In Washington, an Insurer Cannot Refuse to Defend, Change Its Mind, and Still Expect to Control the Defense or Avoid Bad Faith

Kevin Mapes | The Policyholder Report | February 20, 2018

A recent decision from the U.S. District Court for the Western District of Washington again demonstrates the decidedly pro-policyholder nature of insurance-coverage law in the state of Washington. Like so many coverage cases, 2FL Enterprises, LLC v. Houston Specialty Insurance Co., arose from underlying construction-defect litigation.

The insured, 2FL Enterprises, first notified its insurer, Houston Specialty, when a dispute arose between 2FL and the owner of an apartment building that 2FL had worked on. The next month, the owner filed suit, and 2FL promptly tendered the lawsuit to Houston Specialty. Five months later, Houston Specialty issued a letter denying any coverage for the lawsuit. After a default judgment was entered against 2FL, Houston Specialty reconsidered and offered to retain counsel on behalf of its insured. 2FL rejected Houston Specialty’s offer of a defense.

Photo by GotCredit

In the ensuing coverage litigation, the court initially set out the broad nature of the duty to defend under Washington law, finding that “all that is required to trigger the duty to defend is the ‘potential’ for liability,” asking “whether allegations in the complaint could conceivably impose liability on the insured,” and concluding that “if there is any reasonable interpretation of the law that could result in coverage, the insurer must defend.” Applying these standards, the court found that Houston Specialty had breached its duty to defend and acted in bad faith. The court was particularly bothered by the Houston Specialty’s attempt to rely on extrinsic evidence to support its denial. Under Washington law, extrinsic evidence may be used in support of coverage, but an insurer can never rely on documents beyond the complaint and the policy in denying coverage.

Significantly, the court was unimpressed by Houston Specialty’s belated change of heart and attempt to provide a defense. Houston Specialty argued that any breach was “cured” when it belatedly offered to participate in 2FL’s defense, and that 2FL had breached its duty to cooperate when it rejected the offered defense. The court disagreed, finding that Houston Specialty “had already breached the contract by the point in time it argues that Plaintiff was required to cooperate. ‘An insured … should no longer be bound by contractual obligations if the insurer breaches its duty to defend the insured.’” Releasing the insured from its duty to cooperate was not the only consequence of Houston Specialty’s denial of coverage. The Court went on to conclude that by breaching its contractual obligation to defend, the insurer lost the right to control the insured’s defense, despite its later offer to defend.

Finally, the Court found that Houston Specialty had acted in bad faith, and its later offer to defend did not change the court’s position:

The fact that both the delay and the denial were unfounded and unreasonable dictate a finding of bad faith which is unmitigated by the insurer’s later change of heart.

For insurers, this decision reinforces the general state of Washington law: deny the insured a defense at your own peril. The decision also adds a new wrinkle: an insurer that denies a defense cannot simply change its mind and still expect to control the defense of the insured in order to guard against bad-faith exposure. For policyholders, that same wrinkle presents a potential opportunity. Once an insurer has denied coverage, the policyholder should be free to retain counsel of its choosing and to control the defense going forward, even if the insurer later agrees to defend. At a minimum, the decision gives the policyholder a good argument that the insurer should agree to fund the defense through the insured’s choice of counsel, rather than insisting on the insurer’s own panel counsel.

Bad Faith by Insured Should Have Resulted in Sanctions but Only Resulted in Loss

Barry Zalma | Zalma on Insurance | January 29, 2018

Waiting More than a Year After Default is Always Prejudicial

When an insured delayed notifying his insurer of his need for coverage was both unexcused and unreasonable. When the action was commenced against the insured in 2010, a reasonably prudent person would have understood that liability might be incurred. Moreover, when default was entered against the insured he certainly should have known that he could be found liable. Nevertheless, the insured failed to notify the insurer until one and a half years after the lawsuit was commenced and 15 months after the default. Insofar as the insured argued that his untimely notice should be excused because the entity that sued him engaged in unscrupulous tactics, he fails to explain how that conduct prevented him from timely providing notice of the action to the insurer whose summary judgment motion was granted.

