The Washington State Supreme Court Rules that Claims Adjusters May Not Be Held Personally Liable for Insurance Bad Faith

In 2018, the Washington Court of Appeals, Division 1, issued a ruling which rippled through the insurance community by finding that a claims adjuster may be held personally liable for the tort of insurance bad faith. However, in October 2019, the Washington State Supreme Court held that a claims adjuster may not be personally sued for insurance bad faith or for alleged violations of Washington’s Consumer Protection Act, RCW 19.86 et seq. (“CPA”). Keodalah v. Allstate Ins. Co., Slip. Op. No. 95867-0, 2019 WL 4877438 (Wash. Oct. 3, 2019).

In Keodalah v. Allstate Ins. Co., the Supreme Court ruled there is no statutory basis for a bad faith claim against an adjuster under RCW 48.01.030 because this statute does not create an implied cause of action. The Supreme Court also re-affirmed that a bad faith claim premised upon the common law may not be pursued against an adjuster, since an adjuster is outside the quasi-fiduciary relationship between the insurer and its insured. Further, the Supreme Court held that a CPA claim may not proceed against a claims adjuster as a matter of law, regardless of whether it is premised upon a per se regulatory violation or upon alleged bad faith.

In Keodalah, an insured brought suit against their insurer and its claims adjuster for the tort of insurance bad faith and the alleged violation of the CPA in connection with the insured’s claim for underinsured motorist (“UIM”) benefits. The insured alleged that the adjuster had improperly undervalued the UIM claim by relying on incorrect information regarding the subject auto accident. Id. In part, the insured premised his bad faith claim against the adjuster on RCW 48.01.030, which broadly provides “that all persons be actuated by good faith . . . in all insurance matters.” The Supreme Court thus evaluated whether RCW 48.01.030 created an implied cause of action for bad faith against a claims adjuster.

After analyzing the issue under the 3-prong “Bennett test”, the Supreme Court held that “RCW 48.01.030 does not create an implied cause of action for insurance bad faith.” This is because RCW 48.01.030 benefits the general public interest, rather than a specific, identifiable class of persons. RCW 48.01.030 also does not contain a specific enforcement mechanism which, the Supreme Court found, “suggests that the legislature did not intend to imply a cause of action based on violations of RCW 48.01.030.” Moreover, the Supreme Court reasoned that “[i]f we were to read the statute to imply a cause of action, by the statute’s plain language, such implied cause of action would apply against insureds as well. That is, insurers would be empowered to sue their insured … [which] would not be consistent with the legislature’s purpose in enacting the statute[.]” Accordingly, the Supreme Court held that a bad faith claim may not be pursued against a claims adjuster based upon a statutory violation of RCW 48.01.030.

Notably, the Keodalah decision also re-affirmed the Supreme Court’s prior rulings that a bad faith claim premised upon the common law may not be brought against anyone other than an insurer. In citing its ruling in Tank v. State Farm Fire & Casualty Co., 105 Wn.2d 381, 715 P.2d 1333 (1986), the Supreme Court in Keodalah stated that “this court has limited bad-faith tort claims to the context of the insurer-insured relationship[.]” This is because such claims are premised upon “the fiduciary relationship existing between the insurer and insured.” Keodalah, at *15 – 16, n. 6 (quoting Tank, 105 Wn.2d at 385). The Supreme Court found that no such fiduciary relationship exists with respect to a claims adjuster, and that limiting common law bad faith claims to actions against an insurer was consistent with a long line of Washington precedent. See, e.g., St. Paul Fire & Marine Ins. Co. v Onvia, Inc., 165 Wn.2d 122, 130 n.3, 196 P.3d 664 (2008).

Finally, the Supreme Court held that a CPA claim may not be pursued against a claims adjuster, regardless of whether the claim is premised upon alleged bad faith or upon a per se violation of Washington’s regulation concerning unfair claims settlement practices, WAC 284-30-330. By its terms, WAC 284-30-330 only applies to “unfair or deceptive acts or practices of the insurer.” Keodalah, at *14 (citing WAC 284-30-330) (emphasis original). Moreover, because “RCW 48.01.030 does not itself provide an actionable duty” for bad faith, it cannot form the basis for CPA liability against an adjuster. The Supreme Court explained that it has “limited CPA claims based on breach of the statutory duty of good faith” to the insurer because it is the insurer – not the adjuster – who owes a quasi-fiduciary duty to the insured. As a result, the Supreme Court held that “[b]ecause Keodalah claims a breach of the duty of good faith by someone outside the quasi-fiduciary relationship, his CPA claim based on RCW 48.01.030 was properly dismissed.”

The Washington Supreme Court Rules that a Holder of a Certificate of Insurance Is Entitled to Coverage

The Washington courts have historically found that the purpose of a certificate of insurance is to advise others as to the existence of insurance, but that a certificate is not the equivalent of an insurance policy. However, the Washington State Supreme Court recently held that, under certain circumstances, an insurer may be bound by the representations that its insurance agent makes in a certificate of insurance as to the additional insured (“AI”) status of a third party. Specifically, in T-Mobile USA, Inc. v. Selective Ins. Co. of America, the Supreme Court found that where an insurance agent had erroneously indicated in a certificate of insurance that an entity was an AI under a liability policy, that entity would be considered as an AI based upon the agent’s apparent authority, despite boilerplate disclaimer language contained in the certificate. T-Mobile USA, Inc. v. Selective Ins. Co. of America, Slip. Op. No. 96500-5, 2019 WL 5076647 (Wash. Oct. 10, 2019).

In this case, Selective Insurance Company of America (“Selective”) issued a liability policy to a contractor who had been retained by T-Mobile Northeast (“T-Mobile NE”) to construct a cell tower. The policy conferred AI status to a third party if the insured-contractor had agreed in a written contract to add the third party as an AI to the policy. Under the terms of the subject construction contract, the contractor was required to name T-Mobile NE as an AI under the policy. T-Mobile NE was therefore properly considered as an AI because the contractor was required to provide AI coverage to T-Mobile NE under the terms of their contract.

However, over the course of approximately seven years, Selective’s own insurance agent issued a series of certificates of insurance that erroneously identified a different company, “T-Mobile USA”, as an AI under the policy. This was in error because there was no contractual requirement that T-Mobile USA be added as an AI. Nonetheless, the certificates stated that T-Mobile USA was an AI, and they were signed by the agent as Selective’s “authorized representative.”

