Nat'l Fire & Marine Ins. Co. v. Certain Underwriters at Lloyd's London

NATIONAL FIRE & MARINE INSURANCE COMPANY, a Nebraska corporation, Respondent, v. CERTAIN UNDERWRITERS AT LLOYD'S LONDON subscribing to policy number A99BF021, Defendant LIBERTY MUTUAL INSURANCE COMPANY, a Massachusetts corporation, Appellant MUTUAL OF ENUMCLAW INSURANCE COMPANY, a Washington corporation THE OHIO CASUALTY INSURANCE CO., an Ohio corporation; WEST AMERICAN INSURANCE COMPANY, an Ohio corporation; MARYLAND CASUALTY COMPANY, a Maryland corporation; ASSURANCE COMPANY OF AMERICA, a New York corporation; AMERICAN HOME ASSURANCE COMPANY, a Texas corporation; UNITED STATES FIRE INSURANCE COMPANY, a New Jersey corporation; and OLD REPUBLIC INSURANCE COMPANY, a Pennsylvania corporation, Defendants.

NO. 66900-1-I

NO. 66901-0-I

COURT OF APPEALS OF THE STATE OF WASHINGTON DIVISION ONE

FILED: July 16, 2012

UNPUBLISHED OPINION

Lau, J. — An insurer's duty to defend arises "if the insurance policy conceivably covers the allegations in the complaint, whereas the duty to indemnify exists only if the policy actually covers the insured's liability."¹ Because the construction defect complaint filed by Cheswick Lane Condominium Owners Association against project developer Wellington Cheswick LLC and others alleges various breach of warranty and liability claims that are conceivably covered by the umbrella policy issued by Liberty Mutual Insurance Company, we conclude Liberty owed a duty to defend Wellington in the construction defect lawsuit. We affirm the trial court's order granting summary judgment in National Fire & Marine Insurance Company's favor.

FACTS

The material facts are not disputed. This duty to defend dispute arises out of a construction defect suit against Wellington Cheswick LLC and its related entities and individuals. Wellington developed the 71-unit Cheswick Lane Condominiums in three phases from March 20, 2000 to June 30, 2002. After completion, Wellington turned over control of the Condominiums to Cheswick Lane Condominium Owners Association in July 2002. The Association sued Wellington in December 2004, alleging mainly that construction defects breached common law, statutory, and contractual warranties. The Association also alleged Washington Uniform Fraudulent Transfer Act, chapter 19.40 RCW, violations.

After receiving the Association's complaint, Wellington tendered its defense andindemnity to its primary insurers, National Fire & Marine Insurance Company and Certain Underwriters at Lloyd's, London. Wellington's primary policies in effect during the relevant times were:

1. Policy A99BF021 ("Lloyd's policy I"), issued by Lloyd's, effective from February 1, 2000, to February 1, 2001 (year one).

2. Policy A01BF118 ("Lloyd's policy II"), issued by Lloyd's, effective from February 1, 2001, to March 10, 2002 (year two).

3. Policy 72LP149441 ("National Fire policy"), issued by National Fire, effective from March 10, 2002, to March 10, 2003 (year three).

Wellington also purchased an umbrella policy² from Liberty Mutual Insurance Company. Liberty's umbrella policy was effective in year two (at the same time as Lloyd's policy II) from February 1, 2001, to March 10, 2002.

Wellington tendered its defense to National Fire on November 4, 2004. Several months later, National Fire retained defense counsel for Wellington and issued a letter reserving its rights to deny indemnity. National Fire provided Wellington with a complete defense to all allegations in the underlying suit, incurring $1,457,188.17 in defense costs. Wellington tendered its defense of the underlying suit to Lloyd's on March 2, 2005. Lloyd's responded in December 2005 and neither accepted nor denied the tender. Wellington initially tendered its defense to Liberty on August 11, 2005, requesting that Liberty "determine whether or not it has an obligation to drop down and provide a defense and indemnity to [Wellington] in light of the failure of [Lloyd's] to respond to the tender of defense and immunity." Liberty responded the following monthand neither accepted nor rejected the tender. Instead, Liberty reserved its rights based solely on policy exclusions excusing its duty to indemnify.

In February 2006, after failing to reach settlement in the underlying suit, the Association amended its complaint to add the builder (Wellington Builders of Washington, Ltd.), five individuals alleged to be members/shareholders of Wellington, and an ownership entity (Wellington Organization, Ltd.) as defendants.³ This resulted in a second wave of tender letters, including Wellington's re-tender to Liberty in June 2006—to which Liberty did not respond. Lloyd's responded to the second tender in August 2006 by agreeing to participate in the defense of the five individual principals and Wellington Organization, Ltd., subject to a reservation of rights to deny coverage. Lloyd's expressly declined the builder's tender of defense. The builder was one of Liberty's named insureds. Lloyd's never updated its December 2005 equivocal tender response to the developer and its principal (Wellington Cheswick LLC and First Wellington Crown Corporation), each of whom Liberty also insured.

