Security National Insurance Company v. Construction Associates of Spokane Inc

Opinion

U.S. FDILISETDR IINC TT HCEO URT EASTERN DISTRICT OF WASHINGTON

Mar 24, 2022 SEAN F. MCAVOY, CLERK EASTERN DISTRICT OF WASHINGTON SECURITY NATIONAL No. 2:20-cv-00167-SMJ

Plaintiff,

v. ORDER REGARDING SUMMARY JUDGMENT MOTIONS SPOKANE INC., MARK WILSON, and JENNIFER WILSON,

Defendants.

Before the Court are Plaintiff Security National’s Motion for Partial Summary Judgment re 2019 Certificate of Insurance, ECF No. 134; Plaintiff Security National’s Motion for Partial Summary Judgment (Bad Faith), ECF No.157; and Defendants Mark and Jennifer Wilsons’ Motion for Summary Judgment, ECF No. 162. Also pending are number of motions to strike, including the Wilsons’ motion to strike portions of Security National’s first summary judgment motion, as well as Defendants’ motions to strike and for sanctions regarding the Declaration of James Leondiris, ECF No. 160. ECF Nos. 137, 185, 189. After reviewing the file and hearing oral argument from the parties at two hearings, the Court is fully informed. Finding that Security National is bound by the 2019 Certificate of Insurance issued by Security National’s authorized

representative to Defendant Construction Associates, the Court denies Security National’s motions, denies the motions to strike and for sanctions, and grants the Wilsons’ partial summary judgment.

A. The August 2016 Accident Construction Associates of Spokane is a general contractor that had a project at the Paulsen Building in Spokane. ECF No. 21 at 11. Construction Associates

hired a subcontractor, Merit Electric, for whom Mark Wilson worked. Id. at 11, 13. On August 20, 2016, Mark Wilson was seriously injured while working at the Paulson Center. ECF No. 1 at 4. Nearly three years later, he and Jennifer Wilson

sued Construction Associates, along with other defendants, in Spokane County Superior Court. Wilson v. Diamond Plaza, LLC, No. 19-2-03675-32 (Spokane Cnty. Sup. Ct.); see also ECF No. 159-1 at 28–40. In the suit, the Wilsons claimed damages for medical expenses, pain and suffering, mental anguish and emotional

distress, loss of enjoyment of life, loss of wages, and loss of consortium. ECF No. 159-1 at 39. //

// B. Construction Associates’ Tender On October 3, 2019, Construction Associates’ counsel sent a tender letter to

Merit Electric’s broker, Alliant Insurance Services, Inc. Id. at 15–40. Alliant forwarded the letter to Security National on or about October 8, 2019. ECF No. 158 at 2. The tender letter included (1) a Certificate of Insurance issued by Alliant to

Construction Associates on September 3, 2019; (2) an unsigned single-page Contractor Information Sheet that referred to the Security National Commercial General Liability policy issued to Merit and covering April 3, 2013, to April 2, 2014; (3) a price quote from Merit dated August 9, 2016, for electrical work at the Paulsen

Building; (4) a copy of the Summons and Complaint filed by the Wilsons against Construction Associates in Spokane County Superior Court, and (5) Construction Associates’ two-page October 8, 2013 Subcontractor Agreement with Merit

Electric, which has governed the relationship between Construction Associates and Merit from 2013 to the present. ECF No. 159-1 at 15–40. The Subcontractor Agreement required, in part: Certificate of Insurance naming Construction Associates of Spokane, Inc. as Additional Insured. Insurance: Subcontractor shall maintain in full force and effect at all times a comprehensive liability policy in such limits ($1,000,000 minimum covering: Bodily Injury and Property Damage, each occurrence and $2,000,000 Aggregate), business auto policy with limit of $1,000,000 combined single limit, and employers liability with limits of $1,000,000/$1,000,000/$1,000,000. Subcontractor shall furnish certificates of insurance to Contractor upon execution of this agreement as evidence of the above insurance coverage. Subcontractor will be responsible for the additional insurance premium assessed Contractor for failure to comply with the above terms and conditions. The certificate shall provide for a 30-day notice of cancellation to Contractor. Subcontractor shall provide insurance certificates naming Contractor as an additional insured. Id. at 21. Merit’s insurance policy for the 2016–17 period with Security National included an “Additional Insured” endorsement that conferred additional insured status to “any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy.” ECF No. 139-6 at 2. Consistent with the Subcontractor Agreement, Construction Associates received numerous Certificates of Insurance beginning in 2013, see ECF No. 140- 2, but the certificate most relevant to these motions is the 2019 Certificate of Insurance, issued by Alliant to Construction Associates, see ECF No. 159-1 at 18. Briefly, Construction Associates purportedly knew it had received Certificates of Insurance but had trouble finding the Certificate of Insurance for 2016. ECF Nos.140–41. So, on September 3, 2019—approximately two weeks after the Wilsons filed their suit in Spokane County Superior Court—Construction Associates contacted Merit Electric’s broker, Alliant, and requested a Certificate of Insurance that would show that Merit Electric was covered from April 2, 2016, to April 2, 2017, and that Construction Associates was an additional insured. ECF No. 159-3 at 32–37. The same day, Alliant responded with a Certificate of

