Kenco Construction Inc v. Hartford Fire Insurance Company

• Court: District Court, W.D. Washington
• Decided: March 24, 2020
• Docket: 2:19-cv-01000
• Status: Unknown

Opinion

The Honorable Richard A. Jones 1

7 UNITED STATES DISTRICT COURT 8 WESTERN DISTRICT OF WASHINGTON AT SEATTLE 9 KENCO CONSTRUCTION, INC., 10

Plaintiff, 11 NO. 2:19-cv-01000-RAJ

12 v. 13 ORDER GRANTING DEFENDANT’S MOTION FOR 14 HARTFORD FIRE INSURANCE JUDGMENT ON THE COMPANY, PLEADINGS 15

Defendant. 16

17 This matter is before the Court on Defendant’s motion for judgment on the 18 pleadings. Dkt. # 14. For the reasons that follow, the Court GRANTS the motion. Dkt. 19 # 14. 20 I. BACKGROUND 21 The parties in this action have a lengthy and detailed history. Plaintiff Kenco 22 Construction (“Plaintiff” or “Kenco”) was hired by Porter Brothers Construction, Inc. 23 (“Porter”) as a subcontractor on a high school construction project for Highline School 24 District (the “District”). In connection with the project, Porter obtained a surety bond 25 from Defendant Hartford Fire Insurance Company (“Hartford” or “Defendant”). The 26 1 purpose of the bond was to indemnify the District from the claims of unpaid 2 subcontractors and others, if such debts were not fully satisfied by Porter. 3 Kenco entered into two subcontracts with Porter. Disputes arose between Porter 4 and Kenco regarding Kenco’s allegations that Porter failed to pay Kenco progress 5 payments as required under the subcontracts. In 2013, Kenco sued Porter and Hartford 6 in King County Superior Court to recover the disputed progress payments. After a 7 lengthy trial, the jury returned a verdict in favor of Kenco and awarded Kenco the 8 withheld progress payments. Judgment was entered against Hartford on July 12, 2016. 9 Hartford appealed, and on June 11, 2018, the Washington Court of Appeals affirmed the 10 verdict and final judgment. Following the appeal, Kenco alleges that Hartford made several “low-ball” 11 settlement offers, which Kenco rejected. On July 2, 2018, Hartford sought 12 reconsideration of the Court of Appeals decision, which was denied. After the Court of 13 Appeals rejected Hartford’s motion for reconsideration, Kenco alleges that Hartford 14 continued to refuse to tender payment. As a result, on August 3, 2018, Kenco informed 15 Hartford of its intent to assert claims for damages related to Hartford’s “continued unfair 16 claims settlement practices.” Approximately two weeks later, Hartford tendered 17 payment to Kenco, satisfying the final judgment and associated fees and costs. 18 Kenco now brings suit against Hartford alleging extracontractual claims for bad 19 faith and violations of the Washington Consumer Protection Act (“CPA”) and the 20 Insurance Fair Conduct Act (“IFCA”). Hartford moves for judgment on the pleadings 21 under Fed. R. Civ. P. 12(c). Dkt. # 14. 22 II. LEGAL STANDARD 23 “Judgment on the pleadings is proper when the moving party clearly establishes on 24 the face of the pleadings that no material issue of fact remains to be resolved and that it is 25 entitled to judgment as a matter of law.” Hal Roach Studios, Inc. v. Richard Feiner and 26 1 motion is essentially the same as that applied on a Rule 12(b)(6) motion for failure to state 2 a claim: “the allegations of the non-moving party must be accepted as true, while the 3 allegations of the moving party which have been denied are assumed to be false.” Id. The 4 Court is not required to accept as true legal conclusions or formulaic recitations of the 5 elements of a cause of action unsupported by alleged facts. Ashcroft v. Iqbal, 556 U.S. 6 662, 678 (2009). When considering a motion for judgment on the pleadings, a court may 7 consider material which is properly submitted as part of the complaint without converting 8 the motion into a motion for summary judgment. See Lee v. City of Los Angeles, 250 F.3d 9 668, 688 (9th Cir. 2001). 10 III. DISCUSSION 11 A. Standing Hartford argues that Kenco lacks standing to bring its bad faith or CPA claims 12 because it is a third-party claimant to the surety bond. Dkt. # 14 at 7. Payment bonds, 13 such as the one at issue in this case, create a tripartite contractual relationship between 14 the surety, principal (contractor), and obligee (project owner). Colorado Structures, Inc. 15 v. Ins. Co. of the W., 161 Wn.2d 577, 628 (2007). The surety provides a bond to the 16 principal for the benefit of the obligee. In this case, Hartford (the surety) provided a 17 bond to Porter (the principal) for the benefit of Highline School District (the obligee). 