Stouffer & Knight v. Continental Cas. Co.

• Decision Date: 25 June 1999
• Docket Number: No. 24075-1-II.,24075-1-II.
• Citation: 96 Wash.App. 741,982 P.2d 105
• Court: Washington Court of Appeals
• Parties: STOUFFER & KNIGHT, a Washington partnership; Wayne B. Knight and Jane Doe Knight, and the marital community composed thereof; and R.E. Stouffer, Appellants, v. CONTINENTAL CASUALTY COMPANY; CNA Insurance Companies; CNA Financial Corporation; and Transcontinental Technical Services, Inc., foreign corporations, Respondents.

982 P.2d 105

96 Wash.App. 741

STOUFFER & KNIGHT, a Washington partnership; Wayne B. Knight and Jane Doe Knight, and the marital community composed thereof; and R.E. Stouffer, Appellants, v. CONTINENTAL CASUALTY COMPANY; CNA Insurance Companies; CNA Financial Corporation; and Transcontinental Technical Services, Inc., foreign corporations, Respondents.

No. 24075-1-II.

Court of Appeals of Washington, Division 2.

June 25, 1999.

Publication Ordered August 13, 1999.

Guy Jeffrey Sternal, Angelia De An Harlow, Eisenhower & Carlson, Tacoma, for Appellants.

David Martin Schoeggl, Tammy Lynn Lewis, Lane Powell Spears Lubersky, Seattle, for Respondents.

HUNT, J.

Wayne Knight and his law partnership, Stouffer & Knight (Knight), appeal the trial court's grant of summary judgment to the firm's malpractice carrier, Continental Casualty Company (CNA). CNA denied insurance coverage when Knight's secretary embezzled money from a client's account. Holding that the trial court correctly applied the policy's exclusion for losses "arising from" the dishonest act of an employee, we affirm.

FACTS

Wayne Knight was the attorney for Margaret Woodhams from 1988 until her death in 1996. Knight was responsible for her checking account and made checks on the account for Woodhams' expenses. Over time, Knight entrusted his secretary, Marsha Lachelt, with many of the tasks related to Woodhams' checking account: Lachelt prepared checks for Knight's signature, dispatched the checks, and maintained the records for the account.

Unbeknownst to Knight, in April 1991, Lachelt began embezzling from the account by altering checks after Knight had signed them and sometimes forging the payee's endorsement. Before being discovered in October 1995, Lachelt had embezzled approximately $250,000, causing an additional loss of approximately $40,000 in potential investment income. While Lachelt was embezzling, Knight failed to compare Woodhams' check register against the monthly checking account statements, which listed the amounts and payees of each check written on the account. Even a cursory comparison of the statements with the check register would have revealed Lachelt's alterations of the checks.

An errors and omissions professional insurance policy issued by CNA¹ was in effect at the time of Lachelt's embezzlement. The policy provided coverage for "all amounts, up to our limit of liability, which you become legally obligated to pay as a result of a wrongful act by you or by any entity for whom you are legally liable." But the policy specifically excluded coverage for "any claim arising out of: ....any dishonest, fraudulent, criminal or malicious act or omission by you or any of your partners, officers, stockholders or employees."

Knight notified his insurance broker of the loss from Woodhams' account. The insurance broker passed the information on to CNA; the broker noted that he had suggested that Knight inquire about whether coverage existed under his other errors and omissions policy, issued by another insurer, because the CNA policy apparently provided no coverage for employee dishonesty. Bill Ramsey, a claim consultant for CNA, wrote to Knight, acknowledging receipt of Knight's claim and requesting further information. The next day, Ramsey again wrote to Knight,² explaining that CNA was investigating the claim under a reservation of rights³ because the dishonest employee exclusion might preclude coverage. At Knight's request, CNA agreed to pay for Knight's choice of attorney to represent him in the matter and to carry out an investigation of his claim.⁴

After Knight informed them of Lachelt's theft, Woodhams' estate and children made demands for full accounting and reimbursement of losses and damages incurred. After Knight met with Ramsey, CNA offered to settle for $125,000, despite maintaining its position that coverage was precluded. Knight refused to settle the claim for this amount.

CNA filed a declaratory action in federal court. The federal district court exercised its discretion, refused to accept jurisdiction, and dismissed the action. Knight filed suit in state court, alleging: (1) breach of contract; (2) a right to prejudgment interest under RCW 19.52.010; (3) eligibility for declaratory relief that CNA had a duty to defend and a duty to pay for any losses resulting from Lachelt's embezzlement; (4) violation of the Consumer Protection Act (CPA); (5) the tort of bad faith; (6) a right to attorney fees according to Olympic Steamship Co., Inc. v. Centennial Ins. Co., 117 Wash.2d 37, 53, 811 P.2d 673 (1991); (7) negligence in failing to provide loss control services; (8) breach of the implied warranty of fitness for intended purpose; and (9) punitive damages. The trial court granted CNA's motion for summary judgment on the issue of coverage.⁵

