NORTHWEST INSURANCE LAW

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1 NORTHWEST INSURANCE LAW QUARTERLY NEWSLETTER SPRING 2018 Williams Kastner has been serving clients in the Pacific Northwest since our Seattle office opened in With more than 60 attorneys in offices in Washington, Oregon and Alaska and affiliated offices in Shanghai, Beijing, Hong Kong, Kunming and Shenzhen we offer global capabilities and vision with a local sensibility. We are attorneys, paralegals, litigation assistants and support staff dedicated to advancing the business and personal objectives of our clients. We are focused on building bridgescombining wisdom and creativityboth in and out of the courtroom and boardroom. TABLE OF CONTENTS 2 OREGON FEDERAL COURT FINDS NO BREACH OF DUTY OF GOOD FAITH DESPITE INSURER S BREACH OF CONTRACT by Jessica M. Cox 5 WASHINGTON SUPREME COURT FINDS THAT EXCLUSIVE MEANS OF SERVICE FOR AUTHORIZED FOREIGN INSURER IS THROUGH WASHINGTON STATE INSURANCE COMMISSIONER by Eliot M. Harris 3 WASHINGTON COURT FINDS NO BAD FAITH DESPITE PROLONGED CLAIM RECONCILIATION PERIOD by Sean T. James

2 NORTHWEST INSURANCE LAW SPRING 2018 OREGON FEDERAL COURT FINDS NO BREACH OF DUTY OF GOOD FAITH DESPITE INSURER S BREACH OF CONTRACT by: Jessica M. Cox I n a recent decision, an Oregon Cour t r e j e c t e d a n i n s u r e r s p o s i t i o n t h a t t h e t e r m s s u r f a c e w a t e r a n d f l o o d w a ter referred to natural water sources as well as man-made sources, thereby f inding that the insurers breached the c o n t r a c t b y d e ny i n g c ove r a g e. H owe ve r, the Cour t reinforced the general rule in Oregon that, despite being incorrect o n c ove r a g e, t h e i n s u r e r c o u l d n o t b e held liable for breach of its duty of fair d e a l i n g a s a m a t t e r o f l aw s i m p l y f o r incorrectly interpreting the scope of c ove r a g e a f f o r d e d b y i t s p o l i c y. I n Ve l oz v. F o r e m o s t I n s. C o. G r a n d R a p i d s, U. S. D i s t. L E X I S , t h e insureds sustained an accidental f looding to their rental home af ter a water m a i n, w h i c h w a s ow n e d a n d r e g u l a t e d b y t h e E u g e n e Wa t e r a n d E l e c t r i c B o a r d ( EWEB ) and located behind the ins u r e d s p r o p e r t y, b u r s t a n d l e a d t o t h e f l o o d i n g a t t h e i n s u r e d s p r o p e r t y. T h e insurer denied the insureds claim and argued that the water damage to the insured structure fell within a policy e xc l u s i o n f o r l o s s c a u s e d b y [ f ] l o o d [w] a t e r, s u r f a c e w a t e r, w ave s, t i d a l w a t e r, t i d a l w ave s, s t o r m s u r g e, t s u n a m i o r ove r f l ow o f a b o d y o f w a t e r o r s p r ay f r o m a ny o f t h e s e w h e t h e r o r n o t d r i ve n b y w i n d. T h e i n s u r e d s c l a i m e d t h a t t h i s e xc l u s i o n p o l i c y a p p l i e d o n l y t o n a t u r a l w a t e r s o u r c e s, a n d t h u s, d i d n o t e xc l u d e c ove r a g e f o r d a m a g e c a u s e d b y E W E B s burst water main, which they contend was a man-made source. Af ter the denia l o f c ove r a g e, t h e i n s u r e d s f i l e d s u i t f o r breach of contract and for breach of the dut y of good faith and fair dealing. H ow e ve r, t h e C o u r t f o u n d t h a t t h e insurer did not breach a duty of good faith simply because it breached its contract. The Cour t held that, on the facts presented at summar y judgment, t h e i n s u r e r s a d o p t e d a p l a u s i b l e ye t ultimately incorrect reading of the c o n t r a c t. T h e C o u r t f o u n d t h a t t h e insureds needed evidence of something more than a mere breach of contract in order to prevail. The insureds were not entitled to summar y judgment regarding their breach of duty of good faith claim. The Oregon Federal District Cour t h e l d t h a t t h e t e r m s s u r f a c e w a t e r a n d f lood water unambiguously referred only to natural water sources, and not man-made sources such as a water main. As a result, the Cour t found the insurer breached its contract with the insureds when it denied the insureds claim resulting from the water main burst. The Cour t granted the insureds summar y j u d g m e n t w i t h r e s p e c t t o t h i s e xc l u s i o n and found that the insurers breached its c o n t r a c t b y d e ny i n g c ove r a g e. T h e C o u r t s d e c i s i o n i n t h i s c a s e i s s i g n i f i c a n t b e c a u s e i t p r ov i d e s c l a r i t y t o t h e s c o p e o f c ove r a g e a f f o r d e d f o r cer tain water damage claims and emp h a s i z e s t h e i m p o r t a n c e o f t h e w a t e r s source and the specif ic language of the w a t e r e xc l u s i o n t o t h e p o l i c y. I t i s a l s o signif icant because it reinforces the general rule in Oregon that an insurer m ay n o t b e l i a b l e f o r i n s u r a n c e b a d f a i t h e ve n i f i t s c ove r a g e d e c i s i o n i s u l t i m a t e l y i n a c c u r a t e a s l o n g a s t h e c ove r a g e decision is plausible. 2

