McKean Evans

Ninth Circuit Reiterates Insurers Can’t Re-Write Policies to Justify Denying Coverage

As we’ve often observed, insurance policy fine print matters. Insurers can only deny claims if the policy language excludes the claim from coverage. A recent decision from our local federal appeals court confirms insurers cannot re-write the policy after the fact to support denying coverage.

On February 18, 2020, the Ninth Circuit Court of Appeals, the federal appeals court with jurisdiction over Washington State, decided National Union Fire Insurance Company of Pittsburgh, PA v. Zillow, Inc. The court ruled Zillow could proceed with a lawsuit alleging its insurer improperly denied coverage for a lawsuit against Zillow for copyright infringement. The decision is unpublished, so it can be cited for persuasive value but lower courts are not required to follow the ruling.

The insurance claim arose because Zillow was sued for copyright infringement by VHT, Inc. Zillow made a claim under its professional liability insurance policy issued by National Union Fire Insurance Company.

The insurance policy only covered claims that were first made against Zillow during a specific time period (the “policy period”). VHT sued Zillow during the policy period. But, before the policy period began, VHT had sent Zillow a letter threatening to sue Zillow for the same copyright infringement alleged in the lawsuit. Accordingly, National Union argued there was no coverage because the claims alleged in the VHT lawsuit had been raised before the policy period.

The trial court agreed with VHT and ruled Zillow had no coverage for the VHT suit under its insurance policy. But the Ninth Circuit reversed, ruling the insurer should not have been allowed to stretch the policy language to support denying coverage.

The court of appeals examined the insurance policy language closely. For purposes of deciding whether a claim occurred during the policy period, the policy defined a “claim” as either a lawsuit or a demand letter. Since the VHT lawsuit was obviously a lawsuit, the court had no trouble deciding that the lawsuit was a claim arising during the policy period.

The court did not buy the insurer’s argument that VHT’s demand letter and VHT’s lawsuit should be treated as a single claim. The court emphasized that National Union could have added language to this effect to the insurance policy, but chose not to:

“[U]nlike a number of other claims-first-made policies cited by both parties, the Policy does not contain a provision expressly providing for the integration of factually related Claims. Had National Union wanted factually similar Claims to be integrated under the Policy’s coverage provision, it could have easily drafted the Policy to include such a requirement.”

The Ninth Circuit also emphasized that insurance policies must be read as they are written, criticizing the trial court for reading the word “or” out of the definition of “claim”. The court emphasized that Washington State law requires ambiguous insurance policy language, i.e., language that could arguably be read in two different ways, be interpreted in favor of the insured. The court sent the case back down to the trial court to reconsider whether Zillow had insurance coverage under the correct reading of the policy.

The Zillow decision is an important reminder that insurance policy fine print matters. Insurers, after all, are the ones writing their insurance policies. The insurer has the opportunity to draft exclusions into the policy before they sell it. They can’t add new exclusions to the insurance policy after the fact. And, if the policy is so poorly written that it could be read multiple ways, the proverbial tie-breaker goes to the insured.

Flood Insurance Claim Tips

Following several weeks of storms and heavy flooding in Washington State, the state Insurance Commissioner released a list of tips for homeowners dealing with flood losses under their insurance policies. Flood insurance is challenging, so the Insurance Commissioner’s advice should be helpful to policyholders affected by the flooding.

The upshot is:

Most homeowner’s and renter’s insurance policies do not cover flood damage.
Flood insurance is available through the Federal Emergency Management Agency’s National Flood Insurance Program.
NFIP policies come in two types. The first type of policy covers flood damage to the building, such as the foundation, electrical wiring, flooring, etc.
The second type of NFIP policy covers flood damage to personal property like appliances, electronics, and other personal belongings.
Homeowner’s affected by flooding who don’t have flood insurance coverage may be eligible for federal emergency grants or loans.

Deadlines in Policy Fine Print Can’t Cut off IFCA Rights Says Court of Appeals

Washington’s Insurance Fair Conduct Act (IFCA) protects policyholders from insurers’ unreasonable refusal to pay covered losses or provide insurance policy benefits. Unfortunately, many insurers include fine print in the insurance policy contract that supposedly provides the policyholder cannot sue the insurer once certain time period has passed since the loss. These time periods are typically much, much shorter than statutes of limitations, and are often as short as one year.

Insurers often claim this language lets them off the hook for violating policyholders’ rights under IFCA or other laws once enough time has passed. This is particularly problematic because insurers often drag out disputed insurance claims for as long as possible. Accepting these insurers’ arguments would allow insurers to immunize themselves from suit by simply stalling until the deadline runs.

Can they do that?

Fortunately for Washington State policyholders, our Court of Appeals recently said “no way.” On January 13, 2020, the Court of Appeals decided West Beach Condominium v. Commonwealth Insurance Company of America, ruling that the deadline in the insurer’s fine print could not bar the policyholder from pursuing IFCA and similar consumer protection claims.