18 Hartford’s obligations under the bond also included payment of subcontractor claims. 19 Dkt. # 15, Ex. A. Specifically, the bond provides: 20 The Contractor [Porter] and Surety [Hartford] hereby jointly and 21 severally agree with the School District that every Claimant who has 22 not been paid in full before the expiration of a period of ninety (90) days after the date on which the last of such Claimant’s work or labor 23 was done or performed, or materials or equipment were furnished by such Claimant, may sue on this bond for the use of such Claimant, 24 prosecute the suit to final judgment for such sum or sums as may be 25 justly due Claimant and permitted under statute, and have execution thereon. The School District shall not be liable for the payment of 26 any costs of expenses of such suit. 1 Dkt. # 15, Ex. A at 2, ¶ 3. Kenco, as a subcontractor, is a bond claimant and entitled to 2 sue on the bond for payment, which was basis for the previous state court litigation. 3 i. Bad Faith 4 The question of whether a bond claimant can sue a surety for tortious bad faith 5 conduct, however, has yet to be considered by the Washington courts. As a result, the 6 court must “use its own best judgment in predicting” what the Washington Supreme 7 Court would decide. See Amfac Mortgage Corp. v. Arizona Mall of Tempe, Inc., 583 8 F.2d 426, 434–5 (9th Cir. 1978). Hartford relies on the Washington Supreme Court’s 9 decision in Tank v. State Farm, to support its argument that such actions are not 10 permissible under Washington law. Tank v. State Farm Fire & Cas. Co., 105 Wn.2d 381, 385 (1986). 11 In Tank, the Washington Supreme Court considered whether a third-party 12 claimant (Walker), who was injured as a result of the insured’s (Tank) intentional tort 13 was able to bring a bad faith claim against Tank’s insurer, State Farm. Tank, at 392. 14 The lower court dismissed Walker’s claim, holding that an action for breach of good 15 faith against an insurer is limited to the insured. The Washington Supreme Court 16 affirmed, holding that a third-party does not have standing to sue an insurance company 17 directly for an alleged breach of the duty of good faith under a liability policy. Tank, at 18 392. Specifically, the Court held: 19 The duty to act in good faith or liability for acting in bad faith 20 generally refers to the same obligation . . . That source is the 21 fiduciary relationship existing between the insurer and insured. Such a relationship exists not only as a result of the contract between 22 insurer and insured, but because of the high stakes involved for both parties to an insurance contract and the elevated level of trust 23 underlying insureds’ dependence on their insurers. 24 Id. at 385. (internal citations omitted) (emphasis added). 25 This decision has been applied by other courts. In Dussault ex rel. Walker-Van 26 Buren v. Am. Int’l Grp., Inc., a seven-year old girl was injured in a car accident and sued 1 the City of Everett over a lack of curb extensions and red striping along the curb. 2 Although she reached a settlement with the city, the city’s insurer refused to pay. The 3 court held that the plaintiff was barred from suing the insurer for breach of duty of good 4 faith because under Tank, an action for breach of good faith against insurer was limited 5 to the insured. Dussault, 123 Wash. App. 863, 867 (2004). 6 Based on Tank and its progeny, the key question before the Court is whether 7 Kenco is a “third-party claimant” under the surety bond. Hartford contends that Kenco 8 is clearly a third-party claimant because it is not a signatory to the bond. Dkt. # 14 at 8. 9 Kenco argues that it is not a third-party claimant but rather a direct first-party claimant. 10 Kenco relies heavily on the Washington Supreme Court’s decision in Colorado Structures to support its claim that bond claimants are entitled to pursue bad faith claims 11 against sureties. In Colorado Structures, the Washington Supreme Court considered 12 whether a general contractor obligee was entitled to recover Olympic Steamship 13 attorney’s fees against the surety. Colorado Structures, Inc. v. Ins. Co. of the W., 161 14 Wn.2d 577, 603 (2007). The Court determined that the obligee was entitled to Olympic 15 Steamship attorney fees in connection with litigating its bond claim, emphasizing the 16 “disparity of bargaining power” between a surety and obligee. Id. at 603 (“The disparity 17 of power between surety and obligee is, with respect to compulsion of performance, 18 identical to the disparity between insurers and the insured.”). 