Washington liability insurer contemplating coverage denial? Read this first
May, 2005
Under Washington law, a liability insurer that declines to defend in bad faith may forfeit its coverage defenses, even if coverage was correctly denied in the first place. Fortunately, a recent Washington case, Holly Mountain Resources, Ltd. v. Westport Insurance Corp., __ Wn. App. __, 104 P.3d 725 (Wash. App. Div. 2, January 11, 2005), provides some guidance to help insurers stay out of trouble when declining to defend.
There, Holly Mountain agreed to harvest timber for Ahtanum Irrigation District (AID). After harvesting timber for approximately two years, however, a dispute arose and AID sued Holly Mountain for breach of the timber harvest agreement and intentional timber trespass. Holly Mountain turned to its insurer, requesting a defense. The insurer declined because the CGL policy issued to Holly Mountain did not cover damages arising out of Holly Mountain's breach of the agreement or for intentional misconduct.
In holding that the insurer correctly declined coverage, the Washington Court of Appeals commented, with approval, on steps taken by the insurer to investigate the claim and which demonstrated the insurer's "good faith." Among them, the court noted that the insurer:
· Looked beyond the complaint and reviewed other pertinent documents – e.g., the timber harvest agreement;
· Explained to the insured the reasons behind its denial, by telephone and in writing, and quoted the relevant policy language;
· Offered to reconsider its decision if the insured provided additional information; and
· Hired counsel to defend under reservation of rights, despite the carrier's justified belief that the claim was not covered.
Although certainly not an exhaustive list of conduct establishing good faith, the measures taken by the Holly Mountain insurer should be considered instructive for carriers inclined to deny coverage and concerned that their decision may be reviewed, in subsequent litigation or otherwise.