WA Appeals Court Confirms Insurers Can’t Make Coverage Denials A Moving Target

Insurers who deny coverage on an unreasonable basis and get sued by their insureds often try to retroactively change their basis for denying coverage. A recent Washington Court of Appeals decision illustrates why this strategy typically fails.

Nathaniel and Jennifer Cummings owned a home in Western Washington that they rented out. The Cummings purchased homeowners insurance for the property from USAA and continued to rent out the property. Because they lived out of state, the Cummings hired a property manager to handle leasing out the property.

In 2017, the Cummings discovered serious damage and an odd smell left behind when the most recent tenants vacated the property. These issues made it harder for the Cummings’ to sell the property. The Cummings suspected the damage was due to tenants producing methamphetamine in the property.

The Cummings made a claim with USAA and advised that they suspected their property manager had failed to effectively handle the tenants. The only investigation USAA performed was obtaining testing confirming methamphetamine residue in the property, but at levels below the Washington State limits for remediation. The Cummings told USAA they wanted to remediate the methamphetamine contamination anyway because even a small amount of contamination would make it harder to sell the property.

USAA denied the claim. The sole reason it gave was that the policy excluded damage from “pollutants.”

The Cummings filed suit and argued the loss was covered under the USAA insurance policy because the tenants’ meth operation was an act of vandalism. USAA defended its decision to deny coverage by raising new arguments not previously disclosed. It claimed the Cummings violated the policy by failing to disclose the tenants’ use of the property and that the methamphetamine contamination levels were too low to count as vandalism. USAA abandoned its initial reason for denying coverage.

The Cummings argued USAA could not raise new grounds for denying coverage in the lawsuit. The trial court agreed with USAA and dismissed the lawsuit. The Cummings appealed.

The Washington Court of Appeals reversed. Siding with the Cummings, the appellate court agreed that USAA could not raise new justifications for denying the claim after the Cummings filed suit.

The court applied the legal principle of equitable estoppel and relied on Washington State regulations requiring that insurers explain their basis for denying a claim. While insurers can modify the basis for denying coverage when they receive new information as part of a reasonable investigation, insurers cannot raise new grounds for denying coverage after the insured shows that the initial basis given for denying coverage is wrong where they could reasonably have given that bases in the original denial.

The Court of Appeals also agreed with the Cummings that the loss was covered under the policy’s vandalism coverages. The court applied the traditional rule that, where a loss occurs due to multiple causes, and one cause is covered while other causes are excluded, the policy covers whichever cause is the main reason for the damage. The court determined that a reasonable jury could find that the meth contamination qualified as vandalism and hence that USAA should have covered the loss. The appeals court determined the Cummings had the right to challenge USAA’s denial of their claim and sent the case back down to the lower court for trial.

The decision is unpublished, meaning it is not binding precedent, but serves as a good reminder that Washington law frowns on insurers’ efforts to retroactively change their basis for denying coverage after they get caught denying coverage without a reasonable basis.

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