JAMES L. ROBART, District Judge.
This matter comes before the court on Defendant Great American E & S Insurance Company's ("Great American") motion for partial summary judgment (GA Mot. (Dkt. # 16)) and Plaintiff Bayley Construction's ("Bayley") motion for partial summary judgment (Bayley Mot. (Dkt. # 30)). This is an insurance coverage action. Great American moves for partial summary judgment that it had no duty to defend Bayley under Bayley's professional liability insurance policy. (See generally GA Mot.) Bayley moves for partial summary judgment that Great American breached its duty to defend, breached its duty to investigate, denied Bayley's claim in bad faith, and violated Washington's Insurance Fair Conduct Act. (See generally Bayley Mot.) Having considered the submissions of the parties, the balance of the record, the relevant law, and having heard oral argument, the court DENIES Great American's motion for partial summary judgment, and GRANTS in part and DENIES in part Bayley's motion for partial summary judgment.
Great American issued an insurance policy to Bayley that included coverage for professional liability ("Policy"). (Hampton Decl. (Dkt. # 17) Ex. 6 (Policy) at 84.) The Policy states:
Id. The Policy defines "professional services" as follows:
Id. at 83. The Policy defines a "claim" as follows:
Id. at 86. The Policy defines a "loss" as follows:
Id. at 88.
Bayley was awarded the bid for a renovation project at the James B. Learning Resource Center at Saddleback College (the "Project") in Orange County, California. (Hampton Decl. Ex. 5 (Contract) at 59.) The municipal owner of the Project was the South Orange County Community College District ("District"). (Id.) Bayley served as the general contractor for the Project in exchange for a flat fee of $12,299,000.00. (Id. at 59.)
Bayley engaged Central Tech Air Conditioning ("Central Tech") as a subcontractor to perform the heating, ventilation, and air conditioning ("HVAC") work on the Project. (See Dutcher Decl. (Dkt. # 23) Ex. D. (Subcontract).) An investigation by the District's labor compliance administrator, Parsons Brinckerhoff, later revealed that Central Tech was illegally paying its workers on the Project less than California's prevailing wage. (Hampton Decl. Ex. 1 (Request and Notice) at 5-7.) Specifically, although Central Tech issued payroll checks for the prevailing wage, it forced its workers to immediately endorse and return the checks in exchange for a much smaller value of cash. (Id.) Central Tech also underreported the hours worked by its employees. (Id.) Bayley maintains that it was not complicit in Central Tech's illegal operations.
At the conclusion of its investigation, Parsons Brinckerhoff, on behalf of the District, sent the California Division of Labor Standards and Enforcement a Request for Approval of Forfeiture ("Request"). (Request and Notice at 4.) Bayley received a copy of the Request on January 5, 2012. (Id.) The Request delineated Central Tech's mismanagement, the ensuing investigation, and the amount of unpaid wages
The District served Bayley with a Notice of Withholding Contract Payments ("Notice") on March 8, 2012. (Request and Notice at 10.) The Notice stated the District's intent to withhold contract payments to Bayley in the amount of the unpaid wages and penalties. (Id.) The Notice also set forth Bayley and Central Tech's procedural rights to dispute the withholding. (Id.)
After receiving the Notice, Bayley sued Central Tech; Central Tech dissolved its business and both principals declared bankruptcy. (Dutcher Decl. ¶ 11.)
On October 22, 2012, Bayley, via its insurance broker, tendered a claim to Great American under its professional liability policy, and forwarded Great American copies of the Request and the Notice. (Hampton Decl. Ex. 2.) After receiving the claim, Great American requested and received additional information from Bayley, including copies of the contract and subcontract at issue. (Id. Ex. 4 at 40-41; Ex. 5 at 43-45.) Great American also retained the firm Morris, Polich and Purdy to attend and report on an upcoming settlement conference and to advise Great American on California labor law. (Hampton 2d. Decl. Ex. 15 (Shippee Depo.) at 65, 67.) On December 18, 2012, Great American sent Bayley a denial letter declining to cover the claim. (See Denial Letter.) Bayley initiated this suit on December 19, 2012. (Notice of Removal (Dkt. # 1) at 2).
Bayley, in its motion for summary judgment, argues that (1) Great American breached its duty to defend, (2) Great American's investigation and denial of coverage constituted bad faith, (3) as a result of Great American's alleged bad faith, Great American is estopped from denying Bayley coverage, and (4) Great American violated Washington's Insurance Fair Conduct Act ("IFCA"). (See generally Bayley Mot.) Great American, in its motion for summary judgment, argues that it did not breach its duty to defend Bayley as a matter of law, and that therefore all of Bayley's claims (with the exception of a claim for procedural bad faith) must fail. (See generally GA Mot.) The court addresses each argument in turn below.
