Insurance Co. of State of Pennsylvania v. Highlands Ins. Co.

• Citation: 59 Wn.App. 782,801 P.2d 284
• Decision Date: 10 December 1990
• Docket Number: No. 12888-8-II,12888-8-II
• Parties: The INSURANCE COMPANY OF the STATE OF PENNSYLVANIA, et al., Plaintiffs, v. HIGHLANDS INSURANCE COMPANY, Respondent, Pierce County, Appellant.
• Court: Court of Appeals of Washington

Page 782

59 Wn.App. 782

801 P.2d 284

The INSURANCE COMPANY OF the STATE OF PENNSYLVANIA, et al., Plaintiffs, v. HIGHLANDS INSURANCE COMPANY,

Respondent,

Pierce County, Appellant.

No. 12888-8-II.

Court of Appeals of Washington,

Division 2.

Dec. 10, 1990.

Frederick R. Burgess, Timothy R. Gosselin, Burgess Kennedy & Fitzer, PS, Tacoma, for appellant.

William J. Price, Karr Tuttle Campbell, Craig H. Bennion, Cozen & O'Connor, Seattle, for respondent.

WORSWICK, Judge.

We hold that Highlands Insurance Company did not commit a consumer protection act violation against Pierce County, and we affirm a summary judgement to that effect.

In 1986, the County was sued because of its allegedly negligent failure to investigate sexual abuse of children in certain day care centers. The period of the claimed abuse was 1977 to 1984, during which the County carried liability insurance with six companies, including Highlands, and more than one policy with some. ¹ The coverages and other provisions of the policies varied widely, and the policies did not remain the same throughout the period. The dates of claimed injuries were unclear, obscuring the companies' exposure. Companies in addition to Highlands were obligated to contribute to the County's defense expenses, but as defense expenses were incurred and billed, some companies refused to pay anything. This declaratory judgment action eventually became necessary to resolve these coverage questions. The County was not originally a party.

The Highlands' policy required it only to reimburse the County for attorneys fees, not to defend. When in 1987 the County demanded reimbursement by Highlands for all defense costs to date, the Highlands claims representative initially questioned Highlands' liability for the full amount, because Highlands believed only 46 percent of the claimed injuries occurred during its coverage period. Highlands nevertheless paid the full amount incurred to that date, $255,548.32. About two months later, the representative advised the County's risk manager essentially that Highlands continued to question its liability and would not honor further claims for defense costs. The County responded with a bill for another $167,000. After yet another two months, Highlands paid the County $75,000, but it paid nothing further until after all the insurance companies had settled the issue of their exposures. ² It is apparent that, throughout the period of its correspondence with the County, Highlands hoped and expected that the other companies would contribute to the County's defense costs. It is equally apparent that Highlands was less than clear in explaining its position to the County, but also that the County was not receptive to explanations.

In August 1988, the issue this case was originally intended to resolve--the various companies' responsibilities--came before the Superior Court on motions for summary judgment. The court held that the policies of Highlands and the three non-paying companies were triggered by injuries allegedly suffered by the daycare children, that the non-paying companies were obligated to share with Highlands the cost of defending claims brought against the County, and that they also were obligated to reimburse Highlands for part of the defense costs that Highlands had already paid. The dollar amounts to be allocated were left for future determination.

Meanwhile, the County had intervened in the action. It focused its attention on Highlands, claiming not only a judgment for the remainder of its defense costs, but asserting a consumer protection act claim as well. The County moved for summary judgment against Highlands for the balance of its defense costs and for additional damages caused by the alleged consumer protection act violation. Highlands moved to dismiss the consumer protection act claim.