In the ensuing coverage action, a question arose as to whether T-Mobile USA could be considered as an AI given the representations in the certificates. Significantly, the Washington State Supreme Court heard the matter pursuant to a certified question from the Ninth Circuit Court of Appeals, which had previously made several important findings that guided the Supreme Court’s treatment of the case. Chief among them, the Ninth Circuit had already concluded that Selective’s “agent [had] acted with apparent authority in issuing the certificate at issue[.]”

Based upon that predicate, the Supreme Court found that Selective was bound by the representations made by its authorized insurance agent in the certificate of insurance. The Supreme Court noted the general rule in Washington that an “insurance company is bound by all acts, contracts or representations of its agent … which are within the scope of [the agent’s] real or apparent authority[.]” Because the Ninth Circuit had already found that Selective’s insurance “agent acted with apparent authority when it issued the certificate to T-Mobile USA,” pursuant to this general rule in Washington, the Supreme Court concluded that “Selective [was] bound by the representations its agent made in the certificate of insurance.”

Selective sought to argue that T-Mobile USA’s reliance on the agent’s representations was unreasonable because T-Mobile USA knew it was not a party to the construction contract, and therefore knew it was not an AI. However, the Supreme Court found this argument was foreclosed by the fact that the Ninth Circuit had already “rul[ed] that the agent acted with apparent authority[.]” As a result, the Supreme Court reasoned that “the Ninth Circuit necessarily decided that T-Mobile USA’s belief that the agent was authorized to issue a certificate naming it as an additional insured was ‘objectively reasonable’ … [and thus] its reliance on that certificate [was] reasonable.”

The Supreme Court also rejected Selective’s argument that boilerplate disclaimer language in the certificate negated the grant of AI coverage to T-Mobile USA. For example, the boilerplate language stated that the certificate “confers no rights” and “does not affirmatively or negatively amend, extend or alter the coverage afforded by the [policy].” The Supreme Court noted, however, that these disclaimers conflicted with the apparent grant of AI coverage to T-Mobile USA, which had been specifically written into the certificate by the insurer’s agent. Applying a canon of contract interpretation, the Supreme Court held that, in this instance, the “specific written-in additional insured statement [in the certificate] … prevails over the preprinted general disclaimers.”

It is questionable whether this finding can be applied more broadly. The Supreme Court was careful to note that “we do not hold that all disclaimers are ineffective. We hold that the disclaimers at issue here are ineffective because they completely and absolutely contradict the other, more specific promises in that same certificate.” Had the disclaimers not been so directly contradicted by the specific representations in the certificates, or if the Ninth Circuit had not previously held that Selective’s agent acted with apparent authority, this case may have been decided differently.

In any event, the T-Mobile USA case is a stark reminder of the significance that representations by an insurer’s authorized agents may have on coverage issues.

Insurance Adjuster Employed by an Insurance Company May Be Liable for Bad Faith in Washington

As a general proposition, an adjuster working for an insurance company is not subject to personal liability under the common law or under state insurance laws for conduct within the scope of his/her employment. Recently, however, the Washington Court of Appeals, Division One, in Keodalah v. Allstate Ins. Co., 2018 Wash. App. LEXIS 685 (2018), held that an individual adjuster, employed by an insurance company, may be held liable for bad faith and violation of the Washington Consumer Protection Act (“CPA”).

In Keodalah, Moun Keodalah (“Keodalah”) was involved in an accident with a motorcycle, after which Keodalah sought uninsured/underinsured motorist (“UIM”) benefits of $25,000 under his auto policy issued by Allstate. Allstate offered $1,600 based on an assessment that Keodalah was 70 percent at fault, even though the Seattle Police Department and the accident reconstruction firm hired by Allstate concluded that the accident was caused by the excessive speed of the motorcyclist. When Keodalah questioned Allstate’s evaluation, Allstate increased its offer to $5,000. Thereafter, Keodalah sued Allstate for UIM benefits.  Despite having the police investigation report, its own accident reconstruction firm’s findings, and the 30(b)(6) deposition testimony of the Allstate adjuster, who acknowledged that Keodalah had not run a stop sign and had not been on his cell phone at the time of the accident, Allstate maintained its position that Keodalah was 70 percent at fault. At trial, the jury determined that the motorcyclist was 100 percent at fault and awarded Keodalah $108,868.20 for his injuries, lost wages, and medical expenses.

Keodalah then filed a second lawsuit against Allstate and the adjuster, including claims under the Insurance Fair Conduct Act (“IFCA”), the CPA, as well as for insurance bad faith. The adjuster moved to dismiss the claims against her under Rule 12(b)(6). The trial court granted the motion but certified the case for discretionary review. First, the court held that there was no private cause of action for violation of a regulation under the IFCA, following the recent Washington Supreme Court decision in Perez-Cristantos v. State Farm Fire & Cas. Ins. Co., 187 Wn.2d 669 (2017).

The Court of Appeals then addressed whether an individual insurance adjuster may be liable for bad faith and for violation of the CPA. The court looked to the Revised Code of Washington (“RCW”) 48.01.030, which serves as the basis for the tort of bad faith. RCW 48.01.030 imposes a duty of good faith on “all persons” involved in insurance, including the insurer and its representatives, and a breach of such duty renders a person liable for the tort of bad faith. The term “person” is defined as “any individual, company, insurer, association, organization, reciprocal or interinsurance exchange, partnership, business trust, or corporation.” RCW 48.01.070.  Because the adjuster was engaged in the business of insurance and was acting as an Allstate representative, she had the duty to act in good faith under the plain language of the statute. As a result, the Court of Appeals held that the adjuster can be sued for bad faith.

With respect to the CPA claim, the court noted that the CPA prohibits “[u]nfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce.” RCW 19.86.020. The Court of Appeals, Division One, previously ruled that under “settled law,” the “CPA does not contemplate suits against employees of insurers.” International Ultimate, Inc. v. St. Paul Fire & Marine Ins. Co., 122 Wn. App. 736, 87 P.3d 774 (Wash. App. 2004). There, the court held that to be liable under the CPA, there must be a contractual relationship between the parties and because there is no such relationship between an employee of the insurer and the insured, the employee cannot be liable for a CPA violation. The court in Keodalah, however, rejected the adjuster’s reliance on International Ultimate, holding that the prior decision was without any supporting authority, and it was inconsistent and irreconcilable with the Washington Supreme Court case of Panag v. Farmers Ins. Co. of Wash., 166 Wn.2d 27, 208 P.3d 885 (2009) (Washington Supreme Court declined to add a sixth element to the Hangman Ridge elements that would require proof of a consumer transaction between the parties). It appears that the holding in International Ultimate may be losing ground, as at least two federal district court cases have questioned the validity of that case. Lease Crutcher Lewis WA, LLC v. National Union Fire Ins. Co. of Pittsburgh, Pa., 2009 U.S. Dist. LEXIS 97899, *15 (W.D. Wash. Oct. 20, 2009), (statement at issue in International Ultimate “is unsupported by any citation or analysis); Zuniga v. Std. Guar. Ins. Co., 2017 U.S. Dist. LEXIS 79821, *5-6 (W.D. Wash. May 24, 2017) (pointing out at least two problems with the statement at issue in International Ultimate).

