JAMES L. ROBART, District Judge.
Before the court are (1) Plaintiff Berkshire Hathaway Homestate Insurance Company, formerly known as Cornhusker Casualty Company's ("Cornhusker"), motion for summary judgment (Corn. Mot. (Dkt. #73)) and (2) Defendants and Counterclaimants SQI, Inc. ("SQI"), Ledcor Industries (USA), Inc. ("Ledcor") and Admiral Way, LLC's ("Admiral") motion for summary judgment (Def. Mot. (Dkt. #70)). The court has considered the motions and the parties' submissions related to the motions, the balance of the record, and the relevant law. Being fully advised, the court DENIES Defendants' motion, GRANTS Cornhusker's motion, DECLARES that the insurance policies at issue provide no coverage to Defendants related to the underlying litigation, and DISMISSES Defendants' counterclaims.
This is an insurance dispute arising out of underlying construction defect litigation. Cornhusker moves for summary judgment
The case has its origins in a construction project in West Seattle. In 2001, developer Admiral hired Ledcor as the general contractor to build the Admiral Way Project ("the Project"), a structure consisting of 65 residential units, two ground-floor commercial units, and an underground parking garage. (See Corn. Mot. at 6; 3/30/15 Order (Dkt. #48) at 2; 1st Sparling Decl. (Dkt. #30) ¶ 5, Ex. D ("Project CCRs") ¶ 3.1; see also 1st Martens Decl. (Dkt. #33) ¶ 5, Ex. D ("Gartin Decl.") ¶¶ 2, 4.) Ledcor in turn hired multiple subcontractors. (See 1st Sparling Decl. ¶ 8, Ex. G ("Ledcor Compl.") ¶ 12; see also Gartin Decl. ¶ 4.) One of those subcontractors was SQI, which Ledcor hired to do the roofing on the Project. (Corn. Mot. at 6; Ledcor Compl. ¶¶ 12-13.) In addition to working on the original roofing, SQI also performed repairs on the roof in May and June of 2005. (See Corn. Mot. at 8; 1st Gardner Decl. (Dkt. #32) ¶¶ 2-4, Exs. 1-3; 3d Gardner Decl. (Dkt. #83) ¶¶ 2-4.)
SQI had three year-long commercial general liability ("CGL") insurance policies with Cornhusker stretching from May 2003 to May 2006. (See Corn. Mot. at 3; 1st Martens Decl. ¶¶ 2-4, Exs. A-C; 2d Sparling Decl. (Dkt. #74) ¶¶ 2-4, Exs. A-C.) Only the third policy ("the Policy"), which applied from May 2005 to May 2006, is directly in issue.
Litigation related to the Project commenced in 2007, when the Admiral Way Condominium Owners Association ("ACOA") sued Admiral in King County Superior Court alleging defects in the construction of the Project and Admiral added Ledcor as a third-party defendant ("the ACOA Suit"). (See Corn. Mot. at 13; 1st Sparling Decl. ¶ 6, Ex. E ("ACOA Compl."); Admiral Ans. (Dkt. #17) ¶¶ 3.5-3.6.) While the ACOA Suit was ongoing, Admiral and Ledcor sued SQI and various other subcontractors, also in state court ("the Contractor Suit"). (See Corn. Mot. at 13; Ledcor Compl.) In 2010, separate coverage-related litigation began between several insurance companies and Admiral and Ledcor ("the Coverage Suit"). (See Corn. Mot. at 14.)
The parties provide scant information regarding the property damage at issue in these lawsuits. One of the few documents in the record relating to problems with the Project is a "list of known construction defects" that ACOA created in 2007 for its suit against Admiral. (See 2d Martens Decl. (Dkt. #72) ¶ 2, Ex. 4 ("Ledcor Tender") at 7-12 ("ACOA Defect List") (also discussed in 2d Sparling Decl. ¶ 13, Ex. L ("Colvard Report") at 7-8).) This document lists the following alleged defects in the construction of the roof at the Project: (1) the roof membrane has several areas that lack adhesion and have blisters; (2) lead flashings used to weatherproof vent stacks are poorly detailed and prone to water intrusions; (3) galvanized metal flashings are poorly detailed and are prone to water intrusion; (4) metal caps lack saddle flashings at transitions with aboveroof vertical walls; (5) two large areas on the roof have evidence of water trapped between the roofing plies; and (6) several smaller areas have evidence of lack of adhesion between the roofing plies.
Cornhusker learned of the claims against its insured when it received a tender from Ledcor on October 29, 2007, asserting Ledcor's status as an additional insured and requesting coverage in the ACOA Suit. (See Def. Mot. at 3; 2d Martens Decl. ¶ 2, Ex. 3 ("Claim Notes") at 1; Ledcor Tender at 1, 6.) Cornhusker began investigating this claim within 24 hours by sending John Colvard of Washington Oregon Claim Service to examine the roof and prepare a report. (See Claim Notes at 1; see also Colvard Report (dated 11/19/07).) Cornhusker's claim notes show that Cornhusker knew on October 30, 2007, that SQI had performed both the original construction of the Project's roof and the 2005 repair work on the roof. (See Claim Notes at 1.) On December 10, 2007, Cornhusker sent SQI a reservation-of-rights letter. (See 2d Martens Decl. ¶ 2, Ex. 2 ("RoR").) Cornhusker's letter informed SQI that Cornhusker would defend SQI in the underlying dispute but that coverage might not exist under the policies due to, among other policy provisions, the "your work" and residential construction exclusions. (See id. at 1, 9-12.) Cornhusker's letter quoted the entire 2005-06 residential construction exclusion, including its full title; however, the letter did not specifically discuss the language in the exclusion related to coverage for repairs, but rather stated only that the "Residential Construction Exclusions specifically exclude coverage for residential condominiums." (Id. at 11-12.)
