In a decision out of the U.S. District Court for the Eastern District of Washington, the court found that an insurer acted in bad faith when a claim was denied based on the adjuster's lack of knowledge of recent Washington case law. The case is Sec. Nat'l Ins. Co., v. Constr. Assocs. of Spokane, No. 2:20-cv-00167-SMJ, 2022 U.S. Dist. LEXIS 53533 (E.D. Wash. Mar. 24, 2022).
Construction Associates of Spokane was a general contractor hired for a project at the Paulsen Center in Spokane. Construction Associates hired a subcontractor, Merit Electric, for whom Mark Wilson worked. In 2016, Wilson was seriously injured while working at the Paulsen Center. Three years later, he sued Construction Associates and other defendants in Spokane County Superior Court, claiming damages for medical expenses, pain and suffering, mental anguish and emotional distress, loss of enjoyment of life, loss of wages and loss of consortium.
Construction Associates tendered to Merit Electric's broker, Alliant Insurance Services, Inc. Alliant forwarded the tender to Security National, including a certificate of insurance issued by Alliant to Construction Associates on September 3, 2019, and the subcontract with Merit. The subcontract required Merit to maintain CGL coverage with $1 million limits. The subcontractor was required to submit the certificate of insurance to the Contractor.
Merit's policy for the 2016-2017 time period included an "Additional Insured" endorsement that conferred additional insured status to "any person for whom you are performing operations when you and such person have agreed that such person be added as an additional insured on your policy."
Construction Associates asked Merit's broker for the certificate of insurance from April 2, 2016 to April 2, 2017. Alliant provided the wrong certificate, one that was issued for another project that Merit was working on. Another certificate of insurance was provided which was not project-specific but purported to reflect blanket additional insured status for the time period during which Wilson was injured.
According to claim notes, the adjuster felt it necessary to consult with claims counsel to determine if the 2019 certificate of insurance would provide coverage for the Wilson accident, but claims counsel was not consulted. The claim was instead denied because no Additional Insured endorsement for the 2016 policy was found. The adjuster noted that a Washington statute provided that "A certificate of insurance does not confer new or additional rights beyond what the referenced policy of insurance provides."
Counsel for Construction Associates notified the adjuster of a recent decision issued by the Washington Supreme Court, T-Mobile USA Inc v. Selective Ins. Co. of Am., 450 P.3d 150 (Wash. 2019), in which an insurer was bound by the representations of its agent, such as when issuing a certificate of insurance.
Four months later, Security National conducted a second investigation, and then issued a second denial stating that Alliant had no authority to issue any certificate of insurance after the policy expired. Security National then filed a declaratory judgment action against Construction Associates and moved for partial summary judgment regarding the 2019 certificate of insurance. The company then moved for summary judgment on bad faith.
The federal district court relied first on T-Mobile USA v. Selective and found that the certificate of insurance issued by Merit provided coverage to Construction Associates for the Wilson accident.
Then the court turned to Construction Associates' motion and found that Security National acted in bad faith as a matter of law because its denial and determination that it neither had the duty to defend nor indemnify was based, initially, on an inadequate investigation and, later, on arguable readings of the policy and questionable interpretations of Washington law. The adjuster did little to no investigation regarding why the 2019 certificate of insurance was issued. Instead, the adjuster was content to rely on his own erroneous knowledge of the applicable law concerning certificates of insurance. Second, Security National failed to look for and account for published case law directly on point, a fact that was especially troubling given the notations in the file that coverage counsel may be required.
An adjuster was not excused from having at least a baseline understanding of the relevant state's law necessary to carry out their duties. Insurers were obligated to undertake reasonably small steps to ensure the adjusters were equipped to make reasonable coverage and defense determinations. Adjusters had to equip themselves with the appropriate knowledge or seek out others who possessed the requisite tools and knowledge.
Construction Associates' motion for partial summary judgment was granted.
Editor's Note: In denying coverage, the court explained that "Security National had over fifty days in which to do the smallest amount of research into caselaw in Washington State or else consult coverage counsel. Instead, it did next to no research on the applicable law in Washington state." Claims adjusters should pay attention to this case. It is very rare for a court to grant summary judgment on a bad faith claim, and here the court did exactly that.