Insurance that was for the relevant period but specified coverage for work done on the Couer d’Alene Courthouse Plaza. See id. at 35.1 Construction Associates then asked whether there were other Certificates of Insurance or if the Couer d’Alene

Courthouse Certificate in fact covered projects in addition to the Courthouse project. ECF No. 159-3 at 35. Prior to responding, Alliant’s representative conferred with Cathie Hamlin, an employee at Merit who handles insurance issues, and Ms. Hamlin confirmed that Alliant could give a Certificate of Insurance that was

not project specific. ECF No. 152-1 (“[B]lanket any or all projects for them is fine.”). Alliant then delivered the never before produced 2019 Certificate of Insurance, which purported to reflect blanket additional insured status for the

insurance period during which Mark Wilson was injured. ECF No. 139-8 at 2. C. The First Investigation and Denial On October 11, 2019, Security National’s claims adjuster, John Johnstone2 sent an e-mail to Merit Electric. ECF No. 224 at 6. He wrote:

I request that you advise if an actual Additional Insured endorsement was issued. The Certificate that was produced is for information only 1 In fact, according to Construction Associates, the Coeur d’Alene Courthouse Plaza project had concluded in 2014. ECF No. 18 at 11. 2 For purposes of this Order, the Court follows the parties’ practice and makes no distinction between Security National and AmTrust North America, the latter of which actually employs Mr. Johnstone and his replacement, James Leondiris. and confers no rights. The contract documents supplied lack specificity as to whether Merit was required to name Construction Associates of Spokane as an additional insured on the policy. Rather, it simply requires a Certificate of Insurance naming it as an additional insured. While this may seem like a distinction without a difference, the Certificate states on its face that it does not change the policy and that an endorsement may need to be issued. Hence, I need to locate said endorsement assuming it exists. Id. On October 13, 2019, Merit, responded, “The Certificate of Insurance did not contain an endorsement. The original request in 2013 was asking us to list the holder as additional insured but did not have a contract nor request endorsements. It was renewed this way in the year referenced in the claim.” Id. at 7. Next, on October 18, 2019, Mr. Johnstone sent a letter to Construction Associates. ECF No. 164-1 at 88. In the letter, Mr. Johnstone acknowledges receipt of the tender, noted that it had “insufficient information to determine if there is any obligation to defend or indemnify,” and claimed it was “commencing our investigation into this matter.” Id. Mr. Johnsons also noted that “[w]e may also refer this matter to coverage counsel for review and opinion as to AmTrust’s potential obligations.” Id. In a claim note from the same day, Mr. Johnstone wrote that Security National would “likely need an opinion from [Washington] coverage counsel.” ECF No. 159-1 at 12. Later, on or about November 5, 2019, the claim was transferred from Mr. Johnstone to James Leondiris as claims adjuster. ECF No. 158 at 2. Claim notes from October 22 and November 5, 2019, again note the need for Washington state coverage counsel. ECF No. 159-1 at 2. On November 13, 2019, Mr. Leondiris

entered a claim note saying the Certificate of Insurance is not binding and drafted a letter denying tender of defense. Id. at 42–43. On December 3, 2019, Mr. Leondiris, unaware of the Washington Supreme Court’s October 10, 2019 decision in T-

Mobile USA Inc. v. Selective Insurance Company of America, 450 P.3d 150 (Wash. 2019), which addressed the effect of an agent’s representations in certificates of insurance, sends the denial letter to Construction Associates. See ECF No. 159-2. While it is undisputed that Mr. Leondiris had reviewed the tender letter from

Construction Associates before denying tender, the extent of his investigation is in dispute. Reviewing the claim file, Mr. Leondiris noted that Mr. Johnstone had reviewed the 2016 Policy and underwriting documents and determined there was

no endorsement in the 2016 Policy listing Construction Associates as an additional insured. ECF No. 158 at 4. He also noted that Mr. Johnstone had contacted the Named Insured, Merit, and its broker, Alliant, on October 11, 2019. ECF No. 158 at 4. “Alliant’s response informed Security National that, according to the broker:

(1) there was no Certificate of Insurance issued to [Construction Associates] for the 2016 Policy with an [Additional Insured] endorsement; and (2) there was no contract between [Construction Associates] and Merit that required [additional

insured] coverage for [Construction Associates].” ECF No. 158 at 4. Mr. Leondiris also reviewed and analyzed Construction Associate’s tender letter and the documents attached thereto. ECF No. 158 at 4. Mr. Leondiris also did enough

research to encounter WAC 284-30-355(7)(b): “A certificate of insurance does not confer new or additional rights beyond what the referenced policy of insurance provides.” ECF No. 159-1 at 43. Based on this provision, Mr. Leondiris concluded

that under Washington law, the 2019 Certificate of Insurance did not confer additional insured status to Construction Associates. He did no further legal research prior to the December 3, 2019 denial, he did not research case law, he had not hired Washington state coverage counsel, and he was still unaware of the T-

Mobile USA decision directly addressing the effect of an agent’s representations in Certificates of Insurance. On December 5, 2019, counsel for Construction Associates spoke and

e-mailed with Mr. Leondiris regarding the denial. See ECF No. 136-1 at 61. Specifically, counsel informed Mr. Leondiris of the Washington Supreme Court’s decision in T-Mobile USA and asked that Security National reconsider the denial in light of the case’s holding that “an insurance company’s agent who makes an

authoritative representation binds the insurance company, even when that specific representation is transmitted via a certificate of insurance and accompanied by general disclaimers.” ECF No. 136-1 at 61 (quoting T-Mobile USA, 150 P.3d at