During the proceedings involving the County, the insurance companies were negotiating the dollar amounts to be allocated in accordance with the court's earlier order. They settled the issue, whereupon Highlands agreed to the entry of judgment against it for the unpaid portion of the County's fees, together with interest to the date of judgment. A judgment was entered accordingly, but the court rejected the County's contention that the County was entitled to additional amounts as damages for a consumer protection act violation, and it dismissed the County's consumer protection act claim. ³

Any consumer protection act analysis requires a generalized excursion through the statute and the case law, but in this case, as in most cases involving insurance companies, the ultimate question is whether the company acted in bad faith in handling the claim. We disagree with the County's contention that Highlands acted in bad faith. Highlands may have been mistaken or clumsy, but mistakes and clumsiness alone do not amount to bad faith.

An unfair or deceptive act in the conduct of any trade or commerce is unlawful (RCW 19.86.020), and it will afford the basis for a private lawsuit. RCW 19.86.090. ⁴ A private party must prove that (1) the defendant's act was unfair or deceptive; (2) it occurred in the conduct of any trade or commerce; (3) it affected the public interest; (4) an injury was sustained by the plaintiff in his business or property; and (5) the unfair or deceptive act was causally linked to the injury. Hangman Ridge Training Stables, Inc. v. Safeco Title Ins. Co., 105 Wash.2d 778, 784-85, 719 P.2d 531 (1986). Highlands' acts affected no public interest, and they were not unfair or deceptive.

The County relies on RCW 48.01.030, which requires good faith dealing in insurance matters, because a violation of this statute satisfies per se the "public interest" element. Hangman Ridge, 105 Wash.2d at 791, 719 P.2d 531. ⁵ A violation occurs, however, only if the act is both unlawful and in violation of public policy. Salois v. Mutual of Omaha Ins. Co., 90 Wash.2d 355, 581 P.2d 1349 (1978). The denial of coverage or benefits, apparently the County's complaint here, is not in bad faith unless it is both frivolous and unfounded. Miller v. Indiana Ins. Companies, 31 Wash.App. 475, 642 P.2d 769 (1982). Neither denial of coverage because of a debatable coverage question nor delay, unaccompanied by an unfounded or frivolous reason, constitutes bad faith. Felice v. St. Paul Fire & Marine Ins. Co., 42 Wash.App. 352, 711 P.2d 1066 (1985), review denied, 105 Wash.2d 1014 (1986). Although Highlands may have been mistaken, the extent of its responsibility was debatable, and the delay throughout was related to Highlands' attempts--albeit clumsy--to resolve the coverage issue. Therefore, Highlands' acts were not frivolous, nor was its position unfounded. ⁶

Early on, Highlands informed the County that its policies carried a duty to indemnify, but not to defend, and that it based its position on a specific policy endorsement. A letter explaining Highlands' position was mailed to the County about three weeks after the County first notified Highlands that it had expended its deductible and would be looking to Highlands. Highlands then, in fact, began to pay some of the defense costs. It also arranged for a contribution to overall settlement of the case. This behavior did not amount to an unfounded or frivolous denial of benefits. Benefits were not denied, but were partially withheld while Highlands attempted to clarify its exposure. Highlands' agreement to the entry of a judgment for unpaid fees came after all of the companies had agreed to allocate the total insurance burden. The County argues also that Highlands acted in bad faith because, inasmuch as its obligation was joint and several, it should have paid immediately and then sought contribution from the other companies. We disagree. The County relies on Prudential Property & Cas. Ins. v. Lawrence, 45 Wash.App. 111, 724 P.2d 418 (1986). That case, however, concerned a duty to defend (which the insurer had conceded on some claims) and, therefore, applies principles that are inapplicable when an insurer's only duty is to indemnify. This argument by the County is but another variation on its general position: Highlands violated the consumer protection act because, as it turns out, it was wrong in withholding payment. The County's position is incorrect. Highlands' ultimate liability is not in question. Rather, the issue is whether Highlands' actions were frivolous or unfounded when they occurred. Highlands may have made a mistake by not paying promptly and then seeking contribution, but that did not make its actions frivolous or unfounded considering the vexing coverage questions and the fact that other companies also had an obligation to contribute to defense costs.

Although the County's claim is defeated by the absence of the public...