Summary judgment is appropriate if the evidence, when viewed in the light most favorable to the non-moving 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 also Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Galen v. Cnty. 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 non-moving 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. The court is "required to view the facts and draw reasonable inferences in the light most favorable to the [non-moving] party." Scott v. Harris, 550 U.S. 372, 378, 127 S.Ct. 1769, 167 L.Ed.2d 686 (2007).
An insurer has a duty to defend "when a complaint against the insured, construed liberally, alleges facts which could, if proven, impose liability upon the insured within the policy's coverage." Truck Ins. Exch. v. VanPort Homes, 147 Wn.2d 751, 58 P.3d 276, 281-82 (2002). The duty to defend is broader than the duty to indemnify. Am. Best Food, Inc. v. Alea London, Ltd., 168 Wn.2d 398, 229 P.3d 693, 696 (2010) (citing Safeco Ins. Co. of Am. v. Butler, 118 Wn.2d 383, 823 P.2d 499, 504-05 (1992)). Whereas the duty to indemnify "hinges on the insured's actual liability to the claimant and actual coverage under the policy," the duty to defend "arises based on the insured's potential for liability and whether allegations in the complaint could conceivably impose liability on the insured." Woo v. Fireman's Fund Ins. Co., 161 Wn.2d 43, 164 P.3d 454, 462-63 (2007) (emphasis in original).
The insurer is relieved of its duty to defend only if the alleged claim is "clearly not covered by the policy." VanPort Homes, 58 P.3d at 282. "If there is any reasonable interpretation of the facts or the law that could result in coverage, the insurer must defend." Alea London, 229 P.3d at 696. If a complaint is ambiguous, a court will construe it liberally in favor of "triggering the insurer's duty to defend." Woo, 164 P.3d at 459. Similarly, an insurer cannot rely on an equivocal interpretation of the case law to give itself — rather than the insured — the benefit of the doubt. Id. at 463.
The duty to defend must be determined only from the complaint, unless (1) the complaint provides too little factual detail, or (2) the allegations in the complaint are ambiguous or conflict with information known to or readily ascertainable by the insurer. See Woo, 164 P.3d at 459. Even then, an insurer may only rely on extrinsic facts to trigger — not deny — the duty to defend. Id.
Here, the Response and the Notice, both of which Great American received at the time Bayley tendered its claim, could serve as a functional complaint.
Specifically, the District's Request seeks approval from the Division of Labor Standards and Enforcement to withhold contract payments to Bayley on the basis of the labor compliance program's investigation and findings regarding Central Tech. (Request and Notice at 5.) The Request identifies Bayley as the "Affected Contractor," Central Tech as the "Affected Subcontractor," and the District as the "Awarding Body." (Id.) The Request provides a "General Description of the Scope of Work of the Entire Project," stating: "Renovations of Saddleback College Learning Resource Center includes [sic] partial demolition, complete renovation of 100,000 square foot library building, and modernizations...." (Id.) The Request then details the labor compliance program's investigation into Central Tech, describes Central Tech's strategy of underpaying workers and falsifying payment records, summarizes the audit, and recommends wages and penalties due under specific sections of the California Labor Code. (Id. at 6-8.) The Request concludes that
Similarly, the Notice reiterates that the District's labor compliance program identified violations of the California Labor Code with respect to the Project resulting in unpaid wages of $427,709.14 and penalties of $101,750.00. (Id.) The Notice identifies the District as the "Awarding Body," Bayley Construction as the "Prime Contractor" and Central Tech as the "Subcontractor" on the Project. (Id.) The Notice informs Bayley that the District is withholding contract payments in the amount of unpaid wages and penalties. (Id.) The Notice provides that Bayley must submit a written Request for Review within 60 days to obtain a hearing, and that failure to respond "will result in a final order which shall be binding." (Id. at 11.)
Therefore, from the face of the Response and Notice, Great American was aware that Bayley was serving as the prime contractor on a construction project, that the subcontractor Bayley hired had failed to pay its workers California's prevailing wage, and that Bayley was facing liability under California law for that failure. The Policy provides coverage for a "loss" due to an "act, error, or omission in professional services," where professional services are defined as: "Construction Management, Pre-Construction Consulting Services and Design Services," and "loss" is defined "a monetary judgment, award or settlement" that includes "compensatory damages ... punitive, exemplary or multiplied damages, civil fines, penalties and assessments." (Policy at 83, 88.) The facts alleged in the Notice and Response conceivably indicate a "loss"
Great American's argument that it owes Bayley no duty to defend is premised on its interpretation of the term "professional services." (GA Mot. 9-15.) In a nutshell, Great American seeks to define "professional services" as services that "require the exercise of professional skill and judgment" or "specialized knowledge or skill." (Id. at 10). In Great American's view, paying workers the appropriate prevailing wage does not require special skill or judgment, but rather is an obligation common to every public works contractor, and therefore is not a professional service covered by the policy. (Id. at 1-12.)
