Washington high court to insurance companies: Defend your insured
The legal climate in the state of Washington has become one of the most unfavorable in the country for the insurance industry. Insurance claims departments located outside the state may discover that their long-distance decisions have drastic consequences in Washington.
A recent state supreme court decision proves the point. On March 18, 2010, the Washington Supreme Court ruled in American Best Food, Inc. v. Alea London, Ltd. that insurance companies are required to consider even “legal ambiguities” when determining whether to defend an insured.
The case
American Best Food, Inc. operated a nightclub called Café Arizona. On the evening of January 19, 2003, Michael Dorsey was shot nine times outside the club's entrance. Security guards at the club carried Mr. Dorsey inside, but club management instructed the guards to remove him. According to Mr. Dorsey, the security guards “dumped him on the sidewalk” next to the club. Later that year, Mr. Dorsey sued Café Arizona, alleging that it failed to take reasonable precautions to protect him against criminal conduct and that the guards exacerbated his injuries by dumping him on the sidewalk.
Café Arizona tendered defense of the lawsuit to its insurance carrier, Alea London, Ltd. Alea refused to defend, however, on the basis that its policy excluded injuries and damages “arising out of” assault or battery. Alea relied on a Washington case that had held that the phrase “arising out of” in an insurance policy encompasses any occurrence with a connection to the excluded assault or battery. Café Arizona disputed Alea’s decision, citing a Texas court decision and arguing that Mr. Dorsey's alleged dumping on the sidewalk did not “arise out of” an assault and battery. Alea considered the Texas case but decided that it was not binding in Washington. Café Arizona commenced a coverage action to force Alea to defend.
The ruling
The case eventually made its way to the Washington Supreme Court, which departed from the earlier Washington case and instead chose to adopt the reasoning of the Texas case cited by Café Arizona. The Court determined that the Texas decision was more on point than the Washington case, and the allegations in the lawsuit against Café Arizona were potentially covered by the Alea policy. In light of this, the Court held, Alea had a duty to defend. The Court reasoned that the Texas case, when viewed in light of the Washington case, created a “legal ambiguity” under Washington law. Even “legal ambiguities” must be construed in favor of triggering the duty to defend, the Court held. When Alea chose not to defend this lawsuit, therefore, it breached the insurance contract. The consequence for Alea of this first part of the Court's decision was that the insurer would be liable for that part of a settlement or judgment attributable to the covered claim, up to its policy limits.
But the Court went a step further. It held that Alea not only had breached the contract but also had acted in bad faith. The Court reasoned that Alea’s decision to refuse to defend the lawsuit based on its own interpretation of “legally ambiguous” case law constituted bad faith. According to the Court, Alea should have noticed that Texas law created an ambiguity when viewed in light of the Washington case, and should have given Café Arizona the benefit of the doubt and defended the suit. Because Alea had acted in bad faith, the Court concluded, the insurer was liable for the full amount of any settlement or judgment reached, beyond its policy limits and irrespective of whether any amount of that settlement or judgment was actually covered. On this point, four justices dissented.
Lessons for insurers
The American Best Food case provides a stark example of how important it is to defend an insured in the state of Washington. The two key takeaway points are these:
- The only time that an insurer should deny a defense in Washington is if there is a Washington case that is precisely on point as to the coverage question. An insurance carrier that chooses to deny a defense should provide a detailed explanation for the denial, including a citation to the exact Washington case or line of cases that precludes coverage and a detailed analysis explaining why those cases are precisely on point.
- If there is no such caselaw—even if the lawsuit appears to be outside the scope of coverage—then the insurance company should virtually always opt to defend its insured, but it should also issue a reservation of rights and bring a prompt declaratory judgment action to get an interpretation of the law on the coverage issue.
For more information or assistance
To discuss handling your own coverage issues, please contact one of Patterson Buchanan's insurance coverage attorneys:
Michael A. Patterson
206.462.6702
map@pattersonbuchanan.com
Duncan K. Fobes
206.462.6704
dkf@pattersonbuchanan.com
Andrew S. Kamins
206.462.6766
ask@pattersonbuchanan.com
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