McKean Evans

Washington Court of Appeals Enforces Insurance Protections for Domestic Violence Victims

Since 1998, Washington State has had legislation on the books protecting the rights of domestic violence victims when it comes to insurance. Among other things, the law prohibits insurers from excluding coverage for losses based on intentional or fraudulent acts that result from domestic violence. Intentional acts exclusions are common in insurance.

For example, most homeowner’s insurance would be unlikely to cover a fire intentionally started by the insured. Given the interpersonal dynamic of domestic abuse, restricting the insurance company’s ability to exclude losses from coverage because they arose from an abusive family member’s actions is necessary to prevent domestic abuse from becoming an unfair limitation on insurance coverage.

Washington’s Court of Appeals applied this law in its September 3, 2024 ruling in Welch v. PEMCO Mutual Insurance Company.

In that case, Welch had been married to her husband Morgan and owned a home together. When they divorced, the court awarded the family home to Morgan and the two shared custody of their child.

After the divorce, Morgan attacked Welch when she arrived at the family home to collect their child. During the attack, Morgan set the home on fire. The house was destroyed. A jury later found Morgan guilty of attempted murder and arson.

Welch still owned part of the home at the time of the attack because the couple was still in the process of untangling their assets following the divorce. The home was covered under property insurance issued by PEMCO. Welch and Morgan were both named as insureds.

PEMCO denied coverage. It pointed to the insurance policy’s exclusion for any loss caused by intentional acts, which included Morgan’s arson.

As required by law, the insurance policy stated that the intentional acts exclusion did not apply to losses resulting from acts of domestic violence by family members. But PEMCO claimed that this did not apply. Since Welch and Morgan had been divorced, they were no longer married and not “family.” (The legislature has since amended the law to provide that domestic violence among any intimate partner cannot be excluded from insurance coverage by “intentional acts” exclusions).

The Court of Appeals ruled for Welch. It agreed that the historical definition of “family” did not apply. Welch and Morgan were divorced, and Welch lived with a new partner at the time of the attack.

But the court held that the more modern definition of “family” was more appropriate. Recognizing changing times, modern dictionaries define “family” to include two parents rearing children together even if not married.

Under that definition, the court had little trouble determining that the rule limiting insurance exclusions for domestic violence victims applied, and that PEMCO could not exclude the loss.

The ruling is “unpublished,” meaning it is not binding precedent. But it is a good illustration of the impact of Washington State’s protections for insurance policyholders who are victims of domestic violence.

Washington Court of Appeals Emphasizes Distinction Between “Replacement Cost” and “Actual Cash Value” in Homeowners’ Insurance Coverage

Fine print is tedious, but it matters. That’s the takeaway from the Washington Court of Appeals July 30, 2024 ruling in McKay v. PEMCO Mutual Insurance Company.

We’ve blogged before about the distinction between “actual cash value” and “replacement cost” coverage. These are two types of coverage that basically decide when and how much you get reimbursed if your house is damaged.

The distinction has to do with how you define value. Let’s say your house burns down and your insurance policy says the insurance company will reimburse you for the home’s value. What was it worth? What does “value” mean? This is the kind of question generally pondered only by philosophy undergraduates and insurance lawyers.

One perspective is: “things are worth whatever someone would pay for them.” Under this theory, your house is worth whatever you could have sold it for on the open market the day before it burned down. This (basically) is “actual cash value.”

Here’s another way to look at it: “a thing is worth whatever you’d pay to get a new one.” Under this theory, your house is worth what it would cost to rebuild it. This (basically) is “replacement cost.”

The difference matters in a big way. As anyone who’s tried to hire a contractor in the last few years knows, building new is almost always going to cost more than what you could list the property for on the open market.

So, the difference between “replacement cost” and “actual cash value” becomes pretty relevant as soon as your house gets damaged and you need to make an insurance claim.

Back to McKay: Tina McKay’s house caught fire. Luckily, she had homeowner’s insurance. It would pay the full “replacement cost.”

But, like most homeowners’ insurance, the policy said McKay had to fix the damage from the fire before the insurance company was responsible for paying the replacement cost. (This makes sense, from a certain point of view, because how would we know what it cost to replace the home until the owner hires a contractor who completes the work and presents the final bill?).

Before the insured rebuilt the home, the insurance policy stated PEMCO would pay only the “actual cash value.” When PEMCO paid that amount, it did not reimburse McKay for the full amount of sales tax on the cost to restore the home and replace her belongings.