Multiple mediations took place regarding the Contractor Suit. First, in April 2008, before Ledcor filed suit against SQI, Cornhusker received an invitation from Ledcor to a mediation in May. (See 2d Martens Decl. ¶ 2, Ex. 6 ("4/08 Ledcor Letter"); Claim Notes at 6.) Cornhusker had retained R. Scott "Bud" Fallon and the firm of Fallon & McKinley as counsel to represent SQI against Ledcor's claims. (See Corn. Mot. at 13; Corn. Resp. (Dkt. #84) at 5; 2d Martens Decl. ¶ 2, Ex. 9; Messineo Decl. (Dkt. #85) ¶¶ 5-6, Ex. A.) Mr. Fallon represented SQI at the May 2008 mediation but apparently without prior settlement authority from Cornhusker. (See 2d Martens Decl. ¶ 2, Ex. 7; Def. Mot. at 12.) In an internal email sent prior to the May 2008 mediation, Cornhusker employee Tom Dashel stated that the mediation "[s]ounds like ... [a] waste of time.... If there is no involvement of the of the [sic] HOA, this is meaningless." (2d Martens Decl. ¶ 2, Ex. 9.)
Two more mediations appear to have taken place in 2009 and another occurred in October 2010, all of which defense counsel attended — again, apparently without prior settlement authority from Cornhusker. (See 2d Martens Decl. ¶ 2, Ex. 7, Ex. 11.) After the 2010 mediation, Mr. Fallon wrote to Mr. Dashel explaining, "I checked into the mediation on June 8, several times, but the mediator and the parties were never ready to deal with the claims against SQI. I briefly explained our position
A final mediation took place in March 2014. By this point, Admiral and Ledcor had settled the ACOA Suit (see Admiral Ans. ¶ 3.11 (noting that the ACOA suit settled in July 2009)), and Cornhusker had obtained a summary judgment ruling in the Coverage Suit that Ledcor was not an additional insured under SQI's policies with Cornhusker (see 1st Sparling Decl. ¶¶ 12-13, Exs. K-L). During the March 2014 mediation, Cornhusker's coverage counsel, D. Bradley Hudson, attempted to negotiate a settlement that would include a $71,786.00 contribution from Cornhusker, a similar contribution from another insurer, and a release of SQI from further liability. (See 2d Gardner Decl. (Dkt. #71) ¶¶ 3-4, Ex. A ("Hudson Letter") at 1; Hudson Decl.
The parties dispute how Cornhusker arrived at the $71,786.00 figure. Defendants argue that $71,786.00 represents Cornhusker's estimate of the low end of SQI's exposure, and that Cornhusker estimated that SQI might be liable for as much as $937,717.00. (See Def. Mot. at 14.) In support of this position, Defendants point
Following the failed March 2014 mediation, Mr. Hudson sent a letter to Devon Thurtle Anderson, SQI's recently retained personal counsel. (See Hudson Letter; 2d Gardner Decl. ¶ 2; Def. Reply at 3-4.) Mr. Hudson informed Ms. Anderson of what he had done at the mediation. (Hudson Letter at 1.) He also reiterated that Cornhusker did not believe its policies provided coverage for the losses at issue in the Contractor Suit primarily due to the residential construction and "your work" exclusions.
In April 2014, SQI settled with Ledcor and Admiral. (See 2d Martens Decl. ¶ 2, Ex. 16 ("Stip. Judgment").) Acting through Ms. Anderson, SQI agreed to a consent judgment in the amount of $747,785.00 and assigned its rights against Cornhusker to Ledcor and Admiral in exchange for a covenant not to execute. (See Stip. Judgment; 1st Sparling Decl. ¶ 11, Ex. J ("IFCA Notice").) Defendants' settlement signaled the beginning of this action. Not only did SQI assign its rights against Cornhusker and obtain a covenant not to execute, but Defendants gave notice to Cornhusker of their intent to file claims against Cornhusker under Washington's Insurance Fair Conduct Act ("IFCA"), RCW 48.30.015. (See id.) Anticipating impending litigation against Admiral and Ledcor as SQI's assignees, Cornhusker filed this action in federal court seeking a declaration that its policies do not provide coverage for the losses involved in the Contractor Suit. (See Compl. (Dkt. #1).)
SQI, Admiral, and Ledcor have each filed an answer and made multiple counterclaims against Cornhusker. SQI's answer asserts counterclaims for breach of contract (duty to indemnify), bad faith, violation of Washington's Consumer Protection Act ("CPA"), RCW 19.86.010 et seq., and violation of IFCA. (See SQI Ans. (Dkt. #16) ¶ 4.) Admiral's answer contains counterclaims for breach of contract (duty to indemnify Admiral as an additional insured) and violation of the CPA. (See Admiral Ans. ¶ 4.) Ledcor's answer alleges breach of contract (duty to defend and indemnify Ledcor as an additional insured), bad faith, and violation of the CPA. (See Ledcor Ans. (Dkt. #18) ¶ 4.) All three Defendants assert a counterclaim for reformation.
The court has already addressed coverage issues once in this case. On November 13, 2014, Cornhusker filed a motion for summary judgment attempting to establish that Cornhusker has no duty to indemnify SQI or its assignees because the residential construction exclusion bars coverage in all of SQI's policies with Cornhusker. (See MSJ (Dkt. #29).) Defendants resisted that motion on multiple grounds, including that the PCOH constitutes separate coverage to which the residential construction exclusion does not apply. (See MSJ Resp. at 10.) The court granted Cornhusker's motion in part and denied it in part. (See 3/30/15 Order.) Specifically, the court held that (1) PCOH falls within the policies' BI/PD Coverage and is subject to that coverage's exclusions and limitations; (2) the residential construction exclusions in the first two policies preclude coverage under those policies; (3) the third version of the residential construction exclusion places the burden on Cornhusker to show that any otherwise covered property damage occurring between May 2005 and May 2006 arose out of "original construction"; and (4) a genuine dispute of fact remained regarding the applicability of that version of the residential construction exclusion. (See id. at 15-26.)
On July 23, 2015, the parties filed the instant motions for summary judgment. (See Corn. Mot.; Def. Mot.) Cornhusker's motion seeks dismissal of Defendants' contractual and extra-contractual counterclaims and a declaration that its policies provide no coverage for the losses at issue in the Contractor Suit. (See Corn. Mot. at 1-2.) Defendants oppose Cornhusker's motion and bring their own motion in which they ask the court to grant summary judgment in their favor on SQI's assigned extra-contractual claims for bad faith, violation of the CPA, and violation of IFCA. (See Def. Resp; Def. Mot. at 2.) The parties' cross-motions for summary judgment are now before the court.
