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Clearly Applicable Policy Exclusions and the Duty to Defend

by | Sep 17, 2024 | Construction Law, Decisions, Dispute Resolution, Events, Featured, Insurance Law, Misc., News & Updates, Professional Liability & Significant Injury Claims

On August 21, 2024, the Ninth Circuit Court of Appeals issued an unpublished opinion in Sec. Nat’l Ins. Co.  v. Urberg, Case No. 23-35228, 2024 U.S. App. LEXIS 21365, 2024 WL 3912582 (9th Cir. Aug. 21, 2024) affirming the dismissal of the appellants’ claims against Security National Insurance Company (SNIC) regarding SNIC’s duty to defend.

The underlying lawsuit in Urberg arose when the appellant-homeowners noticed damage to their properties several months after purchasing their homes. The homeowners filed suit against the builders and developers alleging breach of contract and breach of express and implied warranties. The general contractor filed a third-party complaint against the subcontractors, including LND Construction, who was insured by SNIC. LND Construction thereafter tendered the defense of the general contractor’s claims to SNIC and SNIC denied.

The United States District Court for the Western District of Washington (the “Western District”) granted summary judgment in favor of SNIC dismissing the appellants’ breach of contract and bad faith claims. The Western District found the appellants failed to establish that SNIC’s denial was unreasonable, frivolous, or unfounded. The Western District further dismissed LND Construction’s claims because aside from an unfounded timing argument, it failed to establish actual harm as a result of SNIC’s alleged bad faith denial.

Pursuant to Washington law, the duty to defend is triggered at the time a lawsuit is filed and “is based on the potential for liability.” Woo v. Fireman’s Fund Ins. Co., 161 Wn.2d 43, 164 P.3d 454, 459 (Wash. 2007) (quoting Truck Ins. Exch. v. VanPort Homes, Inc., 147 Wn.2d 751, 58 P.3d 276, 281 (Wash. 2002)). Additionally, despite insurers having a broad duty to defend in Washington, any alleged claims which are clearly not covered by the policy relieve an insurer of its duty. Kirk v. Mt. Airy Ins. Co., 134 Wn.2d 558, 951 P.2d 1124, 1126 (Wash. 1998).

The Ninth Circuit affirmed the Western District’s decision and likewise found that SNIC did not have a duty to defend. The Ninth Circuit also ruled that it was clear from the operative Complaint and the SNIC policy that the new construction exclusion clearly applied. In particular, the Ninth Circuit held that because it was certain that the claims alleged against LND Construction involved new construction, the exclusion directly applied and no further consideration of facts and/or Washington case law was necessary. Sec. Nat’l Ins. Co., 2024 U.S. App. LEXIS 21365 at *4.

On August 22, 2024, the Western District issued another unpublished opinion in Bitco Gen. Ins. Corp. v. Union Ridge Ranch, LLC & Inland Co., Case No. C22-05624 BHS, 2024 U.S. Dist. LEXIS 150604*; 2024 WL 3924715 (W.D. Wash., Aug. 22, 2024). Specifically, the Western District addressed the applicability of an impaired property exclusion and its exception involving the retaining wall/concrete work the insured, Inland Corporation (Inland Co.), was retained to perform.

Specifically, the Bitco General Insurance Corporation (Bitco) policy included an impaired property exclusion which excluded coverage for property that is rendered “less useful” due to the defective work by the insured. The exception would apply, however, if the insured could prove the “loss of use of other property arising out of sudden and accidental physical injury” to its work after it has been put to its intended use.

After the construction was finished, a prospective buyer retained a geotechnical expert who identified multiple defects with Inland Co.’s work. As a result, the prospective buyer did not purchase the property. Inland Co. later discovered that one of the retaining walls it constructed had failed. A second geotechnical expert further confirmed that the retaining walls were still defective after Inland Co. attempted to repair the defects. The property was eventually sold. However, a third geotechnical expert’s analysis revealed that the retaining walls were improperly constructed and were at risk of failure.

Inland Co. filed suit against Union Ridge Ranch (URR) in Clark County Superior Cout based upon URR’s alleged failure to pay. URR raised counterclaims against Inland Co. alleging breach of contract and negligence based upon Inland Co.’s faulty work which prevented it from selling the property for a profit. Inland Co. tendered the defense of URR’s counterclaims to BITCO and BITCO defended under a full reservation of rights. The parties reached a settlement for $2.66 million and URR agreed not to seek recovery against Inland Co. and Inland Co. assigned its insurance rights against BITCO to URR.

