Illusory “Claims-Made” Commercial General Liability Policy Requiring Loss and Claim to Occur in the Same Year Unenforceable

In August 2022, the Washington State Supreme Court issued an important opinion impacting coverage afforded to contractors under commercial general liability (CGL) policies. The Court held as a matter of first impression in Preferred Contractors Insurance Company v. Baker and Son Construction Inc. that a purported claims-made CGL policy that lacked retroactive and prospective coverage (meaning the policy required both the loss to occur and claim be reported in same policy year) was unenforceable as contrary to public policy.

This coverage dispute arose out of a wrongful death claim against a construction company, Baker and Son Construction Inc. (Baker). In October 2019, a Baker employee allegedly caused a two-by-four to fall and strike Ronnie Cox, the owner of Cox Construction, in the head. Mr. Cox died in his sleep later that night. In September 2020, Baker received a notice that Mr. Cox’s widow was pursuing a wrongful death claim. Baker notified its insurer, Preferred Contractors Insurance Company (PCIC), of the claim two days later.

PCIC had issued two substantively identical CGL policies to Baker. The first had a coverage period of January 5, 2019, to January 5, 2020 (the 2019 policy). The second had a coverage period of January 5, 2020, to January 5, 2021 (the 2020 policy). While these were claims-made policies, the insuring agreement contained language more similar to an occurrence policy. The policies excluded coverage unless the bodily injury or property damage was caused by an occurrence that first took place during the policy period. Additionally, the policies contained an endorsement, limiting coverage to bodily injuries that occurred and were reported to PCIC within the same policy period. The endorsement also stated there was no continuous coverage between policies that were renewed, meaning each policy period was limited to one year. Because Mr. Cox’s death occurred in October 2019 and Ms. Cox did not notify Baker of her intent to sue until September 2020, the occurrence and claim reporting did not occur during the same policy period.

PCIC filed a declaratory action, requesting a declaration that it had no duty to defend or indemnify Baker. That court granted Baker’s and Ms. Cox’s motion for certification of question of state law to be decided by the Washington State Supreme Court. The reformulated certified question was:

When a contractor’s liability insurance policy provides only coverage for “occurrences” and resulting “claims-made and reported” that take place within the same one-year policy period, and provide no prospective or retroactive coverage, do these requirements together violate Washington public policy and render either the “occurrence” or “claims-made and reported” provisions unenforceable?

The Court answered affirmatively, relying on Chapter 18.27 RCW. The Court concluded the legislature created a public policy through RCW 18.27.050 and RCW 18.27.140 requiring contractors to be financially responsible for the injuries they negligently inflict on the public. RCW 18.27.050 requires contractors to have insurance or financial responsibility to cover $100,000 “for injury or damage including death to any one person” to obtain registration with the state. RCW 18.27.140 states the explicit purpose for the chapter: “to afford protection to the public…from unreliable, fraudulent, financially irresponsible, or incompetent contractors.” With such a public policy established, the Court found a contractor’s CGL policy that requires the loss to occur and be reported to the insurer in the same policy year and fails to provide prospective or retroactive coverage, thereby providing essentially illusory coverage, violates this public policy and is unenforceable.

Ultimately, this decision prevents insurers from selling CGL policies to Washington contractors that combine these two coverage restrictions (requiring both the loss to occur and claim be reported in same policy year) or declining coverage to Washington contractors under existing CGL policies based on these same timing restrictions.

This blog post is intended to provide general information to contractors. If you would like to discuss how this ruling may impact your business, current policies in place, or any claims denied based on the timing limitations discussed above, please do not hesitate to contact any of the attorneys in our Construction Law Practice Group.

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