Introduction
The duty of good faith and fair dealing does not apply to the insurer only. But because the insurance industry is so heavily regulated, one might mistakenly believe that to be the case. Instead, the duty of good faith extends to both parties in an insurance, or any, contract. Thus, a policyholder is no less obligated to act in good faith than its insurer.
Facts and Procedural History
In a “reverse bad faith” case, Granite State Ins. Co. v. Integrity Structures, LLC, Slip Copy, 2015 WL 136006 (W.D. Wash. January 09, 2015), Judge Benjamin Seattle of the United States District Court, Western District of Washington, ruled that an insured and its assignee breached the notice and cooperation clauses in a Commercial General Liability policy, as well as breached their statutory obligations, in assisting a insurer with investigation of their claims. In Integrity, the developer (“Dodson-Duus”) contracted with Integrity to be the general contractor for a condominium construction project. Granite State, among other carriers, insured Integrity. After discovering defective construction, the Association sued the developer, Dodson-Duus. Later, the Association also sued Integrity, alleging it was liable for defectively constructing the condominiums.
About one year later, Integrity entered into a contingent settlement agreement with the Association, in which, if certain conditions were met, Integrity would consent to a stipulated judgment and assign its rights against its liability insurers to the Association in exchange for a covenant not to execute the judgment. The Association then settled with Dodson-Duus (which assigned its claims against Integrity to the Association), and the Association brought Dodson-Duus’ claims against Integrity.
In late November 2012 Integrity’s defense counsel (assigned by an insurer other than Granite State) tendered the suit to Granite State. Integrity’s counsel did not mention that Integrity had previously entered in to a covenant judgment and assigned to the Association its rights against its liability insurers. Granite State responded to the tender by asking for documents and information to aid it in its investigation into whether there was any coverage under the policy. Integrity’s counsel forwarded Granite State’s letter to the Association’s counsel, who did not respond to Granite State. Over the next several months Granite State inquired about Integrity’s status in responding to its requests for documents and information. On September 30, 2013, Integrity and the Association entered a $4.1 million stipulated consent judgment against Integrity. On November 20, 2013, Integrity disclosed to Granite State for the first time the facts and details of the September 2012 contingent settlement agreement between Integrity and the Association and the entry of the $4.1 million consent judgment.
Granite State filed a declaratory judgment action against Integrity and the Association, asking the Court to declare that it had no duty to defend or indemnify Integrity and that Integrity’s assignment of claims was unenforceable and void as to Granite State. Integrity and the Association (as the assignee of Integrity’s claims against Granite State) filed counterclaims for bad faith or extra-contractual claims. Granite State and the Association cross-moved for summary judgment.
Court’s Rulings
Granite State requested a finding that Integrity breached contractual, statutory, and common law duties to Granite State. Judge Settle found that Integrity and the Association “substantially and materially breached” the Granite State policy’s notice clauses. He stated that Integrity and the Association had been in litigation for over 15 months before Granite State was notified and that there was no evidence that Integrity and the Association notified Granite State of the potential claims “as soon as practicable.” He found that Integrity and the Association “substantially and materially” breached the policy’s cooperation clauses. For example, prior to the tender Integrity entered into the contingent settlement agreement with the Association, stipulated to a $4.1 million judgment, and assigned its claims to the Association. Judge Settle noted that Granite State began investigating the claims about a week after it received the tender but never received the basic information that it requested that was “material to the circumstances giving rise to its liability.”[1]
Judge Settle also ruled that Integrity and the Association breached their duty under Washington Administrative Code 284-30-370, which provides, in part, that: “[a]ll persons involved in the investigation of a claim must provide reasonable assistance to the insurer. . . .” Judge Settle stated that there was no evidence that Integrity provided any assistance, much less “reasonable assistance” to Granite State in its investigation of the claims.
Despite ruling that Integrity and the Association breached their duties to cooperate, Judge Settle did not grant Granite State’s motion for a finding that the coverage was voided under the policy. Washington is an actual prejudice state, and the judge found that: (1) whether the settlement was reasonable was still left to be determined[2]; and (2) Granite State failed to show that its rights under the policy were materially prejudiced. He did, however, hold that grant Granite State did not act in bad faith.
Judge Settle next addressed the Association’s motion for summary judgment that Granite State breached the duty to defend. Therefore, to the extent that the Association argued that the failure to defend was in bad faith, the Court denied the Association’s motion. The judge ruled that Granite State was not relieved of its duty to defend because questions of fact existed as to whether it was actually and materially prejudiced by Integrity’s and the Association’s failure to cooperate. But the Court also ruled the Association failed to show the existence of factual issues that Granite State acted in bad faith. Therefore the Court denied the Association’s motion asking the Court to find as a matter of law that Granite acted in bad faith by denying the duty to defend.
Finally, for the reasons discussed above, Judge Settle would not dismiss the Association’s breach of contract claim. But the Court dismissed the Association’s bad faith claim. Judge Settle rejected Granite State’s argument that Integrity’s and the Association’s counterclaims should be dismissed because of their unclean hands. He ruled that issues of fact existed as to whether Integrity’s and the Association’s failure to cooperate “directly related” to Granite State’s failure to decide to whether or not to defend Integrity in the underlying lawsuit.
Conclusion
Although Judge Settle stopped short of completely invalidating coverage based on breach of the notice and cooperation clauses (calling it a “close question”), his finding that Integrity and the Association breached both contractual and, more importantly, statutory duties in cooperating with Granite State is significant. Given Granite State’s attempts to obtain more information about the suit following receipt of Integrity’s tender, it is debatable whether a question of material fact existed to avoid the duty to defend. However, it appears that in the abundance of caution Judge Settle denied Granite State’s motion in this regard. Indeed, he commented as follows:
The Court, however, recognizes that this matter is most likely far from over. In light of this fact, the Court denies Granite State’s motion without prejudice. In the event Granite State discovers facts that show that its rights under the contract have been materially affected by Integrity’s failure to cooperate, Granite State may file another dispositive motion.
Holding insureds (and their assignees) to both their contractual and statutory duties is critical to the two-way relationship in an insurance contract. Judge Settle’s decision in Integrity reminds insureds that their obligations are both contractual and statutory. Failure to adhere to their duties could invalidate bad faith claims, which significantly decreases an insurer’s exposure in coverage and extra-contractual damages suits.
*Vasu would like to thank his colleague, Mark Mills, for suggesting the topic of this edition of the Insurance Commando Blog.
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[1] Granite State’s “attempts at garnering this material information were met with virtual silence.”
[2] Having said that, Judge Settle commented: “While the question of whether the judgment is excessive is debatable, Granite State has put forth a strong case that the judgment is a product of collusion.”