Summary judgment is appropriate if the evidence, when viewed in the light most favorable to the nonmoving party, demonstrates "that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a); see Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Galen v. Cty. of L.A., 477 F.3d 652, 658 (9th Cir.2007). The moving party bears the initial burden of showing there is no genuine issue of material fact and that he or she is entitled to prevail as a matter of law. Celotex, 477 U.S. at 323, 106 S.Ct. 2548. If the moving party meets his or her burden, then the nonmoving party "must make a showing sufficient to establish a genuine dispute of material fact regarding the existence of the essential elements of his case that he must prove at trial" in order to withstand summary judgment. Galen, 477 F.3d at 658. A fact is "material" if it might affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A factual dispute is "`genuine' only if there is sufficient evidence for a reasonable fact finder to find for the non-moving party." Far Out Prods., Inc. v. Oskar, 247 F.3d 986, 992 (9th Cir.2001) (citing Anderson, 477 U.S. at 248-49, 106 S.Ct. 2505).
In determining whether the fact-finder could reasonably find in the nonmoving party's favor, "the court must draw all reasonable inferences in favor of the non-moving party, and it may not make credibility determinations or weigh the evidence." Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150, 120 S.Ct. 2097,
The court begins with Cornhusker's motion. As noted above, Cornhusker's motion seeks dismissal of Defendants' contractual and extra-contractual counterclaims, dismissal of Defendants' counterclaims for reformation, and a declaration that the Policy provides no coverage for the losses at issue in the Contractor Suit. (See Corn. Mot. at 1-2.) In support of its motion, Cornhusker makes the following arguments: (1) SQI cannot independently assert any claims against Cornhusker because SQI has assigned all such claims to Admiral and Ledcor (see Corn. Mot. at 16); (2) the Policy provides no coverage for the consent judgment in the Contractor Suit because Defendants can offer no evidence of any property damage that occurred within the policy period and that does not also fall within the residential construction, your work, or injury or damage in progress exclusions (see id. at 9, 17-19); (3) Defendants cannot show that Cornhusker acted in bad faith (see id. at 19-20), (4) violated the CPA (see id. at 21), or (5) violated IFCA (see id. at 20-21); (6) Admiral's and Ledcor's extra-contractual counterclaims are time barred (see id. at 26-27); and (7) Defendants' have no evidence to support their reformation claims (see id. at 27-28).
Pursuant to Defendants' settlement agreement, SQI assigned "any and all of its rights and claims against ... Cornhusker... relating to the Project[.]" (Stip. Judgment at 5.) SQI has since filed an answer in this lawsuit in which it asserts counterclaims for breach of contract (duty to indemnify), bad faith, violation of the CPA, and violation of IFCA. (See SQI Ans. ¶ 4.) Cornhusker attacks those counterclaims on the bases that SQI cannot independently assert any counterclaims against it and, insofar as Ledcor and Admiral assert counterclaims as SQI's assignees, Defendants lack evidence to support their counterclaims.
Defendants concede that following the assignment of its rights SQI cannot independently assert any claims against Cornhusker. (Def. Resp. at 6.) Only Admiral and Ledcor, as SQI's assignees, can now assert the contractual and extra-contractual
Cornhusker next argues that the Policy provides no coverage related to the Project because Defendants can offer no evidence of any property damage that occurred within the policy period and that does not also fall within the residential construction, your work, or injury or damage in progress exclusions. (See Corn. Mot. at 9, 17-19.) The court agrees.
The interpretation of an insurance policy is a question of law for the court. Overton v. Consolidated Ins. Co., 145 Wn.2d 417, 38 P.3d 322, 325 (2002). Insurance policies are contracts, which are construed as a whole with the terms interpreted as they would be understood by an average person purchasing insurance. Id. If the language of an insurance policy is clear and unambiguous, the court must enforce it as written and may not create ambiguity where none exists. Am. Nat'l Fire Ins. Co. v. B & L Trucking & Constr. Co., 134 Wn.2d 413, 951 P.2d 250, 256 (1998).
The determination of whether coverage exists involves a burden-shifting framework. See McDonald v. State Farm Fire & Cas. Co., 119 Wn.2d 724, 837 P.2d 1000, 1003-04 (1992). The insured bears the initial burden to demonstrate that the loss falls within the scope of the policy's insured losses. See id. If the insured makes that demonstration, the insurer can avoid coverage by showing that specific policy language excludes the loss. See id. at 1004. Exclusions from coverage are strictly construed against the insurer because they are contrary to the protective purpose of insurance. Stuart v. Am. States Ins. Co., 134 Wn.2d 814, 953 P.2d 462, 464 (1998).
As discussed above, the Policy covers property damage that occurs during the policy period — from May 2005 to May 2006. (Policy at 4.) Even where such property damage occurs, however, the Policy excludes from coverage property damage that arises out of the "original construction" of a condominium (id. at 24), as well as property damage to the insured's own work (id. at 7; see also id. at 22). The court's prior summary judgment order establishes that these exclusions and limitations apply to the Policy's PCOH provisions. (See 3/30/15 Order at 15-19.)
