§17.7 - Duty to Indemnify

• Jurisdiction: Washington

§17.7 Duty to Indemnify

The circumstances in which the insurer has a duty to indemnify are discussed below.

(1) Misrepresentations at the time of contracting

Misrepresentation of a fact material to the decision to insure is an affirmative defense, thus the burden of proof is on the insurer. Queen City Farms v. Cent. Natl Ins. Co. of Omaha, 126 Wn.2d 50, 96, 882 P.2d 703 (1994), amended, 891 P.2d 718 (1995). The Queen City court held that misrepresentation in obtaining insurance must be proved by clear, cogent, and convincing evidence. Id. at 99. The standard of proof is a high one, requiring that the trier of fact be convinced that the fact in issue is highly probable. Id. at 97.

An insurer may rescind coverage if it has evidence of knowing misrepresentation by the insured. Cutter & Buck, Inc. v. Genesis Ins. Co., 306 F.Supp.2d 988, 997 (W.D. Wash. 2004) (citing RCW 48.18.090(1)), affd, 144 F. Appx 600 (9th Cir. 2005). The insurer must prove that (1) the insured represented certain information as truthful during the negotiation of the insurance contract; (2) those representations were false; (3) the misrepresentations were material; and (4) the misrepresentations were made with the intent to deceive. Id. at 997. Materiality and intent are questions of fact. Id. at 1003-04. However, when an insurer specifically requests certain information, it is presumed to be material. Id. at 1003. Further, a false statement, if knowingly made, is presumed to be made with an intent to deceive. Id. at 1004 (citing Music v. United Ins. Co. of Am., 59 Wn.2d 765, 769, 370 P.2d 603 (1962)). In the absence of credible evidence that false representations were made without an intent to deceive, the presumption prevails. Cutter & Buck, 306 F. Supp. 2d at 1004 (quoting Wilburn Pioneer Mut. Life Ins. Co., 8 Wn.App. 616, 620, 508 P.2d 632 (1973) (emphasis in original)). To rescind coverage, which renders an insurance policy void from its initiation, the insurer must return premiums paid for the policy. See Queen City, 126 Wn.2d at 111-14.

However, other remedies for material misrepresentation available to the insurer include affirming the policy and asserting misrepresentation as a defense, or affirming the policy and suing for damages for misrepresentation. These remedies may not require return of premiums, as the contract is not being fully voided or rescinded. See id.

Practice Tip: Insurers need to be aware that the burden of proof on a misrepresentation defense is high. Witnesses must have knowledge as to the manner in which decisions were made at the time and in the particular company involved, and will not be allowed to speculate.

(2) Satisfaction of policy conditions

As a general rule in Washington courts, an insureds breach of its policy duties is not an adequate basis for denying coverage absent proof that the insurer has been actually and substantially prejudiced by the breach. Axis Surplus Ins. Co. v. James River Ins. Co., 635 F.Supp.2d 1214, 1218 (2009). Several of the most common policy conditions are considered below.

(a) Timely notice

Most CGL policies contain a provision requiring the policyholder to give the insurer notice as soon as practicable after the policyholder may reasonably conclude that an act or event has occurred that may involve injuries or damages covered under its policies. An example of a notice condition reads as follows:

Duties in the Event of Occurrence, Claim or Suit

a. You must see to it that we are notified as soon as practicable of an occurrence or an offense which may result in a claim. To the extent possible, notice should include:

(1)	How, when and where the occurrence or offense took place;
(2)	The names and addresses of any injured persons and witnesses and
(3)	The nature and location of any injury or damage arising out of the occurrence or offense.

Insurance Services Office (ISO) Form GL 00 01 (Ed. 12 07).

However, Washington courts have held that a policyholders failure to give timely notice to its insurer will bar coverage only if the insurer has been prejudiced as a result. See, e.g., Or. Auto. Ins. Co. v. Salzberg, 85 Wn.2d 372, 377, 535 P.2d 816 (1975).

In Canron, Inc. v. Federal Insurance Co., 82 Wn.App. 480, 481, 918 P.2d 937 (1996), review denied, 131 Wn.2d 1002 (1997), a jury found that untimely notice had prejudiced Federal. Prior to notifying Federal, Canron had engaged in substantial negotiations for nearly a year regarding the terms of a consent decree, and the physical characteristics of the site had changed, precluding Federal from having a reasonable opportunity to investigate the claim. Id. at 485, 487-88. Nonetheless, the Court of Appeals reversed, concluding that there was not substantial evidence of actual prejudice. Id. at 492.

