Litho Color, Inc. v. Pacific Employers Ins., 41294-9-I.

• Decision Date: 20 September 1999
• Docket Number: No. 41294-9-I.,41294-9-I.
• Citation: 98 Wash.App. 286,991 P.2d 638
• Parties: LITHO COLOR, INC., a Washington corporation, Appellant/Cross-Respondent, v. PACIFIC EMPLOYERS INSURANCE, COMPANY, a foreign corporation and Hartford Steam Boiler Inspection and Insurance Company, a foreign corporation, Respondents/Cross-Appellants.
• Court: Washington Court of Appeals

991 P.2d 638

98 Wash.App. 286

LITHO COLOR, INC., a Washington corporation, Appellant/Cross-Respondent, v. PACIFIC EMPLOYERS INSURANCE, COMPANY, a foreign corporation and Hartford Steam Boiler Inspection and Insurance Company, a foreign corporation, Respondents/Cross-Appellants.

No. 41294-9-I.

Court of Appeals of Washington, Division 1.

September 20, 1999.

Publication Ordered November 18, 1999.

William Kinsel, Michael McCormack, Seattle, for Appellant/Cross-Respondent.

Craig Hinton Bennion, Stephen Murray Todd, Seattle, for Respondents/Cross-Appellants.

APPELWICK, J.

Litho Color sought coverage under a "Boiler and Machinery" (B & M) endorsement to its commercial property insurance policy for claims arising in October 1991 and February 1992. Pacific Employers Insurance Company (PEIC) issued the B & M policy; however, it was fully reinsured by Hartford Steam Boiler Inspection and Insurance Company (HSB). Prior to trial, Litho and PEIC reached a settlement that released PEIC from certain claims and liabilities in exchange for $335,000, but technically kept PEIC in the suit.

On appeal, Litho, HSB and PEIC each assign errors to the trial court's rulings with respect to the offset of a portion of the settlement against the jury award, as well as other trial court rulings. We hold that HSB and PEIC were entitled to a full offset of the settlement amount against the jury award because Litho failed to allocate portions of the settlement to specific causes of action.

FACTS

Jackie and Douglas Ward own Litho Color (Litho), a Seattle color scan and pre-press company. In 1987, Litho purchased a Crosfield 635E Color Scanner, which reduces film to a digital format. And in August of 1990, Litho purchased a "Studio 19" which retouches and alters pictures by a computerized digital process. Litho also entered into a maintenance agreement with DuPont Crosfield, the manufacturer of the machines. DuPont Crosfield employee Michael Whiteman generally responded to service calls from Litho.

Pacific Employers Insurance Company (PEIC) provided Litho with commercial property and general liability insurance during 1990, 1991 and 1992. Litho also purchased boiler and machinery (B & M) insurance from PEIC to protect against damages to certain equipment and related loss of income. The B & M insurance is characterized as an endorsement to the PEIC policy. The B & M Coverage Form states:

A Covered Cause of Loss is an "accident" to an "object"shown in the Declarations. An "object" must be in use or connected ready for use at the location specified for it at the time of the "accident."

Additionally, the contract defines "accident" to specifically require proof of physical damage necessitating repair or replacement.

Although PEIC issued the B & M endorsement, the policy was reinsured in full by Hartford Steam Boiler Inspection and Insurance Company (HSB). The reinsurance agreement between HSB and PEIC specifies that "[t]he [r]einsurer at its expense will investigate, negotiate and enter into settlement agreements or defend all such claims and losses in accordance with the terms of this coverage subject to this agreement." Under the reinsurance agreement, PEIC maintained final authority over the disposition of any claim filed by Litho.

The Wards claim that the air conditioning at Litho malfunctioned and that the subsequent temperatures damaged the scanner and the Studio 910. The first incident occurred in May 1991, when temperatures at Litho reached 82 degrees. The second incident occurred in October 1991, when temperatures reached 95 degrees.

Litho's third claim arises from an incident that occurred in February of 1992, when temperatures at Litho hit 135 degrees or more. Prior to this incident, the City of Seattle notified Litho that the City would be turning off the water to Litho's building in order to work on the water line. Because Litho's air conditioner was connected to the water supply, the Wards intended to turn off the air conditioner and shut down the plant on Saturday, February 8. However, an employee failed to shut down the scanner and the Studio 910. The following Monday morning, Douglas Ward and Michael Whiteman found that it was extremely warm at Litho.