While the adjuster’s actions in Keodalah appear to have been extreme, presumably policyholders in Washington will rely on this case to sue an insurance company’s adjusters in their individual capacities for bad faith and CPA violations. The court’s holding may have far reaching consequences. For example, will insurers need to appoint separate counsel for their adjusters when the adjusters are personally named in litigation? How will this affect the practice of removing cases from state to federal court? To the extent an insured wants to destroy diversity jurisdiction for its out-of-state insurer, it may choose to name an in-state adjuster, which would limit the insurer to Washington State Court when litigating coverage issues. This is an extremely alarming development for insurers and their employee adjusters in Washington State, who should take this as a reminder to be vigilant in ensuring good faith claims handling and the aggressive defense of bad faith claims.

Insurance Coverage for Malicious Prosecution Claims in Georgia

Until recently, Georgia has had no case law addressing insurance coverage trigger for a malicious prosecution claim. But in 2016, the Georgia Court of Appeals finally rendered an opinion addressing this specific issue, with a twist in that the claimant was arrested during the policy period but was charged and prosecuted after the policy expired.

In Zook v. Arch Specialty Ins. Co., 784 S.E.2d 119 (2016), the claimant was arrested on May 21, 2009 after an incident at the insured’s nightclub. The claimant was charged with simple battery on March 1, 2010 and was prosecuted thereafter. After the jury found the claimant not guilty of simple battery, he commenced a lawsuit against the nightclub and its employees for false imprisonment, battery, negligence, malicious prosecution and malicious arrest. While that action was pending, the claimant filed a declaratory judgment action against the same defendants and Arch Specialty Insurance Company (“Arch”), which issued a CGL policy (“Policy”) to the nightclub from June 27, 2008 to June 27, 2009. The policy provided coverage for injury arising out of malicious prosecution if the offense was committed during the policy period. Arch took the position that the “offense” took place on March 1, 2010, when the claimant was charged with the crime for which he was prosecuted (simple battery). Because the Policy expired on June 27, 2009, Arch argued that no offense took place during the policy period.  The trial court agreed and granted summary judgment to Arch.

The Georgia Court of Appeals, however, disagreed. The Court noted that Georgia appellate courts had not yet addressed the issue of when a malicious prosecution claim arises for purposes of triggering insurance coverage. The Court of Appeals acknowledged that the majority of other jurisdictions have held that “coverage is triggered when the insured sets in motion the legal machinery of the state.” Id. at 674. However, the Court disagreed with Arch’s interpretation of the majority holding because Arch focused on when the claimant was charged and relied on case law that dealt with a scenario in which the claimant was arrested and charged on the same date.

The Georgia Court of Appeals held that in this case, the arrest is the “bad act” of the insured that set the legal machinery of the state in action.  Id. at 675. In other words, the arrest was the “offense” that invoked the judicial process against the claimant, and the arrest took place during the Arch policy period. The Court held,

From the standpoint of a reasonable person in the position of the insured, policy coverage for injury arising from a malicious prosecution occurring during the policy period exists if the insured’s conduct in instituting such a prosecution took place during the covered period. For the foregoing reasons, we adopt the majority rule that when the contract does not specify, insurance coverage is triggered on a potential claim for malicious prosecution when the insured sets in motion the legal machinery of the state.

Id. at 675-6.

The analysis pertaining to the trigger of coverage for wrongful incarceration and malicious prosecution cases are becoming more intricate and detail-oriented as the courts throughout the country are exposed to different fact patterns. To the extent that the claimant is arrested and charged during different policy periods, it appears that the first event of the arrest will be considered as the event that triggers coverage.

The next installment will review the law in Ohio. In the meantime, if there are any questions about other jurisdictions or jurisdictions already discussed, please contact us ([email protected] or [email protected]) and we can address your questions directly.

Washington Supreme Court Denies Reconsideration of Its Decision to Apply the Efficient Proximate Cause Rule to a Third-Party Liability Policy

We previously reported the Washington Supreme Court’s decision in Xia, et al. v. ProBuilders Specialty Insurance Company, et al., 188 Wn.2d 171, 393 P.3d 748 (2017), in which the Court applied the efficient proximate cause rule to a third-party liability policy to find a duty to defend.

To recap, Washington law requires insurers to assess and investigate coverage under first-party insurance policies by applying the efficient proximate cause analysis. Until Xia, the efficient proximate cause rule has only been applied to first party insurance policies in Washington. But the Washington Supreme Court’s decision in Xia changed that by holding that an insurer must consider the efficient proximate cause rule in determining its duty to defend under a CGL policy.

The issue in Xia was whether the pollution exclusion applied to relieve ProBuilders of its duty to defend a claim against the insured alleging that carbon monoxide was released into the claimant’s house through a defectively installed vent. ProBuilders denied coverage to the insured contractor, in part, under the pollution exclusion. The Washington Supreme Court held that while ProBuilders did not err in determining that the plain language of its pollution exclusion applied to the release of carbon monoxide into Xia’s home, “under the ‘eight corners rule’ of reviewing the complaint and the insurance policy, ProBuilders should have noted that a potential issue of efficient proximate cause existed,” as Xia alleged negligence in her original complaint, i.e. failure to properly install venting for the hot water heater and failure to properly discover the disconnected venting.

Ultimately, the Court concluded that the efficient proximate cause of the claimant’s loss was a covered peril – the negligent installation of a hot water heater. Even though ProBuilders correctly applied the language of its pollution exclusion to the release of carbon monoxide into the house, the Court ruled that ProBuilders breached its duty to defend as it failed to consider an alleged covered occurrence that was the efficient proximate cause of the loss. The Court granted judgment as a matter of law to the claimant with regard to her breach of contract and bad faith claims.

Soon after the Washington Supreme Court’s decision, ProBuilders filed a motion asking the Court to reconsider its decision. However, on August 17, 2017, the Washington Supreme Court denied the motion, leaving in place the holding that insurers must take the efficient proximate cause rule when analyzing coverage under third-party policies.

