Truck Ins. Exchange v. VanPort Homes, Inc.

• Decision Date: 21 November 2002
• Docket Number: No. 70747-2.,70747-2.
• Citation: 147 Wash.2d 751,58 P.3d 276
• Parties: TRUCK INSURANCE EXCHANGE, Petitioner, v. VANPORT HOMES, INC., Robert Bogle, Dwane D. Bogle, Ellen Bogle, George Allison, Steve Burgen, Linda Burgen, Jeffery J. Fandell, Frances Fandell, Charles Gutweinger, Lee Gutweinger, Otto Allison, and Michelle Allison, Respondents.
• Court: Washington Supreme Court

58 P.3d 276

147 Wash.2d 751

TRUCK INSURANCE EXCHANGE, Petitioner, v. VANPORT HOMES, INC., Robert Bogle, Dwane D. Bogle, Ellen Bogle, George Allison, Steve Burgen, Linda Burgen, Jeffery J. Fandell, Frances Fandell, Charles Gutweinger, Lee Gutweinger, Otto Allison, and Michelle Allison, Respondents.

No. 70747-2.

Supreme Court of Washington, En Banc.

Argued November 8, 2001.

Decided November 21, 2002.

Burgess Fitzer P.S., Timothy Gosselin, Tacoma, for Petitioner.

Morse & Bratt, William Robison, Ben Shafton, Landerholm Memovich Lansverk & Whitesides, Zachary H. Stoumbos, Jean M. McCoy, Stoel Rives Boley Jones & Grey, Louis Ferreira, Donald Courser, Vancouver, for Respondents.

Bryan Harnetiaux, Spokane, Debra Stephens, Amicus Curiae on Behalf of Washington State Trial Lawyers Association Foundation.

CHAMBERS, J.

We are asked to determine whether policy provisions relieve an insurer of the duty of providing coverage. However, because Truck Insurance Exchange breached its duty to defend in bad faith, we hold that it is estopped from denying coverage. The insurer further argues that in order to establish damages the insured must prove that its settlements with claimants were reasonable. We hold that where an insurer acts in bad faith in refusing to defend, the settlements entered into by insureds with third parties and approved by a court as reasonable will be presumed to be reasonable; such presumption may be overcome by the insurer upon a showing that the settlements were the product of fraud or collusion. The trial court's judgment is affirmed as indicated and the Court of Appeals is reversed to the extent it remanded for further findings regarding the reasonableness of the insured's settlement with the claimants.

FACTS

VanPort Homes, Inc., provided services in connection with the construction of new homes, and it offered two alternative contracts to its customers. It could act either as a general contractor or as a construction consultant to future homeowners wishing to build their own homes. All claims relevant to this appeal arose out of contracts to consult.

VanPort's boilerplate consultation contract provided that, with the exception of minor matters, the customer would "have complete and full authority as to the construction of [the] residence." Clerk's Papers (CP) at 428. The customer's responsibility included the selection of real estate, building plans, and design professionals. VanPort's services included assisting with schedules, budgets, and compliance with government requirements, and were "limited to the advice and materials it provide[d] to client." CP at 428-30.

When Truck Insurance first insured VanPort in 1987, it requested and received a report from Equifax regarding the nature of VanPort's business. The report stated that the company would be "operating as building consultants to prospective clients who come to them and want to have a house built by themselves" and that they would be "strictly a consulting firm." The report outlined VanPort's role essentially as it was laid out in VanPort's contracts with customers. CP at 372-73.

In 1987, after receiving the report from Equifax, Truck Insurance issued a "T-410" policy. From May 1991, coverage was provided by a commercial general liability (CGL) policy. Both policies provided coverage to VanPort as "engineers or architects, consulting, not engaged in actual construction."¹ CP at 484, 524. Thus, the policies acknowledged the fact that VanPort was not functioning as a general contractor but classified the company role as engineers and architects.² Both policies imposed on Truck Insurance the duty to defend.³ Between 1989 and 1991, VanPort entered into construction consulting agreements with five sets of customers (collectively "customers"). The customers complained of numerous incidents of defective labor and materials, which VanPort failed to catch in its inspections, and notified VanPort of the failure of several subcontractors to properly perform work.

Dissatisfied with VanPort's response, the customers sued VanPort in four separate lawsuits for violations of the Washington State Consumer Protection Act, chapter 19.86 RCW, the federal Consumer Credit Protection Act, 15 U.S.C. §§ 1601-1693r, misrepresentation, usury, breach of contract, and negligence. CP at 105. Only the negligence claim is relevant to this appeal. The customers alleged undetected errors in constructing foundations, framing, window installation, electrical work, and flooring. In one house, rafters were not tied to the roof. In another, a customer listed 56 defects, including severe cracks in the foundation, major leaks in the basement and through the roof, and omission of structural supports for the stairs and for certain load-bearing walls, all of which allegedly rendered the house valueless. Between July and October 1992, VanPort tendered the lawsuits to Truck Insurance.