Moreover, Great American's interpretation conflicts with other principles of policy interpretation. Under Washington state law: inclusionary clauses in insurance contracts are liberally construed in favor of covering all acts fairly embraced by the specified terms, Hawaiian Ins. and Guar. Co., Ltd. v. Federated Am. Ins. Co., 13 Wn.App. 7, 534 P.2d 48, 56 (1975); policy language is given a "sensible construction as would be given to the contract by the average person," Am. Nat'l Fire Ins. Co. v. B & L Trucking & Const. Co., 134 Wn.2d 413, 951 P.2d 250, 256 (1998); and ambiguities in the policy (if any) are resolved in favor of the insured, Quadrant Corp. v. Am. States Ins. Co., 154 Wn.2d 165, 110 P.3d 733, 737 (2005). Applying these principles, it is not clear that the term "professional services" limits the "construction management" conduct covered by the Policy. See VanPort Homes, 58 P.3d at 282 (stating that an insurer is relieved of its duty to defend only if the alleged claim is "clearly not covered by the policy"). At this stage, Great American cannot rely on its own narrow interpretation of "professional services" to deny a defense. See Alea London, 229 P.3d at 701.
Even assuming that Great American's interpretation of professional services applied, Great American errs in its application to the instant context. Great American is required to construe the facts liberally in favor of triggering the insurer's duty to defend. Woo, 164 P.3d at 459; see also Alea London, 229 P.3d at 696 ("If there is any reasonable interpretation of the facts or the law that could result in coverage, the insurer must defend.") Although, as Great
Here, the Request and Notice show that Bayley was the general contractor on a $12 million renovation project of considerable scope: the Project encompassed "mechanical, electrical and plumbing systems; interior wall framing, drywall, taping, and painting; formwork and rebar; metal decking and stairway; structural steel installation; roofing; flooring; plastering; underground utilities; skylight installation; ADA upgrades; landscaping; fireproofing." (Request and Notice at 5.) The forfeiture, however, applies to only one piece of the project: "Sheet Metal/HVAC." (Id.) A liberal and reasonable construction of these facts would be that ensuring subcontractors' compliance with prevailing wage laws on a project of this scope required professional skill and judgment.
Extrinsic evidence, which Great American considered in its denial of coverage, supports this conclusion. (See Shippee Dep. at 66 (explaining that Great American's claims counsel investigated extrinsic evidence)); see also VanPort Homes, 58 P.3d at 282 ("If coverage is not clear from the face of the complaint but may exist, the insurer must investigate the claim.") The Contract between Bayley and the District shows that Bayley's responsibilities as prime contractor were to "provide, furnish, and pay for all the labor, materials, necessary tools, expendable equipment, and all taxes, utility and transportation services required for construction of the Project," (Contract at 59), and that Bayley was "solely responsible for the means, methods, techniques, sequences, and procedures of construction," (id. at 68). The Contract also provides that Bayley "shall pay and shall cause to be paid each worker engaged in work on the Project not less than the general prevailing rate of per diem wages determined by the Director, regardless of any contractual relationship which may be alleged to exist between the CONTRACTOR or any subcontractor and such workers." (Id. at 97.) Again, a liberal and reasonable construction of these facts would be that managing the responsibilities assigned under the Contract, including ensuring all subcontractors' compliance with prevailing wage laws, was a task requiring professional skill and judgment.
Summary judgment regarding the duty to defend is appropriate because "the interpretation of language in an insurance policy is a matter of law." Black v. Grange Ins. Ass'n, C08-1699Z, 2009 WL 4110300, at *5 (W.D.Wash. Nov. 19, 2009) (quoting Allstate Ins. Co. v. Peasley, 131 Wn.2d 420, 932 P.2d 1244, 1246 (1997).) Here, the facts alleged in the Request and Notice indicate a potential for covered liability under the plain language of the Policy. Great American's argument that the term "professional services" should be interpreted to limit the type of "construction management" acts covered implicates the question of actual liability, rather than the "potential for liability" contemplated in a duty to defend analysis. See Woo, 164 P.3d at 463. And even if Great American's interpretation is assumed to apply, a liberal construction of the facts does not permit the conclusion that Bayley's professional services claim is clearly not covered by the policy. See VanPort Homes, 58 P.3d at 282. Accordingly, the court denies Great American's motion for summary judgment that Great American had no duty to defend Bayley against the District's withholding of contract payments, and grants Bayley's motion for summary judgment that Great American breached its duty to defend.