3 NORTHWEST INSURANCE LAW SPRING 2018 WASHINGTON COURT FINDS NO BAD FAITH DESPITE PROLONGED CLAIM RECONCILIATION PERIOD by: Sean T. James A n i n s u r e r s e xc e s s i ve l y l ow c l a i m s e t t l e m e n t o f f e r c a n g i ve r i s e t o a c l a i m u n d e r Wa s h i n g t o n s I n s u r a n c e F a i r C o n d u c t A c t ( I F C A ) i f t h e i n s u r e r m a d e t h e o f f e r k n ow i n g t h a t t h e v a l u e o f t h e c l a i m w a s a c t u a l l y m u c h h i g h e r. I n a r e c e n t o p i n i o n, h owe ve r, a Wa s h i n g t o n c o u r t r e j e c t e d a n i n s u r e d s b a d f a i t h a n d C o n s u m e r P r o t e c t i o n A c t ( C PA ) c l a i m s b a s e d o n a d r aw n - o u t c l a i m s adjustment process where the insurer gradually increased its valuation of the claim and ultimately paid the amount t h e i n s u r e d s c o n t r a c t o r e s t i m a t e d a s n e c e s s a r y t o r e s t o r e t h e i n s u r e d s h o m e to its pre-loss condition. I n C r e e l v. S t a t e F a r m F i r e & C a s. C o., W L ( E. D. Wa s h. M a r. 16, ), a r e c o r d - b r e a k i n g w i n d storm caused a tree to fall onto the home of Alejandra and Douglas Creel o n N ove m b e r 17, T h e C r e e l s h a d a h o m e ow n e r s i n s u r a n c e p o l i c y with State Farm insuring them for the c o s t t o r e p a i r o r r e p l a c e w i t h s i m i l a r c o n s t r u c t i o n a n d f o r t h e s a m e u s e t h e d a m a g e d p a r t o f t h e p r o p e r t y. A n adjuster for State Farm inspected the proper t y within a week af ter the storm, e s t i m a t e d t h e d a m a g e a t $ 9 5, , and tendered a check in this amount t o t h e C r e e l s. I m m e d i a t e l y f o l l ow i n g the incident, the Creels hired Guardian Re s t o r a t i o n, w h i c h e s t i m a t e d t h a t i t wo u l d c o s t $ 33 0, t o r e s t o r e t h e home to its pre-loss condition. State Farm met with Guardian to discuss the damage, and later paid the Creels an a d d i t i o n a l $ 81, S t a t e F a r m a n d G u a r d i a n c o n t i n u e d t o e xc h a n g e e s t i m a t e s ove r t h e n e x t f o u r m o n t h s, a n d o n J u n e 17, 2 016, S t a t e F a r m u p d a t e d i t s estimate and paid the Creels the dif ference bet ween its updated estimate and its previous estimate. Shor tly there a f t e r, t h e C r e e l s t e r m i n a t e d G u a r d i a n and hired Capstone as their restoration c o n t r a c t o r. C a p s t o n e a n d S t a t e F a r m 3

4 exchanged estimates over the next two months, and State Farm ultimately accepted Capstone s final estimate of $208, Unbeknownst to Capstone and State Farm, the Creels had entered into a contract to purchase a new house on September 1, 2016, and sold their damaged house as is on September 22, A few days before the sale closed, a public adjuster inspected the property and sent State Farm an estimate of total damage of $413, The Creels notified Capstone on October 7, 2016 that they had sold their home and would not be proceeding with the restoration. The Creels later sued State Farm, asserting claims under IFCA and CPA. These claims were premised largely on the Creels belief that the claims adjustment process was unnecessarily drawn out and that State Farm still owed an additional $150,000 to cover the damage to their former home. Both parties filed cross-motions for summary judgment. The Creels argued that State Farm violated IFCA by: (1) failing to adequately explain their rights or benefits under their policy; (2) not communicating promptly and processing their claims without undue delay; and (3) forcing them to initiate litigation to recover the amounts due under their insurance policy. The Court distilled the Creels IFCA claims down to one controlling question - whether State Farm s September 2016 payment to the Creels to resolve their claim for structural damage to their dwelling was unreasonable as a matter of law. The Court held there was not an unreasonable denial of benefits because State Farm paid the Creels the full amount that the Creels contractor asserted that it would cost to repair the Creels home. Additionally, the Court viewed the extended reconciliation process between State Farm and Guardian and later between State Farm and Capstone as simply an effort to compensate the insured for the loss at issue. Accordingly, the Court granted State Farm s motion for dismissal on the IFCA claims. The Court also held that the Creels CPA claim was insufficient because they failed to specify any losses that would qualify as compensable damages under the CPA, and did not allege any act by State Farm that qualifies as an unfair or deceptive trade practice. Finally, the Creels argued that State Farm breached the terms of their policy by not providing a line-by-line reconciliation of the differences between its estimate and Capstone s estimate. The Court found that State Farm fulfilled this contractual obligations when it paid the Creels the amount Capstone estimated it needed to repair the home. The Court also rejected the Creels argument that they were somehow entitled to additional compensation based on the higher estimates provided by Guardian and the public adjustor because State Farm offered payment for replacement costs, as identified by Capstone, and the Creels accepted payment. Thus, State Farm satisfied its contractual obligation. This decision is important because it demonstrates that an initial low claim settlement offer followed by a drawnout claims reconciliation process, in which the insurer more than doubles its initial valuation of the insured s claim, does not necessarily qualify as bad faith. This decision also suggests that when an insurer settles a claim based on the cost estimate provided by the insured s contractor, and the insured willingly accepts payment, the insured may be foreclosed from subsequently attacking the size of the payment. 4