In Graham Zahoruiko v. Federal Insurance Company, Chubb National Insurance Company, DBA Federal Insurance Company, Chubb Group Of Insurance Companies, collectively and individually, No. 17-965-cv, United States Court Of Appeals For The Second Circuit (January 5, 2018) the Second Circuit affirmed the judgment in favor of Federal on a summary order.


Plaintiff J. Graham Zahoruiko, proceeding pro se, appeals from an award of summary judgment to Federal Insurance Company (“Federal”) on Zahoruiko’s breach of contract and related claims based on Federal’s denial of coverage under a director and officer liability insurance policy. Specifically, Zahoruiko challenges the district court’s determination that he was not entitled to coverage under Connecticut law because he did not timely notify Federal of the claims for which he sought insurance coverage. The court reviewed the challenged award de novo and will affirm only if the record, viewed in the light most favorable to Zahoruiko, shows no genuine dispute of material fact and Federal’s entitlement to judgment as a matter of law. In doing so, the court assumed the parties’ familiarity with the underlying facts, the procedural history of the case, and the issues on appeal, which it referenced only as necessary to explain the decision to affirm substantially for the reasons stated by the district court.

Under Connecticut law, an insurer can be discharged from its coverage obligations pursuant to the “notice” provision of an insurance policy only by showing: “(1) an unexcused, unreasonable delay in notification by the insured; and (2) resulting material prejudice to the insurer.” Arrowood IndemCovKing, 605 F.3d 62, 77 (2d Cir. 2010).

Insofar as Zahoruiko argued on appeal that Federal failed to show prejudice, he forfeited the argument by failing to raise it in the district court. It is a well-established general rule that an appellate court will not consider an issue raised for the first time on appeal. Regardless, upon an independent review of the record and relevant case law, the Second Circuity concluded, as the district court did, that Federal is entitled to summary judgment.

An insured’s “duty to give notice does not arise unless and until facts develop which would suggest to a person of ordinary and reasonable prudence that liability may have been incurred, and is complied with if notice is given within a reasonable time after the situation so assumes an aspect suggestive of a possible claim for damages.” Arrowood IndemCovKing, 605 F.3d at 77 (internal quotation marks omitted). “The purpose of the requirement for prompt notice is to give the insurer a full opportunity to investigate the claim.” As to the prejudice prong, “the insurer bears the burden of proving, by a preponderance of evidence, that it has been prejudiced by the insured’s failure to comply with a notice provision.” Arrowood IndemCovKing, 39 A.3d 712, 725-26 (Conn. 2012).

Zahoruiko’s arguments that the district court improperly assumed prejudice and that Federal failed to carry its preponderance burden are equally meritless. Federal provided a declaration from a senior claim officer stating that Zahoruiko’s failure to give notice until after default was entered denied it the opportunity to interview witnesses or participate in the defense or any proposed settlement of the claim. Zahoruiko argues that the declaration is speculative, and that Federal would not have defended his claim because it denied coverage based on a different clause of the policy. The argument does not persuade. Connecticut recognizes that the denial of the opportunity to investigate, as well as entry of default, are prejudicial to an insurer.

Entry of a default judgment against an insured is evidence of prejudice as well as the lack of opportunity for the insurer to investigate a claim and to pursue a compromise or settlement. Zahoruiko’s prejudice challenge is further belied by his own waiver in the underlying action of defenses that Federal could otherwise have asserted.

Federal having carried its burden, and Zahoruiko having failed to adduce evidence sufficient to support a jury verdict in his favor, or even to challenge Federal’s showing of prejudice in the district court, summary judgment was correctly entered in Federal’s favor.


