Bicyclists Covered Under Insurance Policies That Cover “Pedestrians” Says Washington Supreme Court

Technical terms in the fine print of an insurance policy are often critical to understanding the insured’s rights. These terms often have definitions that differ from the normal dictionary definition. In one case, for instance, a court ruled that school busses are not automobiles under a particular insurance policy. The recent ruling in McLaughlin v. Travelers Commercial Insurance Company is such a case.

In McLaughlin, the Washington State Supreme Court ruled that a bicyclist was a “pedestrian” under McLaughlin’s insurance policy. McLaughlin was riding his bicycle in downtown Seattle when a motorist opened the door of a parked vehicle and hit McLaughlin. McLaughlin made a claim under his Travelers car insurance policy. The policy provided benefits if McLaughlin was struck by a vehicle “as a pedestrian.”

Travelers denied coverage. It argued that McLaughlin was not a “pedestrian” because he was riding his bike. The lower courts agreed with Travelers, relying on the dictionary definition of “pedestrian” as excluding bicyclists.

The Washington State Supreme Court held that McLaughlin had coverage. The court relied on an insurance statute in which the Washington legislature defined a “pedestrian” as any person “not occupying a motor vehicle…” Since McLaughlin was riding a bike and not a motor vehicle when he was injured, he was a “pedestrian”.

The court emphasized that the relevant statutes are read into insurance contracts automatically. Because the legislature has the power to regulate insurance, a valid statute becomes part of the insurance policy. The statutory definition of “pedestrian” therefore became a part of McLaughlin’s insurance policy just as if Travelers had copied the statute into the policy documents.

This conclusion was reinforced by traditional insurance law principles that insurance policy language should be read consistent with the expectations of the average insurance purchaser. The court had no trouble concluding that the average person buying this MedPay coverage would expect to be covered when injured by a car.

Another twist is that the Court applied Washington law even though McLaughlin bought the policy in California. Because he had moved to Washington, the Court determined that he was entitled to all the protections of Washington law. Washington courts have a long history of applying Washington law to any insurance policy protecting a Washington resident.

In sum, the McLaughlin case is a strong reminder that Washington State’s insurance laws and regulations will be enforced regardless of the insurance policy fine print.

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.

ERISA Litigation Spawns Ninth Circuit Decision in Case of First Impression Regarding Excess Insurance Coverage

The Ninth Circuit Court of Appeals (the federal appellate court with jurisdiction over Washington and other western states) recently decided a novel question regarding so-called “excess” insurance coverage. Excess insurance exists where a person or entity has two layers of insurance: a “primary” insurer that provides coverage up to a specific dollar amount, and a second, “excess”, insurer that provides additional coverage above that amount. In its September 14, 2020 decision in AXIS Reinsurance Company v Northrop Grumman Corporation, the Ninth Circuit addressed the question whether an excess insurer can challenge the primary insurer’s decision to pay a claim and thereby trigger the excess insurer’s obligation to pay.

The dispute between AXIS and Northrop Grumman began with an ERISA lawsuit. The federal Department of Labor sued Northrop Grumman alleging Northrop acted improperly in handling its ERISA-governed employee savings and pension plans. Northrop paid a confidential amount to settle the DOL lawsuit. Northrop did not admit any wrongdoing, and the lawsuit never resulted in any findings about what specific allegations the settlement payment addressed.

A few months later, Northrop settled a second, unrelated, ERISA lawsuit brought on behalf of the Plan by a plaintiff named Grabek.

Northrop had insurance against these types of ERISA lawsuit through both primary and excess insurance carriers. Northrop’s primary insurer, National Union Fire Insurance Company of Pittsburgh, PA, and an initial excess insurer, Continental Casualty Company, provided coverage up to a total of $30 million. AXIS provided secondary excess coverage for losses over $30 million. In other words, AXIS only had to pay claims if Northrop’s loss exceeded the $30 million covered by the first two insurers.

The carriers covered Northrop’s settlement for the Department of Labor lawsuit. The primary insurer, National Union, and the first excess insurer, Continental, determined the DOL lawsuit was covered, and paid Northrop’s full loss out of their combined $30 million limit.

But Northrop ran into trouble getting coverage for the Grabek lawsuit. Having paid for the entire DOL settlement, National Union and Continental determined that all but about $7 million that Northrop had to pay in the Grabek lawsuit exceeded their combined $30 million coverage limits. Having exhausted its first layer of coverage, Northrop turned to its excess insurer AXIS to pay the remainder of the Grabek settlement.

