Welch v. Pemco Mut. Ins. Co.

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BRENDA WELCH, Appellant, v. PEMCO MUTUAL INSURANCE COMPANY, a domestic insurance company doing business in Washington, Respondent.

No. 85466-6-I

Court of Appeals of Washington, Division 1

September 3, 2024

UNPUBLISHED OPINION

Bowman, J.

PEMCO Mutual Insurance Company denied Brenda Welch insurance coverage for loss incurred after her ex-husband assaulted her and burned down their former marital home. PEMCO determined that the loss was intentional and rejected Welch's argument that the loss arose from an act of domestic abuse an exception to the intentional loss exclusion. Welch sued PEMCO for breach of contract, bad faith, and violations of the Consumer Protection Act (CPA), chapter 19.86 RCW, and the Insurance Fair Conduct Act (IFCA), RCW 48.30.010 to .015. The trial court dismissed Welch's claims at summary judgment. Because Welch meets the domestic abuse exception to the intentional loss exclusion, we reverse summary judgment for PEMCO, direct the court to enter partial summary judgment for Welch for breach of contract, and remand for further proceedings.

FACTS

Welch and David Morgan married in 2006. Welch owned a home in Lynnwood, and the couple lived there throughout their marriage. The home was subject to a mortgage^[1] held by CitiMortgage Inc. ISAOA ATIMA.^[2] During their marriage, Welch and Morgan had one child together, K.W.

In 2013, the parties separated, and Welch petitioned for divorce. Welch explained that she sought a divorce because Morgan was "controlling" and "verbally very abusive." On May 21, 2014, the court finalized their divorce, awarding Morgan the family home and requiring that he "either sell the property or refinance the debts into his sole name within three (3) years of February 25 2014."^[3] After the divorce, Welch met a new partner and moved in with him. Still, Welch and Morgan shared custody of K.W., and their parenting plan called for joint decision-making.

On November 16, 2014, Welch went to the Lynnwood home at a prearranged time to pick up K.W. from Morgan's care. But K.W. was not there. Instead, Morgan attacked Welch, beat her unconscious, doused her in gasoline, and set her and the house on fire. Welch survived but suffered significant mental and physical injuries. The fire destroyed the house.

At the time of the fire, Morgan had not yet sold or refinanced the Lynnwood home. So, the deed still named Welch as an owner and obligor on the mortgage. Welch and Morgan held an all-risk insurance policy on the property through PEMCO. The policy named both Welch and Morgan as insureds. It also listed CitiMortgage as a mortgagee.

The PEMCO policy excluded coverage for "any loss arising out of any act committed by or at the direction of an insured with the intent to cause a loss." But it has an exception to that intentional loss exclusion for acts of "domestic abuse,"^[4] which provides that the exclusion "will not apply to deny an insured's claim for an otherwise covered property loss if such loss is caused by an act of domestic abuse by another insured under the policy."^[5]

The policy defines "domestic abuse" as "[p]hysical harm, bodily injury, assault or the infliction of fear of imminent physical harm, bodily injury or assault between family or household members," and "[i]ntentionally knowingly or recklessly causing damage to property so as to intimidate or attempt to control the behavior of another family or household member." But it does not define "family" or "household member." The policy limits claims under the domestic abuse exception to "that insured's insurable interest in the property less any payments we first made to a mortgagee or other party with a legal secured interest in the property." And it says that "[i]n no event will [PEMCO] pay more than the limit of liability."

In 2016, a jury found Morgan guilty of attempted first degree murder domestic violence and first degree arson domestic violence. The trial court sentenced him to 260 months in prison. Welch then sued Morgan for her injuries from the assault. Morgan did not respond, and the trial court entered a default order and judgment against Morgan for $5.06 million.^[6] Welch also claimed coverage under the PEMCO policy. And CitiMortgage claimed coverage for the outstanding balance on the mortgage. PEMCO estimated the repair or replacement cost of the damage to the home was $463,732.82.

In June 2016, PEMCO found coverage for CitiMortgage. In a letter explaining its decision, PEMCO cited the Lenders Loss Payable Endorsement that covers CitiMortgage's interest under the policy "despite any act of the named insured which might invalidate the insurance" as to the named insureds. But PEMCO denied Welch's claim. It explained that the intentional loss provision "precludes coverage not only to the arsonist but to any insured, including Ms Welch."