As discussed in our earlier post, the efficient proximate cause rule applies “when two or more perils combine in sequence to cause a loss and a covered peril is the predominant or efficient cause of the loss.” Vision One, LLC v. Philadelphia Indemnity Insurance Co., 174 Wn.2d 501, 276 P.3d 300 (2012). “If the initial event, the ‘efficient proximate cause,’ is a covered peril, then there is coverage under the policy regardless of whether subsequent events within the chain, which may be causes-in-fact of the loss, are excluded by the policy.” Key Tronic Corp., Inc. v. Aetna (CIGNA) Fire Underwriters Insurance Co., 124 Wn.2d 618, 881 P.2d 210 (1994).

Insurers must be extremely cautious when assessing the duty to defend and an exclusion that could potentially preclude coverage. Under Xia, liability insurers must examine the underlying complaint very carefully to determine whether there could potentially be multiple causes of a loss, and if so, which cause is the initiating cause. If the initiating cause is potentially a covered event, then there may be coverage and the insurer must provide a defense under reservation of rights in order to minimize bad faith exposure.

If you would like more information on the efficient proximate cause rule in Washington, please feel free to contact Sally S. Kim ([email protected] or 206-695-5147) or Stephanie Ries ([email protected] or 206-695-5123).

The Ninth Circuit Resolves Split in Authority, Holds that Only Insureds Under First-Party Policies Can Bring Claims Under Washington’s IFCA

Washington’s Insurance Fair Conduct Act (“IFCA”) provides insureds with a statutory cause of action against their insurers for wrongful denials of coverage, in addition to a traditional bad faith cause of action. Unlike a bad faith cause of action, the IFCA allows for enhanced damages under certain circumstances. Under the language of the statute, “any first party claimant to a policy of insurance” may bring a claim under IFCA against its insurer for the unreasonable denial of a claim for coverage or payment of benefits. There has been a split of authority in Washington among both the state appellate courts and federal district courts regarding whether the term “first-party claimant” refers only to first-party policies (i.e., a homeowner’s policy or commercial property policy) or whether it refers to insureds under both first-party and liability policies (e.g., CGL policies which cover the insured’s liability to others). The IFCA expressly defines the phrase “first-party claimant” as “an individual, … or other legal entity asserting a right to payment as a covered person under an insurance policy or insurance contract arising out of the occurrence of the contingency or loss covered by such a policy or contract.”

The Washington Court of Appeals, Division One, held that a “first-party claimant” means an insured under both first-party and liability policies (Trinity Universal Ins. Co. of Kansas v. Ohio Casualty Ins. Co., 176 Wn.App. 185 (2013)), but Division Three held that the IFCA applies exclusively to first-party insurance contracts (Tarasyuk v. Mutual of Enumclaw Insurance Co., 2015 Wash. App. LEXIS 2124 (2015)).

In the federal courts, the majority of decisions from the Western District of Washington have held that an insured with third-party coverage or first-party coverage can be a “first-party claimant” under IFCA. Navigators Specialty Ins. Co. v. Christensen, Inc., 140 F. Supp. 3d 11097 (W.D. Wash. Aug. 3, 2015 ) (Judge Coughenour); City of Bothell v. Berkley Regional Specialty Ins. Co., 2014 U. S. Dist. LEXIS 145644 (W.D. Wash. Oct. 10, 2014) (Judge Lasnik); Cedar Grove Composting, Inc. v. Ironshore Specialty Ins. Co., 2015 U. S. Dist. LEXIS 71256 (W.D. Wash. June 2, 2015) (Judge Jones); Workland & Witherspoon, PLLC v. Evanston Ins. Co., 141 F.Supp.3d 1148 (E.D. Wash. Oct. 29, 2015) (Judge Peterson). These decisions held that any insured who has a right to file a claim under the insurance policy is a “first-party claimant” under the IFCA regardless of whether the policy provides first-party or third-party coverage.

However, Judge Pechman of the Western District of Washington ruled that an insured with third-party coverage is not a “first-party claimant” under IFCA in Cox v. Continental Casualty Co., 2014 U. S. Dist. LEXIS 68081 (W.D. Wash. May 16, 2014) and two subsequent cases. In Cox, Judge Pechman dismissed plaintiff’s IFCA claim on the ground that the insurance policy was a “third-party policy,” i.e. a third-party liability policy, and therefore the insured (who assigned his claim to the plaintiffs) was not a “first-party claimant.” The Ninth Circuit Court of Appeals recently affirmed the Cox decision on appeal, effectively resolving the split of authority in the federal courts in favor of a more limited interpretation of the IFCA. Cox v. Continental Casualty Co., 2017 U.S. App. 11722 (9th Cir. June 30, 2017).

Those watching this issue and looking for a reasoned analysis resolving the split of authority among the federal district courts in Washington will be disappointed, as the Ninth Circuit provided no basis for its holding on the issue, not even a recognition of the split among the courts. On the issue, the Court merely stated “[t]he policy in question is not a first party policy; thus, the Plaintiffs, standing in [the insured’s] shoes, cannot be a first party claimant.” The court’s failure to provide its reasoning for this holding is surprising, given that the parties addressed the split of authority in their briefs. Nonetheless, insurers should take note of this important decision limiting the scope of the IFCA in Washington’s federal courts.

Washington Supreme Court Applies the Efficient Proximate Cause Rule to Third Party Liability Policy to Find a Duty to Defend

The efficient proximate cause rule is one of the more confusing analyses that an insurance company must undertake when investigating certain coverage issues under first party insurance policies. And until now, the efficient proximate cause rule has only been applied to first party insurance policies in Washington. But that has now changed with the Washington Supreme Court’s decision in Xia, et al. v. ProBuilders Specialty Insurance Company, et al., Case No. 92436-8 (April 27, 2017). In Xia, the Washington Supreme Court not only ruled that an insurer must consider the efficient proximate cause rule in determining its duty to defend under a CGL policy, but that ProBuilders acted in bad faith by failing to do so, despite no prior precedent for application of the rule in a CGL coverage analysis.

In Xia, the claimant purchased a new home constructed by Issaquah Highlands 48 LLC (“Issaquah”), which was insured under a CGL policy issued by ProBuilders. The claimant fell ill soon after moving in due to inhalation of carbon monoxide, caused by improper installation of an exhaust vent.

