Moe v. T & G Const., Inc.

• Decision Date: 23 October 2008
• Docket Number: No. 80420-6.,80420-6.
• Citation: 165 Wn.2d 255,199 P.3d 376
• Court: Washington Supreme Court
• Parties: MUTUAL OF ENUMCLAW INSURANCE COMPANY, Respondent, v. T & G CONSTRUCTION, INC., and Villas at Harbour Pointe Owners Association, Petitioners.

199 P.3d 376

165 Wn.2d 255

MUTUAL OF ENUMCLAW INSURANCE COMPANY, Respondent, v. T & G CONSTRUCTION, INC., and Villas at Harbour Pointe Owners Association, Petitioners.

No. 80420-6.

Supreme Court of Washington, En Banc.

Argued May 27, 2008.

Decided October 23, 2008.

Dina J. Wong, Daniel Eli Zimberoff, Barker Martin PS, Seattle, WA, for Petitioners.

James Morton Beecher, Brent William Beecher, Law Offices of Hackett, Beecher, & Hart, Seattle, WA, for Respondent.

CHAMBERS, J.

¶ 1 We are asked to balance the interests of an insured defendant in reaching a reasonable settlement with a claimant against the insurer's interest in fully litigating its insured's legal obligation to that claimant. In the case before us, Mutual of Enumclaw Insurance Company (MOE), the insurer, vigorously defended its insured, a construction corporation, almost to the end. However, MOE declined to participate in the final round of settlement talks. After the talks concluded, MOE challenged the settlement at the reasonableness hearing. Now, in this separate coverage action, MOE challenges its obligation to pay. MOE's principal argument is that under the insurance policy, it is obligated to pay only damages that its insured is legally obligated to pay. It believes its insured should have prevailed on an affirmative defense in the liability case. The judge in the underlying liability case rejected the proffered affirmative defense several times, including at summary judgment and at the reasonableness hearing. In this coverage dispute, the insurer seeks to raise the issue again.

¶ 2 While MOE is correct that its insured's affirmative defense was never litigated to absolute finality, it was substantially resolved in the underlying liability case. We hold that if a coverage question turns upon the same facts or law at issue in the underlying dispute between the claimant and the insured, the insurer will be bound by the results of a trial or settlement judicially approved as reasonable, absent a showing of collusion or fraud. We reverse the Court of Appeals to the extent it holds otherwise. However, we are unable to determine on the briefing or record whether two policy exclusions apply. Accordingly, we remand to the trial court to reconsider consistent with this opinion the applicability of those two exclusions and to decide attorney fees.

FACTS

¶ 3 Villas at Harbour Pointe Owners Association (homeowners) sued the developer of their homes for poorly installed siding leading to rot and mold. The developer brought the general contractor into the lawsuit. In due course, the general contractor brought in the subcontractors, including the siding subcontractor, T & G Construction, Inc. (T & G). T & G in turn sued its own subcontractors. All in all, there were several dozen parties to the underlying suit.

¶ 4 T & G's insurer, MOE, defended T & G under a reservation of rights. More than a year into the underlying litigation, counsel discovered that T & G, a corporation, had been administratively dissolved by the secretary of state for failure to file corporate documents about two years and eight months before it had been sued. At the time, the general statute of limitations for claims against a dissolved corporation was two years. Former RCW 23B.14.340 (1995). Since this lawsuit was filed more than two years after T & G had been administratively dissolved, its counsel moved for summary judgment dismissal. Among other things, the homeowners argued that the general two year statute of limitations did not apply to known claimants who were not given notice of the dissolution and submitted evidence that the general contractor had informed T & G of the defects prior to its dissolution. Former RCW 23B.14.060 (1989). The trial court agreed with the homeowners and denied summary judgment.¹

¶ 5 Over several mediations in 2004, almost all parties settled their underlying claims for a net $5.7 million. While T & G settled with and released its subcontractors at about that time, it did not participate in the larger final settlement talks, perhaps because MOE balked at the numbers. MOE appeared to believe that the potentially covered faulty work was limited to specific, remediable mistakes in installing siding around windows, which could be corrected with "spot" or "surgical" repairs costing about $300,000. The homeowners believed that because of T & G's faulty work and the damage that it caused, all buildings needed to be stripped and resided.

