Fluke Corp. v. Hartford Acc. & Indem. Co.

Citation34 P.3d 809,145 Wash.2d 137
Decision Date21 November 2001
Docket NumberNo. 70519-4.,70519-4.
CourtWashington Supreme Court
PartiesFLUKE CORPORATION, a Washington corporation, Respondent, v. The HARTFORD ACCIDENT & INDEMNITY COMPANY, a foreign insurance corporation, Petitioner, Talon Instruments, Inc., a California corporation; and Robert E. Corby, Defendants.

Phillips & Webster, K.C. Webster, Woodinville, counsel for petitioner.

Danielson, Harrigan & Tollefson, G. Val Tollefson, Matthew Ryan Kenney, Randall Thor Thomsen, Seattle, counsel for respondent.

Linda Blohm Clapham, Robert Leon Israel, Pamela A. Okano, Seattle, amicus curiae on behalf of certain underwriters at Lloyds London, et al.

Craig Hinton Bennion, Thomas Martin Jones, Seattle, amicus curiae on behalf of American International Companies, et al.

Debra Stephens, Bryan P. Harnetiaux, Spokane, amicus curiae on behalf of Washington State Trial Lawyers Ass'n.

Charles Cooper Gordon, James Richard Murray, Jeffrey Iver Tilden, Christie Lynn Snyder, Seattle, amicus curiae on behalf of Costco Wholesale Corp., et al.

Forsberg & Umlauf, John Patrick Hayes, Seattle, counsel for defendant Talon Instruments Inc.

OWENS, J.

The Hartford Accident and Indemnity Company (Hartford) challenges the decision of the Court of Appeals that, under the terms of the Commercial General Liability (CGL) policy that Hartford sold to Fluke Corporation (Fluke), Hartford was obligated to pay both the compensatory and punitive damages that a California jury awarded against Fluke in a malicious prosecution action. In this declaratory judgment action, the trial court and the Court of Appeals concluded that public policy in Washington did not negate the CGL policy's unambiguous grant of liability coverage for malicious prosecution. See Fluke Corp. v. Hartford Accident & Indem. Co., 102 Wash.App. 237, 7 P.3d 825 (2000). However, contrary to the trial court's conclusion, the Court of Appeals held that the policy covered awards of punitive damages against Fluke, and it further determined that coverage for punitive damages did not contravene a clear public policy in this state regarding such insurance. Because California law precludes coverage both for intentional acts (including malicious prosecution) and for punitive damages,1 Hartford invoked California law, but the Court of Appeals agreed with the trial court that Washington law, not California law, governed this declaratory judgment action.

We affirm the Court of Appeals on all issues.

FACTS

Fluke, a manufacturer of electrical equipment, is a Washington corporation having its principal place of business in Snohomish County, Washington. From 1954 to April 30, 1994, Fluke contracted for insurance coverage with Hartford, a foreign corporation with offices in Washington. Relevant to the present case is Fluke's insurance contract with Hartford for primary and umbrella coverage for the period April 1, 1988, to April 1, 1989. Under that contract (hereinafter "the policy"),2 Hartford provided primary CGL coverage with limits of $1 million per occurrence and $2 million aggregate. In addition to Coverage A for "Bodily Injury and Property Damage Liability," the CGL policy included Coverage B for "Personal and Advertising Injury Liability." Clerk's Papers (CP) at 589, 591. That coverage obligated Hartford to "pay those sums that the insured becomes legally obligated to pay as damages because of `personal injury' ... to which this insurance applies." CP at 591. The policy defined "personal injury" as "injury, other than `bodily injury,' arising out of ... [m]alicious prosecution."3 Additionally, Hartford sold Fluke an umbrella personal liability policy with essentially identical coverage but with policy limits of $9 million.

In May 1988, Fluke filed a patent infringement suit in federal district court in California against Talon Instruments (Talon), a California corporation. Fluke amended its complaint in April 1989 to include Robert Corby (Corby), the president, director, and principal shareholder of Talon. Following a jury trial in May 1992, judgment was entered for the defendants.

In November 1993, Talon and Corby filed a malicious prosecution suit against Fluke in Los Angeles County Superior Court. Fluke tendered defense of the suit to Hartford, and in January 1994, Hartford advised Fluke that the policy covered malicious prosecution. However, in February 1996, Hartford sent Fluke a letter disavowing coverage. Consequently, Fluke brought a declaratory judgment action against Hartford in Snohomish County Superior Court in July 1996, seeking a determination of coverage. In December 1996, Fluke and Hartford agreed to stay the declaratory judgment action until a final judgment had been entered in the California malicious prosecution action. In January 1997, the malicious prosecution action went to trial, and in March 1997, the jury returned verdicts for Talon and Corby, awarding a total of $2 million in compensatory damages and $4 million in punitive damages.