Defendants offer only the following evidence to support their assertion that covered property damage occurred during the policy period. First, Mark Gardner, the Vice President of SQI, attests that at the time SQI completed its repair work in June 2005 both the roof of the Project and all its surrounding structures were free from property damage that could have resulted from the original construction of the roof. (3d Gardner Decl. ¶¶ 4-5.) Second, Defendants point to the report that Cornhusker asked John Colvard to prepare after Cornhusker received Ledcor's tender. (See Colvard Report (cited by Def. Resp. at 2, 9).) That report references several roof-related construction defects, including water trapped between roofing plies. (See Colvard Report at 7-8.) From this evidence, Defendants' reason that SQI's repair work must have been defective, and [g]iven the known defects of SQI's repair work, it is virtually certain that water would have penetrated the roof membrane and started causing property damage the first time it rained following the completion of the repair work." (Def. Resp. at 10.) Defendants then observe that June 2005 was a rainy month and conclude that "the `occurrence' triggering coverage under the 2005-2006 policy was likely immediately
Defendants fall short of avoiding summary judgment. Even viewing the above evidence in the light most favorable to Defendants and indulging Defendants' rather large inferential leaps, see Reeves, 530 U.S. at 150, 120 S.Ct. 2097, a fact-finder could conclude at most that SQI defectively repaired the roof thereby leading to the problems described in Mr. Colvard's report (see Colvard Report at 7-8). Those problems, however, are defects with the roof itself — the part of the Project that SQI installed and repaired. (See id.; Ledcor Compl. ¶¶ 12-13; 1st Gardner Decl. ¶¶ 2-4; 3d Gardner Decl. ¶¶ 2-4; 2d Sparling Decl. ¶¶ 5, 11, Exs. D, J.) Thus, even if those problems constitute property damage, such property damage is, as Cornhusker points out, damage to SQI's own work and therefore not covered pursuant to the "your work" exclusion. (See Corn. Mot. at 17-10 & n. 9; Policy at 7, 22.) Defendants point to no evidence of property damage to anything other than the roof that occurred between May 2005 and May 2006.
Defendants attempt to forestall this result by arguing that coverage nevertheless exists under the PCOH provisions because the property damage to the roof occurred after SQI finished its work on the roof. (See Def. Resp. at 10-13.) To reach this conclusion, Defendants repeat an argument they made in response to Cornhusker's previous motion for summary judgment — namely, that the PCOH constitutes separate coverage to which the exclusions and limitations under the Policy's BI/PD Coverage do not apply. (See id. at 11-13.) The court analyzed and rejected that argument in its order on Cornhusker's prior motion. (See 3/30/15 Order at 15-19.) Defendants offer no reason to reconsider that ruling and in fact fail to acknowledge that they are repeating a previously rejected argument. (See Def. Mot. at 10-13.) The court stands on its prior decision and therefore concludes that the "your work" exclusion applies to the PCOH provisions.
In Washington, bad faith handling of an insurance claim is a tort and is analyzed under general tort principles: duty, breach of that duty, and damages proximately caused by the breach. Mut. of Enumclaw Ins. Co. v. Dan Paulson Constr. Co., 161 Wn.2d 903, 169 P.3d 1, 8 (2007). To establish bad faith, an insured is required to show that the breach was unreasonable, frivolous, or unfounded. Kirk v. Mt. Airy Ins. Co., 134 Wn.2d 558, 951 P.2d 1124, 1126 (1998). Ordinarily, whether an insurer acts in bad faith is a question of fact for the jury, unless reasonable minds could reach but one conclusion. See Smith v. Safeco Ins. Co., 150 Wn.2d 478, 78 P.3d 1274, 1277 (2003). Context is critical to determining whether an insurer committed bad faith. See Am. Mfrs. Mut. Ins. Co. v. Osborn, 104 Wn.App. 686, 17 P.3d 1229, 1236 (2001); Keller v. Allstate Ins. Co., 81 Wn.App. 624, 915 P.2d 1140, 1145 (1996) ("To determine whether [an insurer] acted reasonably, fairly, or deceptively, it is necessary to consider the circumstances surrounding the allegedly improper act.").
Furthermore, the duty of good faith "is broad and all-encompassing, and is not limited to an insurer's duty to pay, settle, or defend." St. Paul Fire and Marine Ins. v. Onvia, Inc., 165 Wn.2d 122, 196 P.3d 664, 669 (2008). Thus, even where there would be no coverage or right to a defense under the policy terms, if an insurer mishandles a claim in bad faith, a cause of action based on this conduct remains viable. Id. at 668.
An insurer has an enhanced obligation to its insured when the insurer is defending under a reservation of rights. Safeco Ins. Co. v. Butler, 118 Wn.2d 383, 823 P.2d 499, 503 (1992) (citing Tank v. State Farm Fire & Cas. Co., 105 Wn.2d 381, 715 P.2d 1133, 1137 (1986)). The insurer can discharge this obligation by satisfying four criteria:
Tank, 715 P.2d at 1137. If an insured establishes that its insurer acted in bad faith while defending under a reservation of rights, a rebuttable presumption of harm arises. Butler, 823 P.2d at 504-05. If the insurer fails to rebut that presumption and the insured prevails on the bad faith claim, the insurer is estopped from denying coverage. Id. at 505-06.
Defendants argue that Cornhusker acted in bad faith in six respects: by (1) misrepresenting pertinent policy provisions; (2) failing to engage in settlement negotiations in good faith; (3) failing to conduct a reasonably prompt investigation; (4) failing to render a decision on coverage within a reasonable period of time; (5) improperly comingling its files related to coverage and claims; and (6) unreasonably failing to share its claims file with Defendants
Pursuant to WAC 284-30-330(1), an insurer's misrepresentation of pertinent facts or insurance policy provisions during the settlement of claims constitutes an unfair method of competition or deceptive act or practice in the business of insurance. WAC 284-30-330(1). Defendants contend that Cornhusker misrepresented pertinent policy provisions on two occasions. (See Def. Mot. at 11-12.) First, Defendants point to Cornhusker's reservation of rights letter, in which Cornhusker failed to specifically discuss the so-called "repairs exception" to the Policy's residential construction exclusion and instead quoted the entire exclusion, including the "repairs exception," and then stated that "[t]he Residential Construction Exclusions specifically exclude coverage for residential condominiums." (Id. at 11; RoR at 11-12.) Second, Defendants rely on Mr. Hudson's letter to SQI's personal counsel, wherein Mr. Hudson quoted the residential construction exclusion but omitted the language regarding repairs. (Def. Mot. at 11-12; Hudson Letter at 2.) Defendants argue that this conduct violates WAC 284-30-330(1) and amounts to bad faith. (Def. Mot. at 11-12; Def. Reply at 3-4.)