Over a year later, in December 1993, Truck Insurance responded and declined coverage. The letter denying coverage quoted extensively from the policy language and endorsements but provided no analysis, and no attempt was made to explain how the policy language actually excluded the claim. The letter also stated that after a "thorough investigation" the insurer determined there was no coverage. CP at 553. However, an internal memo dated November 1993 indicates that little or no investigation was actually made:

At this time, it is difficult to assess any negligence that may be attributable to our insured due to the fact that we have not accepted the tender of defense, and therefore, have not [begun] to investigate all the liability issues with [regard] to this loss.

CP at 335.

In April 1994, VanPort wrote to Truck Insurance seeking an explanation for the denial of coverage. The letter stated that VanPort feared the costs of litigation would "be responsible for putting what was otherwise a very profitable and successful corporation out of business." CP at 560. VanPort also requested a meeting to discuss the denial. Truck Insurance never responded. Meanwhile, VanPort continued to defend the actions on its own.

In February 1996, Truck Insurance finally acted by filing a declaratory judgment action against VanPort, its owners, and the customers, seeking a declaration that it had no duty to defend or indemnify. Truck Insurance set out for the first time the basis of its denial of coverage as part of the declaratory judgment action, asserting that the claims were basically malpractice claims and that a CGL policy is not a malpractice policy. The action was stayed while the principal owners of VanPort completed bankruptcy proceedings and was resumed in July 1996. In November 1996, VanPort counterclaimed asserting estoppel, breach of contract, and bad faith, and sought damages to include the costs of defending against the suit brought by the customers. In February 1997, both parties moved for summary judgment.

In March 1997, VanPort and its customers settled their lawsuits for a total of $489,685.93. The customers agreed that they would collect only from VanPort's insurer and not from VanPort itself. VanPort assigned its right to indemnification from Truck Insurance to the customers and assigned to them a percentage of any damages awarded in VanPort's counterclaim.

In the Truck Insurance declaratory judgment action, VanPort brought a cross motion for summary judgment alleging that Truck Insurance had breached its duty to defend in violation of WAC 284-30-330(2), (6), (7) and (12).⁴ The trial court after argument entered an order holding that there was coverage, that Truck Insurance had a duty to defend, and later that Truck Insurance acted in bad faith in failing to defend. This was contested by Truck Insurance in two motions for reconsideration, both of which were denied.

In September 1998, the trial court entered an order of final judgment on some of the claims. The court held that Truck Insurance's wrongful refusal to defend VanPort was an unfair or deceptive practice in violation of consumer protection regulation WAC 284-30-330, and the damages were therefore per se reasonable. Accordingly, the court declined to evaluate further the reasonableness of the settlements. The court awarded a total judgment of $689,741.46, with interest accruing at the rate of 12 percent per annum. The court stayed the claims for lack of good faith and other Consumer Protection Act violations.

Truck Insurance filed an appeal. In an unpublished opinion, the Court of Appeals affirmed the decision that Truck Insurance owed coverage and had a duty to defend VanPort, but remanded for further proceedings concerning the amount of the judgment, declining to find that the damages were per se reasonable. Truck Ins. Exch. v. Vanport Homes, Inc., noted at 99 Wash.App. 1051, 2000 WL 239592. We granted review.

ANALYSIS

Duty to Defend

It is unnecessary for us to reach the issue of whether or not coverage was excluded under specific policy provisions because we hold that an insurer that refuses or fails to defend in bad faith is estopped from denying coverage. It is well established that where an insurer has a duty to defend an action and the insurer refuses to defend, the insurer is bound by the decision of the trier of fact regarding issues necessarily decided in the litigation. Herendeen v. United States Fid. & Guar. Co., 19 Ariz.App. 399, 401, 507 P.2d 1011 (1973); Blais v. Quincy Mut. Fire Ins. Co., 361 Mass. 68, 70-71, 278 N.E.2d 746 (1972); Senger v. Minn. Lawyers Mut. Ins. Co., 415 N.W.2d 364, 368 (Minn.Ct. App.1987); Ramos v. Nat'l Cas. Co., 642 N.Y.S.2d 290, 227 A.D.2d 250 (1996); accord B. Roth Tool Co. v. New Amsterdam Cas. Co., 161 F. 709, 712 (8th Cir.1908); U.S. Fid. & Guar. Co. v. Dawson Produce Co., 180 Okla. 119, 121, 68 P.2d 105 (1937); Carolina Veneer & Lumber Co. v. Am. Mut. Liab. Ins. Co., 202 S.C. 103, 107, 24 S.E.2d 153 (1943); S.W. Sur. Ins. Co. v. Thompson, 180 S.W. 947, 951 (Tex.Civ.App.1915).

An...