In some cases, prejudice can be presumed as a matter of law. E.g., Twin City Fire Ins. Co. v. King Cnty., 749 F. Supp. 230, 234 (W.D. Wash. 1990), affd, 942 F.2d 794 (9th Cir. 1991). In Twin City, the court concluded that when a policyholder failed to notify its insurer until after the appeal of an unsuccessful decision at the trial court level, prejudice could be presumed as a matter of law. Id. at 233.

However, the threshold is fairly high for an insurer to be relieved of its duties under the insurance contract, unless it can show that the late notice caused it actual and substantial prejudice. Mutual of Enumclaw Ins. Co. v. USF Ins. Co., 164 Wn.2d 411, 420-21, 191 P.3d 866 (2008). To show prejudice, the insurer must prove that an insureds breach of a notice provision had an identifiable and material detrimental effect on its ability to defend its interests. See also MacLean Townhomes, LLC v. Am. States Ins. Co., 138 Wn.App. 186, 189, 156 P.3d 278 (2007) (prejudice established when arbitration bound the insurer without notice to the insurer).

The insurers duty to defend or indemnify does not arise until a claim has been properly tendered. Unigard Ins. Co. v. Leven, 97 Wn.App. 417, 426, 983 P.2d 1155 (1999), review denied, 140 Wn.2d 1009 (2000). The Washington Court of Appeals declined to follow those courts that had held that a tender is sufficient as long as it puts the insurer on notice of a claim. Id. The Leven court reasoned that an insurer cannot be expected to anticipate when or if an insured will make a claim for coverage and concluded that the insurers duty does not arise until the policyholder affirmatively inform[s] the insurer that its participation is desired. Leven, 97 Wn.App. at 427 (citing Time Oil Co. v. CIGNA Prop. & Cas. Ins. Co., 743 F. Supp. 1400 (W.D. Wash. 1990)). Consequently, in Leven the court held that although the insurer had notice as early as 1984 of a potential claim under the Model Toxics Control Act (MTCA), Chapter 70.105D RCW, the claim was not tendered until 1997, when the policyholder specifically informed the insurer that he had been named as a potentially liable party (PLP) in 1990. Leven, 97 Wn.App. at 421-22.

The court then went on to consider whether the insurer was prejudiced by the policyholders delay in tendering the claim. Id. at 431. The insurer asserted that prejudice resulted from its inability to argue that the policyholder, who had settled the claim in 1991, should not have incurred individual liability as an owner or operator under the MTCA. Id. After reviewing federal decisions construing the phrase owner or operator as it is used in the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), the court agreed. Id. at 429-31.

In sum, courts in this jurisdiction and others have held that prejudice can arise as a result of, for example, an insurers inability to monitor and/or control the policyholders defense of an underlying claim, when the passage of time deprives an insurer of its right and obligation under the policy to conduct a sufficient investigation of the underlying claim, and when an insurer is unable to participate in settlement negotiations between the policyholder and the underlying claimant.

(b) Cooperation

CGL policies typically contain a provision requiring the policyholder to cooperate in the investigation and defense of claims. Such a provision may provide as follows:

Duties in the Event of Occurrence, Claim or Suit.

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c. You and any other involved insured must:

(1)	Immediately send us copies of any demands, notices, summonses or legal papers received in connection with the claim or suit;
(2)	Authorize us to obtain records and other information;
(3)	Cooperate with us in the investigation or settlement of the claim or defense against the suit; and
(4)	Assist us, upon our request, in the enforcement of any right against any person or organization which may be liable to the insured because of injury or damage to which this insurance may also apply.

ISO Form CG 00 01 (Ed. 12 07).

When a policyholders notice is late, the duty to cooperate has often also been disregarded. Washington insurers may argue that actual prejudice can arise thereby, when the facts support reasons similar to those set forth in §17.7(2)(a), above, in the discussion of late notice. For example, the ability to bring enforcement actions against other PRPs may be prejudiced by a policyholders failure to cooperate.

(c) No voluntary payments

Another typical provision is one prohibiting the policyholder from making payments voluntarily to potential claimants. Such a clause may provide:

Duties in the Event of Occurrence, Claim or Suit.

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d. No insureds will, except at their own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.

ISO Form CG 00 01 (Ed. 12 07).

A Washington trial court has instructed a jury that any payment a policyholder made absent consultation with the insurer violated such a provision, even if the loss was a...