Litho subsequently notified HSB of the overheating accident. Litho claimed that both the scanner and the Studio 910 were significantly damaged by its failure to turn off the machines when the air conditioner was turned off. Litho also claimed that the overheating incidents so damaged the equipment that the business could not operate, or operated at a reduced capacity, which resulted in a loss of income.

HSB has continuously disputed Litho's claims regarding the nature and extent of the damage to those machines. The only damage that HSB acknowledged was that there was an "accident as defined by the policy" that harmed a Winchester disk drive, for which HSB paid $8,898.74. HSB rejected Litho's additional requests for repair and its replacement estimates.

On August 31, 1994, Litho filed a complaint against PEIC and HSB to enforce the insurance contract. Litho also alleged breach of contract, bad faith, and violations of the Consumer Protection Act RCW 19.86. The trial court subsequently dismissed Litho's breach of contract claim as duplicative of Litho's efforts to enforce the insurance contract.

On May 3, 1996, three days before the trial began, Litho entered into a partial settlement with PEIC. Litho released PEIC from liability under the commercial property portion of the policy and for attorney fees, claims of bad faith, and Consumer Protection Act violations, in exchange for $335,000. The settlement does not specifically allocate the proportionate values of the various claims.

The settlement did not release PEIC and HSB "from their obligations or liability, if any, under the boiler and machinery endorsement to the policy." The settlement states that Litho reserved "all of its statutory, regulatory, contractual, extracontractual and other common law rights against [HSB] including but not limited to [HSB's] common law duty of good faith and duty of fair practices under the Consumer Protection Act."

Litho then disposed of the claim that related to the May 1991 incident by an order of dismissal entered prior to trial. Thus, Litho's claims against PEIC and HSB related to the October 1991 and February 1992 incidents proceeded to trial. The trial was bifurcated to determine coverage in the first part; and, if the jury found coverage, the bad faith and Consumer Protection Act claims were to be decided in the second part.

At trial, Litho relied primarily on the testimony of Michael Whiteman and Jackie Ward to show that the machines were damaged by the overheating incidents and that it was entitled to coverage under the B & M policy. Whiteman testified, on a "more probable than not" basis, that machine parts were damaged by the February 1992 overheating incident. He also testified that there were problems with specific machine parts following the 1992 incident. However, he could not specifically explain how those problems may have resulted from the overheating, nor could he recall any specific repairs that occurred after the incident.

Jackie Ward testified, based on her personal observations, that Litho's equipment was damaged by excessive heat. She specifically concluded that the scanner and the Studio 910 were damaged by the February 1992 incident.

At the close of Litho's case-in-chief, HSB moved for a directed verdict, arguing that Litho failed in its burden of proving that the Studio 910 and the scanner were damaged by the overheating incidents as required for coverage under the B & M endorsement. The trial court denied the motion.

The defendants then put forth the following evidence to show that Litho's machines were not damaged such that coverage was required under the B & M policy.

First, Mr. Whiteman testified that he could not specifically recall performing, nor did his records reflect, any repairs to the scanner following the 1992 incident. Second, Mr. Whiteman stated that he did not have any knowledge that any parts of the Litho equipment were damaged in February 1992, except for the Studio 910 Winchester disk drive, which HSB paid for. Whiteman also testified, and DuPont Crosfield service records reflect, that the scanner had malfunctioned several times prior to any of the subject claims being made.

And third, HSB retained three separate and independent analyst companies to assess Litho's claims. All three concluded that the scanner and Studio 910 did not show any physical damage, nor any problems associated with heat exposure, but rather, the machines exhibited problems associated with improper maintenance and with the power supply. Finally, a fourth expert, hired by Litho, concluded that the machine malfunctions were due to inadequate maintenance and improper installation.

The jury deadlocked on the October 1991 claim. Regarding the February 1992 claim, the jury awarded Litho $529,954: $366,000 for physical damage to the machines, $156,240 for loss due to business interruption, and $7,714 for extra expenses that Litho incurred.

The trial court subsequently set aside the business interruption award of $156,240, leaving a jury award of $373,714. HSB then made a motion for a total offset of the PEIC settlement against the verdict. The court allowed an offset of $193,000 by deducting from the PEIC settlement payment of $335,000 those amounts which, the court concluded, did not constitute double recovery. The trial court attributed $75,000 of the settlement amount to bad faith exposure and $67,000 of the settlement amount to exposure for attorney's fees. After subtracting those amounts from the PEIC settlement, the remaining $193,000 was deducted from the $373,714 jury award, leaving a principal verdict of $180,714.

After the trial, HSB filed a "Motion for Judgment as a Matter of Law or in the Alternative for a New Trial" which the court denied...