It took a great deal of gall to bring this action. The prejudice was obvious. The failure to comply with the policy condition was blatant. The insured did not act in good faith to his insurer and should have been sanctioned by the court for making the spurious assertions delineated by the Second Circuit.

Not Every Refusal to Provide Coverage Equals Bad Faith

Cheryl D. Shoun | Nexsen Pruet | January 30, 2018

A complicated and interesting factual history, along with a number of actions, including an earlier one for declaratory judgment, resulted in a thoughtful and reasoned opinion of the United States District Court for South Carolina. Agape Senior Primary Care, Inc. v. Evanston Insurance Company 2018 WL 490386 (January 19, 2018).

Briefly, Agape, a conglomerate of nursing homes in the state, hired an individual it believed to be a licensed physician. Turns out, Agape was duped; the employee had fraudulently assumed the identity of a licensed physician. When the scam surfaced, Agape was faced with a number of claims and looked to Evanston to defend and indemnify pursuant to a policy it issued to several of Agape’s health care providers, including the pseudo doctor. Upon learning of the situation, Evanston initiated a declaratory judgment action seeking a ruling that the policy in question was void ab initio because of the “doctor’s” fraudulent conduct. In a split decision, the court found the policy was not void as to all of Agape’s providers, but certain claims were not covered because of the “doctor’s” misconduct. The Fourth Circuit affirmed. Now, the parties are back before the court on cross motions for summary judgment arising from Agape’s claims against Evanston resulting from Evanston’s conduct on several underlying tort claims, addressed below.

The Watts Litigation

An action brought by the estate of a former patient, Evanston continued to defend Agape through the Fourth Circuit‘s affirmation of the court’s ruling on critical coverage issues. Following affirmation, Evanston discontinued the defense, asserting the claims were not covered pursuant to the court’s earlier ruling. Agape disagreed and raised claims for breach of contract, including bad faith.

After sorting through what the court described as an inartfully drafted mishmash of allegations, it concluded Evanston breached the contract by refusing to continue to defend Agape and by refusing to indemnify for the settlement it reached in Watts. That breach, however, did not mean Evanston acted in bad faith. Sorting through the underlying complaint was a challenge even for the court. Recognizing there are cases that present extremely close calls on coverage, the court found not every refusal to provide coverage rises to the level of bad faith. Bad faith requires a showing of no reasonable basis for the insurer’s decision to deny coverage. A decision that is merely incorrect, but reasonably based, will not result in bad faith.

Changing Defense Firms

After litigation had been pending for some time, Evanston discontinued the services of the defense firm it originally hired and retained other counsel. This change resulted in substantial additional costs. The relevant policy language clearly provided Evanston had the option to choose the attorneys it deemed most qualified and thereby the contractual right to change law firms, at its discretion. Because, however, the policy in question was one of declining coverage, wherein defense costs were deducted from the limits, Agape argued the change in counsel and resulting additional costs resulted in damage. Specifically, the policy limits could have been depleted sooner because of the additional costs associated with the change of defense firms.

Evanston argued it had the unilateral right to change firms and pointed out it agreed not to deduct the additional costs from the policy limit. Responding that Evanston did not make that concession until the onset of this litigation, Agape sought to recover its attorneys’ fees in bringing this suit that it argued was the catalyst for Evanston’s agreement. Because both parties acknowledged that policy limits had not been exhausted, the court declined to rule on this question.

Evanston’s Participation in Mediation

The underlying claims were subject to mandatory state court mediation. The lead attorney seeking disposition of coverage issues on behalf of Evanston attended the mediation, which Agape argued equated to meaninglessly “checking the box” and therefore bad faith. As many as six underlying claims were mediated over a span of two days, one of which resolved.

Agape’s criticism of the attorney who attended mediation necessarily included the insinuation that some other attorney could have attended. However, because Evanston was defending Agape under a reservation of rights and litigating coverage issues at the same time, a common scenario created by state court mediation rules, any attorney employed by Evanston would have struggled under the same conflict of interest cloud.