In May 2019, Welch sued PEMCO for breach of contract, bad faith, and violations of the IFCA and CPA. The case was assigned to Snohomish County Superior Court Judge Anita Farris. In November 2019, PEMCO moved for partial summary judgment dismissal of Welch's breach of contract and IFCA violation claims. It argued that the policy's intentional loss exclusion precluded coverage.

And it argued that the domestic abuse exception to the exclusion does not apply because Welch and Morgan were no longer family or household members since their divorce. It also argued that even if the domestic abuse exception covered Welch's claim, PEMCO paid her "insurable interest in the property" when it satisfied the CitiMortgage debt. PEMCO reasoned that because the divorce order awarded Morgan the property, Welch's insurable interest was limited to only the outstanding mortgage debt at the time of the fire.

Welch responded that the domestic abuse exception covered her claim. She urged the court to define "family" to include former spouses with children in common consistent with domestic violence statutes. She also argued that her insurable interest was for the full cost of repairs, and that PEMCO should be estopped from arguing otherwise because it did not cite a limited insurable interest when it denied coverage. In February 2020, Judge Farris heard argument on PEMCO's partial summary judgment motion and took the matter under advisement.

Welch also moved for partial summary judgment on her breach of contract claim in July 2020. She argued she was entitled to coverage under the domestic abuse exception to the intentional loss exclusion. She also raised her estoppel argument about the extent of her insurable interest.

On August 10, 2020, having not received a ruling on its motion, PEMCO filed a notice of disqualification, asserting it could not receive a fair trial before Judge Farris. Then, two days later on August 12, the court issued an order ruling on PEMCO's motion for summary judgment. Judge Farris dated the order on April 24, 2020. In a letter attached to the order, the court explained to the parties that the filing delay resulted from an error in "remote electronic order processing" that occurred when the court first moved to remote processing during the COVID-19 emergency.

Substantively, the court granted in part and denied in part PEMCO's motion. The court denied PEMCO's motion on the applicability of the domestic abuse exception. It found the term "family" undefined and ambiguous and determined that the term should be construed against PEMCO. But it granted PEMCO's motion on Welch's insurable interest. And it rejected Welch's estoppel claim, concluding that "her insurable interest is limited to whatever she was owed pursuant to the Dissolution Decree at the time of the covered incident."

On August 18, 2020, Welch asked PEMCO if, despite its pending notice of disqualification, it would agree to have Judge Farris hear Welch's motion for partial summary judgment. PEMCO agreed that Welch's "motion can be set to be heard by Judge Farris, since she is already familiar with some of the issues." And PEMCO said that "[t]he motion to change judge has been stricken."^[7]

PEMCO opposed Welch's motion for partial summary judgment. It argued that the court already determined there was a genuine issue of material fact about whether Welch and Morgan were family members, and that PEMCO was not estopped from arguing limited coverage based on Welch's insurable interest. PEMCO did not address disqualification.

On October 16, 2020, the court heard Welch's motion for partial summary judgment. PEMCO again did not raise disqualification. At the end of the hearing, the court took the matter under advisement. Then, on December 1, 2020, the court issued an order on Welch's motion. The court incorporated by reference its finding that the term "family" is ambiguous from its ruling on PEMCO's motion for partial summary judgment. The court then construed the term against PEMCO and determined that "as a matter of law [Welch] falls within the domestic abuse exception in the policy because she falls within the undefined ambiguous term family." And it concluded that PEMCO "breached the policy by denying coverage on the basis Ms. Welch did not fall within that definition [of domestic abuse assault]."

The court also reconsidered its ruling on Welch's insurable interest. It determined that there was an issue of fact as to whether PEMCO is equitably estopped from asserting that Welch "has no or a limited insurable interest." And it again determined that "the extent of Ms. Welch's insurable interest is the extent to which the home was to act as security" for what Morgan owed her under the dissolution decree. But it did not determine what that amount was.

Three months after receiving the adverse ruling, PEMCO moved to enforce its August 10, 2020 disqualification notice and asked Judge Farris to...