue and the issue of damages for common law bad faith and any non-per se CPA violation, as the jury in the first trial did not apportion damages among the claims.

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