AXIS refused to pay. It agreed there was coverage for the Grabek lawsuit, but it claimed that the first two insurers shouldn’t have paid the DOL settlement. AXIS claimed that the primary insurers’ policies excluded the DOL settlement. So, AXIS argued, since the first two carriers shouldn’t have paid for the DOL settlement, the first $30 million in coverage should never have been exhausted, and AXIS should never have been called upon to pay for the Grabek lawsuit. According to AXIS, this was an “improper erosion” of the initial $30 million in coverage. No federal appellate court had previously addressed AXIS’ “improper erosion” theory.

The Ninth Circuit disagreed. It determined that AXIS bore the risk that the primary insurers would exhaust their coverage limits by paying for losses that weren’t really covered. The court explained that excess insurers generally may not reduce their own obligation to pay a covered loss by claiming that the primary insurers shouldn’t have paid. The court emphasized that excess insurers generally have no right to second guess primary insurers’ coverage decisions. The excess insurer could avoid this outcome by including in their policy contracts a provision that improper payments by the primary insurers don’t count, but AXIS had no such language.

Court Ruling Emphasizes Importance of Reading the Insurance Policy as a Whole

Insurance policies contain technical language that often varies from its everyday meaning. When a case depends on the meaning of the insurance policy fine print, how you interpret these technical terms can decide the outcome of a case.

One way to define insurance policy terms is to see how those terms are used elsewhere in the insurance policy. The Ninth Circuit Court of Appeals’ August 17, 2020 ruling in Engineered Structures, Inc. v. Travelers Property Casualty Company of America is a good illustration.

Engineered Structures, Inc. (ESI) was a construction firm that purchased a “builder’s risk policy” from Travelers insurance. The policy covered risks of damage when ESI was building a Fred Meyer gas station in Portland, Oregon.

ESI made a claim under the policy when an underground fuel storage tank ESI’s subcontractor was installing was improperly placed in the ground. The tank was loaded with inadequate ballast. After a rainstorm, the tank floated in the excavation hole, causing damages.

Travelers denied coverage under a policy exclusion for “faulty, inadequate or defective workmanship or construction”. ESI sued Travelers claiming the denial violated the policy and was made in bad faith. The issue depended on what the word “construction” in the exclusion meant. ESI said “construction” meant the finished product it was building, so the exclusion only applied for defects in the finished product.

Certain rules come into play when an insurance term of art is ambiguous, but the court determined those rules didn’t apply because it could understand the term “construction” by reading other language in the policy.  The court examined other language in the insurance policy that treated “construction” as referring to the process of building the gas station. The policy defined certain “construction activities” in terms of the actions taken in the course of constructing the gas station. The court interpreted the word “construction” in the exclusion as referring to the process of constructing the gas station, as opposed to the final product that was built.

This emphasizes the principle that insurance policy language must be read in the context of the entire insurance policy. Where the policy uses technical language in one place, it can often be understood only by reviewing similar language elsewhere in the policy. A few other references to a disputed term elsewhere in the policy can decide insurance coverage for a huge loss.

 

Industry Group Reviewing Insurance Rate Practices for Racial Bias

An industry group known as the Insurance Information Institute is analyzing the role racial bias plays in calculating insurance premiums. Explicit racial bias, i.e.., setting premiums directly based on race (known as “redlining”) has been illegal since the mid 20th century.  But rates continue to bet set based on criteria that indirectly reflect racial bias. One study found persistent rate increases for homeowners’ insurance in minority neighborhoods that exceeded legitimate risk differentials.

Rate criteria reflecting implicit racial bias include credit scores and occupations. The insurance industry has long defended these criteria as reliable predictors of risk. But the new working group pushes back on those assumptions:

Research shows that average credit scores for white and Asian customers are better than those for Black and Hispanic customers…Insurance credit scores reflect and perpetuate historic racism and unfairly discriminate against Black and Hispanic communities.

Other facially neutral rate setting policies can have a discriminatory impact. Motor vehicle records (e.g., traffic tickets) can reflect systemic racism on the basis that affluent white drivers are better able to afford hiring lawyers to dismiss or downgrade citations.

The industry group is also investigating whether the use of computer algorithms to analyze so-called “big data” about drivers can reflect implicit racial bias. This mirrors concerns in other fields (e.g., facial recognition software) that computer programs inadvertently perpetuate existing biases.

This new report shows the insurance industry as a whole is following up on efforts from state regulators to limit discriminatory premium rates. New York’s Department of Financial Services recently prohibited using education and occupation to price car insurance. The rule only applies in New York. Hopefully this pushback will become more widespread as other groups take note.