Additionally, in order to sustain a bad faith claim the insured must prove, among other things, damages from the alleged wrongful conduct. In the context of sending the “wrong” attorney to mediation, the insured would have to prove attendance by the insurer’s counsel somehow adversely affected an otherwise favorable settlement, which would almost always rest on speculation.

Agape did not direct the court to any South Carolina authority establishing a bad faith claim arising from these or similar facts. Moreover, the court viewed any suggestion of conflict created by participation in mediation as largely the responsibility of state court mediation rules. Also noting that one of the mediated claims resolved, the court concluded Evanston acted well within its rights as to mediation.

There are two significant messages provided to insurers by Agape. The first – exercise careful consideration of the underlying complaint, upon which a determination will be made as to whether coverage is triggered. A carefully reasoned decision made in the context of a close coverage issue will not result in bad faith. Next – the insurer must necessarily participate in mediation through an attorney in its employ. Despite the resulting appearance of a potential conflict, created by state court mediation rules, the court will examine all factors, including the insurer’s meaningful participation. 

Civil Remedy Notices – What Are They and What Do They Require?

Marie Laur | Property Insurance Coverage Law Blog | November 29, 2017

You filed a claim with your insurance company after suffering a loss and it is refusing to pay what is owed under your insurance policy – what now? One of your options is to file a Civil Remedy Notice of Insurer Violation, or CRN, with the Department of Financial Services. The CRN serves as notice to the insurance company that a bad faith claim is forthcoming.

The Department of Financial Services explains,

[T]he Civil Remedy Notice is intended for use by parties who are beginning the process of filing suit against an insurer, when a party feels they have been damaged by specific acts of the insurer. The Notice is intended to meet a portion of legal requirements set forth in Section 624.155, Florida Statutes, which requires a party to file Notice with both the insurer and the Department of Financial Services (DFS) at least 60 days prior to bringing an action against the insurer. The DFS does not involve itself in the pre-suit negotiations or communications related to Notices as such actions are not within the scope of its statutory authority.

The Department of Financial Services has provided instructions for completing a CRN and what information is required. A CRN should include the name of the insurance company that the insured claims is in violation of the Florida Statutes. The insurer’s representative(s) that the insured believes is/are responsible for the violation should also be named. Next, the filer should indicate whether the complainant is the insured, a third-party claimant, or a third party. Included in this information should be the name of the complainant, the name of the insured, the policy number, claim number, and the name of the individual filing the CRN. The filer should then check the type of insurance involved, such as homeowners insurance or commercial insurance. If the type of insurance is not listed on the form, the filer should check “Miscellaneous.” Next, the filer should check the reason he or she believes the insurer is in violation, should provide the statutes claimed to have been violated (including the specific language), and should reference the specific policy language relevant to the violation. The filer should note in the CRN if the policy language is not available.

Last, the filer should describe the facts related to the claimed violation. Florida Statute §624.155(3)(b) requires a CRN to, “state with specificity…the facts and circumstances giving rise to the violation.” Florida courts have held that a CRN need not specify a monetary amount required to “cure” the violation.1

A Civil Remedy Notice is a prerequisite to filing a bad faith action after statutory violations have occurred. CRNs give insurance companies an opportunity to resolve a claim before a bad faith lawsuit is filed. More information about the form and filing of Civil Remedy Notices can be found at
1 Hunt v. State Farm Ins. Co., 112 So.3d 547 (Fla. 2d DCA 2013) (“On its face, the statute does not require a specific cure amount. We are hesitant to impose a requirement beyond that directed by the legislature.”).

Good Faith, Bad Faith, No Faith: Will a Subjective Good Faith Standard Influence How Litigants Approach Mediation?