An insurer acts in bad faith if its denial of coverage is "unreasonable, frivolous, or unfounded." Overton v. Consol. Ins. Co., 145 Wn.2d 417, 38 P.3d 322, 329 (2002). Moreover, a claim for bad faith claims handling remains viable even if an insurer did not breach its duty to defend, pay, or settle. St. Paul Fire and Marine Ins. Co. v. Onvia, Inc., 165 Wn.2d 122, 196 P.3d 664, 669 (2008). Claims of bad faith "are not easy to establish and an insured has a heavy burden to meet." Overton, 38 P.3d at 329. Whether an insurer acted in bad faith is a question of fact. Smith v. Safeco Ins. Co., 150 Wn.2d 478, 78 P.3d 1274, 1277 (2003). Therefore, if "reasonable minds could differ that the insurer's conduct was reasonable, or if there are material issues of fact with respect to the reasonableness of the insurer's action, then summary judgment is not appropriate." Id.
Here, Bayley asserts three types of bad faith claims against Great American. First, Bayley asserts that Great American's denial of a defense was unreasonable or unfounded. (Bayley Mot. at 2, 22-23; Reply to Bayley Mot. (Dkt. # 43) at 9-11.) Next, Bayley asserts that Great American's denial of coverage was unreasonable or unfounded. (Id.) Finally, Bayley also asserts that Great American's handling of
Bayley argues that Great American's reliance on an "arguable" interpretation of case law to define "professional services" was unreasonable under Alea London and therefore constitutes bad faith as a matter of law. (Bayley Mot. at 22.) However, unlike the insurer in Alea London, Great American has not ignored contradictory, analogous case law. Moreover, Great American's denial of coverage was not founded solely on the precedent it cites in its summary judgment motion — Great American's denial letter also relied on two other justifications.
First, Great American concluded that the Request and Notice did not show that Bayley was performing "construction management." (Denial Letter at 25.) Bayley offers expert testimony regarding the meaning and scope of "construction management." However, as discussed above in Section II(B)(2), footnote 5, since Bayley did not timely disclose its experts to Great American, the court declines to consider that testimony.
Second, Great American concluded that the unpaid wages and penalties withheld from Bayley's contract payments constituted either "liquidated damages" or "disgorgement," both of which are exceptions to the definition of "loss" covered by the Policy. (Denial Letter at 25-26.) Bayley argues that an adequate investigation by Great American would have revealed that Bayley posted a bond that ostensibly removed the threat of liquidated damages as defined by the California statutes cited in the Notice. (Bayley Mot. at 13-14.) Great American responds that a sum certain such as the unpaid wages nonetheless constitutes "liquidated damages" under Washington law. (Resp. to Bayley Mot. at 18-19.)
Great American also brings forth evidence that Bayley's own insurance brokers were uncertain as to whether Bayley's claim fell within the professional services policy. For example, Jim Sorte, Vice President and Claims Executive at Bayley's insurance broker, Parker Smith & Feek, cautioned Bayley that: "The scenario is unique, so it is difficult for us to definitively say that coverage will be triggered under the insurance policies." (Hampton 2d. Decl. Ex. 7 at 30). When Mr. Sorte explained the situation to his colleague, Jim Hamlin, Mr. Hamlin's reaction was: "That is completely strange! Never had one such as that in the past." (Hampton 2d. Decl. Ex. 1 at 6.) Mr. Hamlin concluded: "Not sure either professional or D & O would respond in this case but worth a try I suppose." (Id.)
Viewing the facts in the light most favorable to Great American, the court concludes that reasonable minds could differ as to whether Great American's denial of a defense was unreasonable. This discrepancy should be resolved by the trier of fact. Smith, 78 P.3d at 1277. Accordingly, the court denies summary judgment with respect to the alleged unreasonableness of Great American's denial of a defense.
Since the duty to defend is broader than the duty to indemnify, the court denies summary judgment with respect to the alleged unreasonableness of Great American's denial of coverage for the same reasons as stated in the immediately preceding section.
