Wash. Federal Court Broadly Applies "Ongoing Ops" Exclusions

In a decision from mid-summer, Judge Rice of the Eastern District of Washington – a relatively new judge in a jurisdiction without a lot of coverage decisions – broadly applied what are known as the “ongoing operations” or “business risks” exclusions, completely voiding the damaged party’s recovery, demonstrating the devastating impact that subtle coverage issues can have, and emphasizing that pro-insured Washington isn’t always so friendly to creative coverage arguments. 

In Western Heritage Ins. Co v. Cannon, a general contract failed to compact fill soils before laying the foundation on a large custom home, resulting in structural failure of the building – signs of which were observed during the construction – and the home eventually being condemned.  The contractor stipulated to  covenant judgment, and the homeowner and carrier filed cross-motions for summary judgment in the ensuing coverage suit. 

The insurance carrier argued among other things that coverage was barred by the “j(5)” and “j(6)” exclusions, which in simple terms exclude from coverage property damage to “that particular part” of the property on which the insured was working if the damage occurred during ongoing operations (as opposed to a latent defect that causes damage after the project is complete).  The homeowner argued that the “particular part” was the fill that the contract failed to compact, which the property damage was to the foundation, and other parts of the structure.

The court didn't buy the owners’ argument.  The court noted that Washington courts have broadly interpreted the j(5)/j(6) exclusions, and rejected a comparable Arizona case adopting a narrow interpretation in similar loose-fill situation.  Judge Rice held, in essence, that the general contractor was working on the fill, and the house, at the time of the property damage, making all of the project “that particular part.” 

In most situations like this one there would be some property damage after completion of the project, and the contractor would have purchased what is known as “Products-Completed Operations Hazard” coverage.  But here the contractor appears not to have purchased that coverage.  So the court held that the owners were completely out of luck.  This is an excellent object lesson that Washington law is not always favorable to the insured, and that any owner contemplating a stipulated judgment arrangement needs to evaluate the considerable risks that they may come up empty-handed.

Insurers Trying to Have It Both Ways on 'First Party' v 'Third Party'

Insurance carrier-side lawyers are celebrating the result in Cox v. Continental Casualty Company, a decision out of the Western District of Washington  in which Judge Pechman held that Washington's Insurance Fair Conduct Act (IFCA) does not apply to claims under liability policies because the policyholder there is not a "first-party claimant," and IFCA specifically refers to "first-party claimants" as the class the statute is intended to protect.  The Cox lawsuit was brought by a group of allegedly injured patients of a dentist who sued the dentist and then took an assignment of  the dentists claims against his malpractice carriers as partial satisfaction of their malpractice claims.  Malpractice insurance is simply one variety of liability insurance, sometimes referred to as "third-party insurance" because it is designed to protect the policyholder against claims brought by "third-party" others (that is, a party other than the two parties to the insurance contract: a "third" party).

In Cox the court took it upon itself to consider whether IFCA's purported limitation to "first-party claimants" means that all claims other than those by policyholders under traditional "first-party" insurance (such as fire insurance, or inland marine insurance) are outside the scope of the statute.  Judge Pechman held that IFCA only encompasses traditional "first party coverage"  insurance relationships, and not liability policies in which policy proceeds are paid to others.  In denying reconsideration of that initial ruling, the court ignored evidence presented by the policyholder that this is not the proper interpretation, including ambiguities in the language of the statute, the fact that liability coverage is often referred to as "indemnity" coverage, and that cases from Washington federal and state courts have applied IFCA to "third-party coverage" situations.  The trial court's decision is wrong, is in the minority, and is likely to be overturned if appealed.  

But for a contrasting view from the insurance industry itself, consider NW Pipe v. RLI Insurance.  NW Pipe is an environmental coverage case from Oregon involving a dispute between one of the larger corporate targets at the Portland Harbor Superfund Site and its primary-layer liability ("third-party") insurer.  The crux of the dispute is whether the limits of the primary-layer policies have been exhausted, meaning that the insurer is off the hook for defense costs.  In NW Pipe the insurer paid for a lot of cleanup-type work on the insured's property, the payment of which clearly eroded some of the limits of the policies.  But those limits were not fully eroded, and it appears that the insured intentionally did not have the insurance company pay for some items to prevent the policies from being exhausted.  Still, the carrier wanted out of its defense obligation, so it sent the insured a check for the balance of the limits (which the insured wisely refused to cash). The insurer then argued to the court that it could force the insured to take the insurance company's money to pay for things that the insured had not asked to be paid for, so that the policies would be exhausted.  You can see where I'm going here: the insurance company in NW Pipe was clearly unconcerned with the "third-party" aspect of this insurance policy (that is, protecting its insured against claims by others) and was completely focused on paying out small benefits to its policyholder in order to further the insurer's larger financial goals.

The insurance industry knows full well that the distinction relied on by Judge Pechman in Cox is only semantic, that liability coverage is fully as much for the benefit of the policyholder as fire insurance, and that policy proceeds in liability coverage are frequently paid directly to the insured.  NW Pipe is but one example.  Hopefully an appeals court will get a crack at the Cox decision and turn it around.