In June 1997, with the stay still pending in the declaratory judgment action in Snohomish County, Hartford filed a declaratory judgment action in California against Fluke, Talon, and Corby. In June 1998, the California court stayed Hartford's suit in light of the declaratory judgment action in Snohomish County. Hartford and Fluke moved for summary judgment in the present declaratory judgment action. Applying Washington law, the trial court concluded that the policy's coverage for malicious prosecution did not contravene public policy but that the policy provided coverage for compensatory damages only, not for punitive damages.

Fluke appealed. The Court of Appeals affirmed the award of compensatory damages and reversed the trial court's denial of coverage for punitive damages. Fluke, 102 Wash.App. 237, 7 P.3d 825. This court granted Hartford's petition for review.

ISSUES

(1) Is providing insurance coverage for the intentional tort of malicious prosecution contrary to public policy in Washington?

(2) a. Does the policy at issue cover punitive damages?

b. If so, is such coverage contrary to public policy in Washington?

(3) If insurance coverage for malicious prosecution and punitive damages is not contrary to public policy in Washington (as it is, by statute, in California), should Washington law or California law apply to this declaratory judgment action?

ANALYSIS

Standard of Review. Hartford contends (1) that public policy requires invalidation of the liability insurance that it sold Fluke for malicious prosecution, (2) that the insurance policy did not cover punitive damages but that, even if it did, public policy would require invalidation of such coverage, and (3) that, if Washington law conflicts with California law, the latter should govern the coverage dispute. Review of these purely legal issues is de novo. Island County v. State, 135 Wash.2d 141, 160, 955 P.2d 377 (1998).

Insurance Coverage for Malicious Prosecution in Washington. The policy expressly insures Fluke against liability for malicious prosecution: "We will pay those sums that the insured becomes legally obligated to pay as damages because of ... injury ... arising out of ... [m]alicious prosecution." CP at 591, 597. Hartford contends that this explicit promise must be negated because Washington public policy forbids insuring against an intentional harm.

As this court has previously observed, "Washington courts rarely invoke public policy to override express terms of an insurance policy."4 We have not previously invalidated on public policy grounds any affirmative grant of coverage made by an insurer. Public policy has, however, been invoked to expand coverage by nullifying policy exclusions in two areas: "[o]ne relates to underinsured motorist insurance (UIM) coverage authorized under RCW 48.22.030; the other involves the Financial Responsibility Act, RCW 46.29." Am. Home Assurance Co. v. Cohen, 124 Wash.2d 865, 874, 881 P.2d 1001 (1994) (citing Mut. of Enumclaw Ins. Co. v. Wiscomb, 97 Wash.2d 203, 643 P.2d 441 (1982); Brown v. Snohomish County Physicians Corp., 120 Wash.2d 747, 756-57, 845 P.2d 334 (1993); Schab v. State Farm Mut. Auto. Ins. Co., 41 Wash.App. 418, 423, 704 P.2d 621 (1985)). But as the Cohen court noted, this court thereafter refused to extend the holding in the UIM and financial responsibility cases "to hold that a family exclusion clause in a homeowner's liability policy was void on public policy grounds." Id. (citing State Farm Gen. Ins. Co. v. Emerson, 102 Wash.2d 477, 687 P.2d 1139 (1984)). In Emerson, the court concluded that, "`[a]bsent prior expression of public policy from either the Legislature or prior court decisions, our inquiry as to whether the family exclusion clause clearly offends the public good must be answered in the negative.'" Id. at 875, 687 P.2d 1139 (quoting Emerson, 102 Wash.2d at 483, 687 P.2d 1139). In those Washington cases in which public policy has served to enhance coverage by overriding policy exclusions, the courts have relied on a public policy "convincingly expressed" in state statutes. Cohen, 124 Wash.2d at 874,881 P.2d 1001. But, here, Hartford can point to no statute or judicial decision suggesting that this state discountenances the selling of CGL insurance for the "offenses" listed in Coverage B—that is, for a number of intentional torts, including not only malicious prosecution but also false arrest, wrongful entry or eviction, and libel or slander. The first form for such coverage was introduced in 1976 as an endorsement to the CGL Coverage Form, but "[b]eginning with the 1986 ISO [Insurance Services Office] Commercial General Liability Coverage Form (the `1986 Form'), coverage for personal injury and advertising injury liability was inserted into the policy itself, rather than being added as a supplement to the policy." Peter J. Kalis, Thomas M. Reiter & James R. Segerdahl, Policyholder's Guide to the Law of Insurance Coverage ...

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