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.

Why Insurers and Their Attorneys Need to Pay Close Attention to Their Discovery Burden in Washington

Neal Philip | Insurance Coverage Law Blog | March 14, 2018

As previously reported in this blog, Washington case law generally affords insureds a broad right to the discovery of claim file materials, including information that should be protected from disclosure by attorney/client privilege or the work product doctrine. Cedell v. Farmers Ins. Co. of Washington, 176 Wn.2d 686, 295 P. 3d 239 (2013). The discovery pitfalls created by Cedell were on full display in a recent Western District of Washington decision that granted an insured’s motion to compel production of work product and attorney/client communications from an insurer’s claims file. Westridge Townhomes Owners Ass’n v. Great American Assur. Co., 2018 U.S. Dist. LEXIS 27960 (W.D. Wash. February 21, 2018)

The background facts are somewhat unclear, but it appears that the insured in this case made a claim for coverage under two insurance policies and there was an allegedly inadequate response from the insurers. The insured sued its insurers for coverage in 2016 before the insurers issued a declination of coverage letter. The two insurers retained the same attorney to represent them, and that attorney subsequently wrote a declination letter on behalf of the insurers, which was sent to the insured on April 12, 2017. The insured ultimately sought production of the entire claim file, which had not been split between the claim investigation and the coverage litigation. The insurers argued, among other things, that the insured was not entitled to anything after the litigation commenced in 2016 on work product grounds, and certainly was not entitled to communications with their attorney.

In ruling on the insured’s motion to compel, the Court concluded that the insurers failed to satisfy their burden of showing that communications with their attorney up to the date of the declination letter were protected, even though the parties were in litigation, because the Court was convinced that their attorney acted as an investigator and evaluator of the claim while the litigation was proceeding. The Court stated that “nothing in Cedell limits the discoverability presumption to pre-litigation evidence…” Furthermore, the insurers failed to show that their communications with their attorney took place because of litigation as opposed to being created in the normal scope of their insurance business. The Court ordered production of all attorney/client communication and work product up to the date the declination letter was sent, ruling that “documents containing [the insurers’ attorney’s] mental impressions regarding the insurers’ quasi-fiduciary duties to the insured, including his liability assessments and coverage advice, are subject to production.”

The Court did not do an in camera review of the documents at issue, as requested by the insurers and authorized by Cedell, writing that the insurers had failed to meet their threshold burden to justify such a review. In this regard, the Court was critical of the insurers’ privilege logs and conclusory explanations in the briefing of why the documents should be protected. “The Court finds that it is insufficient for the parties to rely on a request for in camera review to avoid their responsibility to explain why such documents should be withheld.”

Additionally, one of the insurers moved that if it had to produce such information, the plaintiff should be compelled to produce the same. The Court denied that motion, noting that an insured does not owe a quasi-fiduciary duty to its insurer and that Cedell is not a two-way street.

This ruling should serve as an important reminder to insurers and their counsel about the dangers of discovery in Washington following Cedell. For insurers to chip away at the scope of Cedell, they must take their discovery obligations seriously and lodge specific, well-supported objections in order to protect certain categories of privileged information. Insurers must not only be aware of Cedell, but also be aware that they will often have the burden of convincing the Court that an attorney/client communication or work product document should be protected from discovery. Specifically, insurers should be prepared to argue that the privileged information was not related to the evaluation of the claim, but rather for the specific purpose of rendering legal advice.

What is certainly clear is that an insurer cannot make a blanket assertion that documents are protected and expect the Court to review the documents in camera, which appears to have happened in this case. An insurer should instead be prepared to address each document individually and explain why it is not related to the evaluation of the insured’s claim. Finally, when a claim has been pending and litigation is commenced, the file should always be split so that a new litigation file is created and claim evaluation materials are kept separate from litigation materials.

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.

Washington Legislature to Consider Reforms to Statute Governing Residential Construction Disputes

Grant S. Degginger | Lane Powell PC | January 31, 2018

Efforts are now underway in both houses of the Washington legislature to improve the legal landscape for residential construction defect litigation by adding a mediation option similar to what has been common in commercial and public works contracts.

The House Judiciary Committee is considering House Bill 2475, a bill introduced by Representative Cindy Ryu (D-Shoreline). Meanwhile, Senator Mark Mulle (D-Issaquah) has filed a similar proposal, Senate Bill 6523. Both bills propose several changes to RCW 64.50, the statutes governing the prerequisites for filing a residential construction defect lawsuit. As currently written, the statute requires a homeowner or a condominium association to serve a written notice on any construction professional (defined to include any contractor, subcontractor, developer, declarant, architect, engineer and/or inspector) detailing the defect at issue 45 days before filing suit. The construction professional then has 21 days to serve a written response to the notice proposing one of three options:

  • Propose to inspect the residence within a specified period of time and based upon the inspection offer to remedy the defect, compromise by making a cash payment or dispute the claim;
  • Offer to compromise and settle the claim with a monetary payment without inspection. The offer may include a proposal to purchase the residence that is subject of the claim and pay the claimant’s reasonable relocation costs; or
  • State that the construction professional disputes the claim and will not remedy the construction defect or offer to compromise and settle the claim.

The bills would revise the notice and opportunity to cure process and they would add mediation as a fourth option. Thus, a construction professional could respond to a notice of construction defect by offering to mediate, which would give the claimant 30 days to serve an acceptance or rejection of the offer to mediate. If the claimant rejects the mediation offer, then the notice and opportunity to cure process is terminated. If the mediation is accepted, then the parties have 30 days to do the following:

  • Select a mediator;
  • Agree on a mediation date;
  • Agree on what materials will be submitted at mediation;
  • Complete their respective investigation of the alleged defects;
  • Disclose each party’s proposed repair plan and the estimated costs of repair; and
  • Any other deadlines mutually agreed to by the parties.

The parties can mutually agree to modify the deadlines and the selected mediator is permitted to unilaterally extend deadlines by no more than 90 days.

The bills currently have a provision that allows either party to terminate the mediation process without cause and without costs. Given the time and expense that the parties may have incurred preparing for a construction defect mediation, including the mediator’s time, investigation and expert costs, it only would be fair to require that the party who terminates the mediation should pay at least the cost of any lost deposits for the mediator’s services. Although not currently in the proposed legislation, such an amendment would be reasonable.

The bills also extend the applicable statutes of limitations and repose following service of a claim under RCW 64.50.020 from 60 days after the period of time which the filing of an action is barred until 105 days after termination of the notice and opportunity to cure process; however, the new tolling period applies to claims by one construction professional against another construction professional only if the construction professional serves the claimant’s notice of claim upon the other construction professional within 60 days of receipt of the notice of claim or the amended notice of claim.

Many construction contracts for commercial or public works projects attempt to encourage early claim resolution by requiring the parties to engage in mediation before they can commence litigation. This bill seeks to extend this practice to the field of residential construction. The objective is that the mediation option will encourage early case assessments and timely resolution of disputes.

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