The claimant notified Issaquah about the issue, and Issaquah notified ProBuilders. ProBuilders denied coverage under the pollution exclusion and a townhouse exclusion. The claimant filed a lawsuit, which Issaquah then settled by a stipulated judgment of $2 million with a covenant not to execute and an assignment of rights against ProBuilders. The claimant filed a declaratory judgment action against ProBuilders for breach of contract, bad faith, violation of the Consumer Protection Act and the Insurance Fair Conduct Act.

At the trial court level, ProBuilders won summary judgment on the townhouse exclusion. Division One of the Washington Court of Appeals reversed in part, finding that the pollution exclusion applied, but not the townhouse exclusion.

The Washington Supreme Court accepted review to determine whether the pollution exclusion applied to relieve ProBuilders of its duty to defend. The Court held that even though ProBuilders did not err in determining that the plain language of its pollution exclusion applied to the release of carbon monoxide into Xia’s home, “under the ‘eight corners rule’ of reviewing the complaint and the insurance policy, ProBuilders should have noted that a potential issue of efficient proximate cause existed,” as Xia alleged negligence in her original complaint, i.e. failure to properly install venting for the hot water heater and failure to properly discover the disconnected venting.

Ultimately, the Court concluded that the efficient proximate cause of the claimant’s loss was a covered peril – the negligent installation of a hot water heater. Even though ProBuilders correctly applied the language of its pollution exclusion to the release of carbon monoxide into the house, the Court ruled that ProBuilders breached its duty to defend as it failed to consider an alleged covered occurrence that was the efficient proximate cause of the loss. The Court granted judgment as a matter of law to the claimant with regard to her breach of contract and bad faith claims.

The application of the efficient proximate cause rule to CGL policies in Washington is troublesome for insurers. The Washington courts have long held in cases involving first party policies that under the efficient proximate cause rule, “[i]f the initial event, the “efficient proximate cause,’ is a covered peril, then there is coverage under the policy regardless whether subsequent events within the chain, which may be causes-in-fact of the loss, are excluded by the policy.” Key Tronic Corp., Inc. v. Aetna (CIGNA) Fire Underwriters Insurance Co., 124 Wn.2d 618, 881 P.2d 210 (1994). Also, the efficient proximate cause rule applies only “when two or more perils combine in sequence to cause a loss and a covered peril is the predominant or efficient cause of the loss.” Vision One, LLC v. Philadelphia Indemnity Insurance Co., 174 Wn.2d 501, 276 P.3d 300 (2012).

In Xia, the Court noted that like any other covered peril under a general liability policy, an act of negligence may be the efficient proximate cause of a particular loss. “Having received valuable premiums for protection against harm caused by negligence, an insurer may not avoid liability merely because an excluded peril resulted from the initial covered peril.” Xia at *14. The Court stated:

…it is clear that a polluting occurrence happened when the hot water heater spewed forth toxic levels of carbon monoxide into Xia’s home. However, by applying the efficient proximate cause rule, it becomes equally clear that the ProBuilders policy provided coverage for this loss. The polluting occurrence here happened only after an initial covered occurrence, which was the negligent installation of a hot water heater that typically does not pollute when used as intended.

Xia at *17.

Justice Madsen took issue with the majority decision in a dissenting opinion, specifically with respect to a finding of bad faith when no other case prior to this decision had ever applied the efficient proximate cause rule to CGL policies. Justice Madsen also disagreed with the majority in extending the application of the efficient proximate cause rule to CGL policies when this Court specifically declined to do so in the earlier case of Quadrant Corp. v. American States Insurance Co., 154 Wn.2d 165, 110 P.3d 733 (2005).

The State of Washington unfortunately has been historically unkind to insurers on the duty to defend, and the Xia decision only further cements that reputation.

If you would like more information on the efficient proximate cause rule in Washington, please feel free to contact Sally S. Kim at [email protected] or (206) 695-5147.

The Oregon Supreme Court Again Offers Expansive View of the Fee-Shifting Statute But Provides Clarity to Insurers on Minimizing Fee Awards

In Oregon, ORS 742.061 authorizes an award of attorney fees to an insured that prevails in an action against an insurer. While there have been several Court of Appeals cases addressing this statute in the UIM context, the Oregon Supreme Court last ruled on ORS 742.061 in 2012, holding that the statute is not limited to actions on policies issued in Oregon, but that it applies broadly, to “any policy of insurance of any kind or nature.” Morgan v. Amex Assurance Co., 287 P.3d 1038 (Or. 2012).

Under a similar analysis, consisting of an examination of the statute’s text and context, along with any useful legislative history, the Oregon Supreme Court addressed another aspect of ORS 742.061 in Long v. Farmers Ins. Co. of Oregon, 360 Or. 791 (2017).  Specifically, the Oregon Supreme Court addressed whether an insurer’s voluntary mid-litigation payments can eliminate the right to attorneys’ fees under the fee-shifting statute.

In Long, Plaintiff discovered a leak under her kitchen sink that caused extensive damage to her home. She filed a claim with Farmers, and on January 17, 2012, and Farmers voluntarily paid $3,300.45 to Plaintiff for the actual cash value of the loss. Around that time, Farmers also paid $2,169.22 to Plaintiff for mitigation expenses. However, the Plaintiff submitted a proof of loss that exceeded the sum that Farmers had paid. The parties had not resolved Plaintiff’s claims a year later, so she commenced a lawsuit against Farmers. After appraisal, Farmers made two additional voluntary payments to Plaintiff – one payment in the amount of $2,467.09 on July 11, 2013 and another payment in the amount of $4,766.80 on August 14, 2013 – for the actual cash value that the appraisers had assigned to certain of Plaintiff’s claimed losses and mitigation costs.

Six months later, in February 2014, shortly before trial, Plaintiff submitted proof of loss for the replacement cost of her losses. Three days later, Farmers voluntarily paid $4,214.18 to Plaintiff for the replacement cost of Plaintiff’s undisputed losses. Farmers subsequently prevailed at trial. Nonetheless, Plaintiff filed a petition for attorney fees under ORS 742.061.

Under ORS 742.061, an insurer must pay the insured’s attorney fees if, in the insured’s action against the insurer, the insured obtains a recovery that exceeds the amount of any tender made by the insurer within six months from the date that the insured first filed proof of a loss. In Long, the issue before the Court was the meaning of the word “recovery.” The insured argued that the word “recovery” means any kind of restoration of a loss, i.e. judgment, settlement, voluntary payment or some other means, after an action on an insurance policy has been filed. Accordingly, any post-complaint payments made by an insurer would support an insured’s claim for fees under the statute. On the other hand, Farmers argued that the word “recovery” means a money judgment in the action in which attorney fees are sought. Farmers argued that attorney fees may be awarded only if the insured obtains a money judgment that exceeds any tender made by the insurer within the first six months after proof of loss.

