Soha & Lang, PS Files Ninth Circuit Amicus Brief on Behalf of Insurance Trade Groups

On June 6, 2023, in Gold Creek Condominium-Phase I Assn. of Apartment Owners v. State Farm Fire and Cas. Co., Ninth Circuit Case No. 22-35606, Soha & Lang, PS attorneys Paul Rosner, Sarah Davenport, and Jillian Henderson filed an amici brief on behalf of the American Property Casualty Insurance Association and the National Association of Mutual Insurance Companies. The brief addressed the trigger of coverage in a first-party property insurance claim when there are hidden damages and the policy covers loss “commencing during the policy period.” It asked the Ninth Circuit to adopt an injury-in-fact trigger theory, which would provide clarity for cases involving hidden rainwater damage – a common hazard for property in Washington.
The brief argued that, while a continuous trigger theory has been adopted by Washington courts in the context of third-party insurance, such a theory is inconsistent with the language and policies involved in first-party property claims. Unlike in third-party insurance, the brief explained, “[a] property owner’s potential loss is capped at the value of the insured property.”

The brief also argued the term “commence” is not ambiguous under Washington law, and an injury-in-fact theory is consistent with both the policy language and Washington law, as “no reasonable policyholder would answer that the loss ‘commenced’ 55 times in a single year.”

Finally, the brief offered the alternative argument for a manifestation trigger, where coverage is determined when damage becomes apparent. Such a trigger “provides a bright-line rule that creates certainty for both insureds and insurers.”

Disclaimer: the opinions expressed in this blog are those of the author and do not necessarily reflect those of Soha & Lang, P.S. or its clients.

Washington Court of Appeals Weighs in on Ensuing Loss

On December 19, 2022, in The Gardens Condo. v. Farmers Ins. Exch., 83678-1-I, the Washington Court of Appeals, Division One, held that the ensuing loss provision contained in an exclusion for faulty design and construction preserved coverage for resulting losses that are caused by a covered cause of loss, reversing the trial court’s summary judgment ruling in favor of Farmers and remanding for further proceedings.

The insured, Gardens Condominium, is a 26-unit condominium building in Shoreline. In 2004, Gardens had roof repairs performed to correct inadequate ventilation. In 2019, Gardens discovered the 2004 repairs were defective, and that water vapor emitted from inside the units continued to be trapped in the roof joist cavities, allowing condensation to form during cool weather and overnight temperature drops. That repeated exposure to moisture damaged the sheathing, fireboard, joists, and sleepers.

Gardens held an all-risk insurance policy from Farmers, which covered all “direct physical loss or damage” to the building not specifically excluded by the policy. The policy excludes coverage for damage caused by faulty design or repair, but the exclusion contains an ensuing loss provision, which states: “But if loss or damage by a Covered Cause of Loss results, we will pay for that resulting loss or damage.”

Farmers denied coverage because faulty construction “initiated a sequence of events resulting in the loss or damage.” Gardens objected to Farmers’ denial of coverage, contending that the resulting loss clause narrowed the faulty workmanship exclusion, preserving coverage for damage caused by a resulting covered peril, and that the policy covers the perils of humidity and condensation.

Gardens sued Farmers for breach of contract and declaratory relief. Gardens and Farmers cross-moved for summary judgment. The parties stipulated to key facts, including that the damage to the roofing assembly “was caused by condensation and/or excess humidity resulting from inadequate ventilation of the roof assembly due to the faulty, inadequate, or defective construction, repairs, and/or redesign.”

The trial court granted summary judgment for Farmers, concluding that the policy excludes coverage because faulty construction began a sequence of events that resulted in the damage, and the resulting loss clause exception did not “somehow resurrect[ ]” coverage. The Court of Appeals reversed on de novo review, finding that the trial court misinterpreted the ensuing loss provision.

Citing Vision One, 174 Wn.2d 501, 276 P.3d 300 (2012), the Court of Appeals found that the ensuing loss provision contained in the Farmers policy preserved coverage for resulting damage caused by a covered cause of loss. Thus, if the policy covers the perils of condensation and excess humidity, it covers the loss or damage from those perils. The Court of Appeals also noted that, although an ensuing loss otherwise covered by the policy remained covered, the uncovered event – in this case faulty construction – is never covered.

Relying on citing Vision One, Farmers argued that the Court should apply an “efficient proximate cause” analysis to the ensuing loss to determine whether the damage at issue flows from an excluded event, preventing coverage. The Court of appeals rejected this argument, noting that Farmers’ reference to the term “inverse efficient proximate cause” in Vision One was taken out of context and misapplied.