5 WASHINGTON SUPREME COURT FINDS THAT EXCLUSIVE MEANS OF SERVICE FOR AUTHORIZED FOREIGN INSURER IS THROUGH WASHINGTON STATE INSURANCE COMMISSIONER by: Eliot M. Harris Similar to the vast majority of other states, service of legal process is governed by statute in Washington. RCW (1) states that an authorized foreign or alien insurer must appoint the commissioner as its attorney to receive service of, and upon whom must be served, all legal process issued against it in this state upon causes of action arising within this state. Despite that, attorneys and litigants in Washington have attempted to serve foreign insurers in a variety of different ways. Similarly, many authorized foreign insurers have attempted to dispute valid service when accomplished through the insurance commissioner. However, this cat and mouse game of service on foreign insurers may have been resolved for good by a recent decision by the Washington Supreme Court. Upon a certified question from the Washington Federal District Court as to whether service on the insurance commissioner was the exclusive means to serve a foreign insurer, the Washington Supreme Court answered in the affirmative, and held that a 2011 amendment to RCW (1) that changed the word shall with must made it unambiguous as to whether an authorized foreign insurer had a mandatory duty to appoint the insurance commissioner as its exclusive agent to receive legal service of process. The case of Ohio Security Ins. Co. v. AXIS Ins. Co. involved in an insurance coverage dispute after a snow storm caused structural damage to a commercial building. Ohio Security s insured, Grosso Enterprises Tacoma LLC, leased a building to AXIS s insured, Reddy Ice Holdings. The roof of that building collapsed during a 2012 snow storm, which prompted Grosso and Reddy Ice to tender claims to their respective insurers. Ohio Security alleged that it paid for Grosso s loss and that AXIS has an equitable obligation to reimburse Ohio Security for these expenses. Ohio Security sued AXIS in Pierce County Superior Court, but failed to serve the Insurance Commissioner as required by 5

6 RCW , and instead served AXIS at its Chicago office pursuant to RCW (10) and Washington s long arm statute, RCW Ohio Security served the Insurance Commissioner only after AXIS filed a motion to dismiss for improper service. By this time, the statute of limitations on Ohio Security s claim had already expired. AXIS removed the lawsuit to federal court, where both AXIS and Ohio Security filed summary judgment motions. AXIS argued, in part, that Ohio Security s equitable contribution claim was time barred because its improper service failed to toll the statute of limitations. The district court certified the question regarding service to the Washington Supreme Court: Do RCW (7)(a), RCW , and RCW establish service through the Washington State Insurance Commissioner as a uniform and exclusive means of service for authorized foreign or alien insurers in Washington State? The Washington Supreme Court noted that this case required analysis of multiple statutes to determine who the legislature has designated to receive service of a summons for actions commenced against an authorized foreign insurance company. The Court made a clear and definitive ruling that [t]he plain language of RCW and RCW (1) designate the Insurance Commissioner as the exclusive agent to receive service. The Court noted that permitting alternative methods of service for an authorized foreign insurer would create a conflict between these statutes and that a party cannot comply with both. Thus, the Court found that RCW (7)(a) and RCW (1) should control because it is more specific than the statute that applies broadly to service on foreign corporations. The ruling by the Washington Supreme Court in this case appears to largely resolve the long standing conflict in Washington regarding the proper method of service on foreign insurers. Under this ruling, service on the Insurance Commissioner is the exclusive means of service on foreign insurers. 6

7 WILLIAMS KASTNER INSURANCE TEAM For over eighty years Williams Kastner attorneys have represented clients in the insurance industry, including primary and excess insurers, reinsurers, self-insurers, agents, brokers, and insurance pools. Our attorneys have advised clients on regulatory and claim handling issues, and have assisted insurers in countless claims from the claim investigation through trial on cases involving coverage and bad faith claims. Please feel free to contact us if you have any questions regarding insurance law in Washington, Oregon or Alaska. ELIOT HARRIS (206) JERRY EDMONDS (206) THOMAS PED (503) MEREDITH DISHAW (206) JESSICA COX (206) SEAN JAMES (206)