Because this dispute is a matter of statutory interpretation, the Oregon Supreme Court examined ORS 742.061’s text and context, as well as any useful legislative history. The Court noted that it has repeatedly instructed that the terms of ORS 742.061 and its predecessors should be interpreted in light of their function within the statute’s overall purpose, and if it heeded that instruction in this case, “it becomes evident that the term ’recovery‘ must be read to include mid-litigation payments such as the ones that Farmers made.”

The Oregon Supreme ultimately concluded that the fact that Plaintiff did not obtain a “judgment” memorializing Farmers’ mid-litigation payments did not make ORS 742.061 inapplicable. The Court further clarified that a “declaration of coverage is not sufficient to make ORS 742.061 applicable; an insured must obtain a monetary recovery after filing an action, although that recovery need not be memorialized in a judgment.” Id. at 805.

Based upon that clarification, the Court held that Plaintiff was entitled to attorney fees for the work performed by her attorney up until the time that Farmers made voluntary payments to Plaintiff in July and August of 2013. This is because by then, Plaintiff had brought an action on her insurance policy and, by virtue of Farmers’ July and August payments, Plaintiff had “recovered” more in that action than Farmers had tendered in the first six months after proof of loss.

The Court continued, however, that Plaintiff was not entitled to her attorney fees that accrued after the July and August 2013 payments. First, the voluntary payments made by Farmers in February 2014 were payments for the replacement value of Plaintiff’s loss, for which Plaintiff filed her proof of loss. That proof of loss for replacement value triggered the six-month period for settlement of Plaintiff’s claim for the replacement value of her losses under ORS 742.061, and Farmers made payments for the replacement cost within the six-month period, as mandated by the statute.

Second, except for the two replacement cost payments that Farmers made in February 2014, Plaintiff did not recover, after August 2013, any amount over and above what Farmers had already paid. At trial, Plaintiff sought but was unsuccessful in obtaining any greater sum. Thus, because Plaintiff’s recovery after Farmers’ August 2013 payment did not exceed Farmers’ timely tender, Plaintiff was not entitled to attorney fees under ORS 742.061 for work performed by her attorney after that date.

This case demonstrates how important it is for insurance companies to keep track of when voluntary payments are made and the potential impact of those payments on their ability to minimize an insured’s entitlement to attorney’s fees under ORS 742.061.

Insurance Coverage for Wrongful Incarceration Cases in New Jersey

The third jurisdiction we address pertaining to wrongful incarceration coverage issues is New Jersey, which has three relevant cases. New Jersey courts have held that for purposes of determining the existence of insurance coverage under a general liability policy, in the absence of any applicable exclusion, the triggering event occurs on the date when the underlying criminal complaint is filed against the claimant. However, when determining coverage for a municipal insured’s obligation to indemnify its employee for fees incurred in defending against criminal charges, as required by specific statutes, the triggering event is not the filing of criminal charges against the employee, but rather the acquittal or dismissal of those charges against the employee.

The first of the malicious prosecution cases is Muller Fuel Oil Co. v. Ins. Co. of North America, 232 A.2d 168 (N.J. Super. Ct. App. Div. 1967), in which the insured, Muller Fuel Oil Company (“Muller”), unsuccessfully filed a criminal complaint against Thomas Policastro (“Policastro”) for issuing a worthless check. Policastro was arrested in November 1961 and indicted in May 1962.  In December 1962, Muller purchased a CGL policy from Insurance Company of North America (“INA”). Thereafter, in March 1963, Policastro was acquitted of the criminal charges and quickly filed a malicious prosecution and false arrest suit against Muller.

Muller sought coverage from INA, claiming that Policastro’s lawsuit against it did not fully ripen until his acquittal in March 1963, and thus constituted an “occurrence” during INA’s policy period of December 1, 1962 to December 1, 1965. INA, on the other hand, denied coverage for Muller’s claim, contending that the criminal complaint that was the basis for Policastro’s malicious prosecution suit was filed by Muller prior to inception of the INA policy. Muller then sought a declaratory judgment that coverage existed under the policy.

On appeal from a New Jersey Superior Court ruling dismissing Muller’s complaint against INA, the Appellate Division affirmed the decision, finding that “[i]n a claim based on malicious prosecution the damage begins to flow from the very commencement of the tortious conduct – the making of the criminal complaint.” According to the Appellate Division, the allegedly tortious conduct and injury to the accused as a result of the malicious prosecution (arrest on November 1961) antedated the issuance of the policy (December 1, 1962) by more than year. As a result, there was no coverage under the INA policy.

The second malicious prosecution case is Paterson Tallow Co. v. Royal Globe Ins. Co. 89 N.J. 24, 444 A.2d 579 (1981). In Paterson, the New Jersey Supreme Court affirmed the judgment of the lower court that insurer Royal Globe Insurance Company (“Royal Globe”) was not obligated to defend the insured, Paterson Tallow Company (“Paterson”), because the complaint that resulted in the malicious prosecution action against Paterson was filed before the effective date of Royal Globe’s policy.

In Paterson, Paterson filed criminal charges in June 1969 against a former employee, James Brown (“Brown”), for theft. In October 1970, while the criminal charges were pending, Paterson purchased a CGL policy that provided coverage for bodily injury, property damage, and personal injury, including coverage for malicious prosecution. In March 1971, Brown was acquitted of all charges against him. Brown filed suit against Paterson in January 1977 alleging malicious prosecution, and Paterson tendered the claim to Royal Globe seeking coverage. Royal Globe denied coverage for the claim, in part, because “all the acts that were alleged to constitute malicious prosecution took place before the policy was issued in 1970.” In a subsequent declaratory judgment action, Paterson and Royal filed cross motions for summary judgment and Paterson asserted that it was entitled to coverage for the action because a crucial component of the malicious prosecution offense, specifically, termination of the criminal charges against Brown, occurred during Royal Globe’s policy period.

The trial court found the appellate court’s ruling in Muller (discussed above) dispositive and granted summary judgment in favor of Royal Globe. On appeal, the New Jersey Supreme Court held that “for the purpose of determining the existence of coverage under this type of policy, in the absence of any qualifying exclusion or exception the offense of malicious prosecution occurs on the date when the underlying [criminal] complaint is filed. Inasmuch as the [criminal complaint] in this case was filed before the effective date of the policy, we affirm the judgment of the Appellate Division denying coverage.”

