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

• Citation: 7 P.3d 825,102 Wash.App. 237
• Decision Date: 28 August 2000
• Docket Number: No. 44349-6-I.,44349-6-I.
• Court: Court of Appeals of Washington
• Parties: FLUKE CORPORATION, a Washington corporation, Appellant/Cross-Respondent, v. The HARTFORD ACCIDENT & INDEMNITY COMPANY, a foreign insurance corporation; Talon Instruments, Inc., a California corporation; and Robert E. Corby, Respondents/Cross-Appellants.

7 P.3d 825

102 Wash.App. 237

FLUKE CORPORATION, a Washington corporation, Appellant/Cross-Respondent, v. The HARTFORD ACCIDENT & INDEMNITY COMPANY, a foreign insurance corporation; Talon Instruments, Inc., a California corporation; and Robert E. Corby, Respondents/Cross-Appellants.

No. 44349-6-I.

Court of Appeals of Washington, Division 1.

August 28, 2000.

As Modified October 23, 2000.

G. Val Tollefson, Matthew Ryan Kenney, Danielson, Harrigan & Tollefson, Seattle, K.C. Webster, Phillips & Webster, P.L.L.C., Woodinville, for Appellants.

John Patrick Hayes, Forsberg & Umlauf, P.S., Seattle, for Respondents.

BECKER, J.

In a California lawsuit, a jury found that Fluke Corporation had maliciously prosecuted a claim against a competitor. The court entered judgment for both punitive and compensatory damages. Fluke had commercial liability insurance through The Hartford Accident & Indemnity Company, insuring Fluke for those sums it became obligated to pay as damages because of injury arising out of malicious prosecution. We hold that the policy covers punitive damages as well as compensatory damages; that Washington, unlike California, has no public policy invalidating insurance coverage for punitive damages or for the intentional tort of malicious prosecution; and that Washington law applies because Washington has the most significant relationship with the insurance contract. Therefore, Fluke has coverage for the entire award.

Fluke Corporation, based in Everett, Washington, manufactures electrical equipment. In 1988, Fluke brought a patent infringement suit in federal court in California against a competitor, Talon Instruments, and Talon's president, Robert Corby. Fluke lost. Judgment was entered in December 1992 on the jury's verdict of non-infringement.

Talon and Corby sued Fluke in a California state court in November of 1993, alleging that Fluke had maliciously prosecuted the patent infringement claim in an attempt to force them out of business. Fluke tendered the claim to its insurer, Hartford. Fluke had general commercial liability insurance with Hartford, including a primary and an umbrella policy.

Hartford agreed to defend Fluke in the lawsuit, but notified Fluke that California does not allow insurance coverage for intentional acts, including malicious prosecution, or for punitive damages. Fluke instituted the present suit against Hartford in Snohomish County Superior Court in July 1996, seeking a declaration of coverage. The parties agreed to stay the litigation in Washington until the entry of a final judgment in the malicious prosecution case. The jury in California found in favor of Talon and Corby in the spring of 1997. The verdict awarded two million dollars in compensatory damages and four million dollars in punitive damages. Both Hartford and Fluke then moved for summary judgment in the declaratory action.

Choosing to apply Washington law, the trial court found no bar to Fluke's entitlement to coverage for the award of compensatory damages. As to punitive damages, however, the court construed the policy's insuring clause as providing no coverage. The court awarded Fluke its fees and costs under the rule of Olympic Steamship Co. Inc. v. Centennial Ins. Co., 117 Wash.2d 37, 811 P.2d 673 (1991). Fluke appeals from the ruling denying coverage for punitive damages. Hartford appeals from the ruling granting coverage for compensatory damages and from the award of fees.

1. Hartford agreed to cover both compensatory and punitive damages.

We begin with the contract. Hartford defends the trial court's construction of the policy as indemnifying Fluke for compensatory damages only, while Fluke contends the coverage includes punitive damages as well. Neither party suggests that the law of California should govern our analysis of this issue, so we apply Washington principles of contract construction. One basic principle is that where policy language is clear and unambiguous, the court must enforce it as written and may not modify it or create ambiguity where none exists. Allstate Ins. Co. v. Peasley, 131 Wash.2d 420, 424, 932 P.2d 1244 (1997).

Under Coverage B of the primary policy, "Personal and Advertising Injury Liability", Hartford agreed to pay "those sums that the insured becomes legally obligated to pay as damages because of `personal injury' or `advertising injury to which this insurance applies." The policy defines "personal injury" as "injury, other than `bodily injury,' arising out of one or more of the following offenses: ... b. Malicious prosecution". The policy limit is one million dollars for each occurrence and two million dollars aggregate. The umbrella policy grants similar coverage, with a limit of nine million dollars. The policies contain 34 subsections of exclusions, including an exclusion of coverage for the "violation of a penal statute". There is no exclusion for punitive damages.