19 Kenco reads the Court’s decision broadly, arguing that under Colorado Structures 20 sureties are equally liable to bond claimants for bad faith. But Kenco’s interpretation 21 goes well beyond the Court’s decision. In fact, the Court explicitly distinguished a 22 California Supreme Court case in which the California court declined to expose sureties 23 to tort remedies. Colorado Structures, at 599 (“The issue in Cates was whether the trial 24 court properly recognized tort remedies for breach of the covenant of good faith and fair 25 dealing in the context of performance bonds . . . Cates concerns itself with the line 26 1 awarded.”). In Colorado Structures, the Court did not consider whether the surety was 2 liable for bad faith tort remedies. Id. at 603 (“This case gives us no occasion to consider 3 whether tort remedies should be available.”). The Court’s decision was limited to 4 whether the obligee was entitled to Olympic Steamship attorney’s fees. 5 Even if Colorado Structures could be interpreted to hold sureties liable to 6 obligees for bad faith, the question before the Court is far more limited. The Court need 7 not consider whether Highline School District as the obligee under the policy has a right 8 to bring a bad faith claim. The Court must only determine whether Kenco as a bond 9 claimant has standing to bring such a claim. 10 Other out-of-state courts have taken competing positions on this issue. Several courts have held that a subcontractor is permitted to bring a bad faith claim against a 11 surety insurer. See, e.g. U.S. ex rel. Don Siegel Const. Co. v. Atul Const. Co., 85 F. 12 Supp. 2d 414, 418 (D.N.J. 2000) (holding subcontractor had standing to assert bad faith 13 claim against surety for delay in responding to subcontractor’s claim on the payment 14 bond); K-W Industries, a Div. of Associated Technologies, Ltd. V. National Surety 15 Corporation, 754 P.2d 502 (Mont. 1988) (same); Szarkowski v. Reliance Ins. Co., 404 16 N.W.2d 502, 505-06 (N.D. 1987) (same). Other courts have held that subcontractors do 17 not have standing to bring bad faith claims under surety bonds. See, e.g. U.S. for Benefit 18 & Use of Ehmcke Sheet Metal Works v. Wausau Ins. Companies, 755 F. Supp. 906, 911 19 (E.D. Cal. 1991) (holding subcontractor did not have standing to sue surety for bad 20 faith); Trans Ocean Container Corp. v. Intercargo Ins. Co., No. C 95-2187 FMS, 1995 21 WL 870958, at *4 (N.D. Cal. Dec. 20, 1995) (same). 22 On balance, the Court believes that the Washington Supreme Court would not 23 permit a cause of action by Kenco against Hartford for bad faith. Although Kenco has a 24 right to pursue payment under the bond, this does not create a fiduciary relationship 25 between Kenco and Hartford, as is required under Tank. In addition, to hold otherwise 26 1 the bond a duty of good faith and fair dealing. If the surety may also be liable to a third 2 party for bad faith, then it may be forced to compromise the duty to one to fulfill the 3 duty to the other.” Ehmcke, at 911 (internal citations omitted). Finally, as noted by the 4 Tank Court, such a claim would not be in the public interest: 5 In foreclosing the right of third party claimants to sue insurers for breach of their statutory duty of good faith, we are persuaded that the 6 public as a whole would not benefit from allowing such suits. The goal of the insurance regulations is a well-regulated insurance 7 industry. To this end, the Insurance Commissioner, not a third party 8 claimant, should have the primary enforcement right. 9 Tank at 393-95. Because the Court concludes that Kenco lacks standing, Hartford’s 10 motion for judgment on the pleadings as to Kenco’s bad faith claim is GRANTED. 11 ii. CPA 12 The same standing issues apply to Kenco’s CPA claim. It is well established that 13 insureds may bring private actions against insurers for breach of the duty of good faith 14 under the CPA. Tank, 105 Wash. 2d at 394. A breach of the insurer’s duty of good faith 15 constitutes a per se CPA violation. Id. Under Washington law, only an insured can 16 bring a per se CPA claim. Transamerica Title Ins. Co. v. Johnson, 103 Wash.2d 409, 17 418, 693 P.2d 697 (1985). For the same reasons that Kenco’s bad faith claim fails, 18 Kenco’s per se CPA claim also fails. Kenco, as a bond claimant, does not have standing 19 to assert a per se CPA violation. See Tank at 394. 