West Beach, a West Seattle condo owners’ association, had insurance coverage for the condo complex through Commonwealth Insurance. West Beach found substantial water damage in the condo complex and made an insurance claim with Commonwealth on September 26, 2016.

In March of 2017, Commonwealth denied coverage. Commonwealth claimed that the water damage had been happening for the past ten years. Commonwealth’s insurance policy contained fine print requiring West Beach to sue within a year after the loss, i.e., within a year after the initial water damage.

West Beach sued, alleging that Commonwealth breached the insurance policy contract. West Beach also sued under IFCA and Washington’s Consumer Protection ACT (CPA). The lower court dismissed the entire lawsuit because the claimed damage occurred more than one year before West Beach filed suit.

The Court of Appeals reversed and ordered that the lower court should not have dismissed the IFCA and CPA claims. Commonwealth claimed on appeal that by failing to file suit by the contractual deadline, West Beach gave up its right to any insurance coverage. Therefore, Commonwealth argued, West Beach had no right to bring IFCA or CPA claims because it had given up its insurance coverage.

The Court of Appeals determined the suit limitation clause only prevented West Beach from filing a very specific type of claim for breach of the insurance policy contract. But, the court ruled, Commonwealth could not use the contractual deadline to immunize itself from suit under IFCA and the CPA. These statutes give policyholders rights that do not go away merely because the policyholder missed a deadline buried in the insurance policy.

The West Beach decision is important because it preserves policyholders’ rights under Washington’s consumer protection statutes. These laws exist to protect Washington policyholders from sharp practices. Allowing insurers to exempt themselves from these laws simply by adding arbitrary deadlines to their insurance policy fine print would allow insurers to circumvent these protections by using the very type of sharp practice these laws exist to prevent.

ERISA Insurer’s Hiding Doctor’s Opinions Results in Appellate Win for Claimant

On December 11, 2019, the Ninth Circuit Court of Appeals (the federal appeals court with jurisdiction over Washington and other coastal and western states) decided Wagenstein v. Cigna Life Insurance Company. The decision is unpublished, meaning it is not binding on lower courts but may still be used as persuasive authority.

Lea Wagenstein sued to challenge Cigna’s termination of her long-term disability benefits under an ERISA-governed insurance policy. The district court dismissed Wagenstein’s case, agreeing with Cigna’s decision to terminate benefits.

The Ninth Circuit reversed the district court. The court emphasized that even Cigna’s own consultant, hired to examine Wagenstein at Cigna’s behest, determined Wagenstein’s disability precluded her from sitting more than 2.5 hours per day. As such, the Ninth Circuit noted that report showed Wagenstein could not perform sedentary work requiring sitting for most of an 8 hour workday.

The Ninth Circuit noted Cigna possessed a report from another consultant, hired by Cigna, who determined Wagenstein could actually sit for a full workday and thus could perform two sedentary jobs. Cigna relied on this report in concluding Wagenstein was not disabled. But Cigna hid the report from Wagenstein until Cigna’s final denial of her appeal of the termination of her benefits. That deprived Wagenstein of the opportunity to provide a response from her treating physicians, who agreed Wagenstein was disabled. Failing to provide Wagenstein the report violated ERISA’s rules requiring full and fair review of claims.

Because Cigna violated ERISA by withholding its physician’s report, the Ninth Circuit remanded the case back to the lower court with instructions to allow Wagenstein to submit statements from her doctors rebutting Cigna’s consultant in determining whether Wagenstein remained entitled to disability insurance benefits.

The Wagenstein decision, while not binding precedent, remains an important reminder that, where the insurer relies on consultants’ opinions in denying claims or terminating benefits, ERISA protects the claimant’s right to rebut the insurer’s evidence.

Insurance Company’s Duty to Reasonably Investigate Claims Under Washington law

The Washington State Association for Justice recently published McKean Evans’ article regarding insurers’ duty to reasonably investigate claims. The article, entitled Insurance Company’s Duty to Reasonably Investigate Your Client’s Claim a Powerful Tool for Making Client Whole, discusses the legal basis for insurers’ duty to reasonably investigate claims. Evans discusses how insurers’ breach of this duty is actionable and can be used to rebut typical insurer defense strategies in insurance bad faith litigation.

Among other things, the article explores:

How an insurer’s breach of its duty to investigate establishes liability in an insurance bad faith action;
The Washington Supreme Court’s seminal decision in Coventry Assocs. v. Am. States Ins. Co., 136 Wn. 2d 269, 276, 961 P.2d 933, 935 (1998), establishing that the duty to reasonably investigate claims is a fundamental part of the benefit the policyholder receives in exchange for their premiums;
How the duty to reasonably investigate requires an insurer to base its coverage decisions on “adequate information” and not “overemphasize its own interests;” consider new information the insured provides in response to the insurer’s denial of her claim; and reasonably consider a policyholder’s final coverage demand under the Insurance Fair Conduct Act;
Facts to look for in investigating an insurer’s bad faith that would help prove the insurer failed to reasonably investigate the claim.