Defendants direct the court to only one case holding that a violation of WAC 284-30-330(1) amounted to bad faith. (See Def. Mot. at 7-8 (citing Anderson v. State Farm Mut. Ins. Co., 101 Wn.App. 323, 2 P.3d 1029, 1034 (2000))). In that case, the Washington Court of Appeals held that an insurer acted in bad faith by failing to disclose the existence of UIM coverage when specific information before the insurer established that UIM coverage would likely apply, and the insurer had no reasonable basis for discounting that information. See Anderson, 2 P.3d at 1034. Thus, an insurer that omits pertinent information about the policy is guilty of bad faith only if that omission was unreasonable in light of the circumstances existing at the time. See id.; Pac. Coast Container, Inc. v. Royal Surplus Lines Ins. Co., No. C08-0278MJP, 2008 WL 2705588, at *7 (W.D.Wash. July 8, 2008); see also HB Dev., LLC v. W. Pac. Mut. Ins., 86 F.Supp.3d 1164, 1184-85 (E.D.Wash.2015).
Even viewing the facts in the light most favorable to Defendants, see Reeves, 530 U.S. at 150, 120 S.Ct. 2097, no reasonable fact-finder could conclude that Cornhusker misrepresented pertinent policy provisions in bad faith, see Anderson, 2 P.3d at 1034. To begin, the facts do not establish that Cornhusker's conduct amounts to a misrepresentation. Cornhusker's reservation of rights letter fails to mention the "repairs exception" in its discussion of the residential construction exclusions, but on the previous page of the letter, Cornhusker quotes the entire residential construction exclusion from the Policy, including the "repairs exception" and the following title: "
An insurer defending under a reservation of rights has a duty to make a good faith effort to settle a claim, including an obligation to conduct good faith settlement negotiations sufficient to ascertain the most favorable terms available. Moratti ex rel. Tarutis v. Farmers Ins. Co. of Wash., 162 Wn.App. 495, 254 P.3d 939, 944-45 (2011). The insured, however, retains authority over the ultimate choice regarding settlement because the insured may have to pay the settlement. Tank, 715 P.2d at 1138. Indeed, the insurer's obligations in this context do not necessarily require the insurer to pay the settlement or prohibit the insurer from considering coverage issues when deciding how much to contribute to a settlement. See Specialty Surplus Ins. Co. v. Second Chance, Inc., 412 F.Supp.2d 1152, 1165-66 & n. 4 (W.D.Wash.2006); Thomas v. Harris, Washington Insurance Law § 19.05 (3d ed.2010). The insurer acts in good faith as long as its conduct is reasonable and does not demonstrate a greater concern for its own financial interest than its insured's financial risk. See id.; Tank, 715 P.2d at 1137-38. Here, as in all cases of alleged bad faith, context is important to a determination of reasonableness. See Osborn, 17 P.3d at 1236; Keller, 915 P.2d at 1145; Truck Ins. Exch. of Farmers Ins. Grp. v. Century Indem. Co., 76 Wn.App. 527, 887 P.2d 455, 460 (1995).
Defendants present the following evidence of bad faith in the settlement process: (1) Cornhusker did not give SQI's defense counsel settlement authority prior to the May 2008 mediation and referred to such mediation as a "waste of time" in an internal communication; (2) Cornhusker did not give counsel prior settlement authority with respect to the two mediations
Furthermore, the contextual evidence in the summary judgment record indicates that Cornhusker acted reasonably. With respect to the 2008 mediation, Ledcor's invitation stated that Ledcor wanted to discuss SQI's obligation to defend and indemnify Ledcor for the claims Ledcor then faced in the ACOA Suit. (See 4/08 Ledcor Letter at 1-2.) Cornhusker employee Tom Dashel referred to that mediation as likely being a "waste of time"; however, his statement links that view to the fact that ACOA would not be participating in the mediation. (See 2d Martens Decl. ¶ 2, Ex. 9 ("If there is no involvement of the... HOA, this is meaningless.").) Defendants present no evidence showing that Mr. Dashel's dim view of the 2008 mediation's utility was unjustified or unreasonable, nor do they offer any evidence linking this view to a lack of concern for SQI's interest. See Tank, 715 P.2d at 1137-38.
In addition, the record shows that at least through 2010 SQI's defense counsel, whose good faith in relation to SQI is not challenged here, believed that SQI had very little liability exposure, and that Ledcor and Admiral's demands to SQI were merely pro rata allocations of ACOA's claimed damages unsupported by evidence of SQI's responsibility for those damages. (See 6/9/10 Fallon Letter; 4/12/10 Fallon Letter; Messineo Decl. ¶ 8, Ex. C ("11/5/10 Fallon Letter"); see also Messineo Decl. ¶ 10, Ex. E.) He recommended attending the 2010 mediation to explain that SQI was not liable, and he indicated that SQI shared his view of liability. (See 4/12/10 Fallon Letter at 2 ("My recommendation is that we participate [in the June 7, 2010, mediation] as we did last time to have our client and expert explain why there is no liability on the part of SQI and then see what develops.").) The record also indicates that in the 2009 and 2010 mediations Admiral and Ledcor did not even have time to mediate with SQI. (See 6/9/10 Fallon Letter; 4/12/10 Fallon Letter at 1.) This contextual evidence casts Cornhusker's approach to the mediations as reasonable, not frivolous, unfounded, or self-interested. See Osborn, 17 P.3d at 1236; Keller, 915 P.2d at 1145. Furthermore, although Defendants make much of Cornhusker's failure to give counsel settlement authority prior to the 2008, 2009, and 2010 mediations (see, e.g., Def. Mot. at 12-13), Defendants offer no authority for the proposition that such conduct, by itself, constitutes evidence of unreasonable behavior, and the court is aware of none.