20 However, the Tank Court expressly excluded non-per se violations from its 21 analysis. Kenco now argues that its CPA claim also asserts a non-per se violation based 22 on Hartford’s “collusion with its own bond principal to dissuade enforcement.” Dkt. # 23 18 at 20. This is hardly clear from the complaint. Kenco’s CPA allegation is largely a 24 conclusory recitation of the legal elements of a CPA violation. Dkt. # 1-1 at ¶¶ 6.1-6.5. 25 It is not evident from the complaint what alleged misconduct Kenco is relying upon to 26 support a CPA violation. As such, the Court is unable to determine whether Kenco is 1 stating a per se or non-per se violation. Accordingly, Hartford’s motion for judgment on 2 the pleadings as to this cause of action is GRANTED. However, to the extent that 3 Kenco believes it can sufficiently plead a non-per se violation of the CPA, the Court will 4 grant Kenco leave to do so. 5 B. IFCA 6 Hartford next moves for judgment on the pleadings on Kenco’s claim under the 7 Insurance Fair Conduct Act. Dkt. # 14 at 13. Under RCW 48.30.015: Any first party claimant to a policy of insurance who is unreasonably 8 denied a claim for coverage or payment of benefits by an insurer may 9 bring an action in the superior court of this state to recover the actual damages sustained, together with the costs of the action, including 10 reasonable attorneys’ fees and litigation costs . . . 11 Kenco alleges that Hartford violated the IFCA when it failed to “effectuate prompt and 12 fair resolution of Kenco’s bond claim . . .” Dkt. # 1-1 at ¶ 5.2. 13 Kenco’s IFCA claim fails to meet the core statutory requirements. The IFCA 14 provides a cause of action for claimants who are “unreasonably denied a claim for 15 coverage or payment.” RCW 48.30.015 (emphasis added). Here, the Complaint does not 16 allege that Hartford denied a claim for coverage or payment. See Dkt. # 1-1 at ¶ 5.2. 17 Instead, it appears Hartford satisfied Kenco’s claim in August 2018 when it tendered 18 payment in satisfaction of the final judgment. Even assuming Hartford unreasonably 19 delayed in paying the disputed claim, this is insufficient to state a claim under the IFCA. 20 Several courts in this district have similarly held that an IFCA claim cannot 21 survive “where the insurer has fulfilled the claimant’s entire demand.” See, e.g. Smith v. 22 State Farm Mut. Auto. Ins. Co., No. C12-1505-JCC, 2013 WL 12107577, at *3 (W.D. 23 Wash. Jan. 29, 2013); Hann v. Metropolitan Cas. Ins. Co., No. C12-50310-RJB, 2012 24 WL 3098711, at *2 (W.D. Wash. July 30, 2012) (finding no “denial” of payment where 25 insurer paid full policy limit following trial, despite three-year delay between initial 26 claim and resolution of suit.); Neyens v. Am. Family Mutual Ins. Co., No. C12-1038, 1 2012 WL 5499870, at *3 (W.D. Wash. Nov. 13, 2012) (dismissing IFCA claim, despite 2 the 19 month delay, because insurer ultimately paid claim after finding of liability and 3 damages); Country Preferred Ins. Co. v. Hurless, No. C11-1349-RSM, 2012 WL 4 4127727, at *4 (W.D. Wash. Sept. 19, 2012) (“The fact that Country did not pay this 5 amount sooner does not establish a “denial of payment” but rather a delay which was 6 caused by a dispute between the parties over the amount of [plaintiff’s] wage loss….”). 7 Because Hartford paid Kenco in full, Kenco’s IFCA claim fails. Accordingly, 8 Hartford’s motion is GRANTED as to this cause of action. 9 C. Res Judicata1 10 In Washington, “[f]iling two separate lawsuits based on the same event—claim splitting—is precluded[.]” Landry v. Luscher, 95 Wash. App. 779, 780 (1999). Hartford 11 argues that Kenco’s claims are barred by the doctrine of res judicata. Application of res 12 judicata under Washington law requires identity between a prior judgment and a 13 subsequent action as to (1) persons and parties, (2) causes of action, (3) subject matter, 14 and (4) the quality of persons for or against whom the claim is made. Loveridge v. Fred 15 Meyer, Inc., 125 Wash. 2d 759, 763 (1995). Res judicata also requires a final judgment 16 on the merits. Id. 17 Here, factors one, three, and four weigh in favor of preclusion. The only question 18 is whether there is an