In Washington, Insurers Can’t “Unring The Bell” After Wrongful Denial Of Coverage

Kevin Mapes | The Policyholder Report | April 23, 2018

For the second time in two months, a federal court in Washington state has rejected an insurer’s attempt to avoid the consequences of its wrongful failure to defend its insured by effectively changing its mind and later—in this case much later—offering a defense. In Rushforth Construction Co. v. Wesco Ins. Co., plaintiff Rushforth was a general contractor. Following good contracting practices, Rushforth made sure that it was included as an “additional insured” under liability policies issued to its subcontractors. When Rushforth was sued for construction defects, it tendered the claim to Wesco, the insurer for one of those subcontractors.

Wesco’s claims handling was less than stellar. Rushforth tendered the matter to Wesco on July 1, 2016. To its credit, Wesco opened a file and began investigating the claim, even going so far as to draft a reservation of rights letter sometime around September 1, 2016. From there, however, the claims-handling wheels came off. For reasons unexplained, the reservation-of-rights letter was never finalized or sent, despite repeated inquiries from Rushforth. Finally, more than a year after the claim was tendered, Rushforth filed suit against Wesco. Only then did Wesco send its letter, agreeing to defend under a reservation of rights. Rushforth rejected that offer.

Rushforth moved for partial summary judgment on three issues: 1) whether Wesco breached its duty to defend; 2) whether Wesco acted in bad faith; and 3) whether Wesco’s belated offer to defend cured its breach. According to Judge Coughenour of the Western District, the answers are 1) yes; 2) yes; and 3) no. The Court specifically rejected Wesco’s argument that it never actually denied a defense, and thus could not have breached. “An insurer may breach its duty to defend by failing to respond to an insured’s tender in a reasonably timely manner.” And because Wesco offered no justification for its delay, the Court went on to conclude that Wesco had acted in bad faith as a matter of law.

Finally, the Court rejected the insurer’s argument that its belated offer of a defense cured its prior breach. Because Wesco’s breach was material, the insured was released from its contractual duty to cooperate, and Wesco had no right to provide a belated defense. The insured “had the option of allowing Wesco to assume a defense, but it was not required to do so. Wesco cannot cure its breach by forcing [Rushforth] to accept a belated defense.”

For insurers handling claims in Washington, the case presents another reminder that Washington law favors the policyholder. Fail to defend at your own peril, and don’t expect the opportunity to “fix” a wrongful denial if the insured fights back. For policyholders, the lesson is similar: the law is frequently on your side in Washington, and insureds should not hesitate to aggressively protect their interests in the face of an insurer’s denial of coverage (or, as here, an insurer’s failure to act).

Can a Contingent Payment Provision Affect a Construction Lien Claim in Washington?

Bart Reed | Stoel Rives LLP | April 24, 2018

During Seattle’s current construction boom, general contractors and subcontractors may be concentrating more on finalizing work on their projects than on worrying about the niceties of their construction contract documents. It is no less prudent now, however, for the parties to remain aware of their contractual rights and responsibilities—especially those tied to payment.  One payment term commonly contained in subcontract agreements is the contingent payment provision, which, depending on its terms, may pose an interesting challenge to construction lien rights.

Contingent payment provisions (e.g., “pay-if-paid” or “pay-when-paid” clauses) are frequently inserted in subcontract agreements. The hallmark of pay-if-paid clauses is usually “condition precedent” language, where the general contractor and subcontractor expressly agree that the general contractor’s receipt of payment from the owner is a condition precedent to payment by the general contractor to the subcontractor.  Under this clause, the subcontractor assumes the risk of non-payment by the owner.  On the other hand, pay-when-paid clauses have been interpreted to delay the subcontractor’s entitlement to payment until the owner pays, or for some reasonable time if the owner does not pay.