Finally, the court rejects Defendants' contention that Cornhusker's offer at the 2014 mediation was unreasonably low and indicative of bad faith. (See Def. Mot. at 1315.) Washington law contains almost no guidance regarding an insurer's duty to settle and, in particular, to contribute funds to settlement in the context of a defense under a reservation of rights. See Second Chance, Inc., 412 F.Supp.2d at 1165-66 & n. 4; Harris, Washington Insurance Law § 19.05. Thus, as Judge Coughenour recognized in Second Chance, Inc., an insurer's duty in this context is defined by Tank's general requirement that the insurer refrain from conduct demonstrating
Although the lack of clarity in the law gives the court pause, summary judgment is nevertheless appropriate here. Nothing in Tank requires insurers in this context to ignore whether coverage exists under their policies. See Tank, 715 P.2d at 1137-38; Second Chance, Inc., 412 F.Supp.2d at 1165-66 & n. 4 ("Tank permits an insurer at least to consider whether it owes a settlement payment when it considers the amount of such a payment." (emphasis in original)). Cornhusker has maintained from the outset of this dispute that coverage likely does not exist due to the residential construction and "your work" exclusions. (See RoR; see also Hudson Letter.) Now, after more than seven years of litigation involving the Project, Defendants still have presented no evidence of covered property damage, and the court has found that no coverage exists under any of the policies. See supra Part III.B.1.b.; (3/30/15 Order at 25.) Moreover, Defendants have offered nothing to indicate that at the time of the 2014 mediation Cornhusker had reason to believe that it owed coverage under the policies. The court therefore concludes that, at least in these narrow factual circumstances, Washington courts would not find a triable issue regarding whether Cornhusker demonstrated a greater concern for its own financial interests than SQI's financial risk. See Tank, 715 P.2d at 1137-38; Second Chance, Inc., 412 F.Supp.2d at 1165-66 & n. 4; Harris, Washington Insurance Law § 19.05. Accordingly, the court grants summary judgment on and dismisses Defendants' counterclaim for bad faith breach of the duty to settle.
Defendants also attempt to establish bad faith by arguing that Cornhusker failed to conduct a reasonably prompt investigation into SQI's claims. (See Def. Mot. at 2, 14.) "`The implied covenant of good faith and fair dealing in the policy should necessarily require the insurer to conduct any necessary investigation in a timely fashion and to conduct a reasonable investigation before denying coverage.'" Coventry Assocs. v. Am. States Ins. Co., 136 Wn.2d 269, 961 P.2d 933, 938 (1998) (quoting 1 Allan D. Windt, Insurance Claims & Disputes: Representation of Insurance Companies and Insureds § 2.05, at 38 (3d ed.1995)); Lakehurst Condo. Owners Ass'n v. State Farm Fire & Cas. Co., 486 F.Supp.2d 1205, 1213 (W.D.Wash. 2007) ("The duty to act in good faith requires the insurer to act reasonably in ... investigating the claim.") Defendants' only evidence of Cornhusker's unreasonable conduct in this regard is an objection to interrogatories in this case in which Cornhusker states that it "has not completed its investigation of the facts related to this case, discovery or preparation for trial." (Def. Mot. at 2, 18 (citing 2d Martens Decl. ¶ 2, Ex. 1 ("Corn. Disc. Resp.") at 1).)
This evidence is insufficient to create a genuine dispute of material fact that Cornhusker's investigation was unreasonably delayed. See Scott, 550 U.S. at 380, 127 S.Ct. 1769. Defendants point to no case from any jurisdiction where analogous evidence was deemed sufficient to support an inference of unreasonable conduct. (See Def. Mot.; Def. Resp. Def. Reply.) That absence is not surprising. Allowing Defendants to present their bad faith investigation claim to a jury based on nothing more than a discovery objection such as Cornhusker's would effectively disable
In a related vein, Defendants suggest that Cornhusker committed bad faith by failing to make a decision affirming or denying coverage within a reasonable period of time. (See Def. Mot. at 2, 14.) Washington insurance regulations list "failing to affirm or deny coverage of claims within a reasonable time after fully completed proof of loss documentation has been submitted" as an unfair or deceptive act or practice in the business of insurance. WAC 284-30-330(5). Here, Defendants point out Cornhusker's statement in this litigation that it "never made any `decision to approve or deny benefits to SQI related to the ... Project and/or the Admiral Way Litigation under the Policies.'" (Corn Disc. Resp. at 2 (quoting SQI's request for production no. 3); see Def. Mot. at 2, 14, 18.) Defendants direct the court to no authority showing how a violation of WAC 284-30-330(5) intersects with the common law tort of bad faith in the context of a reservation of rights case, and the court's own research has revealed none.
Nevertheless, whether or not a violation of WAC 284-30-330(5) constitutes bad faith, Defendants' are not entitled to survive summary judgment on the record before the court. Defendants point to no evidence and provide no analysis or authority to show that Cornhusker's conduct was unreasonable. Cornhusker defended SQI under a reservation of rights for roughly six years — from before the beginning of the Contractor Suit, in 2008, through April 2014, when SQI settled with Ledcor and Admiral and assigned its rights against Cornhusker to them. (See Corn. Mot. at 13; Corn. Resp. at 5; RoR; 2d Martens Decl. ¶ 2, Ex. 9; Messineo Decl. ¶¶ 5-6, Ex. A; Ledcor Compl.; Stip. Judgment.) Approximately two months after that settlement, Cornhusker unequivocally denied coverage by filing this lawsuit asserting that no coverage exists under the subject policies. (See Compl.) Defendants present nothing from which a fact finder could conclude that Cornhusker's conduct constitutes unreasonable delay. See Scott, 550 U.S. at 380, 127 S.Ct. 1769. The court therefore grants summary judgment in Cornhusker's favor on this aspect of Defendants' bad faith claim.
Finally, Defendants contend that Cornhusker committed bad faith by commingling its defense and coverage files related to SQI's claim and by failing to produce its claims filed during discovery in this case. (See Def. Mot. at 2-3, 23-25.) Defendants provide no authority showing that either of these types of conduct constitutes bad faith, and the court has located none. Defendants cite Sharbono v.