Farmers also argued that the ensuing loss provision should be interpreted to apply to losses from “only unforeseen covered events, occurring independent of the excluded peril”, citing TMW Enterprises, Inc. v. Federal Insurance Co., 619 F.3d 574 (6th Cir. 2010). Farmers argued that failure to do so would allow the ensuing loss provisions to “swallow the faulty workmanship exclusion whole.” The Court of Appeals rejected this argument as inconsistent with Washington law, citing Vision One, 174 Wn.2d 501, 276 P.3d 300 (2012) and Sprague v. Safeco Ins. Co. of Am., 174 Wn.2d 524, 529, 276 P.3d 1270 (2012). The Court of Appeals also noted that Farmers’ interpretation would render the ensuing loss provision superfluous.

Finally, Farmers’ argued that Gardens was not seeking coverage for an “ensuing loss”, but just for “the loss”, citing Sprague, 174 Wn.2d at 527, 276 P.3d 1270 (2012). The Court of Appeals rejected this argument, stating that, in Sprague, all the causes of the loss at issue were subject to exclusions, and thus the policy did not provide coverage under the ensuing loss provision in question. Here, the parties stipulated that the perils of condensation and excess humidity caused the roof damage, but they dispute whether Farmers’ policy covers those perils.

The Court of Appeals remanded the case for further proceedings consistent with its ruling that the ensuing loss provision contained in the exclusion for faulty design and construction preserved coverage for resulting losses that are caused by a covered cause of loss.

The Gardens Condo. v. Farmers Ins. Exch., ____ P.3d _____ (Wash. Ct. App. Dec. 19, 2022).

Disclaimer: the opinions expressed in this blog are those of the author and do not necessarily reflect those of Soha & Lang, P.S. or its clients.

Washington Supreme Court Rules in Favor of Builders’ Risk Insurers in Seattle Tunnel Project Coverage Dispute

In a unanimous decision, the Washington Supreme Court held in Seattle Tunnel Partners, et al v. Great Lakes Reinsurance (UK) PLC, et al. No. 100168-1 (September 15, 2022) that under the Builders Risk Policy naming both Seattle Tunnel Partners (“STP”) and the Washington Department of Transportation (“WSDOT”) as insureds that: (1) the Policy’s Mechanical Breakdown Exclusion (“MBE”) excluded coverage for property damage to the Tunnel Boring Machine (“TBM”) caused by any alleged design defects; (2) the Policy did not afford coverage for losses due to project delays; and (3) the loss of use or functionality of the tunnel did not constitute “direct physical loss, damage or destruction” covered under the Policy.

The case arose out of a major construction project in Seattle to replace the Alaskan Way Viaduct in Seattle. STP contracted with WSDOT to construct a tunnel replacing the viaduct and as part of the agreement obtained a builder’s risk all-risk insurance policy from Great Lakes Reinsurance (UK) PLC and other underwriters. The Policy had two sections, insuring two types of insured property: (Section 1) damage to the “tunneling works” defined as “the tunnel itself during the course of construction, and property being used or intended for use in the construction of the tunnel (except for the TBM); and (Section 2) Damage to the TBM.

In December 2013, after the TBM had been excavating part of the tunnel, the machine stopped working, and did not resume excavation until December 2015. The delay in tunneling was caused by the need to extract the TBM and perform repairs. STP and WSDOT tendered insurance claims to Great Lakes, which denied the claims, and this suit followed. The Supreme Court’s decision affirmed the trial court’s rulings on the parties’ motions for partial summary judgment.

The first issue addressed by the Court was whether in the event the factfinder found that a design defect in the TBM caused the TBM to stop working, the MBE applied. The MBE read: “[The insurers] will not indemnify the Insured [for] [l]oss or or [d]amage in respect of any item by its own explosion mechanical or electrical breakdown, failure breakage or derangement.” The Court first rejected STP’s argument that the MBE was ambiguous, noting that STP did not explain how any missing word or punctuation made it fairly susceptible to two different but reasonable interpretations. The Court next held that the phrase “by its own” in the MBE meant that coverage for damage to the TBM from inherent or internal causes was excluded. Finally, after a lengthy discussion of case law both inside and outside of Washington, the Court concluded that the MBE excluded coverage for machinery breakdowns resulting from an internal cause, which includes a defective design. In so concluding, the Court rejected the application of Washington’s efficient proximate cause rule because any design defect would be the initial event –an uncovered peril under the MBE.

The Court next addressed whether STP could recover its project delay losses arising out the damage to the TBM. Relying on its decision in Vision One, LLC v. Phila. Indem. Ins. Co., 174 Wn.2d 501, 276 P.3d 300 (2012), the Court rejected STP’s argument that because its delay losses would not have occurred but for the physical damage to the TBM, such losses had to be covered under an all-risk policy. Like in Vision One, the Court held that the Policy’s coverage grant for “direct physical loss, damage, or destruction” extended only to “physical” losses to covered property and that delay losses were nonphysical losses.

