Griffin v. Allstate Ins. Co.

• Citation: 108 Wash. App. 133,108 Wn. App. 133,29 P.3d 777
• Decision Date: 27 August 2001
• Docket Number: No. 46498-1-I.,46498-1-I.
• Parties: L. Dennis GRIFFIN and Marilyn Griffin, husband and wife, and their marital community, Appellants, v. ALLSTATE INSURANCE COMPANY, an Illinois corporation, Respondent.
• Court: Court of Appeals of Washington

29 P.3d 777

108 Wn. App. 133

108 Wash. App. 133

L. Dennis GRIFFIN and Marilyn Griffin, husband and wife, and their marital community, Appellants, v. ALLSTATE INSURANCE COMPANY, an Illinois corporation, Respondent.

No. 46498-1-I.

Court of Appeals of Washington, Division 1.

August 27, 2001.

Pellegrino L. Certa, Thomas Lether, Clarke Bovingdon Cole, Mills Lether PC, Seattle, for Respondent.

Randall C. Johnson, Badgley-Mullins Law Group, Seattle, for Appellants.

ELLINGTON, J.

Subject to policy based defenses, an insurer is liable for fees and costs incurred before the insured tenders defense of a covered claim. We therefore reverse summary judgment for the insurer. Because questions of fact exist on bad faith and Consumer Protection Act claims, we also reverse summary judgment dismissal of those claims.

FACTS

L. Dennis and Marilyn Griffin reside on a farm of some 40 acres in Ravensdale, Washington. They purchased homeowners insurance from Allstate Insurance Company. After the Griffins cleared and graded a field for pasture and improved a horse track, their neighbors, the Andersons, brought suit, alleging Griffins' activities deposited fill in a stream and obstructed its natural flow, rendering the Andersons' property unsuitable for certain purposes and threatening the Andersons' domestic water supply. Griffins hired a lawyer, who obtained a stipulation and order of dismissal because service was defective.

Andersons refiled their suit, alleging the same facts and asserting the same claims. The two complaints are almost identical.¹ Griffins tendered their defense to Allstate. Its agent inspected the property, took photographs, met with the Griffins, and spoke with the Andersons' attorney. Allstate also took Mr. Griffin's recorded statement. Allstate then denied any obligation to the Griffins on several grounds. The Griffins filed this action for declaratory relief, bad faith, and violation of the Consumer Protection Act (CPA).²

On summary judgment, the trial court ruled Griffins' were entitled to a defense, and that Allstate was required to indemnify them for their costs in defending the Anderson suit. Allstate does not appeal that ruling. The trial court limited its award of defense fees and costs to those incurred after the Griffins tendered defense to Allstate. On Allstate's summary judgment motion, the court dismissed the bad faith and CPA claims. Griffins appeal.

DISCUSSION

We conduct de novo review of summary judgment, viewing the facts and all reasonable inferences in the light most favorable to the nonmoving party, to determine whether any genuine issue of material fact is in dispute preventing the moving party from obtaining judgment as a matter of law.³ We review de novo the interpretation of an insurance policy.⁴

Scope of the Duty to Defend

Allstate assumed a broad duty to defend the Griffins in a suit for covered damages:

Losses We Cover Under Coverage X. Subject to the terms, conditions and limitations of this policy, Allstate will pay damages which an insured person becomes legally obligated to pay because of bodily injury or property damage arising from an occurrence to which this policy applies, and is covered by this part of the policy.

We may investigate or settle any claim or suit for covered damages against an insured person. If an insured person is sued for these damages, we will provide a defense with counsel of our choice, even if the allegations are groundless, false or fraudulent.⁵

The duty to defend is "one of the main benefits of the insurance contract."⁶ "`The general rule is that insurers who have reserved the right and duty to defend are obliged to defend any suit which alleges facts wherein, if proven, would render the insurer liable.'"<sup>7</sup> The triggering event is the filing of a complaint alleging covered claims: "`The key consideration in determining whether the duty to defend has been invoked is whether the allegation [in the complaint], if proven true, would render [the insurer] liable to pay out on the policy.'"⁸ Allstate wrongly refused Griffins' tender of defense, thereby breaching the policy. Following an insurer's breach, the insured must be put in as good a position as he or she would have been in had the contract not been breached.⁹ Where the breach is the failure to defend, damages may include "the amount of expenses, including reasonable attorney fees the insured incurred defending the underlying action[.]"¹⁰

Allstate urges us to adopt a bright-line rule that pre-tender fees and costs are not recoverable, contending the majority of states disallow recovery of pre-tender defense costs. But Allstate offers few authorities, none helpful to our analysis. The cases either do not discuss the issue presented here, and merely recite, without analysis, that the duty to defend "arises" upon tender;¹¹ or involve denial of pre-tender fees because the insured's late tender breached the policy and excused the duty.¹² Allstate fails to persuade us the majority of states take Allstate's view,¹³ but the question is irrelevant, because in Washington, the rule is otherwise.

