Public Utility Dist. No. 1 of Klickitat County v. International Ins. Co.

Decision Date06 October 1994
Docket NumberNo. 3,No. 1,60237-9,Nos. 59944-1,No. 2,1,3,2,s. 59944-1
CourtWashington Supreme Court
PartiesPUBLIC UTILITY DISTRICT NO. 1 OF KLICKITAT COUNTY; Public Utility Districtof Lewis County; Public Utility Districtof Mason County; Public Utility Districtof Okanogan County; Public Utility Districtof Pacific County; Public Utility Districtof Skamania County; Public Utility Districtof Wahkiakum County; Public Utility Districtof Benton County; Public Utility Districtof Clark County; Public Utility Districtof Grays Harbor County; Robert W. Blodgett; Donald L. Clayhold; John J. Goldsbury; Ed Fischer; Edwin L. Morris; George W. Watters; Ferris G. Gilkey; John J. Welch; Marion C. Babb; Gerald Fenton; Leonard Allen; Arnold J. James; T.R. Teitzel; Dennis E. Rohr; Stanton H. Cain; John Dunsmoor; Quentin Mizer; Harold A. Norman; Rolf E. Jemtegaard; Charles Emerick; Francis Longo; and David Myers; Respondents, v. INTERNATIONAL INSURANCE COMPANY, an Illinois corporation; and Industrial Underwriters Insurance Company, a Texas corporation, Appellants, and Walbrook Insurance Company, Limited, et al., Defendants (Two Cases).
Edwards, Sieh, Wiggins & Hathaway, Charles K. Wiggins, Catherine W. Smith and Howard M. Goodfriend; and Hallmark, Keating & Abbott, Daniel F. Mullin, Seattle, for appellants.

Johnson & Martens, P.S., Barry M. Johnson, Pamela M. Andrews, Seattle, Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, Albert R. Malanca, and Kenneth G. Kieffer, Tacoma, and Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, Donald S. Cohen, Seattle, for respondents.

DOLLIVER, Justice.

These consolidated appeals arise from an insurance coverage dispute involving the Washington Public Power Supply System (WPPSS) bond default. The defendants, International Insurance Company (International) and Industrial Underwriters Insurance Company (Industrial), appeal from a jury verdict awarding the plaintiffs $13,000,000 in liability insurance coverage and an assessment of over $6,500,000 in prejudgment interest. International and Industrial also challenge the trial court's attorney fee award of almost $2,800,000.

The plaintiffs in these cases consist of 10 Washington Public Utility Districts (the PUDs), several employees and commissioners of the PUDs who served on the WPPSS Board of Directors and Participants' Committee (the individuals), and the Washington Public Utilities Districts' Utility System (WPUDUS). WPUDUS, of which the PUDs are members, is an unincorporated association of public utility districts that formed a joint agreement to self-insure and to purchase additional insurance.

As is customary, WPUDUS arranged for insurance coverage in layers. WPUDUS provided the first $500,000 in coverage for claims against its members as part of its self-insurance agreement. During the years relevant to this appeal, 1981 and 1982, WPUDUS also had excess coverage under a primary policy issued by Transcontinental Insurance Company (Transcontinental) as well as under additional policies incorporating the terms of this primary policy issued by several insurers, including the defendant companies, International and Industrial. Specifically, in 1981 WPUDUS obtained excess insurance coverage from Transcontinental for $500,000 for the period of January 31, 1981, to January 31, 1982. WPUDUS also purchased $3,000,000 in excess coverage from defendant International under the same terms and for the same period as the Transcontinental policy. In 1982 the Transcontinental policy was increased to $19,500,000, and WPUDUS obtained an additional layer of excess coverage from defendant Industrial for $10,000,000 "PER TERMS AND CONDITIONS OF UNDERLYING TRANSCONTINENTAL In March 1983, holders of the WPPSS bonds filed class action suits against the participating utilities and the individual commissioners and employees who were members of the WPPSS Participants' Committee or of the WPPSS Board of Directors for alleged securities law violations in connection with the termination of WPPSS Plants 4 and 5 and the sale of the bonds financing these projects. See In re WPPSS Sec. Litig., 720 F.Supp. 1379 (D.Ariz.1989), aff'd sub nom. Class Plaintiffs v. Seattle, 955 F.2d 1268 (9th Cir.), cert. denied, --- U.S. ----, 113 S.Ct. 408, 121 L.Ed.2d 333 (1992).

POLICY". The existence of this coverage is relevant because the PUDs incurred massive liability as a result of the termination of WPPSS Plants 4 and 5.