Knight filed a motion to compel discovery, also seeking sanctions and vacation of the order dated January 14, 1997, in which the court had granted summary judgment to CNA on the coverage/exclusion issue. He claimed that CNA had refused to produce certain requested documents on grounds of relevance.⁶ Later, in "an effort to avoid disputes," CNA produced several of these documents, while maintaining that Knight was not entitled to them. By memorandum opinion dated February 12, 1998, the trial court granted summary judgment to CNA on Knight's remaining claims. The trial court also denied Knight's motions to compel, for sanctions, and to vacate the January 14, 1997, memorandum opinion. On March 17, 1998, the trial court entered an order dismissing with prejudice all of Knight's claims, and Knight appealed to the Supreme Court.⁷ The Supreme Court transferred the case to us.

ANALYSIS

I. STANDARD OF REVIEW

We review de novo an order of summary judgment. Safeco Ins. Co. of Am. v. Butler, 118 Wash.2d 383, 394, 823 P.2d 499 (1992). Summary judgment is appropriate only if reasonable persons could reach but one conclusion, and there is no genuine issue of material fact. Butler, 118 Wash.2d at 394-95, 823 P.2d 499. Summary judgment in an insurance coverage case should be granted where (1) there is no dispute about the facts and (2) coverage depends solely on the language of the insurance policy. See Roller v. Stonewall Ins. Co., 115 Wash.2d 679, 682, 801 P.2d 207 (1990).

Interpretation of an insurance policy is a question of law, which we review de novo. Roller, 115 Wash.2d at 682, 801 P.2d 207. In construing an insurance policy, the policy should be given a fair, reasonable, and sensible construction, in a manner consistent with the way that the average person purchasing insurance would understand the policy language. E-Z Loader Boat Trailers, Inc. v. Travelers Indem. Co., 106 Wash.2d 901, 907, 726 P.2d 439 (1986).⁸ "Exclusionary clauses contained in insurance policies are strictly construed against the insurer." Allstate Ins. Co. v. Raynor, 93 Wash.App. 484, 492, 969 P.2d 510, 975 P.2d 517 (1999).

II. COVERAGE UNDER LANGUAGE OF THE POLICY

A. DISHONEST EMPLOYEE EXCLUSION

An insurance company, as a private contracting entity, is generally permitted to limit the liability it assumes under its policies. Findlay v. United Pacific Ins. Co., 129 Wash.2d 368, 379, 917 P.2d 116 (1996). The parties agree that Knight's negligent failure to supervise Lachelt was a "wrongful act" under the policy;⁹ thus, absent an applicable exclusion, the losses caused by Lachelt's embezzlement would be covered by the policy. But an exclusion does apply.

The parties disagree about the effect of the dishonest employee exclusion: CNA argues that it unequivocally precludes coverage for the losses resulting from Lachelt's embezzlement; Knight argues that the exclusion applies only to the dishonest acts of "an insured," and that Lachelt, because she was not acting in the course of her employment when she was embezzling, is not "an insured" under the policy. In the alternative, Knight argues that the exclusion creates an ambiguity in the policy, which must be construed against CNA. Neither of Knight's arguments is persuasive.

1. PLAIN LANGUAGE OF EXCLUSION

As noted above, although the policy covers "wrongful acts" of those insured under the policy, it also excludes coverage for claims

arising out of: ... any dishonest, fraudulent, criminal or malicious act or omission by you or any of your partners, officers, stockholders or employees.

CNA argues that "arising out of" excludes coverage for the losses resulting from Lachelt's actions; Knight responds that the exclusion applies only where an insured attorney is the dishonest actor.

"Insurance policies are to be construed as contracts, and interpretation is a matter of law. The entire contract must be construed together in order to give force and effect to each clause." Washington Pub. Util. Dist. Utilities Sys. v. Public Util. Dist. No. 1 of Clallam County, 112 Wash.2d 1, 10, 771 P.2d 701 (1989) (citations omitted). The court will enforce the contract as written if the language is clear and unambiguous. Utilities Sys., 112 Wash.2d at 10, 771 P.2d 701.

The court will determine the parties' intent by viewing the contract as a whole, examining its purpose, objective, and subject matter, the circumstances of its making, the subsequent conduct of the parties, and the reasonableness of their respective interpretations. The contract will be given a practical and reasonable interpretation that fulfills the object and purpose of the contract rather than a strained or forced construction that leads to an absurd conclusion, or that renders the contract nonsensical or ineffective.

Utilities Sys., 112 Wash.2d at 11, 771 P.2d 701 (citations omitted).

2. NO AMBIGUITY

No ambiguity exists in Knight's CNA insurance contract¹⁰ because "the language on its face" is not "fairly susceptible to two different but reasonable interpretations[.]" See Utilities Sys., 112 Wash.2d at 11, 771 P.2d 701. The language of the policy does not support Knight's contention that the exclusion applies...