Wellington and the Association settled the underlying suit for $2,497,000 in August 2006. Lloyd's and National Fire each contributed $600,000 and Liberty contributed $300,000 toward the settlement amount. To recoup its defense costs incurred in Wellington's defense, National Fire sued Wellington's other insurers—including Lloyd's and Liberty—alleging equitable contribution by eachdefendant insurer based on its respective share of these defense costs.

In a series of summary judgments,⁴ Liberty moved unsuccessfully to dismiss National Fire's equitable contribution claim. The court also denied Liberty's summary judgment motion on the duty to defend and allocation issues and granted National Fire's cross motions for summary judgment, finding Liberty owed Wellington a duty to defend and liability for contribution to National Fire's defense costs, including accrued prejudgment interest. Liberty appeals the court's adverse summary judgment rulings that (1) concluded that it owed a duty to defend Wellington and (2) imposed contribution liability for defense costs incurred by National Fire.⁵

ANALYSIS

Standard of Review

We review a summary judgment order de novo, performing the same inquiry as the trial court and considering facts and reasonable inferences in the light most favorable to the nonmoving party. Jones v. Allstate Ins. Co., 146 Wn.2d 291, 300, 45 P.3d 1068 (2002). Summary judgment is proper if no genuine issue of material fact remains and the moving party is entitled to judgment as a matter of law. CR 56(c).

Similarly, the construction of an insurance contract is a question of law. State Farm Gen. Ins. Co. v. Emerson, 102 Wn.2d 477, 480, 687 P.2d 1139 (1984); Bordeaux, Inc. v. Am. Safety Ins. Co., 145 Wn. App. 687, 694, 186 P.3d 1188 (2008). Courtsconstrue insurance policies as contracts. Austl. Unlimited, Inc. v. Hartford Cas. Ins. Co., 147 Wn. App. 758, 765, 198 P.3d 514 (2008). We consider the policy as a whole and give it a "'fair, reasonable, and sensible construction as would be given to the contract by the average person purchasing insurance.'" Weyerhaeuser Co. v. Commercial Union Ins. Co., 142 Wn.2d 654, 665, 15 P.3d 115 (2000) (quoting Am. Nat'l Fire Ins. Co. v. B&L Trucking & Constr. Co., 134 Wn.2d 413, 427-28, 951 P.2d 250 (1998)). "[I]f the policy language is clear and unambiguous, the court must enforce it as written and may not modify it or create ambiguity where none exists." Austl. Unlimited, 147 Wn. App. at 765-66. A policy is ambiguous only if its provisions are susceptible to two different interpretations, both of which are reasonable. Allstate Ins. Co. v. Peasley, 131 Wn.2d 420, 424, 932 P.2d 1244 (1997). We resolve ambiguity in favor of the insured. Moeller v. Farmer's Ins. Co. of Wash., 173 Wn.2d 264, 272, 267 P.3d 998 (2011). When interpreting insurance policies, we are bound by the definitions provided in the policy. Austl. Unlimited, 147 Wn. App. at 766.

Umbrella Policies in Washington

Insureds often purchase excess coverage in the form of umbrella policies. An umbrella policy provides coverage for amounts exceeding the limits of the underlying or primary policy and protects against gaps in that underlying policy. Prudential Prop. & Cas. Ins. Co. v. Lawrence, 45 Wn. App. 111, 119, 724 P.2d 418 (1986). Explained another way, umbrella insurers typically agree to provide not only excess coverage on claims within the ambit of the insured's primary policy, but also primary coverage for those claims not included in the insured's basic primary coverage. We explained thisgap-filling effect⁶ in Lawrence:

The very nomenclature chosen to designate umbrella or catastrophe policies suggests an intent to protect against gaps in the underlying policy. As stated by one authority:

"It should be noted that [catastrophe and umbrella] policies often provide a primary coverage in areas which might not be included in the basic coverage, since it is the intent of the company to afford a comprehensive protection in order that such peace of mind may truly be enjoyed. In those areas, such coverage will, in fact, be primary."

Lawrence, 45 Wn. App. at 119 (emphasis added) (alteration in original) (quoting 8A John Alan Appleman & Jean Appleman, Insurance Law and Practice, § 4909.85, at 452-53 (1981)). Our Supreme Court cited Lawrence when explaining the gap-filling effect:

In the ordinary case, excess or umbrella coverages are designed to pick up where the primary insurance coverage leaves off, providing an excess layer of coverage above the limit of the primary policy. In fact, such excess policies are designed to protect against gaps in coverage.

Weyerhaeuser, 142 Wn.2d at 707 (citation omitted). Similarly, in MacKenzie v. Empire Insurance Cos., 113 Wn.2d 754, 782 P.2d 1063 (1989), the court recognized that the purpose of an umbrella policy is not necessarily limited to providing an extra layer of...