In Washington, the duty to defend arises upon the filing of a covered complaint, and the duty is not excused by late notice unless the insurer is prejudiced. Unigard Insurance Co. v. Leven¹⁴ involved claims for indemnification and defense in the context of suits for environmental contamination at eight Washington sites where Leven's corporations operated. Unigard's policies covered Leven's companies and Leven personally. Defense of Leven's companies was tendered and accepted. Leven himself, however, did not invoke a right to a defense until seven years after he was designated a potentially liable person by the Department of Ecology. He argued that Unigard's awareness of the claims was sufficient to trigger the duty to defend him, and that he was entitled to be reimbursed some $900,000 in defense costs.

We first stated the general rule: "In Washington, an insurer's duty to defend an action brought against its insured arises when a complaint against the insured, construed liberally, alleges facts which could, if proven, impose liability upon the insured within the policy's coverage."¹⁵ We rejected Leven's argument that Unigard's awareness of the claims obligated Unigard to act: "[A]n insurer cannot be expected to anticipate when or if an insured will make a claim for coverage; the insured must affirmatively inform the insurer that its participation is desired."¹⁶

We then turned to whether Unigard owed Leven reimbursement of his defense costs. In Washington, an insured's breach will excuse the insurer's performance only where the insurer can demonstrate prejudice: "But even when an insured breaches an insurance contract, the insurer is not relieved of its duty to defend unless it can prove that the late notice resulted in actual and substantial prejudice."¹⁷ Because Unigard demonstrated such prejudice from Leven's delay, Unigard had no duty to defend.¹⁸ Whether fees were incurred before or after tender played no part in our analysis.¹⁹

Allstate relies upon Leven for the proposition that no duty arises until tender. But Leven discusses tender only in the context of whether Unigard breached its duty to defend by failing to act before defense was formally requested. Rather than the bright-line rule Allstate urges us to apply, the Leven court discussed at length whether Unigard was prejudiced by Leven's violation of the notice clause in the policy.

Certainly breach of the duty to defend cannot occur before tender. The scope of a duty, however, is defined not by its breach, but by the contract. Allstate undertook a broad duty to defend.²⁰ Even if Allstate's policy required tender as a condition precedent to the duty to defend (which it does not), a showing of actual and substantial prejudice is required before an insured's breach will release an insurer from its duty under the policy—including the duty to defend.²¹ Except in extreme cases, we do not presume prejudice.²² Allstate alleges no prejudice at all.

This is not to say that insureds may freely conduct their own litigation and then seek reimbursement. Allstate's promise is to defend through counsel of its own choosing. Prejudice to the insurer may follow from an insured's retention of counsel who may charge higher rates or fail to pursue appropriate strategies. Prejudice may be more difficult to show where an insured is forced to incur expense before tender can be made,²³ but the issue is still factual. Here, however, Allstate refused to defend. Allstate's duty is limited by policy-based defenses. Allstate asserts only the "voluntary payment" provision:

Section II Conditions

1. What You Must Do After an Accidental Loss

In the event of bodily injury or property damage, you must do the following:

....

Any insured person will not voluntarily pay any money, assume any obligations or incur any expense, other than for first aid to others at the time of the loss as provided for in this policy.²⁴

The purpose of a voluntary payment provision is to "obviate the risk of a covinous or collusive combination between the assured and the injured third party and to restrain the assured from voluntary action materially prejudicial to the insurers contractual rights."²⁵

The Griffins contend their defense expenses were not voluntarily incurred, and that the voluntary payments clause is aimed at settlements, not defense costs. But even assuming Allstate could prove breach of the voluntary payment provision, Allstate must also prove actual prejudice.²⁶ Again, Allstate has never asserted it was prejudiced.

The court erred in failing to award pre-tender defense expenses. The Griffins have requested and are entitled to Olympic Steamship²⁷ fees on this issue, and are directed to comply with RAP 18.1.

Bad Faith and CPA

The Griffins claimed Allstate acted in bad faith in failing to conduct a reasonable investigation and failing to defend, and violated the CPA. The...