The third case is slightly different in that it addressed coverage for an insured’s obligation to indemnify its employee for fees and costs the employee incurred defending against criminal charges against him that were ultimately found to be meritless. In Board of Education v. Utica Mut. Ins. Co., 798 A.2d 605 (N.J. 2002), the New Jersey Supreme Court was tasked with deciding whether it was the filing of criminal charges against an employee of a board of education, or the acquittal of dismissal of those charges, that triggered coverage under an insurance policy issued to satisfy the board’s statutory obligation to indemnify such employee. The trial court found that the triggering event was the acquittal or dismissal while the appellate court reversed and decided that the triggering event was the filing of criminal charges. On appeal, the New Jersey Supreme Court held that the triggering event is the acquittal or other disposition of the criminal charges in favor of the employee of the board of education.

This case involved a teacher, David Ford (“Ford”), employed by the Borough of Florham Park Board of Education (“Board”), who was arrested and charged with sexual assault and reckless endangerment of four of his students in June 1996. In March 1999, a jury acquitted Ford of all charges. Soon after, he demanded that the Board reimburse him nearly $500,000 in legal fees and expenses for successfully defending the criminal action pursuant to various New Jersey statutes that “…obligate a board of education to defray all costs incurred by an … employee of the board in defending criminal charges filed against the person whose charges: … (2) resulted in a final disposition in favor of such person.” The statute also authorized a board to purchase insurance to cover all such damages, losses and expenses the board may be obligated to pay.

The Board sought coverage from Selective Insurance Company (“Selective”) and Utica Mutual Insurance Company (“Utica”) for its indemnity obligation to Ford. At the time of Ford’s arrest, the Board was insured by Selective under a policy that provided coverage from July 1, 1993 to July 1, 1996. By endorsement, the Selective policy provided that “this Coverage Part shall conform to the terms of the New Jersey compiled statutes” discussed above. Utica insured the Board from July 1, 1996 to July 1, 1999, and contained a nearly identical endorsement provision as the Selective policy, incorporating the pertinent New Jersey statutes. Utica denied coverage to the Board because its policy was not in effect when Ford was criminally charged in June 1996. Selective denied coverage for any legal expenses that were incurred after its policy expired on July 1, 1996, and reserved the right to deny all coverage. The Board filed a declaratory judgment action against Selective and Utica.

The trigger issue was appealed to the New Jersey Supreme Court. The Court noted that both the Selective and Utica policies incorporated by reference the statutory language, which specified that an employee’s right to reimbursement accrues when “the criminal charges result in an acquittal or otherwise are dismissed.” The Court also noted that indemnification obligations generally accrue “only on an event fixing liability, rather than on preliminary events that eventually may lead to liability but have not yet occurred.” The Court held that the triggering event for coverage was the favorable disposition of all criminal charges against Ford. As a result, Utica’s policy was triggered since Ford incurred no reimbursable expenses prior to his acquittal. On the other hand, Selective had no coverage obligation as the Selective policy had expired by the time of Ford’s acquittal.

The Court distinguished its holding in Paterson and explained that when an insured seeks coverage related to its own conduct of initiating criminal charges against its employee, it is reasonable to use the conduct of the insured in filing the criminal charges as the “triggering event” to assess coverage for malicious prosecution. But in a statutory indemnification case, the “essence” of the claim is not the filing of the criminal charges.” Rather, the Board’s liability “is triggered by the event specified in the statutes, namely a final disposition of those charges in favor of the Board’s employee.”

In light of the cases discussed above, the New Jersey courts are fairly clear that the trigger of coverage in malicious prosecution and wrongful arrest cases is the filing of charges against the claimant. However, in cases involving coverage for statutory indemnification of fees and costs incurred in defending against a criminal prosecution case, the trigger of coverage is not filing of charges, but rather, acquittal of such charges. As is always the case, it is important to carefully review the applicable policy and understand the scope of coverage provided.

The next installment will review the law in Georgia. In the meantime, if there are any questions about another jurisdiction, please contact us ([email protected] or [email protected]) and we can address your questions directly.

Insurance Coverage for Wrongful Incarceration Cases in California

The second jurisdiction we will discuss pertaining to coverage issues arising out of claims for wrongful incarceration is California, which, like New York, has two pertinent decisions involving coverage for malicious prosecution cases. Unlike New York, however, the case law in California stems from civil cases, not criminal cases. Nonetheless, the Court of Appeal in California held that it makes no difference whether the case is civil or criminal in determining whether a claim for malicious prosecution implicates insurance coverage.

The first case is Harbor Insurance Company v. Central National Insurance Company, 165 Cal. App.3d 1029, 211 Cal. Rptr. 902 (1985), in which the insured, A.J. Industries, Inc. (“A.J.”) unsuccessfully prosecuted an action between 1971 and 1978 against its former president and chairman. When A.J. filed the action, it was insured by Zurich Insurance Company (“Zurich”) for a limit of $300,000 and by Harbor Insurance Company (“Harbor”) for $5,000,000. While the malicious action was pending (and until April 1, 1975), A.J. switched insurers and had primary insurance with Argonaut Insurance Company (“Argonaut”) and excess insurance with Midland Insurance Company (“Midland”).

On April 16, 1976, the former president and chairman filed an action against A.J. for malicious prosecution. By that point in time, A.J. was insured by Central National Insurance Company (“Central National”). A.J. nonetheless tendered its defense to Zurich.  Zurich accepted the tender and turned the matter for handling to Harbor, the concurrent excess carrier. Harbor defended the malicious prosecution action under reservation of rights, and also tendered the claim to Central National, Midland and Argonaut. After those insurers denied coverage, Harbor filed suit.

The issue addressed by the California Court of Appeal, Second Appellate District, was whether Argonaut’s or Midland’s policies provided coverage for the malicious prosecution lawsuit against A.J.

Argonaut’s policy provided coverage for damages because of “personal injury” sustained by any person arising out of an offense committed in the conduct of the named insured’s business.  The term “offense” included false arrest, detention or imprisonment, or malicious prosecution, if such offense is committed during the policy period. The Court of Appeal ruled that the “offense” of malicious prosecution is “committed” upon institution of the malicious action against the defendant. The court noted that the “gist of the tort is committed when the malicious action is commenced and the defendant is subjected to process or other injurious impact by the action.” In other words, “from both the tortfeasor’s and the victim’s standpoint the ‘offense’ is ‘committed’ upon initial prosecution of that action. At that point the tortfeasor has invoked the judicial process against the victim maliciously and without probable cause, and the victim has thereby suffered damage.” Because the malicious action was commenced before the Argonaut policy came into effect, the court held that there was no coverage under the policy.