The Court finally addressed WSDOT’s argument that it should recover under Section 1 of the Policy for its loss of use of the tunneling works while the TBM was being repaired. WSDOT alleged that the tunneling works suffered direct physical loss or damage because the tunnel was “physically incapable of performing its essential function”: completing construction of the tunnel. The Court agreed that physical loss or damage may under certain circumstances include the physical loss of use of insured property, but that this case did not present those circumstances. Again, the Court looked to the applicable Policy language, “direct physical loss, damage or destruction,” and relying on the standard dictionary definitions of “Loss,” “Damage,” and “Physical,” the Court held that “direct physical loss [or] damage” refers to the deprivation or dispossession of or injury to the insured property and that the deprivation, dispossession, or injury must be physical, meaning that the loss must have a material existence, be tangible, or be perceptible by the senses. Because WSDOT did not allege that the tunneling works itself suffered any loss or damage that was physical, i.e. perceptible, material, or tangible, but rather that WSDOT was deprived of its use of the tunneling works due to the physical blockage of the TBM.

Disclaimer: the opinions expressed in this blog are those of the author and do not necessarily reflect those of Soha & Lang, P.S. or its clients.

Washington Supreme Court Rules Covid-19 Proclamation Related Loss Does Not Trigger Coverage

In a unanimous decision, the Washington Supreme Court held in Hill and Stout, PLLC v. Mutual of Enumclaw Insurance Company, No. 100211-4 (August 25, 2022) that the phrase “direct physical loss of . . . property” in a property insurance policy does not include constructive loss of intended use of property, as such a loss is not “physical.” The Court also held that the virus exclusion applied to preclude coverage and that the efficient proximate cause rule did not mandate coverage.

The Plaintiff, Hill and Stout PLLC, commenced this action against its insurer alleging that its property insurance policy covered business income lost due to “direct physical loss of or damage to” the insured property. The policy also included a virus exclusion. Plaintiff alleged it was unable to use its offices for nonemergency dental practice due to gubernatorial proclamations issued by Governor Inslee. The trial court granted the insurer’s motion for summary judgment, finding that “direct physical loss of or damage to property” is not ambiguous and does not cover constructive loss of property under the Proclamation. The trial court also held that the virus exclusion applied, and that the efficient proximate cause rule did not apply in this case. Plaintiff appealed directly to the Washington Supreme Court.

The primary issue was the interpretation of the phrase “direct physical loss of or damage to Covered Property.” Plaintiff argued that “direct physical loss of” property can reasonably be interpreted to include the loss of the ability to use property. Mutual of Enumclaw argued that coverage requires that something physically happen to covered property, and that there was no coverage because Plaintiff admitted that nothing happened to its property. Hill and Stout argued it sustained a physical deprivation of property because it was physically deprived of the use of its business property as an immediate result of Governor Inslee’s proclamations, and urged the Court to apply a “loss of functionality” test instead of requiring that there be a physical alteration to the property. However, the Court found Plaintiffs loss to be more akin to an abstract or intangible loss than a “physical” one.

While the Court agreed that there are likely cases in which there is no physical alteration to the property but there is a direct physical loss under a theory of loss of functionality (such as contamination with a problematic substance), the Court found this was not such a case because Plaintiffs property continued to be functional. In so finding, the Court stated even under a loss of functionality test there must be some physical effect on the property. Furthermore, the Court found its interpretation of “direct physical loss” consistent with other policy provisions including the “period of restoration” during which business income coverage for the suspensions of operation applies. Thus, the Court held that deprivation of the full intended use of property is not sufficient to trigger coverage under the phrase “direct physical loss of or damage to” property where nothing “physical” has happened to the covered property.

Although the Court did not need to examine the issue of efficient proximate cause and the virus exclusion, the Court did so given that the issue was fully briefed and is likely to repeat in other cases regarding the interpretation of similar insurance policies. The Court found that the causal chain in this case was clear and that an excluded peril (the COVID-19 virus) initiated the sequence of events, causing the governor to issue the proclamations. As the causal chain was initiated by an excluded peril, the Court held that the efficient proximate cause rule did not apply to mandate coverage. The Court further held that the virus exclusion applied.

Disclaimer: The opinions expressed in this blog are those of the author and do not necessarily reflect those of Soha and Lang, P.S. or its clients.

Washington Court of Appeals Holds Noneconomic Damages Available under Insurance Fair Conduct Act (IFCA)

Whether the term “actual damages” as used in RCW 48.30.015 includes noneconomic damages is an issue of first impression under Washington law. On April 19, 2022, the Court of Appeals, in Beasley v. GEICO General Insurance Company, et al., 2022 WL 1151426 (Wash. Ct. App. 2022), held that the legislative history demonstrates that noneconomic damages are “actual damages” under RCW 48.30.015 and reversed the trial court.

