Washington Court Holds Insurer Had Duty to Defend Property Owner as Additional Insured

A judge in the Western District of Washington recently issued an opinion in Seaway Properties LLC v Fireman’s Fund Ins. Co., 2014 WL 1612696, — F.Supp.2d — (W.D. Wash. Apr. 22, 2014), which addressed a property owner’s claim for defense and indemnity as an additional insured under its tenant’s insurance policy.  The case involved Seaway, which owned a building in West Seattle.  It leased space in the building to a restaurant operator called Ciao Bella.  As part of the lease agreement, Ciao Bella was required to name Seaway as an additional insured on its liability insurance policy.  Ciao Bella, in turn, purchased an insurance policy that contained a “Blanket Additional Insured” endorsement that covered Seaway as an additional insured for liability arising out of the use of the property.  A patron of the restaurant was injured when she fell as she attempted to step down from a concrete platform between the building parking lot and the entrance to the restaurant.  The platform where the patron fell was in a common area of Seaway’s property.  The lease agreement gave Ciao Bella the right to use the common areas, but it did not have exclusive control over that portion of the property.

The patron eventually sued both Seaway and Ciao Bella for her injuries.  After the lawsuit was filed, Seaway demanded that both Ciao Bella and its insurance company defend and indemnify it.  Approximately two years after learning of the accident, the insurance company denied Seaway’s claim for a defense and indemnity.  The basis for the insurance company’s denial of the claim was that Seaway was not an insured under the policy.  Seaway objected to the denial and requested that the insurance company reconsider its denial.  The insurance company reiterated its denial.  Ciao Bella and Seaway ultimately settled the claim with the injured patron, with Seaway paying a portion of the settlement and incurring defense costs.   Shortly after the settlement with the patron, the trial court held a bench trial on Seaway’s claim against Ciao Bella for indemnity.  The court determined that under the terms of the lease agreement Ciao Bella was not obligated to indemnify Seaway.  The court reasoned that the loss did not fall within the scope of the indemnity provision because the liability did not occur “by reason of the condition or use of the Premises” within the meaning of the clause.

Neither the settlement agreement nor the bench trial addressed the issue of whether Seaway was an insured under Ciao Bella’s insurance policy.  Seaway ultimately used the insurance company for breach of contract for failing to defend and indemnify it in the underlying action brought against it by the injured patron.  Seaway also alleged that the insurance company acted in bad faith and violated the Washington Consumer Protection Act (CPA) and Insurance Fair Conduct Act (IFCA).  The insurance company filed a motion for summary judgment on the ground that Seaway was not an insured and, alternatively, that the policy did not cover the claimed loss.  Seaway filed a cross-motion seeking a declaration that the insurance company breached the insurance policy, acted in bad faith, and violated the CPA and IFCA—but did not move on the issue of damages.

Initially, the court determined that Seaway was an insured pursuant to the “Blanket Additional Insured” endorsement.  The court next found that, under the terms of the policy, the insurance company had a duty to defend and indemnify Seaway with respect to the patron’s personal injury lawsuit.  In making its conclusion the court first found that the term “premises” as used in the policy included the common area where the patron fell.  Second, the court addressed the more difficult issue of whether the patron’s injuries arose from the use of the common area that was leased to Ciao Bella.  After considering case law from throughout the country, the court determined that the policy provided coverage for the loss.  Accordingly, the court found that the insurance company breached the insurance policy when it refused to defend and indemnify Seaway.

In addition, the court found that the insurance company was liable on Seaway’s extra-contractual claims.  Citing to the Ninth Circuit’s opinion in American Economy Ins. Co. v. Zurich Am. Ins. Co., 534 Fed. Appx. 645 (9th Cir. 2013), the court determined that it must hold as a matter of law that the insurance company acted in bad faith because it did not “give the insured ‘the benefit of any doubt as to the duty to defend.’”  The court also determined the insurance company was liable under the CPA because it violated a number of provisions in the Washington Administrative Code (WAC), including failing to act promptly in response to pertinent communications (WAC 284-30-330(2)), unreasonably extending the investigation (WAC 284-30-370), and failing to provide a reasonable explanation of the denial (WAC 284-30-330(13)).  Finally, the court found that the insurance company violated the IFCA based on its finding that it unreasonably denied Seaway’s claim for defense and indemnity.  In so holding, the court reiterated the holdings in the federal court that the IFCA does not provide a cause of action for violation of the WACs, but requires an initial showing that the claim denial was unreasonable.

MLR represents clients in cases involving questions about an insurer’s duty to defend and indemnify an insured.  It also frequently represents clients in claims for insurance bad faith and violation of the Washington Consumer Protection Act (CPA) and Insurance Fair Conduct Act (IFCA).  Please contact us with any questions about this case or any other matter you see addressed on the MLR Insurance Coverage Blog.

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