It is unclear whether Washington courts would enforce a pay-if-paid clause, but pay-when-paid clauses have been enforced. See Amelco Elec. v. Donald M. Drake Co., 20 Wn. App. 899, 902-03, 583 P.2d 648 (1978) (contract specifying that the subcontractor would receive payment only “to the extent that the Contractor has received payment . . . from Owner” did not create a condition precedent to the subcontractor’s payment; rather, it postponed payment for a reasonable period of time after the work was completed, during which the general contractor was afforded an opportunity to obtain funds from the owner to pay the subcontractor).

The challenge to construction lien rights could arise as follows: faced with a lien claim filed by a subcontractor, a general contractor may argue: “A lien must be supported by an underlying debt, and there is no debt here. You (sub) have no right to be paid by me, because I have not yet been paid by the owner.” Recall that a lien claim must be filed within 90 days of the claimant’s last work.  If the “pay-when-paid” defense is accepted, it could deprive the subcontractor of its lien rights (if the owner fails to pay the general within 90 days of the sub’s last work).  Should the general contractor be able to make this defense?

The answer is probably no under current Washington legal authority, although a Washington appellate court has yet to rule on the issue. Although general contractors may be pressured to exert such a defense (emanating from possible contractual duties owed to the owner to keep the property lien-free), the lien statutes in Washington are remedial in nature and liberally construed to safeguard the payment rights of those furnishing lienable improvements to real property. RCW 60.04.021.

A general contractor (as a “construction agent” of the owner) may assert defenses to the underlying debt—for example, that the claimed work was not done, or that the claimant has been paid. But, if the claimant has furnished labor, material, equipment or services to improve the property for which it has not been paid, a court will probably look for ways to permit the lien claim to go forward.

One possible approach would be to say that, when lien rights are in question, it is not “reasonable” for a general contractor to delay payment to a subcontractor more than 90 days, so the debt will always mature, as it were, in time for the lien filing. Another approach is to permit the lien filing but to stay any foreclosure lawsuit until a “reasonable” time for payment (as construed by the court) has expired.  A third approach is to interpret the lien claim statute, RCW 60.04.091, which requires the claimant to list the “person indebted to the claimant,” to be satisfied by listing the general contractor, even if the general’s obligation to pay has not yet matured.  Any of these approaches would, to some extent, enforce the pay-when-paid clause without stripping away the subcontractor’s lien rights.

It is unclear how a Washington court would handle the collision of two established principles, the enforcement of contracts and the protection of lien rights. Each case will depend on its unique set of facts and whether the general contractor seeks to rely on a pay-if-paid or a pay-when-paid clause.  As long as this uncertainty remains, general contractors should be wary of relying on contingent payment clauses to challenge lien rights.

Claim Handling Requirements by State – Washington

Julitza Perez | Property Insurance Coverage Law Blog | April 18, 2018

Washington State is not only known as the “Evergreen State” and the only state named after a United States President, but it is also the home of many innovative Internet companies and where the biggest coffee chain in the world was founded: Starbucks. Besides these facts it is also important to know how a claim should be handled in Washington.

First an insured may bring an action in the superior court of this state to recover the actual damages sustained, together with the costs of the action, including reasonable attorneys’ fees and litigation costs.1 The court may increase the total award of damages to an amount not to exceed three times the actual damages2 or make any other determination regarding an action for an unfair or deceptive practice of an insurer or provide for any other remedy available at law.3

It is important for the first party claimant to provide a written notice of the basis for the cause of action to the insurer and office of the insurance commissioner twenty (20) days prior to filing.4The notice may be provided by regular mail, registered mail, or certified mail with return requested and the insurer and insurance commissioner are deemed to have received notice three (3) business days after the notice is mailed. If a written notice of a claim is served under the time prescribed for filing an action, the statute of limitations for the action is tolled during the twenty (20) day period.5

