Washington Supreme Court Expands Definition of Bad Faith in Context of Insurer's Breach of Duty to Defend

The Washington Supreme Court in a March 18, 2010 decision (5-4, majority opinion authored by Justice Tom Chambers) ruled that commercial liability carrier Alea London Ltd, in refusing to defend its insured American Best Foods, Inc. dba Café Arizona (“Insured”) based upon an assault exclusion, even in the face of allegations of post assault negligence which caused or exacerbated injuries, not only breached its duty to defend but committed bad faith as a matter of law by giving itself the benefit of the doubt and basing its decision on an equivocal interpretation of the case law.

The Facts of the Case

As described in Justice Chambers’s majority opinion, the facts are as follows:

American Best Food, Inc., operates Café Arizona, a Federal Way nightclub. On January 19, 2003, after they apparently brushed against each other on the dance floor, George Antonio confronted Michael Dorsey inside Café Arizona. Club security escorted Antonio out of the building. When security later let Antonio return, he confronted Dorsey again. This time security escorted both men outside. Once outside the nightclub, Antonio pulled a gun and shot Dorsey nine times. A club security guard returned fire, wounding Antonio. Dorsey apparently staggered to the alcove of the club, where security guards carried him inside. Myung C. Seo instructed club employees to remove Dorsey from the establishment. According to Dorsey’s complaint, the employees “dumped him on the sidewalk.” Clerk’s Papers (CP) at 42.

Later that year, Dorsey sued, alleging that Café Arizona failed to take reasonable precautions to protect him against criminal conduct despite considerable notice of the potential harm given the history of violence at the club and the specific conduct of Antonio. In an amended complaint, Dorsey also explicitly contended that the security guards exacerbated his injuries by dumping him on the sidewalk after he was shot. Café Arizona promptly sought protection from its insurer, Alea London, by notifying it of Dorsey’s law suit, and asserting rights to a defense and indemnity. Alea refused, citing the exclusion in its policy for injuries or damages “arising out of” assault or battery.

Procedural History

Insured sued Alea in May 2005 for breach of contract, bad faith and violation of the Consumer Protection Act. On cross motions for summary judgment, the King County Superior Court found for Alea and dismissed Insured’s claims.

Scott B. Easter and Montgomery Purdue Blankinship & Austin associated as counsel on appeal. Division I of the Court of Appeals partially reversed, holding that Alea breached its duty to defend and that summary judgment dismissal of the Insured’s bad faith refusal to defend and indemnification claims was inappropriate. It affirmed dismissal of Insured’s Consumer Protection Act (“CPA”) claims.

Alea petitioned the Supreme Court for review, which was opposed by Insured, but in the alternative, if review were granted Insured requested that in addition to affirming the lower court’s finding of breach of duty to defend, that the Court go further (reversing the Court of Appeals) to find bad faith and remand the CPA claim to the trial court to resolve issues of fact. The Supreme Court granted review of all issues, followed by Amicus briefs from the Washington State Association for Justice on side of Insured and separate briefs by State Farm, Interested London Insurers and Washington Defense Trial Lawyers, on the side of Alea.

The Decision

Seventeen months after oral argument, the Supreme Court published a 5-4 decision. The majority decision, written by Justice Chambers (joined by justices Charles Johnson, Richard Sanders, Mary Fairhurst and Phillip Thompson, Justice Pro Tem) sustained the lower court’s finding of a violation of breach of duty to defend, reversed the lower court by finding bad faith as a matter of law, and sustained the trial court and lower court’s dismissal of the CPA claim. The dissenting opinion authored by Justice Susan Owens (joined by Justices Barbara Madsen, Gerry Alexander, and James Johnson) dissented in part. Dissenters had no problem in sustaining the lower court’s finding of breach of the duty to defend and dismissal of the CPA claims, but in a strongly worded dissent took issue with the majority’s ruling of bad faith as a matter of law.

Discussion and Significance of Majority Opinion

Counsel for Alea and Insured, at both appellate levels, strongly disagreed with respect to the implications of a prior holding of Division I of the Court of Appeals, McAllister v. Agora Syndicate, Inc., 103 Wn. App 106, 11 P.3d 859 (2000), which held that an assault exclusion precluded coverage where previously ejected patrons were allowed by insured’s nightclub staff to reenter the club resulting in a fight which club’s staff failed to take any action to suppress. Alea contended that based upon the McAllister case, existing Washington law justified denial of a defense to Insured in the instant case, since even exacerbation of existing injuries or new injuries when the patron was dumped on the curb following the fight “arose out of …” the assault and therefore were not covered.

Insured argued that the issue of whether post assault injuries were within an assault exclusion was an issue of first impression in Washington, that McAllister was distinguishable, and cited cases from other jurisdictions which upheld coverage despite assault exclusions in similar factual settings. Insured further argued that under Truck Ins. Exch. v. VanPort Homes, Inc., 147 Wn.2d 751, 760, 58, P.3d 276 (2002), the insurer must defend unless and until it was clear that the insured was not covered and therefore Alea breached its duty to defend. Both the Court of Appeals and all nine of the justices of the Supreme Court ultimately upheld the Insured’s position on this point, which is relatively unsurprising.

What is significant and makes new law in Washington is that the majority went further to rule that Alea breached its duty of good faith by not offering a defense under a reservation of rights and (if it wished to avoid the ongoing defense obligation) commencing a declaratory action to determine the ultimate coverage and defense obligations. In other words, in a situation where the law arguably is unsettled in Washington, by not giving the insured the benefit of the doubt and offering a defense, Alea committed bad faith as a matter of law.

This case gives counsel for policy holders an additional powerful weapon to force insurers to offer a defense in cases where the law is uncertain and where there will be an argument that reasonable minds could differ on questions of the state of Washington law as it affects duty to defend. Coverage counsel for insurers need more than a “reasonable” or “legally defensible” justification to deny defense to avoid a later bad faith determination — all reasonable doubts as to the current state of the law must be resolved in favor of the insureds.

Scott Easter has been a member (partner) at the Seattle firm of Montgomery Purdue Blankinship & Austin PLLC since 1983. His commercial litigation practice has emphasized insurance coverage, health law and fiduciary litigation for the past 10-15 years and he has been designated a “Super Lawyer” each year from 2001 to the present.