158). D. Second Investigation and Denial Over the next two months, Mr. Leondiris was in contact with Merit, Alliant,

and Construction Associates. ECF No. 158 at 11–12. Then, on February 19, 2020, more than four months after receiving Construction Associates’ tender, Mr. Leondiris informed Construction Associates that it had decided to retain

Washington coverage counsel to consider the T-Mobile USA decision. Id. at 13. Mr. Leondiris then continued to investigate the claim. For example, in late March 2020, he sent letters to Merit, Alliant, and Construction Associates’ counsel requesting additional information that might help establish Construction Associates

as an additional insured. Id. at 14. Construction Associates’ response included additional documents that were not previously provided with the initial tender letter, including additional pages relating to the 2013 subcontract between Merit and

Construction Associates, as well as dozens of Certificates of Insurance. Id. at 14– 15. Finally, on April 29, 2020, Security National affirmed its denial of defense in a letter sent to Construction Associates. ECF No. 164-1 at 182–84. In that letter,

Security National stated that Alliant had no authority to issue “any Certificate of Insurance for any Security National insured years after the policy expired.” Id. at 184. Moreover, the letter continued, T-Mobile USA was inapplicable to this

coverage dispute because the 2019 Certificate of Insurance was issued after the policy period, and Construction Associates could not have relied on the representation contained in the certificate. Id.

E. Lawsuit On April 30, 2020, the day after affirming its denial of defense, Security National filed this suit against Construction Associates, seeking (1) a declaration

that Construction Associates is not covered by the insurance policy, (2) damages for material misrepresentations, and (3) damages for violation of RCW 48.01.030. ECF No. 1. Next, Defendants informed the Court that Construction Associates had assigned its rights to bring certain claims against Plaintiff to the Wilsons, and the

Court granted the Wilsons leave to intervene. ECF No. 19. As assignees of the claims held by Construction Associates, the Wilsons filed counterclaims against Security National, including claims for breach of contract, negligence, violations of

the Washington Consumer Protection Act, RCW 19-86, et seq., violations of the Washington Insurance Fair Conduct Act, RCW 48.30.015, breach of the duty of good faith, coverage by estoppel, and damages/fees pursuant to the Olympic Steamship doctrine. ECF No. 21

The Court must grant summary judgment if “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as

a matter of law.” Fed. R. Civ. P. 56(a). A fact is “material” if it “might affect the outcome of the suit under the governing law.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A dispute about a material fact is “genuine” if “the evidence

is such that a reasonable jury could return a verdict for the nonmoving party.” Id. The moving party bears the initial burden of showing no genuine dispute of material fact exists because a reasonable jury could not find in favor of the

nonmoving party. See Celotex Corp. v. Catrett, 477 U.S. 317, 323, 325 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 588 n.10, 587 (1986). If the moving party makes this showing, the nonmoving party then bears the burden of showing a genuine dispute of material fact exists because reasonable

minds could differ on the result. See Anderson, 477 U.S. at 248–51; Matsushita Elec. Indus., 475 U.S. at 586–87. The nonmoving party may not rest upon the mere allegations or denials of its

pleading and must instead set forth specific facts, and point to substantial probative evidence, tending to support its case and showing a genuine issue requires trial resolution. See Anderson, 477 U.S. at 248–49. The Court must enter summary judgment against the nonmoving party if it fails to make a showing sufficient to

establish an element essential to its case and on which it would bear the burden of proof at trial. See Celotex Corp., 477 U.S. at 322. In ruling on a summary judgment motion, the Court must view the evidence

in the light most favorable to the nonmoving party. See Tolan v. Cotton, 572 U.S. 650, 657 (2014) (quoting Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970)). Thus, the Court must accept the nonmoving party’s evidence as true and draw all

reasonable inferences in its favor. See Anderson, 477 U.S. at 255. The Court may not assess credibility or weigh evidence. See id.

A. Security National is Not Entitled to Summary Judgment Regarding the 2019 Certificate of Insurance Plaintiff Security National moves for partial summary judgment regarding the 2019 Certificate of Insurance. ECF No. 134. Specifically, Security National seeks an order “concluding as a matter of law, and as a matter of fact (based on the recent admissions of [Construction Associates] and its defense counsel) that the 2019 Certificate of Insurance issued by Merit Electric’s broke (Alliant) to Construction Associates of Spokane . . . does not provide ‘additional insured’ covered for Construction Associates under the Policy issued by Security National to Merit Electric.” Id. at 1–2. Security National’s arguments on this first summary judgment motion boil down to this: Defendants must show that Construction Associates relied on the 2019 Certificate of Insurance, they cannot make such a showing, and, regardless, recovery based on the 2019 Certificate of Insurance is barred by the known-loss rule. As explained in more detail below, the Court disagrees that a showing of reliance is required here and finds that Security National waived application of the known-loss doctrine by failing to assert it as an affirmative defense. Given these rulings, the Court also denies the Wilson’s motion to strike portions of Security National’s summary judgment motion.