Brian J. Laliberte | Tucker Ellis | November 16, 2017

I. Introduction

Mediation as a dispute resolution mechanism does not succeed because courts, statutes, or rules impose a good faith standard on participants or sanction bad faith conduct. Mediation succeeds because litigants and their lawyers prepare their case, know their objectives, and work to achieve them. Ideally, requiring lawyers and litigants to adhere to minimal objective good faith requirements, to act professionally and civilly, and to respect the process should be sufficient to facilitate meaningful participation in mediation. Often, it is not. In some cases, lawyers and litigants misbehave and frustrate the process. Will a subjective good faith mediation standard influence how litigants approach mediation?‡

II. Good Faith/Bad Faith/No Faith

A. Objective Good Faith

What is good faith mediation? Most courts interpret the concept narrowly. Generally, it has been limited to requiring parties to do the following: (1) provide a mediation statement prior to the mediation date; (2) attend the mediation; and, (3) have a representative with authority to settle present. These are the most basic and widely accepted objective good faith mediation requirements.

These requirements often are memorialized in detailed pre-trial mediation orders issued pursuant to Fed. Civ. R. 16. Rule 16 authorizes the use of pretrial conferences to “formulate and narrow issues for trial and to discuss means for dispensing with the need for costly and unnecessary litigation.”i As such, “[p]retrial settlement of litigation has been advocated and used as a means to alleviate overcrowded dockets, and courts have practiced numerous and varied types of pretrial settlement techniques for many years.”ii Indeed, since 1983, “Rule 16 has provided that settlement of a case is one of several subjects which should be pursued and discussed vigorously during pretrial conferences.”iii

Rule 16 also addresses a court’s authority to sanction litigants for failing to comply with pretrial orders including orders directing them to mediate and to do certain things prior to a scheduled mediation. Rule 16 states:

On motion or on its own, the court may issue any just orders, including those authorized by Rule 37(b)(2)(A)(ii)-(vii), if a party or its attorney:

(A) fails to appear at a scheduling or other pretrial conference;

(B) is substantially unprepared to participate or does not participate in good faith in the conference; or

(C) fails to obey a scheduling or other pretrial order.

In addition to rule-based powers to sanction, Courts have inherent powers to control the proceedings before them and to see to “the orderly and expeditious disposition of cases” through sanctions and other means.iv

Complying with a court’s mediation order, appearing at mediation, and sending a representative with authority to negotiate (and/or with access to higher corporate authority), are basic requirements any litigant and its lawyer can meet. If, for some reason, one of those requirements cannot be met, it behooves counsel for that litigant to contact opposing counsel, the mediator, and/or the court to obtain relief. A litigant’s unexcused failure to satisfy minimal objective good faith mediation requirements likely warrants sanctions. Such sanctions should be designed to compensate the non-offending party for the fees and costs expended to prepare for and attend mediation. They should not, however, serve to influence the outcome of the case. In short, objective good faith mediation requirements should serve the interests of judicial economy and case administration without imposing punitive or coercive sanctions upon litigants.

B. Subjective Good Faith

Courts have struggled to define subjective good faith requirements intended to evaluate the quality of litigant participation in mediation. The district court in In Re A.T. Reynolds & Sons, Inc., explained the pros and cons of using subjective good faith mediation standards.v

It vacated sanctions entered by the bankruptcy court after an unsuccessful mediation between two creditors. The bankruptcy court held that one creditor (Wells Fargo) failed to mediate with another creditor in good faith. It explained that:

Passive attendance at mediation cannot be found to satisfy the meaning of participation in mediation, because mediation requires listening, discussion and analysis among the parties and their counsel. Adherence to a predetermined resolution, without further discussion or other participation, is irreconcilable with risk analysis, a fundamental practice in mediation…. [T]his Court has authority to order the parties to participate in the process of mediation, which entails discussion and risk

