Federal District Court in Washington Addresses the Duty to Defend and Indemnify

In Bayley Const v Great American E And S Ins Co., U.S. Dist. Court, Western Dist. of Wash, Case No. C13-0114 JLR (Nov. 1, 2013), the U.S. District Court for the Western District of Washington recently considered dueling motions for summary judgment in a case asserting claims for breach of an insurance contract for failure to defend, bad faith investigation and denial of coverage, estoppel from denying coverage, and violation of the Insurance Fair Conduct Act (IFCA).  The insured, Bayley Construction, was awarded a renovation contract at a community college in California.  As part of the renovation project, Bayley retained a subcontractor to perform the HVAC work.  Following an investigation, it was determined that the subcontractor was violating the labor laws concerning payment of the appropriate prevailing wage to its employees.  As a result, the community college authorities sought authority to withhold payment under the contract in the amount of the underpaid wages.  Bayley initiated action against the subcontractor for the withheld contractual proceeds.  The subcontractor dissolved is business and its principals declared bankruptcy upon receiving notice of the suit.

Bayley then tendered claim to its professional liability insurance company, Great American, for the amount of damages being withheld by the community college authorities.  Great American requested additional information from Bayley, such as the contract and subcontract at issue, both of which were provided.  Following its investigation, Great American denied Bayley’s claim for a defense and indemnification for the loss.  Bayley filed suit alleging the above-referenced claims against Great American.

The parties filed opposing motions for summary judgment on Bayley’s claims.  Great American asserted in its motion that there was no coverage for Bayley’s losses under the “professional services” section of the insurance contract based on the argument that payment of a prevailing wage does not require any professional skill or judgment.  The Court rejected Great American’s argument, finding that the insurance policy was not as limiting as suggested by the insurer based upon application of Washington case law.  Instead, the Court found in favor of Bayley that the notice of violation of the labor laws contained sufficient allegations to potentially trigger liability under the insurance contract.  The Court denied both parties motions on Bayley’s extra-contractual claims, however, because there were factual issues regarding the reasonableness of Great American’s alleged breach of the duty to defend, indemnify and investigate.  Similarly, the Court refused to grant summary judgment on the IFCA claim because there were fact issues on the reasonableness of the denial.

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