Washington’s Administrative Code (WAC) defines “Specific Unfair Claims Settlement Practices.”6This definition provides nineteen (19) specific deceptive acts or practices considered as unfair methods of competition and practices of the insurer in the business of insurance. Many of these acts and methods are common to those defined by statutes in other states such as misrepresenting pertinent facts,7 failing to acknowledge and act reasonably promptly upon communication,8 refusing to pay claims without conducting a reasonable investigation,9 and not attempting in good faith to effectuate prompt, fair and equitable settlements.10 WAC also included other specific acts or unfair methods in the business of insurance such as failing to adopt and implement reasonable standards for the processing and payment of claims after the obligation to pay has been established11 and negotiating or settling a claim directly with any claimant known to be represented by an attorney without the attorney’s knowledge and consent.12

Both Washington codes provide a wide list for protection against unreasonable denials, payment or unfair settlements of insurance claims. It is important for Washington insureds to know of their rights under these codes and for insurers to comply.
_______________
1 RCWA 48.30.015 (1)
2 RCWA 48.30.015 (2)
3 RCWA 48.30.015 (6)
4 RCWA 48.30.015 (8) (a)
5 RCWA 48.30.015 (8) (d)
6 WAC 284-30-330
7 WAC 284-30-330 (1)
8 WAC 284-30-330 (2)
9 WAC 284-30-330 (4)
10 WAC 284-30-330 (6)
11 WAC 284-30-330 (16)
12 WAC 284-30-330 (19)

Adjusters May Be Personally Liable Under Washington Law

Dwain Clifford | The Policyholder Report | April 11, 2018

The Washington Court of Appeals recently held that the obligation to act in “good faith” applies to the adjuster working for an insurer, not just the insurer that employed the adjuster. This rule not only permits insureds to go directly after the person at the insurance company responsible for denying a claim in bad faith, but it may also allow insureds to keep state-law claims filed in state court right where they were filed.

In Keodalah v. Allstate Ins. Co., Division 1 of the Washington Court of Appeals accepted the insured’s request for interlocutory review of a trial judge’s decision that shielded an adjuster making bad-faith decisions from personal liability (this procedure allows review of trial-court decisions before the case goes all the way to trial). The trial judge had ruled that bad-faith claims and claims under Washington’s Consumer Protection Act (CPA) could be brought only against the insurance company, Allstate, but not Allstate’s employee, Tracey Smith, who made the decisions about what Allstate would pay.

In this case, Moun Keodalah had stopped at a stop sign and then started to drive through an intersection when his truck was struck by a motorcycle, killing the motorcycle driver and injuring Keodalah. The police department determined that the motorcycle had been traveling between 70 and 74 mph (in a 30 mph zone!). And the insurer’s own investigator found that Keodalah had stopped, that the motorcycle had been going at least 60 mph, and that the motorcyclist’s “excessive speed” had caused the accident. Straightforward approval of the claim, right? Well, no.

Photo by Chris Yarzab

Despite all of this evidence pointing to the motorcyclist’s fault, Allstate responded to Keodalah’s claim under his underinsured-motorist coverage with its determination that Keodalah was somehow 70% at fault, offering only $1,600 to settle the claim (the jury in this first lawsuit later found nearly $109,000 in damages). Disregarding the police report and the conclusions of Allstate’s own investigators, Smith claimed that Keodalah had run the stop sign and been talking on his cell phone (the latter conclusion was contradicted by Keodalah’s phone records). Keodalah won his coverage lawsuit, including a jury determination that the motorcyclist was 100% at fault, and then filed a second lawsuit asserting bad-faith and CPA claims against both Allstate and Smith.

In this second lawsuit, the trial judge gave a quick victory to Smith in dismissing the bad-faith and CPA claims against her, but this was not to last. The Keodalah court held that Washington’s statute requiring “good faith” in the business of insurance applies to insurers and those acting on behalf of insurers: “Smith was engaged in the business of insurance and was acting as an Allstate representative. Thus, under the plain language of the statute, she had the duty to act in good faith. And she can be sued for breaching this duty.”