BITCO then filed a declaratory judgment coverage action against URR arguing that it did not owe coverage for the settlement under the commercial general liability and umbrella policies it issued to Inland Co. The Western District determined that the failure of one of the retaining walls was gradual and inevitable rather than sudden or accidental. When considering the impaired property exception, the Western District ruled that the exception did not apply because even if the failure of the retaining wall was “sudden and accidental”, Inland Co. could not show that URR’s damages arose from that failure.

Moreover, the Western District commented that the only thing surprising about the failed retaining wall is that it was the only retaining wall to visibly fail. The Western District heavily considered the three geothermal experts’ analysis revealing that the retaining walls, both before and after the single wall failed, were likely to fail. Ultimately, the Western District determined that it was clear the impaired property exclusion applied, without exception, to exclude coverage to Inland Co. because the property was “less useful” as a direct result of the improperly constructed retaining walls.

The Bitco and Urberg decisions evidence that Washington Courts broadly construe insurers’ duty to defend. Specifically, when there is any reasonable interpretation of the facts or law which could result in coverage, the insurer must defend. However, when it is uncontested that an alleged claim is not covered or clearly excluded by the policy, Washington Courts will oftentimes determine that the insurer is relieved of its duty to defend and/or indemnify.

Lether Law Group has represented and advised commercial general liability primary and excess insurers on all aspects of coverage, including the duty to defend, scope of coverage, and application of policy exclusions and their exceptions. If you would like to discuss the implications of the Bitco and/or Urberg decisions or coverage issues involving these types of claims, please feel free to contact our offices.

Oregon Supreme Court Unilaterally Creates “Negligence” Cause of Action Against Insurers

by | Jan 5, 2024 | Decisions, Dispute Resolution, Events, Featured, Insurance Law, Misc., News & Updates, Professional Liability & Significant Injury Claims

On December 29, 2023, the Oregon Supreme Court effectively created new bad faith liability exposure for insurers doing business in Oregon when it issued its opinion in Moody v. Or. Cmty. Credit Union, 371 Ore. 772, 2023 Ore. LEXIS 692 (2023). In Moody, an insured sued a life insurance company for breach of contract and negligence based on a denial of a claim for life insurance proceeds.

The Plaintiff’s husband was the named insured under a life insurance policy and was accidently shot and killed. At the time of his death, the decedent had marijuana in his system. The Plaintiff filed a claim, and the defendant insurer initially denied the claim because the decedent’s death purportedly fell within an exclusion for deaths caused by or resulting from being under the influence of a narcotic or other drug.

The Plaintiff brought suit alleging that the death was not caused by or resulting from the use of any drug. She alleged claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and negligence. Plaintiff sought both economic and non-economic damages including emotional distress damages. The extra-contractual claims were dismissed by the trial court and proceeded to an appeal. The Court of Appeals reversed the trial court’s dismissal of the negligence claim and the Supreme Court accepted direct review.

On review, the Supreme Court framed the primary question as whether the Plaintiff could pursue a negligence per se claim. The Court clarified that, in Oregon, a negligence per se claim is shorthand for a negligence claim that otherwise exists where the standard of care is set forth in a statute or rule and violation of the statute or rules raises a presumption of negligence.

Under that framework, the Court first examined whether the Plaintiff had a legally protected interest sufficient to subject the Defendant to liability for emotional distress damages. In determining that she did, the Court examined ORS 746.230 (Oregon’s Unfair Claim Settlement Practices statute). While acknowledging that the statute did not create an independent cause of action, the Supreme Court nevertheless found as follows:

We find that the statue provides explicit notice to insurers of the conduct that is required and, in requiring insurers to conduct reasonable investigations and to settle claims when liability becomes reasonably clear, does so in terms that are consistent with the standard of care applicable in common claw negligence cases.

Moody, 2023 Ore. LEXIS 692 at *41.

The Court went on to hold that permitting a common law negligence claim could further the statute’s purpose by deterring insurers from engaging in prohibited conduct. The Court went on to find that allowing emotional distress damages would not place an undue burden on the Defendant because insurers are in a relationship of mutual expectations with insureds and that the insurer could reasonably foresee that failing to exercise reasonable care in the handling of the relationship could result in emotional harm. Finally, the Court held that the claimed harm was of sufficient importance under public policy to justify allowing the claim to proceed. The Court’s ultimate conclusion was stated as follows:

Considering all of those factors, and not relying on any one of them alone, we conclude that the insurance claim practices that ORS 476.230 requires and the emotional harm that may foreseeably occur if that statute is violated are sufficiently weighty to merit imposition of common-law negligence and recovery of emotional distress damages.

Moody, 2023 Ore. LEXIS 692 at *51.

