In HB Development, LLC, et al. v. Western Pacific Mutual Insurance, et al., Case No. 2:13-cv-5050-RMP (E.D.Wa. Feb. 6, 2015), the United States District Court for the Eastern District of Washington granted summary judgment in favor of the insurer, holding that a claims-made policy did not provide coverage because the insured did not provide timely notification of claims or potential claims to the insurer.
Western Pacific Mutual Insurance (“Western”) had issued claims-made commercial general liability coverage to a general contractor, HB Development, LLC, and its members, Fraser Hawley and Sharon Brown (collectively, “HB”) for a policy period from 2004 to 2010. Between 2007 and 2010, HB received complaints from two homeowners regarding defects in a home HB had built. HB never notified Western of these complaints, however. In 2012, after the Western policy period expired, the homeowners served written notice of their construction defect, property damage, and loss of use claims to HB, and provided Western with copies of the claims. Through its claim administrator, Western denied coverage for the claims. Subsequently, the homeowners filed a lawsuit against HB, and the parties reached a $600,000 settlement (later reduced to $420,000), in which HB assigned its rights against Western to the homeowners.
HB and the homeowners brought suit against Western and its underwriting administrator and agent, Lockton Risk Services (“Lockton”), asserting causes of action for alleged negligence, bad faith, and violation of the Washington State Consumer Protection Act. The plaintiffs also asserted declaratory judgment and breach of contract claims against Western.
After finding that the plaintiffs had standing to sue, the court held that there was no reasonable interpretation of the policy that would provide coverage for the claims, and that Western thus had no duty to defend or indemnify HB. The court observed that the policy explicitly limits coverage to instances in which a claim is first made against an insured during the policy period or any Extended Reporting Period, and that the policy requires the insured to notify Western promptly of any claims against the insured. The court held that: “The [policy] language is clear that coverage under the policy is contingent on an insured notifying Western of any claims made against it, and there is no evidence, nor do plaintiffs argue, that HB or its members notified Western of [the homeowners’] complaints prior to 2012.”
In short, the case holds that the insurer had no duty to defend or indemnify because there was no evidence that the insured notified its insurer of any complaints against the insured until after the policy’s Extended Reporting Period expired.
With respect to the other causes of action, the court concluded that Western and Lockton had not acted negligently in selling a claims-made policy to HB, and that Washington law does not require insurers to sell only occurrence-based insurance policies. The court also dismissed the bad faith claim asserted against Western, holding that its declination of coverage was reasonable. Also, because Lockton was an insurance agent, and could owe no duty to defend or indemnify HB, the court held there was no reasonable basis for a bad faith finding against Lockton. Finally, the court held that the insurer and the agent did not violate the Washington Consumer Protection Act by issuing a “replacement” policy on a claims-made basis, although the prior policy was occurrence based, because there was no evidence that the term “replacement” could deceive a substantial portion of the public, particularly in light of the notices that had advised the insured of the changes in coverage.
For the above reasons, the court granted the defendants’ motions for summary judgment and dismissed the case with prejudice.