1. Reliance Central to the parties’ dispute here is T-Mobile USA v. Selective Ins. Co. of Am., 450 P.3d 150 (Wash. 2019), which concerned an insurance dispute between

T-Mobile USA Inc. and Selective Insurance Company of America. After T-Mobile USA was sued over damage to a building caused by one of its cellular antennae towers, a dispute arose over whether T-Mobile USA was entitled to coverage as an additional insured under a Selective insurance policy taken out by a contractor that

helped construct the tower. Id. It was clear the insurance policy covered only T-Mobile NE, not T-Mobile USA, which are distinct legal entities. Id. at 152–53. Nonetheless, T-Mobile USA argued that because Selective’s broker agent had

provided T-Mobile USA with annual Certificates of Insurance indicating coverage for T-Mobile USA as an additional insured, Selective was bound to cover T-Mobile USA when it tendered a defense. See id. at 154. After a federal district court granted Selective summary judgment, the case

reached the Ninth Circuit Court of Appeals. T-Mobile USA Inc. v. Selective Ins. Co. of Am., 908 F.3d 581, 584 (9th Cir. 2018). There, the Ninth Circuit concluded that the agent broker had acted with apparent authority in issuing the Certificates of

Insurance, but found that it was confronted with two competing principles under Washington insurance law that are at loggerheads here. The first is that under Washington law, “an insurance company is bound by all acts, contracts, or representations of its agent, whether general or special, which are within the scope of the agent’s real or apparent authority.” Chicago Title Ins. Co. v. Wash. State Office of Ins. Comm’r, 309 P.3d 372, 379 (Wash. 2013) (quoting Pagni v. N.Y. Life Ins. Co., 23 P.2d 6, 16 (Wash. 1933)). The second is that under Washington law, “the purpose of issuing a [Certificate of Insurance] is to inform the recipient thereof that insurance has been obtained.” Postlewait Constr., Inc. v. Great Am. Ins. Cos., 720 P.2d 805, 807 (Wash. 1986). Accordingly, under Washington law, a [Certificate of Insurance] is not the functional equivalent of an insurance policy, and it therefore cannot be used to amend, extend, or alter the coverage provisions of an insurance policy. See id.; Int’l Marine Underwriters v. ABCD Marine, LLC, 267 P.3d 479, 484 (Wash. Ct. App. 2011). T-Mobile USA, 908 F.3d at 585 (alteration in original). The Ninth Circuit panel therefore certified a question to the Washington State Supreme Court: “Under Washington law, is an insurer bound by representations made by its authorized agent in a certificate of insurance with respect to a party’s status as an additional insured under a policy issued by the insurer, when the certificate includes language disclaiming its authority and ability to expand coverage?” Id. at 588. The panel also clarified that it did “not intend [its] framing of this question to restrict the Washington Supreme Court’s consideration of any issues that it determines are relevant” and noted that “[t]he Washington Supreme Court may, in its discretion, reformulate the question.” Id. (citation omitted). The Washington Supreme Court answered that “where: (1) the Ninth Circuit has already ruled that the agent acted with apparent authority, but (2) that agent’s

representation turned out to be inconsistent with the policy, and (3) the certificate included additional text broadly disclaiming the certificate’s ability to ‘amend, extend or alter the coverage afforded by’ the policy,” “the answer is yes: an

insurance company is bound by the representation of its agent in those circumstances.” T-Mobile, 450 P.3d at 416. “Otherwise, an insurance company’s representations would be meaningless and it could mislead without consequence.” Id.

In reaching that answer, the Washington Supreme Court reiterated the longstanding “general rule” in Washington: an insurance company is bound by all acts, contracts, or representations of its agent, whether general or special, which are within the scope of [the agent’s] real or apparent authority notwithstanding they are in violation of private instructions or limitations upon [the agent’s] authority, of which the person dealing with [the agent], acting in good faith, has neither actual nor constructive knowledge. Id. at 420 (quoting Pagni v. N.Y. Life Ins. Co., 23 P.3d 6 (1933)). Given this rule, under Washington law, where Selective’s agent acted with apparent authority when it issued the certificate to T-Mobile, the insurance company was bound by the agent’s representation. Id. at 421. Reliance comes up briefly both in the majority opinion and in the dissent, but neither establishes a reliance requirement. In the majority opinion, the court noted that Selective had argued that T-Mobile USA’s “alleged reliance on the representation . . . was unreasonable,” given that T-Mobile USA approved T-Mobile

NE’s contract with the contractor that “explicitly stated that T-Mobile USA was not a party to the contract.” Id. But the court rebuffed this argument: But the Ninth Circuit has already ruled that Selective’s agent acted with apparent authority. That ruling conclusively resolves this argument. Apparent authority “depend[s] upon objective manifestations made by the principal.” King v. Riveland, 886 P.2d 160 (1994) (citing Smith v. Hansen, Hansen & Johnson, Inc., 818 P.2d 1127 (1991)). Those objective manifestations by the principal “must cause the [third party] to actually, or subjectively believe, that the agent has authority to act for the principal” and “be such that the [third party's] actual, subjective belief is objectively reasonable.” Id. (emphasis added) (citing Smith, 818 P.2d 1127). Thus, in ruling that the agent acted with apparent authority, 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.” T-Mobile USA’s objectively reasonable belief that the agent had authority to issue the certificate necessarily makes its reliance on that certificate reasonable. Accordingly, under the general rule, Selective is bound by the representations that its agent made to T-Mobile USA when the agent issued the certificate of insurance. T-Mobile USA, 450 P.3d at 154–55. To be sure, the above-quoted passages allude to T-Mobile USA’s reliance, but reliance is unnecessary to the holding. Instead, the court is refuting an attack Selective raised at every level of the litigation—that T- Mobile USA knew at all relevant times that it was not an additional insured. In rebuttal, the Washington Supreme Court notes that the Ninth Circuit already found apparent authority, resolving the question of reasonableness, and that this was sufficient to bind Selective to the representations in the Certificate of Insurance.