The court rejected Harbor’s argument that the offense of malicious prosecution is a “continuing occurrence,” which is “committed” throughout the prosecution of the malicious action because it continues to cause damage until the action is terminated. The Court of Appeal noted that such an argument was a theoretical misunderstanding of the elements of the tort in that “[a]lthough continued proceedings after commencement of the action will increase and aggravate the defendant’s damages, the initial wrong and consequent harm have been committed upon commencement of the action and the initial impact thereof on the defendant.”

The Court then addressed the two Midland policies, one of which agreed to indemnify A.J. against such ultimate net loss in excess of the primary limits by reason of liability for damages because of personal injury caused by an occurrence. This excess policy defined “personal injury” as “injury arising out of false arrest, false imprisonment, wrongful eviction, detention, malicious prosecution, … which occurs during the policy period.” The Court of Appeal held that the definition of “personal injury” required the malicious prosecution to “occur” during the policy period. For the reasons discussed pertaining to the Argonaut policy, the Court of Appeal held that malicious prosecution did not “occur” during this Midland policy, so Midland had no obligations under the policy.

The second Midland policy agreed to indemnify A.J. for all sums that it became obligated to pay by reason of liability for damages on account of “personal injuries” caused by an “occurrence.” The term “personal injuries” was defined, in part, as malicious prosecution, and the term “occurrence” was defined as “an accident, including injurious exposure to conditions, which results, during the policy period, in bodily injury or property damage neither expected nor intended from the standpoint of the Insured.” In order to avoid a self-defeating construction of the policy that would render “personal injuries” being excluded from coverage, the court deemed as an oversight the use of the term “bodily injury” in the definition of “occurrence” and inserted “personal injuries” in the place of “bodily injury” in the definition.

So construed, however, the policy yet remains limited in coverage to “occurrences” which result in personal injury (here, i.e., malicious prosecution), or property damage, within the policy period. The upshot of this “occurrence” limitation is that the instant incident of malicious prosecution was not subject to this policy. As discussed above, A.J.’s malicious prosecution “occurred” before the policy term began, when the malicious action was commenced against [the former president and chairman] in 1971. The gist of the wrong then was inflicted and complete.

The Court found no coverage under this Midland policy.

The second California case is Zurich Ins. Co. v. Peterson, 188 Cal. App.3d 438, 232 Cal. Rptr. 807 (1986), which involved a lawsuit filed by Tri-Tool against its president to rescind an employment contract. When the complaint was filed, Tri-Tool was insured by Home Insurance Company (“Home”). The Home policy agreed to indemnify Tri-Tool for damages because of injury arising out of the offenses of false arrest, detention, or imprisonment, or malicious prosecution, if such offense is committed during the policy period.

In February of 1980, the Home policy was replaced by a primary policy issued by American Guarantee and Liability Insurance Company (“AGLIC”) and an excess policy issued by Zurich Insurance Company (“Zurich”). The AGLIC policy agreed to pay all sums that the insured becomes legally obligated to pay as damages because of “personal injury,” which, in turn, was defined as an “injury arising out of one or more of the following offenses committed during the policy period” and listed false arrest, detention, imprisonment or malicious prosecution as the offenses. The Zurich policy also provided coverage for personal injury, including “injury resulting from false arrest, detention or imprisonment, … malicious prosecution ….” The policy defined an “occurrence” of malicious prosecution as “an act or series of acts of the same or similar nature, committed during this policy period which causes such personal injury.”

The Court of Appeal, Third Appellate District, noted that a favorable termination of the malicious action might be a prerequisite to the filing a malicious prosecution action, but it was not determinative of coverage because the policies at issue did not contain any reference to a particular date. Rather, to implicate coverage, the policies required the act or offense of malicious prosecution to have been committed during the policy period. The court then reviewed the Harbor Insurance Company case and noted that the Harbor court rejected the continuing occurrence concept and determined that the critical date was the filing of the complaint. The Court ruled,

It makes little difference whether the state or an individual controls the maliciously prosecuted action: an individual is first injured upon the filing of a complaint with malice and without probable cause. While some of the adverse consequences to the injured party will depend on whether a criminal prosecution is begun or a civil suit prosecuted, in each case a party’s reputation is injured and legal expenses are incurred at the initiation of the malicious complaint. The fact that damages increase as the prosecution continues does not transform malicious prosecution into a continuing occurrence. We join the reasoned decisions of the majority in holding that for purposes of an insurance policy which measures coverage by the period within which the “offense is committed,” the tort of malicious prosecution occurs upon the filing of the complaint.

Because the policies issued by Zurich and American came into effect after the date Tri-Tool filed its complaint against the president, neither insurer had an obligation to defend or indemnify Tri-Tool.

The interesting thing about California is the interplay between wrongful incarceration cases and California Insurance Code Section 533 (“Section 533”), which states, in part, that an “insurer is not liable for a loss caused by the willful act of the insured; but he is not exonerated by the negligence of the insured, or of the insured’s agents or others.” In short, Section 533 precludes insurance coverage, or indemnity, for a “willful act,” but Section 533 does not apply to the duty to defend or to vicarious liability.

In Downey Venture, et al. v. LMI Ins. Co., 66 Cal. App. 4th 478, 78 Cal. Rptr.2d 143 (1998), the California Court of Appeal, Second Appellate District, held that Section 533 precluded coverage for malicious prosecution, even though such coverage was expressly provided in the policy, because malice is an element for establishing a claim for malicious prosecution. The Court of Appeal noted that in California, “the commission of the tort of malicious prosecution requires a showing of an unsuccessful prosecution of a criminal or civil action, which any reasonable attorney would regard as totally and completely without merit, for the intentionally wrongful purpose of injuring another person.” Id. at 154. The Court of Appeal ultimately held that because the commission of the tort of malicious prosecution constitutes a willful act within the meaning of Section 533, LMI was not obligated to indemnify the insured for such claim.

Ultimately, under California law, an insurer may have a defense obligation in wrongful incarceration cases, but there is a good chance that the insurer will not have an indemnity obligation to the extent that the liability of the insured(s) is based on “willful acts” of malicious prosecution.

The next installment will review the law in New Jersey, a jurisdiction that may have the oldest case law pertaining to insurance coverage for malicious prosecution cases. Again, if there are any questions about another jurisdiction, please contact us ([email protected] or [email protected]) and we can address your questions directly.