McKay sued. She alleged that sales tax should be included in the “actual cash value” even if she never collected the “replacement cost.” She relied on a Washington Supreme Court case from 2010 finding that insurers must pay the full cost of sales tax on the cost to repair a home after a loss.

The Court of Appeals saw it differently. It agreed with McKay that the 2010 Supreme Court case entitled her to be reimbursed for the full sales tax in the abstract.

But the court ruled that McKay couldn’t recover the full sales tax amount until she completed restoration and collected the “replacement cost.” The court reasoned that “actual cash value” is the equivalent of fair market value for used goods or property, and that, when you buy used goods, you pay sales tax on the secondhand price rather than the price you would have paid to buy new.

This case is a good example of how fine print and abstract ideas about the meaning of “value” can have a real-world impact for insurance coverage.

Washington Supreme Court Emphasizes Power of Ensuing Loss Clauses to Preserve Insurance Coverage

The Washington Supreme Court recently upheld a broad reading of so-called “ensuing loss” insurance policy language in The Gardens Condominium v. Farmers Insurance Exchange.

In that case, Farmers sold an insurance policy to The Gardens Condominium. The policy covered any direct physical loss to the condominium building.

This type of coverage is common. It’s known as “all-risk” coverage. All-risk insurance covers basically any loss that isn’t excluded. This puts the onus on the insurance company to draft specific exclusions for losses they don’t want to cover.

In the insurance policy it sold to Gardens, Farmers included some exclusions but went a step further. It added a provision that losses caused by an excluded cause of loss are excluded even if they set off a chain of events that results in a covered cause of loss. In other words, if any exclusion played any role in the loss at all, the entire loss would not be covered.

The Gardens’ insurance policy also included an “ensuing loss clause.” This is another common insurance policy term. It provides that if an excluded event caused a covered cause of loss, that loss (i.e., the ensuing loss) would be covered.

In Gardens’ case, that ensuing loss clause applied specifically to an exclusion for “faulty workmanship.” Thus, the policy said that losses caused by faulty workmanship wouldn’t be covered; but if faulty workmanship led to another covered cause of loss, that loss would be covered.

Why did this matter? It spelled the difference between coverage or no coverage for a huge loss.

In 2019, Gardens discovered damage to its building. The roof was built without proper venting. This allowed water to condense inside the roof.

Over time, that water did extensive damage to the structure. Gardens made a claim under its Farmers insurance policy.

Farmers denied the claim. It determined the faulty workmanship exclusion applied.

Gardens filed suit. It argued that the cause of the loss was the condensation, not the faulty roof directly. Condensation was a covered cause of loss.

Thus, while acknowledging that there would be no coverage for replacing the faulty roof itself because of the exclusion, Gardens asserted that the ensuing loss clause meant there was covered for the damaged caused by the condensation.

The case made its way up to the Washington Supreme Court. The court acknowledged that neither party disputed the faulty workmanship exclusion applied. The only question was whether the ensuing loss clause provided coverage as an exception to that exclusion.

The court held that it did. Farmers argued that there was no real ensuing loss. It characterized the condensation as a natural consequence of the faulty workmanship of the roof; not its own separate cause of loss.

The court disagreed. It held that Farmers’ reasoning would render the ensuing loss clause meaningless. The whole point of that clause, said the court, is to provide coverage for secondary consequences of an excluded loss.

Emphasizing that Farmers could have chosen to sell the insurance policy without the ensuing loss clause, the court stated that it would not re-write the policy after the fact.

This case is a good reminder of the strength Washington law gives to coverage language in insurance policies. Insurers selling all-risk coverage must carefully draft exclusions for specific events they don’t want to cover.

Washington Supreme Court Upholds Narrow Interpretation of Mental Health Parity Laws

We’ve previously blogged about the Mental Health Parity Act. This law forbids insurers from discriminating against mental health and substance addiction by covering treatment for those conditions less favorably than other medical treatment. A 2022 report noted insurers continue to violate this law.

A new Washington Supreme Court ruling restricts individuals’ ability to enforce this law. On December 21, 2023, the court ruled in P.E.L. v. Premera Blue Cross that the plaintiffs could not sue their health insurer for excluding certain mental health treatment.

In that case, two parents sued Premera Blue Cross for failing to cover their child’s mental health and substance abuse treatment. The child’s symptoms were so severe they required inpatient hospitalization. The child spent two months at a “wilderness therapy” program before transitioning to long-term treatment.

Premera denied coverage for the wilderness therapy program. The insurance policy generally covered “residential treatment” for mental health conditions. But it specifically excluded any kind of “wilderness” or similar therapy.