An insurer's duty of good faith to its insured includes the duty to conduct
Bayley argues that Great American's investigation was inadequate because Great American did not research the meaning of the term "construction management" within the construction industry or inquire as to the level of skill and judgment that Bayley exercised in its role as general contractor for the Project. (Bayley Mot. at 5-6, 14-17 (citing testimony from Great American's 30(b)(6) deponent, Ms. Patricia Shippee).) To support its argument that Great American's investigation was unreasonable as a matter of law, Bayley cites cases in which, for example, the claims handler "conducted no investigation at all," Aecon Bldgs., Inc. v. Zurich N. Am., 572 F.Supp.2d 1227, 1237 (W.D.Wash.2008), and in which the insurer "offer[ed] no support for the notion that any investigation preceded its determination as to [coverage]," Travelers Cas. & Sur. Co. of Am. v. Spectrum Glass Co., Inc., C 11-1324-JCC, 2012 WL 3780356 (W.D.Wash. Aug. 31, 2012). That is not the case here.
Here, Great American provides evidence that, after Bayley's tender, Great American requested, received, and reviewed additional information and documents from Bayley, including a copy of the Contract, a copy of the Subcontract, and transcripts of depositions (Hampton Decl. Ex. 4 at 40-42; id. Ex. 5 at 43-45), consulted with Bayley's insurance broker Jim Sorte at Parker, Smith, and Feek regarding the claim (Shippee Dep. at 68), and retained California labor law firm Morris Polich & Purdy to advise on California labor law (id. at 65), participate in a settlement conference between Bayley and the District (id. at 65), and draft a legal coverage opinion (id. at 67). All in all, Great American's investigation lasted almost two months. (See Hampton Decl. Ex. 2 at 1; Denial Letter at 1.)
Viewing the facts in the light most favorable to Great American, the court finds that Great American has raised a triable issue of fact with respect to the reasonableness of its investigation. Accordingly, the court denies Bayley's motion for summary judgment that Great American breached its duty to investigate.
Typically, if an insured prevails on a bad faith claim, the insurer is estopped from denying coverage. Aecon Bldgs, 572 F.Supp.2d at 1234 (citing Mut. of Enumclaw Ins. Co. v. Dan Paulson Const., Inc., 161 Wn.2d 903, 169 P.3d 1, 10 (2007)); but see St. Paul Fire, 196 P.3d at 669 (no presumption of harm for procedural bad faith when no coverage is due). Because the court denies Bayley's motion for summary judgment that Great American acted in bad faith, the court also denies Bayley's motion for summary judgment on estoppel.
The 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." RCW 48.30.015(1). Bayley asserts that Great American's alleged violations of the WAC automatically constitute a violation of the IFCA. (Bayley Mot. at 23); but see Lease Crutcher Lewis
For the foregoing reasons, the court DENIES Defendant Great American's motion for summary judgment (Dkt. # 16). The court GRANTS Plaintiff Bayley Construction's motion for summary judgment (Dkt. # 30) on the duty to defend only, and DENIES the motion in all other respects.
Great American's denial letter points out that the Policy excludes "liquidated damages" from the definition of "loss," and argues that the Policy is inapplicable because the Notice at one point describes the unpaid wages as liquidated damages. (Denial Letter at 25.) However, the Notice provides that liquidated damages only become due if the contractor fails to post a bond within 60 days, and that subsequent administrative proceedings may alter the amount of wages and penalties due. (Request and Notice at 13-14.) Moreover, the parties continue to dispute the definition of "liquidated damages" under the Policy, California law, and Washington law. (See, e.g., Bayley Mot. at 13-14, 21-22; Resp. to Bayley Mot. (Dkt. # 32) at 18-19; Reply to Bayley Mot. (Dkt. # 34) at 9.) Therefore, the mere appearance of the term "liquidated damages" in the Notice is not an appropriate basis for deciding that Bayley's claim was "clearly not covered by the policy." See VanPort Homes, 58 P.3d at 282.
Additionally, Great American moves to strike these declarations, as well as the declaration of Mr. Thorne, because Bayley failed to disclose any experts to Great American before the deadline for expert disclosures. (See Reply to GA Mot. (Dkt. # 26) at 2 (citing Minute Order Setting Trial Dates and Related Dates, (Dkt. # 11).) At oral argument, Bayley's counsel conceded that Bayley did not disclose Mr. Amento as an expert witness before the deadline, and that Bayley does not oppose Great American's motion to strike Mr. Amento's declaration. Accordingly, the court strikes Mr. Amento's declaration (Dkt. # 21). Because Bayley did not disclose Mr. Thorne and Mr. Dutcher as experts, the court also strikes the declarations of Mr. Thorne (Dkt. # 20) and Mr. Dutcher (Dkt. # 23) to the extent these declarations contain opinion testimony.
