The U.S. District Court for the Western District of Washington recently issued an important decision confirming that insurers can be held liable for damages even in the absence of coverage. This decision underscores the importance of: (1) making sure insurers make proper coverage determinations; and (2) making sure insurers make coverage determinations in a timely, proper manner. While the decision addressed coverage under a commercial general liability policy, the insurer’s duty to make proper coverage determinations in a timely, proper manner applies to every type of insurance: commercial general liability, builder’s risk, professional liability, property, title, and homeowners alike.
In City of Bothell v. Berkley, the insurer issued a commercial general liability policy to a general contractor that was hired to build a new driveway for a church located in the City of Bothell. The City was to be named as an additional insured under that insurance policy.
In July 2011, a bicycle accident occurred after the contractor failed to slope the driveway properly. The injured individual made a claim against the City. The City tendered the claim to the insurer, but the insurer denied coverage by claiming that the insurance policy only covered accidents that occurred during ongoing operations and that the accident occurred after the contractor’s operations were completed. Two years later, when the injured individual filed suit, the City re-tendered the claim to the insurer, but the insurer failed to respond. A month later, the City sent a follow-up letter to the insurer, but the insurer again failed to respond. The City sent a second follow-up letter to the insurer, and the insurer finally responded, but denied coverage for the same reason the insurer initially denied coverage. The insurer later asserted two additional reasons for denying coverage: (1) because there was no written agreement signed by the contractor requiring that the City be named as an additional insured; and (2) because the injured party was using the driveway for its intended use.
The City filed suit against the insurer for breach of contract and bad faith. The Court quickly dismissed the insurer’s first two reasons for denying coverage because: (1) the lawsuit did not allege that the accident occurred after the contractor’s operations were completed; and (2) the contractor and the City had a written agreement requiring that the City be named as an additional insured. However, the Court concluded that the insurer ultimately had no duty to defend the City because: (1) the insurance policy excluded coverage for injuries that occur after the portion of the work giving rise to the injury has been put to its intended use; and (2) the lawsuit alleged that the driveway had been put to its intended use at the time of the accident.
Even though the insurer ultimately asserted a legitimate basis for denying coverage, the insurer’s conduct was not without repercussion. Notably, the Court held that the insurer acted in bad faith by failing to timely respond to the City’s communications, by misrepresenting requirements under the insurance policy, and by asserting serial justifications for denying coverage without adequate investigation and/or in contravention of Washington insurance law. Similarly, the Court held that the insurer’s actions (and inactions) violated the Insurance Fair Conduct Act and Consumer Protection Act (which subjected the insurer to treble damages).
Jay Donovan is a member of Foster Pepper who focuses on representing policyholders (including general contractors, retailers, homeowners, transportation providers, and non-profits) in their pursuit of insurance coverage for a variety of claims (including claims for construction defects, title defects, property damage, and intellectual property claims).