Tellingly, Security National principally relies on language in the dissent to argue that the Court should apply a reliance element here. Briefly, the dissent argued that Certificates of Insurance were “informational documents only” and “cannot

supplant a policy that does not award coverage.” Id. at 428. The dissent then brings up reliance in the context of disagreeing with a different theory of relief—estoppel: Accordingly, I disagree with the majority that T-Mobile USA's certificates of insurance take precedence over an insurance policy that simply does not cover T-Mobile USA. Nor would I apply equitable estoppel principles in this case. Robinson v. City of Seattle, 830 P.2d 318 (1992). Equitable estoppel requires (1) a party’s admission, statement, or act inconsistent with its later claim, (2) reasonable reliance on that act by another party, and (3) injury to the relying party. Id. Assuming the insurance agent here acted as an agent for Selective Insurance, T-Mobile USA did not “reasonably” rely on the certificates. The record indicates T-Mobile USA believed the certificates provided coverage based on one declaration. 2 ER at 121- 24 (declaration of insurance and claims manager Lisa Bauer). The certificates’ disclaimers clearly stated the documents did not confer any “rights” or “amend, extend or alter” the terms of the policy. E.g., Ala. Elec. Coop., Inc. v. Bailey’s Constr. Co., 950 So. 2d 280, 285–86 (Ala. 2006) (holding it unreasonable to rely on a certificate of insurance to confer coverage based on its disclaimer language). And T-Mobile USA is a sophisticated business entity with extensive experience dealing with insurance matters. This is not to say that equitable estoppel could never be applicable when a certificate is alleged to provide more coverage than an underlying policy where a party can show reasonable reliance. That is not the case here Id. at 430–31 (emphasis added). It is clear that the dissent transitioned from the majority’s holding to an alternative theory of estoppel and expressing why any reliance—an element in the

estoppel analysis—would not have been reasonable under the circumstances. This reading makes particular sense in light of T-Mobile USA’s colloquy at oral argument that the justices could rule in T-Mobile USA’s favor is one of two ways:

(1) by issuing a decision making a general statement about the effect of Certificates of Insurance made by authorized agents or (2) by issuing a narrower ruling based on the doctrine of estoppel. See Washington State Supreme Court Oral Arguments, https://tvw.org/video/washington-state-supreme-court-2019051069/?eventID=201

9051069 (last visited March 23, 2022). For this reason, and because the Court should be cautious not to place too heavy a weight on a dissenting opinion’s characterization of the majority’s holding, the Court finds Security National’s

arguments regarding the dissent unpersuasive. Ultimately, the Court finds that the Washington Supreme Court’s majority opinion is clear. As it repeats throughout the decision: “an insurance company’s agent who makes an authoritative representation binds the insurance company, even

when that specific representation is transmitted via a certificate of insurance and accompanied by general disclaimers. T-Mobile USA, 450 P.3d at 158. Moreover, as that court emphasized, enforcing those authorized representations is good public

policy: “it provides the principal with an additional incentive to ensure that the agent’s representations—made in person, on the phone, or in writing—are true.” Id. at 157. This Court declines to undermine those determinations by adding a reliance

requirement to the Washington Supreme Court’s clear pronouncement. 2. The Known-Loss/Risk Doctrine The “known-risk” defense “is premised on the principle that an insured

cannot collect on an insurance claim for a loss that the insured subjectively knew would occur at the time the insurance was purchased.” Public Utility Dist. No. 1 of Klickitat Cty. v. Int’l Ins. Co., 881 P.2d 1020, 1030 (Wash. 1994). “To prevail on the defense, the court must find the insured expected a specific occurrence before it

obtained insurance coverage. This is ordinarily a question of fact, and summary judgment is improper when the scope of the insured’s knowledge is unresolved.” Mut. of Eumclaw Ins. Co. v. USF Ins. Co., 153 P.3d 877, 883 (Wash. App. 2007),

aff’d, 191 P.3d 866 (Wash. 2008). “[T]he insurer has the burden of proving that the insured knew the particular loss would occur.” Port of Longview v. London Mkt. Insurers, 197 Wash. App. 1018, at *9 (Wash. App. 2016) (citing Alum. Co. of Am. v. Aetna Cas. & Surety Co., 998 P.2d 856 (2000).

As an initial matter, the Court must determine whether Security National was required to plead the defense in its answer, which it did not. See ECF No. 23. “In responding to a pleading, a party must affirmatively state any . . . affirmative

defense.” Fed. R. Civ. P. 8(c)(1). Affirmative defenses “deny [a] plaintiff’s right to recover, even if the allegations of the complaint are true.” G & G Closed Circuit Events, LLC v. Nguyen, No. 10-CV-00168-LHK, 2010 WL 3749284, at *5 (N.D.