With respect to their commingling claim, Defendants point to only the following evidence: Cornhusker claims examiner Rebecca Messineo signed the reservation-ofrights letter, Ms. Messineo stated in a 2010 email that she was assisting with coverage issues on SQI's claim, and Cornhusker identified Ms. Messineo in discovery in this matter as "Cornhusker's claims handler for SQI's defense." (See Def. Mot. at 3 & n. 5 (citing RoR at 13; 2d Martens Decl. ¶ 2, Ex. 7; Corn. Disc. Resp. at 5).) Defendants provide no analysis or authority to show how this evidence indicates bad faith, and the court finds Defendants' evidence insufficient to support the conclusion that Cornhusker acted in bad faith. See Scott, 550 U.S. at 380, 127 S.Ct. 1769. Furthermore, in the only case to which Defendants cite on this issue, the court ruled that assigning a single adjuster to defense and coverage functions does not constitute to bad faith. Am. Capital Homes, Inc. v. Greenwich Ins. Co., No. C09-622-JCC, 2010 WL 3430495, at *5-6 (W.D.Wash. Aug. 30, 2010). Accordingly, the court grants summary judgment against Defendants' claims that Cornhusker's discovery abuses and commingling amount to bad faith.
A claim under the CPA requires proof of five elements: "(1) [an] unfair or deceptive act or practice, (2) occurring in trade or commerce, (3) public interest impact, (4) injury to plaintiff in his or her business or property, [and] (5) causation." Hangman Ridge Training Stables, Inc. v. Safeco Title Ins. Co., 105 Wn.2d 778, 719 P.2d 531, 533 (1986). "A violation of WAC 284-30-330 constitutes ... a per se unfair trade practice[,]" thereby satisfying the first element of a CPA violation. Industrial Indem. Co. of Nw., Inc. v. Kallevig, 114 Wn.2d 907, 792 P.2d 520, 529 (1990). Defendants base their CPA claim on their assertion that Cornhusker violated six provisions of WAC 284-30-330:
(Def. Mot. at 16-18.) Cornhusker counters that it did not violate these provisions, and that even if it did, Defendants cannot show that any such violation caused injury to SQI's business or property. (See Corn. Mot. at 21.)
These alleged CPA violations overlap with four aspects of Defendants' bad faith claim. See supra Part III.B.1.c. Defendants cite no new evidence in this context, nor do they provide any authority or argument indicating that the court should evaluate the evidence differently in this context. (See Def. Mot. at 17-19.) As such, the court grants summary judgment against these CPA claims for the reasons discussed above with respect to the corresponding bad faith claims. See supra Part III.B.1.c.
In support of this claim, Defendants offer an April 13, 2010, email exchange between Cornhusker personnel. (See Corn. Mot. at 17-18 (citing 2d Martens Decl. ¶ 2, Ex. 17 ("4/13/10 Emails")).) This exchange indicates that Cornhusker did not respond to Ledcor's October 2007 tender letter or Ledcor's April 2008 invitation to mediation. (See 4/13/10 Emails at 1 ("I don't see in the file where there were any responses to the October 2007 letter or the April 23, 2008 letter.").) Defendants do not explain how this particular conduct injured SQI's business or property. Instead, Defendants state generally that all of "Cornhusker's unfair settlement practices and bad faith" forced SQI to (a) hire personal counsel to settle the claims against it and (b) to agree to a covenant judgment that has "impact[ed] SQI's reputation, good will, insurance rates, and insurability." (Def. Mot. at 16, 18-19 (citing 2d Gardner Decl. ¶¶ 2-9).)
Summary judgment is appropriate against this claim because Defendants fail to create a genuine dispute of fact regarding causation. See Hangman Ridge Training Stables, Inc., 719 P.2d at 533. Defendants only evidence of injury to SQI's business or property are the fees that Cornhusker paid to its private counsel and the impact of the covenant judgment on SQI's business interests. (See Def. Mot. at 16, 18-19 (citing 2d Gardner Decl. ¶¶ 2-9).) This evidence derives exclusively from Mr. Gardner's declaration. Yet neither Mr. Gardner's declaration nor any other evidence of which the court is aware plausibly links Cornhusker's failure to respond to Ledcor's October 2007 and April 2008 letters to SQI's asserted injuries. (See Gardner Decl. ¶¶ 2-9.) After receiving Ledcor's letters, Cornhusker hired defense counsel for SQI. (See Messineo Decl. ¶¶ 5-6, Ex. A; 2d Martens Decl. ¶ 2, Ex. 9; 4/08 Ledcor Letter.) Defense counsel attended at least four mediations over the next six years, including the mediation to which Ledcor's April 2008 letter pertained. See supra at 7-9. SQI did not hire personal counsel until just before the final mediation in March 2014 and did not settle with Ledcor and Admiral until shortly after that mediation. (See Def. Reply at 3-4;
Defendants offer no way for a reasonable fact-finder to trace Cornhusker's non-response in October 2007 and April 2008 through six years of litigation, defense, and mediation and find that non-response to have caused SQI to hire personal counsel and agree to a covenant judgment. Thus, even if Cornhusker violated WAC 284-30-330(2), which the court does not decide, Defendants present insufficient evidence to show that such violation caused injury to SQI's business or property. See Hangman Ridge Training Stables, Inc., 719 P.2d at 533. Accordingly, the court dismisses Defendants' CPA claim concerning Cornhusker's alleged violation of WAC 284-30-330(2).
This claim fails in light of the court's foregoing rulings. Because Defendants have failed to create a genuine dispute with respect to coverage, see supra Part III.B.1.b., they cannot show that Cornhusker compelled SQI to submit to litigation by offering substantially less in settlement than the amount ultimately recovered on the Policy in this litigation. See WAC 284-30-330(7).
IFCA establishes a cause of action for "[a]ny first party claimant to a policy of insurance who is unreasonably denied a claim for coverage or a payment of benefits." RCW 48.30.015(1). Defendants appear to concede that Cornhusker has not "denied a claim for coverage or a payment of benefits" in the traditional sense. (See Def. Mot. at 21-23.) They assert, however, that Cornhusker's alleged violations of the Washington insurance regulations listed in subsection (5) of IFCA constitute a violation of IFCA, and that Cornhusker denied payment of benefits within the meaning of IFCA when Cornhusker offered an unreasonably low amount to settle the Contractor Suit. (Id. (citing Langley v. GEICO Gen. Ins. Co., 89 F.Supp.3d 1083, 1090-92 (E.D.Wash.2015) (holding that an insured may maintain a cause of action under IFCA for a violation of a Washington insurance regulation listed in subsection (5) of IFCA); Morella v. Safeco Ins. Co. of Ill., No. C12-0672JLR, 2013 WL 1562032, at *3 (W.D.Wash. Apr. 12, 2013) (holding that an unreasonably low settlement offer amounts to a denial of benefits under IFCA))); but see Seaway Props., LLC v. Fireman's Fund Ins. Co., 16 F.Supp.3d 1240, 1254-55 & n. 5 (W.D.Wash.2014) (holding that a violation of Washington insurance regulations is not a violation of IFCA and collecting cases). The court need not decide the legal issues that Defendants raise because even if the court were to side with Defendants on those issues, summary judgment would nevertheless be appropriate against Defendants' IFCA claim.