The parents alleged that exclusion violated the Mental Health Parity Act and its Washington State counterpart. The Washington Supreme Court disagreed.

The court acknowledged that mental health parity laws aim to fix a long history of discrimination against people diagnosed with mental health disorders which has manifested in the insurance industry. Insurance policies historically singled out these diagnoses for worse coverage. They charged higher premiums and provided lower benefits for them.

These laws began in 1996 with the federal Mental Health Parity Act and continued through Congress’ enactment of the Affordable Care Act in 2016, which included protections for mental health coverage. Washington State also enacted similar legislation in 2005.

The court found that the plaintiffs could not sue for violations of the federal laws. Congress decided not to include a private right of action with that legislation. So the plaintiffs could not pursue violations of those laws by alleging they became part of their insurance policy contracts.

The court also found the parents could not sue for violation of the Washington State version of these laws. Washington State’s mental health parity laws require insurance to cover mental health services equally. That means insurance must provide equal copays, out of pocket limits, deductibles, and similar provisions to mental health diagnoses as they do to other conditions.

In particular, the state law says that insurers cannot impose special exclusions for medically necessary mental health treatment. The parents argued Premera violated that rule when it refused to cover their child’s wilderness therapy without deciding it wasn’t medically necessary.

The problem for the parents is that the state parity law excludes “residential treatment” from these protections. Since “wilderness” therapy is a form of residential treatment, the parity law didn’t apply.

Washington Federal Court Helps Clarify Meaning of IFCA’s “Payment of Benefits” Provision

In 2007, Washington voters approved the Insurance Fair Conduct Act (“IFCA”). IFCA gives people recourse if their insurance company unreasonably refuses to pay their insurance claim. Recourse under IFCA includes important relief that consumers couldn’t previously get, including punitive damages up to three times the amount of their loss and attorneys’ fees. This was considered a big deal.

Insurers, naturally, have urged courts to read IFCA narrowly. Like any new statute, judges applying it in the first instance have to consider how the language approved by the voters applies to the facts of particular cases. So the first few batches of rulings on a new law like IFCA often have a big impact on how that law applies in the real world.

One way insurers have tried to limit IFCA’s reach is by arguing it doesn’t apply to a dispute about how much the insurance company pays on an insurance claim. The language approved by the voters states that IFCA applies to an insurance policyholder who is:

“unreasonably denied a claim for coverage or payment of benefits by an insurer[.]”

So if the company denies the claim and refuses to pay anything, IFCA obviously applies. What about where the insurer accepts the claim and then pays less than the value of the loss?

This happens frequently. For example, a homeowner has a house fire. They get a contractor’s bid to repair the home. It will cost $100,000. They make a claim to their homeowners’ insurance company. The insurance company tells them the loss is covered, but the company will only pay $50,000. Does IFCA apply?

“No”, according many insurers who have taken this issue to court. These companies’ creative lawyers have reasoned that paying less than the value of the claim isn’t the same as “denying a claim” or refusing “payment of benefits.” “After all,” the company says, “we didn’t deny coverage, and we did pay some benefits.”

A recent decision from the Washington federal court clarifies that this isn’t what the voters intended when they passed IFCA.

In the recent decision Kyu-Tae Jin v. GEICO Advantage Ins. Co., No. 2:22-cv-1714, (W.D. Wash. Nov. 2, 2023), a consumer sued their insurance company after the insurer failed to pay all of the Uninsured Motorist benefits they alleged were owed under their insurance policy.

The policyholder asked the insurer to pay the entire amount of his policy limits, which were $100,000. The insurance company offered to pay $2,000. The policyholder, as you might expect, sued for violation of IFCA, arguing the decision was unreasonable.

The insurance company asked the federal court to throw out the case before trial. The company’s argument boiled down to: “even if our decision wasn’t reasonable, we didn’t deny coverage, and we didn’t refuse to pay benefits–the policyholder just thinks we should have paid more.”

The federal court disagreed. It emphasized that paying any amount at all can’t immunize an insurer from an IFCA claim. The question for IFCA depends on whether the amount the company paid in benefits was “reasonable based on the information it had.”

So, the court reasoned, if the insurance company’s offer to pay $2,000 in response to a claim for $100,000 was unreasonable under the circumstances, the company would violate IFCA. Under the facts of the particular case, the court ruled a jury had to decide that question.

This interpretation would seem to make sense. It’s hard to imagine that the voters who approved IFCA in 2007 intended that an insurance company could get itself off the hook by paying $1 on a $1 million claim.

This decision helps provide some valuable clarity regarding IFCA’s scope.