Cal. Sept. 23, 2010). In other words, affirmative defenses “plead matters extraneous to the plaintiff’s prima facie case, which deny the plaintiff’s right to recover.” Pertz v. Heartland Realty Investors, Inc., No. 19-cv-06330-CRB, 2020 WL 95636, at *1

(N.D. Cal. Jan 8, 2020). An answer containing an affirmative defense must plead “sufficient factual matter to state a defense that is ‘plausible on its face.’” Id. (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). Here, Security National seeks to use the known-loss doctrine to deny

recovery even if the allegations in the Defendants’ counterclaims are true. Accordingly, the doctrine is an affirmative defense that must be sufficiently pleaded in Security National’s answer. See Newmont USA Ltd. v. Am. Hom. Assur. Co., 795

F. Supp. 2d 1150, 1162 (E.D. Wash. 2011) (“The ‘known loss’ defense is a public policy-based affirmative defense….”). As such, the argument is waived and not properly before the Court. In any event, Security National would not be entitled to summary judgment

on this issue. When Construction Associates tendered, it purportedly did so based on a number of relationships and representations, not solely based on the 2019 Certificate of Insurance. For example, the tender was also purportedly based the

Subcontractor Agreement governing the relationship between Construction Associates and Merit Electric and the other certificates of insurance that had been issued to Construction Associates since 2013. Given that Construction Associates

also relied on these representations, it could not be said to have “expected a specific occurrence before it obtained insurance coverage.” Mut. of Enumclaw, 153 P.3d at 882.

3. Motion to Strike Given that the Court denies Security National’s motion, the Court denies as moot the Wilson’s request that the Court strike portions of Security National’s partial summary judgment motion as inadmissible speculation. But even if the

motion to strike was not moot, the Court would deny the motion. Under Rule 602, “[a] witness may testify to a matter only if evidence is introduced sufficient to support a finding that the witness has personal knowledge

of the matter.” Fed. R. Evid. 602. “Rule 602 requires any witness to have sufficient memory of the events such that she is not forced to ‘fill[ ] the gaps in her memory with hearsay or speculation.’” United States v. Whittemore, 776 F.3d 1074, 1082 (9th Cir. 2015) (quoting 27 Charles Alan Wright et el., Federal Practice &

Procedure Evidence § 6023 (2d ed. 2007)). Witnesses are not “permitted to speculate, guess, or voice suspicions.” Id. (quoting § 6026). But “personal knowledge includes opinions and inferences grounded in observations and

experience.” Id. Lay witnesses may testify about inferences pursuant to Rule 701: If a witness is not testifying as an expert, testimony in the form of an opinion is limited to one that is: (a) rationally based on the witness’s perception; (b) helpful to clearly understanding the witness’s testimony or to determining a fact in issue; and (c) not based on scientific, technical, or other specialized knowledge within the scope of Rule 702. Fed. R. Evid. 701. Whittemore is instructive here. At Whittemore’s trial, one witness testified that, given his personal and professional relationship with Whittemore, he would have made a contribution to the senator’s campaign if asked by Whittemore to do so. Whittemore, 776 F.3d at 1082. The Ninth Circuit determined that the testimony by was not impermissibly speculative or was similarly harmless. Id. Here, the objected-to statements were not self-serving and addressed what the declarant would personally have done had they had they had slightly more/different information—(1) Mr. Stocker, defense counsel for Construction Associates, says he would have tendered the Wilsons’ claim to Security National using the 2016 Certificate of Insurance if he knew of its existence, instead of using the 2019 Certificate of Insurance; (2) Ms. Drew Hoskins of Alliant said that she would not have issued the 2019 Certificate of Insurance if she knew why it was being requested; and (3) Ms. Hamlin, an administrator at Merit, testified that, had she known why Construction Associates was asking for the 2019 Certificate of Insurance to be issued, she would have deferred to Merit’s CFO. See ECF No. 134. As with the witness in Whittemore, these statements are admissible and are not unduly speculative.

B. Cross-Motions for Summary Judgment Having resolved Security National’s first motion for summary judgment, the Court turns to the cross motions for summary judgment regarding bad faith under

the Consumer Protection Act, RCW 19.86 et. seq., and under the Insurance Fair Conduct Act, ECW 48.30.015. Having already decided that T-Mobile USA does not require a showing of reliance for an authorized agent’s representation to find an insurer, the motions become simpler, and the Court has little trouble finding that,

even with the facts viewed in the light most favorable to Security National, Defendants are entitled to summary judgment that Security National acted in bad faith in denying Construction Associates tender of defense.

1. The Duty to Defend “Under Washington law, an insurer owes its insured two primary duties: the duty to indemnify and the duty to defend.” Osborne Constr. Co. v. Zurich Am. Ins. Co., 356 F. Supp. 3d 1085, 1091 (W.D. Wash. 2018) (citing Am. Best Food, Inc. v.

Alea London, Ltd., 229 P.3d 693, 696 (2010)). The duty to defend is much broader than the duty to indemnify, and “is triggered at the time an action within the terms of the policy is initiated against the insured.” Id.