The bankruptcy court found that Wells Fargo engaged in bad faith mediation for the following reasons: (1) Wells Fargo failed to meaningfully participate in mediation because it “insisted on being dissuaded of the supremacy of its legal obligation in lieu of participating in discussion and risk analysis;” (2) the Wells Fargo corporate representative (a) only had authority to settle for a predetermined amount, despite the potential actual amount in controversy; (b) the representative was only prepared to discuss certain specific legal issues; (c) the representative had no authority to enter into “creative solutions that might have been brokered by the Mediator;” and, (3) Wells Fargo “sought to control the procedural aspects of the mediation by resisting filing a mediation statement and demanding to know the identity of the other party representatives.”vii It then concluded that “attendance without participation in the discussion and risk analysis… constitutes failure to participate in good faith.”viii

The district court rejected the bankruptcy court’s qualitative analysis of Wells Fargo’s participation in the mediation. It explained that such an analysis: (1) interferes with litigant autonomy; (2) may encroach upon confidential attorney-client communications and work product; and (3) may coerce settlement in cases where a litigant otherwise may take a “no pay” or “nuisance value” settlement position.ix The district court characterized the bankruptcy court’s analysis of Wells Fargo’s conduct as impractical and unrealistic. It concluded that an inquiry into the reasons a litigant has taken a certain settlement position, in the absence of a statute or rule authorizing such an inquiry and defining a standard, goes too far.x

C. Bad Faith

Defining bad faith can be an inherently vague notion that is difficult or even impossible to reasonably and logically enforce.xi Using a common definition of bad faith may be helpful. In the litigation context, it may include unreasonable, unprofessional, or vexatious conduct.

Specific examples of “bad faith” conduct during mediation include: refusing to discuss the mediation process with the mediator and opposing counsel before the conference; unprofessional and acrimonious statements or behavior during mediation (e.g., insulting the opposing party, counsel or the mediator); placing unreasonable time limits on offers/counteroffers; unilaterally terminating or abandoning a mediation without explanation; and disrespecting the mediator or the process (e.g., interrupting, ignoring, or refusing to engage in dialogue).xii

None of this conduct should require an inquiry into a litigant’s motives. Rather, it should be evaluated against professional conduct rules, local standards for civility among members of the bar, and common sense. It also should be evaluated in the context of the entire litigation i.e., has a litigant and/or its lawyer behaved badly throughout the case.

Finally, in addition to compensatory sanctions, punitive sanctions may be appropriate in the “bad faith” context. Punitive sanctions should be crafted to both punish recent unprofessional, uncivil and vexatious conduct and to deter it in the future.

D. No Faith?

It may be fair at this point to ask: What value does mediation have if litigants only must adhere to basic, non-stringent objective good faith standards? What value does it have if there is no subjective evaluation of litigant participation? These are not questions a reviewing court or appointed neutral should answer. These are questions that in-house, transactional, and trial lawyers should be asking each time they are presented with an opportunity to mediate a dispute regardless whether it is voluntary or mandatory. The answer should not be “none.” If it were, it would reflect a lack of faith in mediation that should not govern our approach to dispute resolution.

Lawyers, therefore, must take responsibility for engaging in mediation consistent with their duty to zealously represent their client and their corresponding duties of professionalism and civility. This will facilitate adherence to both objective and subjective good faith standards, even if the latter cannot be defined precisely or enforced. It also will diminish the likelihood that litigants will engage in bad faith conduct designed to degrade the mediation process.

III. Conclusion

Lawyers should approach mediation with the intent to maximize its value regardless of the context. This takes effort and a commitment to prepare for mediation as thoroughly as one would for a hearing or argument. To maximize the value of mediation, lawyers must: know their client; know their case; know their adversary; identify their client’s objectives; value the claims rationally; set the stage for mediation with their client and their adversary; time the mediation to maximize potential outcomes; negotiate from a position of strength (if possible); and, be prepared to take the case to trial. Preparing to mediate using these guidelines will serve the client’s best interests and should demonstrate good faith participation in the process regardless of outcome and regardless whether objective or subjective criteria are used to evaluate it.