In a related matter, on June 15, 1983, we held in Chemical Bank v. WPPSS, 99 Wash.2d 772, 666 P.2d 329 (1983), aff'd on reh'g, 102 Wash.2d 874, 691 P.2d 524 (1984), cert. denied, 471 U.S. 1065, 105 S.Ct. 2140, 85 L.Ed.2d 497, 471 U.S. 1075, 105 S.Ct. 2154, 85 L.Ed.2d 510 (1985), that certain utilities lacked the authority to form the "Participants' Agreement", which provided for the funding of WPPSS Plants 4 and 5. This holding, in part, provided a basis for liability in Multidistrict Litigation (MDL) 551.

In August 1983, 29 separate federal securities lawsuits, including those mentioned above, were consolidated by the Panel on Multidistrict Litigation into "MDL 551", a complex and unwieldy mass of litigation. In re WPPSS, 720 F.Supp. at 1384. The Federal District Court assigned to MDL 551 managed, supervised, and finally approved the settlement agreements reached in MDL 551, which totaled over $580 million for the bonds which had been issued in the amount of $2.25 billion. These settlements ultimately were determined to be fair, reasonable and adequate. See Class Plaintiffs v. Seattle, supra.

Transcontinental, as an insurer with potential liability in MDL 551, had initiated a declaratory judgment action in 1984 seeking to determine if its two policies (the primary policies incorporated into the Industrial and International policies in the present case) provided coverage for the claims asserted in MDL 551. In August 1988, we held that "both Settlement in the MDL 551 litigation was achieved in stages and involved several intermediate rulings by the court. As settlement progressed, the individuals were released from the MDL 551 litigation after negotiating a settlement under which they assigned a percentage of the face value of their insurance policies to the MDL 551 claimants and a smaller percentage to the PUDs, the individuals' employers. The PUDs subsequently negotiated a separate settlement with the MDL 551 claimants under which the PUDs (who are plaintiffs in the present case) paid the claimants more than $90 million (substantially less than originally demanded by the claimants), and in exchange, the claimants assigned their percentage of the insurance proceeds they had received from the individuals to the PUDs (as a compromise for the lower cash amount). Thus, the MDL 551 claimants received firm settlement dollars and were alleviated from the burden of having to collect the insurance proceeds from the numerous excess insurers.

                [Transcontinental] policies provide coverage for officers, directors and employees in their duties as such for liabilities arising out of the WPPSS-related litigation."  Transcontinental Ins. Co. v. Washington Pub. Utils.  Dists.' Util.  Sys., 111 Wash.2d 452, 464, 760 P.2d 337 (1988).  In February 1988, the MDL 551 court found the individuals were immune from liability, but found their immunity was waived to the extent they were insured from claims of the sort brought by the MDL 551 claimants.  In re WPPSS, 720 F.Supp. at 1406.   Under these rulings, the excess insurance carriers providing coverage based on the Transcontinental policies were implicated
                

In March 1989, the plaintiffs in this case filed the present action in state court to enforce the insurance contract so that the PUDs could recover under those policies. All of the insurers except International and Industrial settled prior to trial. Both International and Industrial, however, disputed coverage and refused to settle. International asserted that its policy did not provide coverage for the MDL 551 claims. Industrial conceded its policy provided such coverage, but argued along with International that the insureds had Because the trial court had resolved many of the issues of coverage on summary judgment, the only questions submitted to the jury were (1) whether the plaintiffs knew before the effective date of the policies that there was a substantial likelihood of a bondholder suit; (2) whether the defendants were prejudiced by insureds' failure to obtain their consent for the assignments of the policy proceeds; and (3) whether the directors, officers, and employees of WPPSS (the insureds) were acting within the scope of their employment when they served as members of the WPPSS Board of Directors or Participant Committee. On its special verdict form, the jury answered the first two questions "no" as to both defendants and answered the third question "yes".

improperly assigned the proceeds of the policies, had settled without consent of the insurers in violation of the coverage terms, and had improperly acquired the insurance coverage. The trial court granted partial summary judgment in the plaintiffs' favor on these issues.

Based on these findings, the trial court enforced the MDL 551 settlement and awarded the plaintiffs the face amount of the policies ($3 million against International and $10 million against Industrial) plus a total of $6,513,534.25 in prejudgment interest. The trial court also granted the plaintiffs' request for an attorney fees award and awarded $2,198,599.22 in fees to Gordon, Thomas, Honeywell, Malanca, Peterson and Daheim; $399,768.09 to Johnson and Martens; $59,243 to Blair, Schaefer, Hutchison and Wolfe; and $114,042.91 to Garvey, Schubert and Barer.

International and Industrial appeal directly to this court both from the underlying judgment and from the award of attorney fees.

I

First we must consider whether the policies at issue in this case provide...

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