“The duty to defend is triggered ‘if the insurance policy conceivably covers allegations’ in the complaint.” Osborne, 356 F. Supp.3d at 1091 (quoting Am. Best

Food, 229 P.3d at 669) (emphasis in Am. Best Food). In other words, “if there is any reasonable interpretation of the facts or the law that could result in coverage, the insurer must defend.” Am. Best Food, 229 P.3d at 696. If the existence of the

duty to defend cannot be determined from the face of the complaint, “the insurer must investigate the claim and give the insured the benefit of the doubt.” Truck Ins. Exch. v. Vanport Homes, Inc., 58 P.3d 276, 282 (2002). An insurer “must defend until it is clear that the claim is not covered.” Am. Best Food, 229 P.3d at 696. And

“[i]f the insurer remains uncertain, the insurer must provide a defense under a reservation of rights while seeking a declaratory judgment that it has no duty to defend.” Osborne, 356 F.Supp.3d at 1091.

“[I]t is an insurer’s affirmative duty to investigate a claim before it denies coverage.” Aecon Bldgs., Inc. v. Zurich N. Am., 572 F. Supp. 2d 1227, 1236 (W.D. Wash. 2008); see also Coventry Assocs. v. Am. States Ins. Co., 961 P.2d 933, 938 (1998) (the duty of good faith “require[s] the insurer to conduct any necessary

investigation in a timely fashion and to conduct a reasonable investigation before denying coverage.”). Thus, it is “not the insured’s duty to continue supplementing the record to an uninquisitive insurer.” Aecon, 572 F. Supp. 2d at 1236. That is, the

burden is on the insurance company to investigate a tender and “clarify the matter before denying coverage.” Osborne, 356 P.3d at 1095. Moreover, “[a]n insurer may not fail to conduct a reasonable investigation simply because it appears initially that

the loss is not covered.” Fireman’s Fund Ins. Cos. v. Alaskan Pride P’ship, 106 F.3d 1465, 1470 (9th Cir. 1997). Finally, if there is any “legal uncertainty” regarding an insurer’s duty to

defend, that “uncertainty works in favor of providing a defense to the insured.” Am. Best Food, 229 P.3d at 698.; see also id. at 700 (“failure to defend based upon a questionable interpretation of law was unreasonable”). 2. Bad Faith and Coverage by Estoppel

An insurer’s wrongful denial of insurance coverage is ordinarily remedied through traditional contract damages. Kirk v. Mt. Airy Ins. Co., 951 P.2d 1124, 1126 (1998). However, when the insurer’s conduct is in “bad faith,” the denial of

insurance benefits is itself tortious. Id. To prevail on a claim of bad faith, an insured must show that its insurer breached a contract for insurance, and that such breach was “unreasonable, frivolous, or unfounded.” Id. An insurer acts in bad faith when it relies on an “arguable legal interpretation of its own policy” or a “questionable

interpretation of law” to deny a tender of defense. Am. Best Food, Inc., 229 P.3d at 700. In contrast, bad faith is not shown when a refusal “is based upon a reasonable interpretation of the insurance policy,” even if that interpretation is ultimately

incorrect. Kirk, 951 P.2d at 1126 (citing Transcon. Ins. Co. v. Wash. Pub. Utils. Dists.’ Util. Sys., 760 P.2d 337, 347 (1988)).

When an insurer denies a tender of defense in bad faith, Washington law requires that it be estopped from refusing to indemnify any liability eventually assessed against the insured on the claims the insurer refused to defend. Id. at 1127–

28; Woo v. Fireman’s Fund Ins. Co., 161 Wash.2d 43, 164 P.3d 454, 463 (2007). In other words, a bad faith refusal to defend “creates liability for the insurer to pay at least policy limits for any claim that should have been defended but was not.” Woo, 208 P.3d at 564. The “coverage by estoppel” remedy is intended to

create “a strong incentive for the insurer to act in good faith, and [to] protect[ ] the insured against the insurer’s bad faith conduct.” Kirk, 951 P.2d at 1128. 3. Security National’s Duty to Defend

Based on T-Mobile USA, there was a “reasonable interpretation of the facts the law that could result in coverage,” triggering Security National’s duty to defend. Am. Best Food, 229 P.3d at 696. First, it is a reasonable interpretation of the facts and law that Alliant acted with actual, or at least apparent, authority when it sent

the 2019 Certificate of Insurance. The Agency Company Agreement between Alliant and Security National gave Alliant the authority to “issue certificates of insurance reflecting validly issued insurance policies.” ECF No. 139-7 at 2. That is

exactly what it did in sending the 2019 Certificate of Insurance. And the case for apparent authority is stronger, as Alliant had in the past issued such certificates directly to Construction Associates. See ECF No. 140-2 at 2–11. In doing so, Alliant

signed the certificates as Security National’s “Authorized Representative.” ECF Nos. ECF No. 140-2 at 2–11; 140-3 at 2. As in T-Mobile USA, this is sufficient to establish apparent authority.