identity of “causes of action.” To determine whether there is a 19 concurrence of identity between causes of action, Washington courts consider the 20 following factors: 21 (1) [W]hether rights or interests established in the prior judgment would be 22 destroyed or impaired by prosecution of the second action; (2) whether 23 substantially the same evidence is presented in the two actions; (3) whether 24 25 1 Although Kenco’s bad faith and IFCA claims fail as a matter of law, because the Court 26 is granting Kenco leave to amend, the Court will address Hartford’s remaining the two suits involve infringement of the same right; and (4) whether the 1 two suits arise out of the same transactional nucleus of facts. 2 Rains v. State, 100 Wash.2d 660 (Wash. 1983) (en banc) (internal citation omitted). “Res 3 judicata acts to prevent relitigation of claims that were or should have been decided among 4 the parties in an earlier proceeding.” Norris v. Norris, 95 Wash. 2d 124, 130 (1980). 5 Here, the Court agrees with Hartford that any claims based on alleged conduct 6 occurring prior to the jury verdict and final judgment could, and should, have been brought 7 in the original state court action and Kenco is precluded from doing so now. See Smith v. 8 State Farm Mut. Auto. Ins. Co., No. C12-1505-JCC, 2013 WL 1499265, at *7 (W.D. 9 Wash. Apr. 11, 2013). However, Kenco alleges that its current claims are based on post- 10 judgment conduct that could not have been brought previously. Dkt. # 18 at 22 (“Kenco’s 11 factual allegations are substantially different than these first party auto claim cases because 12 the entry of judgment preceded Hartford’s actionable conduct.”). This is somewhat 13 inconsistent with Kenco’s complaint which includes multiple allegations of conduct 14 occurring prior to, and throughout, the state court litigation. Dkt. # 1-1 at ¶¶ 3.15-3.18, 15 4.2-4.3. These are issues that could easily have been raised during the underlying state 16 court action. As such, any claims based on this earlier conduct are precluded. 17 However, the complaint does allege some conduct that arguably would have been 18 impossible for Kenco to raise during the previous litigation. See Dkt. # 1-1 at ¶¶ 3.21- 19 3.28. Under the doctrine of res judicata, only issues that “might have been raised and 20 determined [in the prior action] are precluded.” Zweber v. State Farm Mut. Auto. Ins. Co., 21 39 F. Supp. 3d 1161 (W.D. Wash. 2014). Accordingly, to the extent that Kenco’s non-per 22 se CPA claim is based on conduct occurring after the verdict and final judgment, that claim 23 is not precluded. 24 D. Statute of Limitations 25 The parties agree that a four-year statute of limitations governs Kenco’s CPA 26 claim. Instead, the dispute arises over when the claim accrued. “The statute of 1 limitations time period generally runs from the time an action has accrued.” Malnar v. 2 Carlson, 128 Wn.2d 521, 529 (1996) (internal citation omitted). “[U]nder Washington’s 3 discovery rule, a cause of action does not accrue until a party knew or should have 4 known the essential elements of the cause of action - duty, breach, causation, and 5 damages.” Green v. A.P.C., 136 Wn.2d 87, 95 (1998) (internal citation omitted). 6 Hartford argues that Kenco’s claims are barred by the applicable statute of 7 limitations because they all stem from Hartford’s denial of coverage which began in 8 2013. Dkt. # 14 at 16. Kenco counters that its claims are not related to Hartford’s initial 9 investigation and denial of its bond claim, but rather, its unreasonable delay in tendering 10 payment of the final judgment after the jury verdict. Dkt. # 18 at 22. As discussed above, Kenco’s position is not entirely supported by the complaint which includes 11 repeated references to earlier conduct. See supra, at 10-11. However, to the extent that 12 Kenco’s remaining non-per se CPA claim is based on alleged misconduct occurring after 13 July 12, 2016, such a claim is not barred by the statute of limitations. 14 IV. CONCLUSION 15 For the reasons stated above, Hartford’s motion is GRANTED. Dkt. # 14. 16 Kenco’s complaint is DISMISSED without prejudice. Kenco shall have 14 (fourteen) 17 days from the date of this Order to file an amended pleading or the Court will dismiss 18 this action. 19 20 DATED this 24th day of March, 2020.

21 ____________________________ A 22

23 The Honorable Richard A. Jones 24 United States District Judge 25