The court turns first to Defendants' IFCA claim based on alleged violations of Washington insurance regulations. IFCA references the following regulations:
RCW 48.30.015(5). Defendants provide no additional facts or analysis supporting their claim that Cornhusker violated IFCA by violating one of these regulations. Instead, Defendants state only that "the previously cited and discussed facts... establish as a matter of law Cornhusker's violation of each of the regulations enumerated under [IFCA subsection (5)]." (Def. Mot. at 22.) Thus, Defendants' regulation-based IFCA claim merely repeats Defendants' other extra-contractual claims related to WAC provisions. See supra Part III.B.1.b., c. For the reasons discussed above with respect to those claims, the court grants summary judgment in Cornhusker's favor on Defendants' regulation-based IFCA claim.
Defendants' claim that Cornhusker unreasonably denied payment of benefits likewise must fail. The court has already found that Defendants' have failed to raise a genuine dispute regarding coverage and the reasonableness of Cornhusker's settlement practices. See supra Part III.B.1.b., c.ii. Accordingly, Defendants cannot now maintain an IFCA claim based on the notion that Cornhusker offered too little in settlement. See Morella, 2013 WL 1562032, at *3. The court therefore dismisses Defendants' IFCA claim.
In addition to asserting counterclaims as SQI's assignees, both Admiral and Ledcor have asserted their own counterclaims against Cornhusker for breach of contract, violation of the CPA, and bad faith (Ledcor only). (Admiral Ans. ¶ 4; Ledcor Ans. ¶ 4.) These independent counterclaims rely on Defendants' contention that Admiral and Ledcor are additional insureds under the policies that Cornhusker issued to SQI, and that Cornhusker therefore should have indemnified Admiral and Ledcor in the ACOA Suit. (See id.; Def. Resp. at 13-16.) Cornhusker argues that the court should dismiss Admiral's and Ledcor's counterclaims on several grounds, including that the extra-contractual counterclaims are time barred. (See Corn. Mot. at 21-27.) The court agrees. Admiral's and Ledcor's contractual counterclaims fail because none of the subject policies provide coverage
Under Washington law, a cause of action for insurance bad faith has a three-year statute of limitations. Moratti, 254 P.3d at 942 (citing RCW 4.16.080; Butler, 823 P.3d at 503) (observing that Washington applies a three-year statute of limitations to tort claims and that insurance bad faith sounds in tort). A four-year statute of limitations applies to CPA claims. RCW 19.86.120. These periods begin to run, at the latest, when the putative insured settles with the underlying claimant. See Moratti, 254 P.3d at 942; Walker v. Metropolitan Prop. & Cas. Ins. Co., No. C12-0173JLR, 2013 WL 942554, at *3-5 (W.D.Wash. Mar. 8, 2013). Ledcor and Admiral settled with ACOA in July 2009 (see Ledcor Ans. ¶ 3.9; Admiral Ans. ¶ 3.11), but asserted their present extra-contractual counterclaims against Cornhusker five years later in their July 2014 answers to Cornhusker's complaint (see Ledcor Ans. ¶ 4, at 14; Admiral Ans. ¶ 4, at 14). Thus, even if Ledcor and Admiral qualify as additional insureds,
All three Defendants assert the following counterclaim in their answers:
(SQI Ans. ¶ 5.1; Admiral Ans. ¶ 5.1; Ledcor Ans. ¶ 5.1.) Defendants argue for dismissal of these counterclaims on the bases that (1) Defendants lack evidence to merit reformation, and (2) the intent of parties to a separate contract — the subcontract between SQI and Ledcor — is irrelevant to whether Cornhusker's contracts (policies) with SQI should be reformed. (See Corn. Mot. at 27-28.) Faced with this argument, Defendants reinterpret their reformation claims as requesting that the court give effect to the so-called "repairs exception" to the Policy's residential construction exclusion. (See Def. Resp. at 16-17.)
Cornhusker is entitled to summary judgment against Defendants' reformation counterclaims. "Reformation is an equitable remedy employed to bring a writing that is materially at variance with the parties' agreement into conformity with that agreement." Denaxas v. Sandstone Ct. of Bellevue, L.L.C., 148 Wn.2d 654, 63 P.3d 125, 132 (2003) (citing Akers v. Sinclair, 37 Wn.2d 693, 226 P.2d 225 (1950)). "A party may seek reformation of a contract if (1) the parties made a mutual mistake or (2) one of them made a mistake and the other engaged in inequitable conduct." Id. (citing Wash. Mut. Sav. Bank v. Hedreen, 125 Wn.2d 521, 886 P.2d 1121 (1994)). "The party seeking reformation must prove the facts supporting it by clear, cogent and convincing evidence." Id. (citing Akers, 226 P.2d 225; Kaufmann v. Woodard, 24 Wn.2d 264, 163 P.2d 606 (1945)). Defendants point to no evidence that Cornhusker and SQI shared a mutual mistake or that SQI made a mistake and Cornhusker engaged in inequitable conduct during the formation of their contracts. Furthermore, Defendants offer no legal authority for the proposition that the
For the foregoing reasons, the court DENIES Defendants' motion, GRANTS Cornhusker's motion, DECLARES that SQI's policies with Cornhusker provide no coverage for the losses at issue in the Contractor Suit, DISMISSES Defendants' counterclaims, and DENIES as moot the pending motions in limine (Dkt. ##93, 94).