¶ 6 Pursuant to court order and presided over by a professional mediator, T & G entered into negotiations with the remaining parties. With MOE's knowledge, but without its consent or participation, the remaining parties settled their claims against T & G for an additional $3.3 million and the customary assignment of claims against the insurer. The parties sought a reasonableness determination from the Snohomish County Superior Court. MOE appeared in the subsequent reasonableness hearing and objected to the settlement. One of the many issues considered at the hearing was whether an ultimate trier of fact was likely to find that the statute of limitations applied to bar claims against T & G. The judge concluded that the trier of fact was likely to find that the statute of limitations did not apply.² The Snohomish County judge also concluded that T & G's proposed limited repair was not a sufficient remedy and that all siding needed to be removed and the buildings re-sided. The experts estimated that the cost of reclading the buildings ranged between about $2 million and $4.6 million; the median of these estimates was the amount of the settlement: $3.3 million. In determining that the settlement was reasonable, the judge also took into consideration that the homeowners had spent $850,000 on the litigation and that, should the case go to trial, T & G was at risk for some or all of these expenses as well as its own costs in conducting a three to five week trial. Although the court initially found that the settlement of $3.3 million was reasonable, upon a motion for reconsideration by MOE, the judge reduced it to $3 million.

¶ 7 Meanwhile, MOE brought this declaratory judgment action in King County Superior Court against the surviving parties, including its insured,—arguing that its insured was not liable on the grounds that the statute of limitations had run, that the insured's damages were outside the coverage provisions, that T & G had breached its obligation to cooperate, and that several policy exceptions applied. In a sequence of decisions, Judge Spector granted summary judgment against MOE on all issues.

¶ 8 The Court of Appeals reversed. It concluded that given the lack of bad faith, MOE should be allowed to litigate to finality whether the statute of limitations had run on the underlying claims and, if the trial court concluded that the statute of limitations had not run, directed it to consider whether MOE had been prejudiced by its insured's failure to cooperate at the end of the liability case. Mut. of Enumclaw Ins. Co. v. T & G Constr., Inc., 143 Wash.App. 667, 2007 WL 959894 (2007). Simultaneously, the Court of Appeals upheld the settlement in the liability suit. Villas at Harbour Pointe Owners Ass'n v. Mut. of Enumclaw Ins. Co., 137 Wash.App. 751, 154 P.3d 950 (2007), review denied, 163 Wash.2d 1020, 180 P.3d 1292 (2008).

¶ 9 The homeowners and T & G sought review of the coverage case while MOE separately sought review of the underlying liability case. We accepted review of this coverage dispute. We reverse in part, affirm in part, and remand to the trial court for further proceedings consistent with this opinion.

ANALYSIS

¶ 10 Since only questions of law are presented, our review is de novo. Sherry v. Fin. Indem. Co., 160 Wash.2d 611, 617, 160 P.3d 31 (2007) (citing Parents Involved in Cmty. Schs. v. Seattle Sch. Dist. No. 1, 149 Wash.2d 660, 670, 72 P.3d 151 (2003)). Under the insurance contract, MOE is obligated to only "pay those sums that the insured becomes legally obligated to pay as damages because of ... `property damage.'" Clerk's Papers (CP) at 646. The primary issue we must resolve is whether the insurer is entitled to an independent determination in a coverage declaratory judgment action of the facts establishing its insured's liability when those disputed facts were considered in the liability case and the parties reached a settlement which was judicially approved as reasonable. MOE contends that the liability suit did not resolve whether its insured was in fact legally obligated to pay damages because there was no final decision on whether the statute of limitations had run before the case was filed. T & G and its assignee, the homeowners, counter that by virtue of the settlement and its approval by the trial court in a reasonableness hearing, whether it is "legally obligated to pay damages" has been finally adjudicated and should not be relitigated.

¶ 11 Generally speaking, "an insurer will be bound by the `findings, conclusions and judgment' entered in the action against the tortfeasor when it has notice and an opportunity to intervene in the underlying action.'" Fisher v. Allstate Ins. Co., 136 Wash.2d 240, 246, 961 P.2d 350 (1998) (citing Finney v. Farmers Ins. Co., 21 Wash.App. 601, 618, 586 P.2d 519 (1978)). This avoids inconsistent judgments, delay, additional expense, and the creation of a perverse incentive for carriers to wait until liability and damages had been established before deciding whether it is cost-effective to intervene. Id. at 249, 961 P.2d 350. Even a default judgment against an uninsured tortfeasor is enforceable against an underinsured motorist insurer who had notice of the suit, even though the parties have not fully litigated the underlying dispute. Lenzi v. Redland Ins. Co., 140 Wash.2d 267, 280, 996 P.2d 603 (2000) (quoting Loveridge v. Fred Meyer, Inc., 125 Wash.2d 759, 763, 887 P.2d 898 (1995)). The insurer is bound "`to what might, or should, have...