It is undisputed that the policy language quoted above grants coverage for the compensatory damages awarded to Talon and Corby for injury arising out of malicious prosecution by Fluke. The trial court found that the language of the policies, covering damages that the insured becomes legally obligated to pay "because of" personal injury, does not cover punitive damages. The trial court's memorandum opinion reasons that punitive damages are awarded not to compensate but rather to deter and punish, without regard to the extent to which the wronged party was damaged, and therefore they are not damages flowing from the tort. Hence, they are not included under coverage for damages the insured must pay "because of" the injury arising out of the insured's misconduct.

A review of case law from other jurisdictions interpreting virtually identical policy language shows that the trial court's rationale is the minority rule. Most courts do not focus on the meaning of "because of"; they look instead to the phrase "all sums that the insured becomes legally obligated to pay as damages"¹ and interpret it as providing coverage for punitive damages. See, e.g., Lazenby v. Universal Underwriters Ins. Co., 214 Tenn. 639, 383 S.W.2d 1 (1964)

; Price v. Hartford Acc. & Indemn. Co., 108 Ariz. 485, 502 P.2d 522 (1972); Concord Gen. Mut. Ins. Co. v. Hills, 345 F.Supp. 1090 (D.Me.1972); Abbie Uriguen Olds. Buick, Inc. v. United States Fire Ins. Co., 95 Idaho 501, 511 P.2d 783 (1973); Norfolk & Western Ry. Co. v. Hartford Acc. & Indemn. Co., 420 F.Supp. 92 (N.D.Ind.1976); Harrell v. Travelers Indemnity Co., 279 Or. 199, 567 P.2d 1013 (1977); State v. Glens Falls Ins. Co., 137 Vt. 313, 404 A.2d 101, (1979); Dayton Hudson Corp. v. American Liability Ins. Co., 621 P.2d 1155 (Okla.1980); Hensley v. Erie Ins. Co., 168 W.Va. 172, 283 S.E.2d 227 (1981); Skyline Harvestore Systems, Inc. v. Centennial Ins. Co., 331 N.W.2d 106 (Iowa 1983); Providence Wash. Ins. Co. v. Valdez, 684 P.2d 861 (Alaska 1984); Brown v. Maxey, 124 Wis.2d 426, 369 N.W.2d 677 (1985); United Services Auto. Ass'n v. Webb, 235 Va. 655, 369 S.E.2d 196 (1988); South Carolina State Budget & Control Board v. Prince, 304 S.C. 241, 403 S.E.2d 643 (1991). But see Heartland Stores, Inc. v. Royal Ins. Co., 815 S.W.2d 39 (Mo.App., 1991).

The majority rule emphasizes the absence of a specific exclusion for punitive damages and the absence of any other distinction in the policy between compensatory and punitive damages. As explained by the Oregon Supreme Court, a person insured by such a policy would suppose that the term "damages" would include all damages which became, by judgment, a "sum" that the insured became legally obligated to pay — including punitive damages. Harrell, 567 P.2d at 1015.

The majority rule is in accord with the interpretive rules followed by Washington courts in construing insurance policies. Insurance contracts should be interpreted in the way that an average insured would read them. Bowers v. Farmers Ins. Exch., 99 Wash.App. 41, 45, 991 P.2d 734 (2000). The trial court's interpretation excluding coverage imputes a legalistic meaning to the phrase "because of" rather than reading it as it is commonly understood, in context with the rest of the insuring clause. And even if the phrase "because of" rendered the contract susceptible to more than one meaning, the ambiguity would be construed against the drafter, the insurer. See Queen City Farms Inc., v. Central Nat'l Ins. Co. of Omaha, 126 Wash.2d 50, 83, 882 P.2d 703 (1994)

.

Hartford could have achieved the objective it now seeks by inserting the word "compensatory" or by specifically excluding punitive damages. "We will not add language to the policy that the insurer did not include." American Nat'l Fire Ins. Co. v. B & L Trucking & Constr. Co., Inc., 134 Wash.2d 413, 430, 951 P.2d 250 (1998). Following what we perceive to be not only the majority rule, but also the better-reasoned rule and the one most consistent with Washington's rules for interpreting insurance contracts, we conclude the Hartford policy language, by its express terms, unequivocally covers Fluke not only for the award of compensatory damages, but for the award of punitive damages as well.

2. California would invalidate the coverage as against public policy.

If a contract violates public policy, the contract is void and unenforceable. Brown v. Snohomish County Physicians Corp., 120 Wash.2d 747, 753, 845 P.2d 334 (1993). Hartford contends that any grant of coverage for malicious prosecution damages, whether compensatory or punitive, is ineffective because it violates public policy.

It is undisputed that under California law, it is against public policy to insure against liability for intentional misconduct such as malicious prosecution as well as to insure against liability for punitive damages. California's insurance code provides that "An insurer is not liable for a loss caused by the willful act of the insured". Cal. Ins. Code § 533. California courts have interpreted this statute to prohibit indemnification for punitive...