It was also a reasonable interpretation of T-Mobile USA—in fact it is this Court’s interpretation of that decision—that when Alliant, acting with actual or apparent authority, makes a representation in the 2019 Certificate of Insurance that Construction Associates is covered as an additional insured to Merit Electric’s

policy, Security National is bound by that representation, even if there is general disclaimer language in the Certificate of Insurance or the policy. See 450 P.3d at 416. As such, Security National had, at the least, a duty to defend until it could

obtain a declaratory judgment stating that it had no obligations to Construction Associates under the policy. 4. Security National Acted in Bad Faith as a Matter of Law The Court finds that Security National acted in bad faith as a matter of law

because its denial and determination that it neither had the duty to defend nor indemnify was based, initially, on an inadequate investigation and, later, on “arguable” readings of the policy and “questionable” interpretations of Washington

law. As an initial matter, the Court considers the relevant investigation period to be the time of tender—October 3, 2019—to the time of Security National’s December 3, 2019 denial. During this time, Security National conducted an

investigation that failed in at least two respects. First, Mr. Leondiris did little-to-no investigation regarding why the 2019 Certificate of Insurance was issued. See ECF No. 224 at 6. Instead, the adjustors were content to rely on their own (erroneous)

knowledge of the applicable law concerning Certificates of Insurance. Id. (“The Certificate that was provided is for information only and confers no rights.”). Second, and most significantly, Security National and Alliant failed to look for and account for published case law directly on point, which is especially troubling given

the multiple notations in the file that Washington coverage counsel may be required. See ECF No. 159-1 at 2, 12. Had the adjustors performed such a search or obtained local coverage counsel, they would have encountered the T-Mobile USA decision.

Instead, Mr. Leondiris ultimately drafted a denial letter on November 13, 2019, that took into account little more than the items included in the tender letter and at least one WAC provision. Id. at 42. On December 3, 2019, still unaware of relevant case law, he sent the denial letter to Construction Associates. See ECF No. 159-2.

Security National pushes against this criticism with two arguments that bear mentioning. Security National protests that claims adjustors cannot be expected to know the law and perform legal research, and Security National emphasizes that

T-Mobile USA was decided after the tender. Neither of these arguments are sufficient for the Court to excuse the lack of a reasonable investigation.

True, the adjustors are not attorneys in Washington and are presumably not trained in the same kinds of legal research techniques as lawyers. But that does not excuse an adjustor from having a at least a baseline understanding of the relevant

state’s law necessary to carry out their duties. Instead, it means insurance companies must undertake what in practice are reasonably small steps to ensure adjustors are equipped to make reasonable coverage and defense determinations. Such steps could include teaching adjustors to run case searches or, more likely, supplying

adjustors with subscriptions to relevant legal newsletters, a resource most attorneys rely on to keep apprised of legal developments. Regardless, ignorance of the applicable case law, even of a relatively new case law, does not excuse the conduct

of adjustors who deny defense or indemnification. Doing otherwise would allow insurance carriers to intentionally stay ignorant and hide behind their ignorance when their claim denials are challenged. Adjustors must equip themselves or else seek out those with the requisite tools and knowledge.

Nor is it accurate to characterize T-Mobile USA as an opinion published so recently that the claims adjustors would not have had a reasonable opportunity to discover the opinion. T-Mobile USA was, as insurance law decisions go, a

blockbuster. The Ninth Circuit certified the question the Washington State Supreme Court on November 9, 2018. After briefing from the parties and amici curiae, the justices of that court heard oral argument on May 16, 2019. The Court’s opinion

was ultimately published on October 10, 2019, which as Security National emphasizes repeatedly is after the tender of defense. But that is not the relevant comparison. The relevant comparison is to the date of denial, which is December 3,

2019, meaning Security National had over fifty days in which to do the smallest amount of research into caselaw in Washington State or else consult coverage counsel. Instead, it did next to no research on the applicable law in Washington State.

And even if the Court were to broaden the scope of its analysis to encompass the entire investigation, to include the period from December when Security National affirms its denial of the tender, Defendants would be entitled to summary

judgment regarding bad faith. This is so because, even after further investigation and an awareness of T-Mobile USA, Security National relied on arguable interpretations of its own policy and questionable and strained interpretations of the law to avoid providing Construction Associates with a defense. See Am. Best Food,

Inc., 229 P.3d at 700. As such, Defendants are entitled to coverage by estoppel. Kirk, 951 P.2d at 1127–28. //

// Accordingly, it is hereby ORDERED: 1. Plaintiff Security National’s Motion for Partial Summary Judgment re

2019 Certificate of Insurance, ECF No. 134, is DENIED. 2. Defendant Mark and Jennifer Wilsons’ Motion to Strike, ECF No. 137, is DENIED.

3. Plaintiff Security National’s Motion for Partial Summary Judgment (Bad Faith), ECF No. 157, is DENIED. 4. Defendants Mark and Jennifer Wilsons’ Motion for Summary Judgment, ECF No. 162, is GRANTED. The Court finds that Mark

and Jennifer Wilson are entitled to summary judgment as to the following counterclaims: 3 A. Second Cause of Action—the claim under the Consumer

Protection Act regarding WAC 284-30-330(4) for failure to adequately investigate Construction Associates’ tender; B. Fourth Cause of Action— the claim that Security National acted in bad faith in conducting its investigation and denying the

tender of defense; and C. Sixth Cause of Action—the claim for coverage by estoppel.

3 See ECF No. 21 at 22, 25–28. 5. The Defendants’ motions to strike and for sanctions regarding Mr. Leondiris’ declaration, ECF Nos. 185 and 189, are DENIED. IT ISSO ORDERED. The Clerk’s Office is directed to enter this Order and provide copies to all counsel.

DATED this 24" day of March 2022. ° pn etege SOF SALVADOR MENDOZAZJR. United States District Judge