Judge Richard Jones from the Western District of Washington issued an Order in this declaratory judgment action recently, in which he found issues of material of fact precluded summary judgment on most of the grounds argued by the parties, but did find as a matter of law that Chartis Specialty Insurance Company acted in bad faith when it refused to defend its insured. You can see the decision for yourself by clicking here.
The case stems from construction on the old Queen Anne High School in Seattle, which was converted into condominiums. The condominium association wasn’t happy with the work and in 2009 it sued the contractor (Queen Anne HS LLC), which had primary insurance of $1 million through Westchester Surplus Lines and excess insurance of $10 million through Chartis. Westchester defended Queen Anne in the litigation and eventually a dispute arose regarding whether Chartis also had a duty to defend Queen Anne. Chartis’s position, based upon the language in its policy, was that it did not have any duty until either Westchester or Queen Anne made an “actual payment” of $1 million towards judgment or settlement of the case. According to Chartis (and a prior decision in the case by Judge Jones), Westchester’s payment of $1 million in defense costs did not trigger Chartis’s duty to defend.
However, in August 2011 Westchester had paid $1 million in defense costs and stopped paying for Queen Anne’s defense because its obligation under its policy had been met. Queen Anne’s defense counsel, funded by Westchester, withdrew from the litigation. Although Queen Anne demanded that Chartis provide a defense, Chartis refused.
Queen Anne and the condominium association then “hatched a plan”, in Judge Jones’ words, that they thought would trigger Chartis’s duty to defend. They agreed to settle some but not all of the association’s claims in exchange for a $1 million promissory note, secured by Queen Anne’s claims against its insurance broker for malpractice in securing its insurance policies. Chartis rejected this plan, arguing that the insured could not satisfy the “actual payment” requirement in the policy through the use of a promissory note.
Queen Anne and the association then entered into a $12 million settlement, subject to a reasonableness hearing. The court found that $12 million was not reasonable, but $10.4 million was. The parties then agreed to a “covenant not to execute” settlement. As part of the settlement, Queen Anne agreed to have judgment entered against it for $10.4 million and the association agreed not to execute the judgment against Queen Anne, but that it would only execute against the Chartis policy. Queen Anne also assigned its rights under the insurance policy to the association.
Judge Jones made several findings in his Order. First, he found that Queen Anne “actually paid” $1 million through its promissory note. Chartis disputed that a promissory note satisfied the requirement of “actual payment” because a promise to pay was not a true payment, but the court rejected its arguments, at one point stating: “Chartis has a point, but it is a point that only a lawyer or banker would make.” At the very least, the court ruled, the policy was ambiguous on the question of whether “actual payment” included a promissory note. Chartis could have inserted language that would have clarified the issue but did not. Because ambiguities are construed against the insurer, the court ruled against Chartis on this point.
The court next found that Chartis breached its duty to defend, concluding that Washington law was as follows:
An excess insurer must defend if an insured engages in conduct that conceivably triggers the defense obligation described in the excess policy. In this case, even if the partial settlement was a sham, even if it did not extinguish a covered loss, even if it did not extinguish claims arising from a single occurrence, it at least conceivably exhausted the retained limit. Chartis was obligated to assume Queen Anne’s defense.
This was an interesting conclusion by the court, which did not cite any authority to support these statements. It is based upon Washington’s broad duty to defend, which requires a primary insurer to defend its insured if a claim against the insured is “conceivably” covered. The court took it one step further, however, holding that if the insured under an excess policy takes action that “conceivably” triggers coverage, the duty to defend exists. As the court noted, this would include steps taken by the insured that constitute a sham.
Chartis certainly thought this was a sham, a product of collusion by Queen Anne and the association to force it to defend when the duty did not exist. In response to these arguments, the court stated: “But there is nothing presumptively improper about collusion for the purpose of obtaining insurance coverage.” Based upon this reasoning, the court concluded that Chartis breached its duty to defend, and also that it did so in bad faith as a matter of law:
Chartis declined to assume Queen Anne’s defense primarily because of its bare assertion that Queen Anne’s promissory note was not “actual payment” of a settlement. Chartis cited no legal authority for that assertion, but the court will assume for the sake of argument that Chartis relied on the same legal arguments it makes in these motions. Washington law does not permit it to do so. Chartis was not at liberty to rely on an “equivocal interpretation of case law to give itself the benefit of the doubt rather than its insured.” Woo, 164 P.3d at 463 (emphasis in original). An insurer must defend if “any reasonable interpretation of the facts or the law could result in coverage . . . .” Am. Best Food, Inc. v. Alea London, Ltd., 229 P.3d 693, 700 (Wash. 2010)(emphasis added).
Moreover, where an insurer fails to defend based on a “questionable interpretation of law,” it acts in bad faith as a matter of law. Am. Best Food, 229 P.3d at 700 (“It cannot be said that the insurer did not put its own interest ahead of its insured when it denied a defense based on an arguable legal interpretation of its own policy.”). Given Washington authority favoring Queen Anne’s position and the lack of any authority (precedential or otherwise) establishing that a promissory note cannot serve as “actual payment,” the court must find that Chartis acted in bad faith.
This is an interesting decision for several reasons, not the least of which is the finding of bad faith as a matter of law, something you don’t see very often. One issue that is somewhat perplexing, though, is that the promissory note wasn’t secured by any property or tangible item that had an assessed value of $1 million; it was secured by Queen Anne’s claim against its insurance broker, the value of which is somewhat amorphous. The court stated that if the claims the association extinguished in the partial settlement were not reasonably susceptible of a valuation of at least a million dollars, Chartis could perhaps claim that the settlement was a sham, but ruled that Chartis failed to show that the settlement was a sham as a matter of law.
These were just motions for partial summary judgment, so the case goes on. We’ll see what happens next…
Following the court’s April 4 ruling described above, Chartis moved for reconsideration, but the parties settled before the court ruled on the motion. Chartis then moved to vacate the court’s ruling, and Queen Anne stipulated to vacating the ruling, having agreed to do so in the settlement agreement. Judge Jones refused to vacate the ruling, however, because considerable judicial resources had been spent in consideration of the partial summary judgment motion and the public therefore had an interest in the existence of the decision. Furthermore, vacating the decision would benefit no entity other than Chartis. You can read Judge Jones’ decision here.
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