In this underinsured motorist (UIM) case, when instructing the jury on the elements of the IFCA claim, the trial court included the following language: “The Court has determined that [GEICO] unreasonably denied the payment of benefits by failing to pay the undisputed $10,000 offer of UIM benefits made on October 23, 2015.” However, the trial court refused to provide the jury with Beasley’s proposed instruction on damages under IFCA that included noneconomic damages based on the trial court’s ruling that the IFCA claim did not include noneconomic damages because the claim sounded in negligence rather than intentional tort. The jury found that Beasley had proven his IFCA claim and that Beasley’s IFCA-related damages were $84,000. The jury further found that Beasley had proved his insurance bad faith claim and that he had incurred $400,000 in noneconomic damages related to that claim. Beasley appealed the trial court’s ruling that IFCA does not include noneconomic damages.

The Court of Appeals determined that the legislature intended “actual damages” to include noneconomic damages under IFCA because this legislation was intended to protect insureds from an insurer’s unreasonable actions and remanded the matter to the trial court for a new trial on noneconomic damages related to the IFCA claim.

The Court of Appeals held that merely tripling the bad faith noneconomic damages was not an appropriate remedy. Rather, the Court held that the “proper remedy is based on an understanding that although not all bad faith conduct constitutes an IFCA violation, we can presume under the facts of this case that GEICO’s IFCA violations also constituted bad faith” and that “[b]ecause a violation of IFCA also would constitute bad faith under the facts of this case, any IFCA noneconomic damages necessarily would have been included in the $400,000 the jury awarded in bad faith damages.” The Court remanded for a new trial on the issue of IFCA noneconomic damages only, noting that the “IFCA noneconomic damages may be less than the bad faith damages because the bad faith cause of action is much broader.” The Court of Appeals further noted that Beasley is not automatically entitled to treble damages. RCW 48.30.015(2). The Court also ruled that Beasley is not entitled to double recovery.

Washington Federal Judge says adjusters need a baseline understanding of Washington law

According to a new opinion out of the U.S. Court for the Eastern District of Washington, insurers have a duty to ensure that adjusters know enough about applicable case law in order to make reasonable coverage and defense decisions. In Security National Ins. Co. v. Construction Associates of Spokane, Inc., 2022 WL 884911 (E.D. Wash. 3/24/2022), the Court suggested that insurance companies could meet this duty by teaching adjusters to run case searches, purchasing subscriptions to legal newsletters, or consulting legal professionals.

The case involved a Certificate of Insurance issued in 2019 in connection with a construction site injury that occurred in 2016. The injured worker, who was employed by a subcontractor, sued the general contractor. The general contractor tendered its defense to the subcontractor’s insurer, Security National.

In preparing the tender, the general contractor searched its records for a Certificate of Insurance that confirmed its status as an additional insured under the subcontractor’s insurance policy. When it was unable to locate a Certificate for 2016, it contacted the subcontractor’s insurance broker and asked it to issue a Certificate confirming that the subcontractor was insured for the policy period during which the accident occurred and that the general contractor was an additional insured.

While Security National was investigating the tender, the Washington Supreme Court issued its opinion in T-Mobile USA, Inc. v. Selective Ins. Co. of Am., 194 Wn.2d 413, 450 P.3d 150 (2019), which held that the insurer was bound by the representation of its authorized agent in a Certificate of Insurance that an organization was an additional insured even though the Certificate said that it could not be used to expand coverage beyond that provided in the insurance policy. Previous cases had held that a Certificate of Insurance could not expand coverage provided by the insurance policy.

Although the adjuster reviewed the Insurance Commissioner’s regulation on Certificates of Insurance, he was not aware of the T-Mobile opinion. He sent a letter denying the tender almost two months after the opinion had been issued. After the general contractor’s attorney called Security National’s attention to the T-Mobile opinion, it reinvestigated the tender, eventually affirming its denial.

Judge Mendoza, Jr. granted the general contractor’s motion for summary judgment, holding that Security National was bound by its authorized agent’s representation in the 2019 Certificate that the general contractor was an additional insured on the date of the accident. He also held that the insurer acted in bad faith as a matter of law when it denied the tender of defense, rejecting Security National’s argument that claims adjusters cannot be expected to know the law and perform legal research, especially when a new case is decided during an investigation. After noting that the file included notes about sending the tender out for review by coverage counsel and making suggestions about training adjusters to know the law, he held that ignorance of the law does not excuse the conduct of adjusters who deny claims for defense or indemnification. “Adjustors must equip themselves or else seek out those with the requisite tools and knowledge.”