Reliance upon an “Equivocal Interpretation of Case Law” to Deny a Defense Is Bad Faith, Washington Supreme Court Holds in Split Decision

American Best Food, Inc. v. Alea London, Ltd. (Wash. S. Ct., March 18, 2010)

After Michael Dorsey was shot nine times at Café Arizona, a night club, the club owner instructed its security guards to remove him from the building. Mr. Dorsey sued Café Arizona, alleging that the security guards “dumped him on the sidewalk,” negligently exacerbating his injuries.

Café Arizona tendered Dorsey’s suit to its insurer, Alea London. Alea refused to defend, citing a policy exclusion for injuries or damages “arising out of” an assault or battery. Alea rejected Café Arizona’s argument that the exclusion was inapplicable to post-assault negligence, relying upon McAllister v. Agora Syndicate, Inc., 103 Wn. App. 106 (2000), a case where a similar exclusion was held applicable to a claim that a night club negligently allowed a violent patron to reenter the club after removing him. Alea wrote: “[U]nder McAllister, Washington courts would likely find the allegations of negligence not sufficient [to trigger coverage].” Café Arizona sued Alea, alleging bad faith, breach of contract, and violation of the Washington Consumer Protection Act, chapter 19.86 RCW. Alea prevailed on summary judgment, and Café Arizona appealed.

The Court of Appeals, Division One, held that the assault and battery exclusion did not apply, that Dorsey’s claims were covered, and that Alea’s refusal to defend was incorrect. The court distinguished McAllister as involving pre-assault negligence. However, the court held that bad faith was a jury question that depended on whether Alea’s interpretation of the exclusion was reasonable. The Washington Supreme Court accepted review.

The Supreme Court unanimously agreed with the Court of Appeals that the assault and battery exclusion did not apply. The court reasoned: “[I]t was irrelevant that the chain of events was caused by an assault; if the insured had acted exactly the same in response to [a] covered occurrence, liability could have been the same.” The court criticized Alea’s determination that it had no duty to defend, stating: “[A] balanced analysis of the case law should have revealed at least a legal ambiguity as to the application of an ‘assault and battery’ clause with regard to postassault negligence[.]”

A slim, five-justice majority of the court then went a significant step further and held that Alea’s reliance upon its interpretation of the case law to refuse to defend was bad faith, resulting in waiver of its policy limits. Referring to its 2007 holding in Woo v. Fireman’s Fund Insurance Co., 161 Wn.2d 43, the court rejected “the argument now advanced by Alea that an insurer may rely upon its own interpretation of case law to refuse to defend.” The court stated the familiar “unreasonable, frivolous, or unfounded” standard for bad faith, then held that “Alea’s failure to defend based upon a questionable interpretation of law was unreasonable and Alea acted in bad faith as a matter of law.”

The four justices who dissented from the bad-faith holding (including most of the dissenters from the 5-4 Woo decision) accused the majority of “conflating the duty to defend and the duty of good faith” and finding “per se liability” for bad faith. Believing that “bad faith determinations should be reserved for more culpable conduct, the dissenting justices reasoned: “Proof that an insurer failed to defend based on a questionable interpretation of law is proof only of breach of its duty to defend, not breach of its duty of good faith.”