Similarly, the court followed a recent decision by the Washington Supreme Court to reverse an older case that had required a contractual relationship between the defendant and a plaintiff asserting claims under the CPA. Without this element, the Keodalah court held that CPA claims can be asserted against adjusters like Smith even though, of course, an insured and an adjuster do not have any contact with each other.

While this result will gratify insureds who often feel personally aggrieved by an adjuster’s bad faith and relish the thought of holding an adjuster personally responsible, Keodalah will doubtlessly play an important role in the familiar battleground between insurers and insureds about which court will hear a case.

Insurers often prefer federal court and remove coverage cases filed in state court to federal court based on what is known as “diversity jurisdiction,” which applies when the plaintiffs and defendants are all citizens of different states. Under Keodalah, insureds can sue individual adjusters, which may defeat diversity jurisdiction (if the insured and adjuster are citizens of the same state) or defeat removal (if the adjuster is a defendant of the state where the suit is brought).

Both because of the availability of bad-faith and CPA claims against another defendant, and because of the procedural advantages in suing an adjuster, Keodalah offers several tools for lawyers on the policyholders’ side of the bar.

Washington Court of Appeals Dismisses Oregon Contractor’s Collection Action for Failure to Strictly Comply With Registration Requirements

Rachel B. Greenlee | Lane Powell | April 3, 2018

In an unpublished opinion filed April 3, 2018, in HNS, Inc. v. Eagle Rock Quarry, et al., Cause No. 34695-1-III, Division Three of the Washington Court of Appeals dismissed a contractor collection action finding that the contractor failed to substantially comply with the requirements of Washington’s contractor registration act, RCW 18.27, which is a prerequisite to filing suit.

Eagle Rock Quarry, Inc., located in Mesa, Washington, entered into an oral agreement with HNS Inc., an Oregon company, for HNS to blast and stockpile gravel at its Washington location. Eagle Rock made a number of payments to HNS under the agreement, but suddenly stopped paying HNS’s monthly invoices in September 2015. Four months later, HNS sued Eagle Rock for its failure to pay.

Despite expressing sympathy for HNS having performed work without payment, the trial court granted Eagle Rock’s motion to dismiss the Complaint on the basis that HNS was not duly registered as required under RCW 18.27, which is a prerequisite to filing suit.

RCW 18.27 requires every contractor engaging or offering to engage in services in Washington to register with the Department of Labor and Industries (L&I). In any action to collect compensation for work or to enforce a contract, a contractor must prove that it was duly registered at the time it entered into the contract or performed the work. The statute states that a court may not find a contractor in substantial compliance with the registration requirements unless:

  1. L&I  has on file the registration information prescribed in RCW 18.27.030,
  2. The contractor had at all times in force a current bond or surety as required by RCW 18.27.040, and
  3. The contractor had at all times in force a current insurance as required by RCW 18.27.050.

HNS had formerly been licensed in Washington, but failed to renew its license in 2010. The Court of Appeals reasoned that by virtue of its previous registration, L&I likely had on file much but not all of the information required by RCW 18.27.030. However, the Court found that HNS’s $75,000 surety bond did not qualify as a bond required by RCW 18.27.040 because it named the State of Oregon as obligee. RCW 18.27.040 requires the contractor’s bond to name the State of Washington as obligee. To this point, the Court of Appeals quoted the trial court’s comments at oral argument that “the purpose of the statute is to protect against damage claims … [for] people that work here. People that have accidents that occur here.” (Emphasis added).

Further, HNS could not demonstrate that it possessed the required insurance because it provided only premium notices, rather than a copy of the policy, or other evidence that the insurance in place covered its operations with Eagle Rock in Washington.

Accordingly, while similarly sympathetic to HNS’s situation, the Court found that HNS did not substantially comply with RCW 18.27.080 in the manner required to enjoy access to Washington courts, and affirmed the trial court’s dismissal of the action. This case emphasizes the importance of strict compliance with the Washington contractor registration act, especially for out-of-state contractors.

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