Bad Faith Against Carrier
Refusal to Respond, Among Other Things, Results in Bad Faith Against Carrier
Vivian Persand
January 20, 2012
In a federal case from Washington, a company providing general contracting services found itself facing lawsuits for construction defects and its insurance company would not respond to its requests for coverage or indemnification.
Ledcor Industries (USA) Inc. ("Ledcor"), a general contractor, obtained insurance coverage from Virginia Surety Company, Inc. ("Virginia Surety"). The policy was issued specifically for the Adelaide Project, to construct townhomes and condominiums. The owner and developer of the construction project was West Seattle Property, LLC ("WSP").
When the homeowners associations ("HOA") for the condominiums and townhomes found certain construction defects, they contacted Ledcor. As any insured should do when finding out about a possible claim, Ledcor gave Virginia Surety notice of the potential insurance claims. Virginia Surety requested certain information and documentation, and Ledcor promptly complied with those requests. Ledcor's attorney also told Virginia Surety that there was a dispute regarding the date that Ledcor achieved "substantial completion" of construction.
Virginia Surety denied the claim on several grounds, including two exclusions in the policy. It claimed that its duty to defend only applied if a lawsuit was filed against Ledcor and it only had a duty to indemnify if Ledcor became legally obligated to pay damages.
"Virginia [Surety] relied upon the Policy's 'Progressive, Continuous or Intermittent ‘Property Damage’ Exclusion'...that… excludes coverage for damages that occurred prior to commencement of the Policy...Virginia [Surety] also claimed that the 'damage to your work' exclusion…that…excludes coverage for damage caused by the policyholder (as opposed to damage caused by third-parties, such as the policyholder's subcontractors)—“may well operate to bar coverage for this claim...Rather than claiming that this exclusion definitively barred coverage, however, Virginia [Surety] stated that “we do not have sufficient information to know if the subcontractor exception to the exclusion might apply."
When the townhomes' HOA filed a lawsuit against WSP alleging various defects in the building and naming Ledcor as a third-party defendant, Ledcor notified Virginia Surety and provided Virginia Surety with certain pleadings. Although Ledcor again submitted a claim for coverage, Virginia Surety did not respond.
Several months later, the condominiums' HOA filed a similar lawsuit against WSP, naming Ledcor as a third-party defendant. Ledcor sent the relevant pleadings to Virginia Surety and re-tendered its claim for coverage. Virginia Surety did not respond.
Like many homeowners who challenge the denial of a claim or the amount of loss determined by their carrier, Ledcor sued Virginia Surety for breach of insurance contract, violations of Washington's Consumer Protection Act, and Violations of the Insurance Fair Conduct Act. Once the litigation was underway, Ledcor filed a Motion for Partial Summary Judgment claiming, among other things, that Virginia Surety's denial letter misinterpreted and misrepresented the policy and that the carrier failed to acknowledge and investigate Ledcor's initial tender for defense and indemnity.
When evaluating the evidence before the United States District Court for the Western District of Washington, the Court pointed out that Virginia Surety’s own claims handler testified that the 'damage to your work exception' would not apply to work conducted by Ledcor's subcontractors. He also testified that, at the time Virginia Surety sent the denial letter, he knew that Ledcor was the general contractor on the Adelaide Project and that it employed a number of subcontractors. Despite the fact that Virginia Surety knew this, the Court could find no evidence that the carrier conducted any investigation into whether a subcontractor caused the damages at issue.
The Court also considered that Virginia Surety relied upon the Fungus Exclusion to deny coverage when the lists of construction defects provided by the HOAs did not mention mold or fungus. Finally, the Court ruled that the Progressive Loss Exclusion did not apply to preclude coverage either. The evidence showed that Virginia Surety was aware that certain punch list work was still ongoing at the Adelaide Project as late as April of 2004, a date that was several months into the term of the policy. The Court agreed with Ledcor’s position that a reasonable investigation by Virginia Surety would have revealed the ongoing nature of the work at the Adelaide Project and would have at least required an inquiry into whether the construction defects at issue occurred within the term of the policy.
After undergoing the analysis above, the Court determined that Virginia Surety's denial of coverage and failure to investigate, together with its subsequent failures to respond, constituted bad faith and breach of contract and violations of Washington's Consumer Protection Act and Insurance Fair Conduct Act.
The ruling referenced above is specific to the United States District Court for the Western District of Washington; rulings on the same or similar issues in other jurisdiction may vary.