While the Court cautioned that its conclusion would not make every contracting party liable for negligence that causes emotional harm, the holding is extremely concerning and problematic for insurers. In fact, the holding may effectively overturn long-standing Oregon case law holding that insurers are not liable in tort for the handling of an insurance claim. See, e.g., Farris v. U.S. Fid. and Guar. Co., 284 Ore. 453, 587 P.2d 1015 (1978) (Farris II). This issue was recognized in the Moody dissent as follows:

The majority’s analysis creates uncertainty about the remaining precedential effect of Farris II. If the majority means to distinguish Farris II on its facts, then courts may still rely on Farris II as rejecting tort liability for third-party insurers that have denied coverage in bad faith, which were the facts presented in that case. On the Other hand, if the majority is distinguishing Farris II based on the pleadings or based on the legal theory that the plaintiffs asserted in that case, then Farris II might have no precedential effect in any case styled as a negligence claim.

Moody, 2023 Ore. LEXIS 692 at *78 n.7.

The full nature and impact of the Moody decision will likely remain unknown until the Oregon Supreme Court has had the opportunity to further clarify or refine its holding in subsequent cases. As it stands, insurers in Oregon now potentially face liability for general damages (and potentially other alleged consequential damages) in tort as long as those claims are styled as negligence claims. Effectively, the Oregon Supreme Court has created bad faith liability for insurers based on a negligence standard of proof. This reflects a substantial increase in exposure for insurers doing business in Oregon especially when one considers that the majority of jurisdictions require a higher burden of proof for bad faith claims (i.e. unreasonable, frivolous, or unfounded denial of benefits).

The attorneys at Lether Law Group have in excess of thirty-one years’ experience in advising insurers on the handling of extra-contractual claims. This experience includes handling claims and litigating insurance disputes in the state of Oregon. We have several attorneys licensed in Oregon and actively litigating coverage and extra-contractual claims in that jurisdiction. Please do not hesitate to contact our office if you have any questions regarding the Moody decision or any other insurance matter.

 

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Wintertime Property Claims

by | Dec 13, 2023 | Dispute Resolution, Events, Insurance Law, Misc., Natural Disaster Claims, News & Updates

It is the Season. Not just for the Holidays but also for winter storm property damage claims.

The volume of commercial and homeowner property claims typically increase during the winter months. This is due in large part to winter weather conditions. The typical types of winter claims include:

Frozen Pipe Claims: Exposed pipes will freeze. These types of claims trigger language in almost all property policies, including coverage and exclusions involving claims arising from the sudden accidental failure of plumbing systems due to freeze conditions. Typically, the policy language requires the building owner to take precautions to drain water lines or prevent against such freezing in order to have coverage.

Storm Drain Backup Claims: Heavy rains or snow melt can lead to storm drain back ups and flooding. These claims are typically covered but may be subject to a specific and lower policy limit.

Wind Driven Rain Claims: Particularly for those who live in the Northwest, we are used to heavy periods of rainfall often accompanied by strong wind conditions. A typical wind-driven rain claim may involve sudden and accidental leakage into a building as well as long-term water and decay damage. In Washington, wind-driven rain claims may be covered in the absence of weather exclusionary language.

Wind Claims: Winter storms usually bring high wind conditions. This can result in the failure of power utilities, downed trees, roof damage, etc. Depending on the policy language, these types of claims are typically covered.

Landslides: Heavy rainfall and wind conditions can contribute to saturated soils. This often results in landslides, particularly in the Northwest. Landslide events are typically excluded from coverage unless landslide coverage is expressly provided for.

Flood Claims: Heavy rainfall and snowmelt can lead to both river and tidal flooding. In addition to river overflow, strong King tides can result in oceanic saltwater flooding from tidal bodies of water. In the absence of express flood coverage, most surface water and floodwater claims are excluded from coverage. If a building owner has flood insurance, that insurance is typically paid by an insurer through the Federal Emergency Management Agency (FEMA) under the National Flood Act. There are severe restrictions on what is allowed to be recovered under the National Flood Insurance Act. For example, in a FEMA flood claim, there is no right to policy appraisal, no right to trial by jury, and no recovery of extra contractual or bad faith claims.

 

Once again, every policy is different. However, those building owners who are confronted with severe winter weather should review their policies and understand what is and what is not covered.

Lether Law Group has handled winter storm-related claims throughout the Northwest. This includes major catastrophes such as the Oso landslide, the Skagit River valley flooding, the Kingston and Perkins Lane landslide losses, and thousands of water intrusion and wind-driven rain type claims. Tom Lether has been directly involved as counsel retained through FEMA to litigate claims involving flood losses under the National Flood Insurance Act.

If you have questions in regard to winter storm damage claims, please feel free to info@letherlaw.com or (206) 467-5444.