Washington Supreme Court strikes down “complaints” policy issued to contractor on public order grounds | Hinshaw & Culbertson – Information for Insurers
Preferred Contractors Insurance Company Risk Retention Group, LLC v Baker and Son Construction, Inc., 2022 Wash. LEXIS 426 (August 11, 2022)
Traditionally, general liability insurance contracts have been “event-based” contracts. Claims insurance contracts have existed for many years, particularly in the context of professional liability insurance. Beginning in the mid-1980s, claims-based contracts were introduced to the general liability insurance market in response to court rulings on the triggering of a coverage problem under claims-based contracts. events as applied to claims for bodily injury or long-tail property damage. Under event-based contracts, the contract(s) in effect at the time the bodily injury or property damage occurs must respond to an otherwise covered loss.
In “claims made” contracts, it is the time the claimant first makes a claim against the policyholder or the time the claim is first made and reported that determines whether the contract Insurance must respond to an otherwise covered loss, rather than the time of bodily injury or property damage. Most claims-based contracts have retroactive dates, which are often the start dates of the contract, but may be earlier. Coverage for bodily injury or property damage occurring before the retroactive date is generally excluded even if the claim is first brought against the policyholder during the term of the contract. Thus, in most claims contracts, coverage is “triggered” by a first claim presented on or after the retroactive date and before the expiry of the contract. Many loss contracts have extended reporting periods or “tails” to provide coverage for claims made during a certain period after the contract expires resulting from events occurring during the contract period.
Some policies may incorporate elements of “event-based” and “claimed” policies. The Washington Supreme Court was confronted with such a policy and overturned it on public order grounds. Specifically, the Washington Supreme Court overturned an “event-based” policy issued to a contractor that included a “claims made” endorsement requiring the claim to be first made during the policy period on August 11, 2022.
In Preferred Contractors Insurance Company Risk Retention Group, LLC v Baker and Son Construction, Inc. a unanimous Washington Supreme Court ruled that a commercial general liability policy violated Washington’s public order after accepting a certified question from the United States District Court for the Western District of Washington.
This case asks, via a certified question, whether a contractor’s Commercial General Liability (CGL) insurance policy that requires the loss to occur and be reported within the same policy year and does not provide prospective cover nor retroactive violates Washington public policy. In light of Chapter 18.27RCW, which regulates the registration of contractors, and specifically RCW 18.27.050, which requires registered contractors to assume financial liability of at least $100,000 for bodily injury, we respond in the affirmative to the certified question.
The claim arose out of a wrongful death action arising from the death of an individual on a construction project.
The court actually described the policies as “claims-based policies” with an insurance agreement that offered coverage with language more similar to an occurrence insurance policy:
b. This insurance applies to “bodily injury” and “property damage” only if: (1) The “bodily injury” or “property damage” is caused by an “event” which occurs or begins during the “period of ‘insurance “. An “event” is deemed to have occurred or commenced on the date on which the conduct, act or omission, process, condition or circumstances alleged to have caused the “bodily injury” or “property damage » began, first existed, was first committed, or was first triggered, even though the “event” causing such “bodily injury” or “property damage” may be continuous exposure or repeated at substantially the same general damage; (2) The “bodily injury” or “property damage” resulting from the “event” occurs, begins, appears and is first identified during the “insurance period”. All “bodily injury” or “property damage” shall be deemed to have occurred or commenced on the date on which the “bodily injury” or “property damage” first becomes or is believed to become known to any person, in any or in part. , even though the location(s), nature and/or extent of such damage or injury may change and even though the damage or injury may be continuous, progressive, latent, cumulative, changing or evolving. Identifier. at 46-47, 109-110.
The “claims made” policy features were added in a “claims made and reported” endorsement. He provided:
[T]its policy applies only to claims first made against the insured and reported to us in writing during the period of insurance. Cover under this policy will only apply to claims made against the insured which are reported to us on or after the effective date of the policy and before the expiry date of the policy. , as indicated on the Declarations page(s), subject to the extended declaration period indicated below. If, prior to the effective date of this policy, an Insured had reasonable cause to believe that a claim might arise, this policy will not apply to such claim or any related claim. As a condition of any cover (defense or indemnification) under this policy, you must notify the company in writing of any claim as soon as possible, but in any event no later than: (a) the end of the police ; or (b) 60 days after the end of the policy period so long as such “claim” is made within the last 60 days of that policy period. Identifier. 86, 149. By endorsements, successive policies also provided that there was no continuous coverage between renewed policies, limiting each policy period to one year.
In this case, because the individual died in October 2019 and his widow did not notify the insured of her intention to sue until September 2020:
…the occurrence and reporting dates did not occur within the same policy period. In other words, the 2019 policy did not cover the claim because it was not declared during the insurance period and the 2020 policy did not offer coverage because the event giving rise to the the claim occurred before the start of the insurance period on January 5, 2020.
The Washington Supreme Court noted that it would be simplistic to say that all claims or occurrence policies are the same. Most claims-based policies come into effect from a defined “retroactive date”, which:
…can be defined before the period of insurance to avoid a gap in coverage when the insured changes insurer or switches from an accident policy to a loss policy. The court further noted that it is more common to set the retroactive date to the first day of the claims insurance period and retain that retroactive date during insurance renewals to avoid gaps in coverage.
According to the court, “claims-based policies, although fundamentally different from traditional occurrence policies, generally do not violate public order”.
However, the policies in this case are not pure claims-based policies because they do not offer retroactive coverage, not even for claims occurring during an insurance period and reported during a subsequent period of insurance. No court in this state has ruled on the applicability of non-retroactive claims policies, and few other courts across the country have considered the issue.
The court noted that the New Jersey Supreme Court declined to apply such a non-retroactive claims policy in Sparks v. St. Paul Insurance Co, 100 NJ 325, 339, 495 A.2d 406 (NJ 1985). The New Jersey Supreme Court based its decision on certain doctrines of contract interpretation that Washington does not follow, as well as public policy. ID. at 339. The Washington Supreme Court distinguished the policy at issue in this case from the policy at issue in MSO Wash., Inc. v. RSUI Group., Inc.., No. C12-6090 RJB, 2013 WL 1914482 (WD Washington, May 8, 2013) (unreported) on the basis that the policy at issue in this case contained a retroactive date which was the effective date of the first policy, which provides continuous coverage at policy renewal and some form of retroactive coverage for the second policy.
According to the Washington Supreme Court:
[w]We are aware that the parties to insurance contracts must generally have the freedom to contract. But when the legislature orders contractors to take financial responsibility for injuries their negligence may cause and dictates that insurance is the preferred method of complying with that mandate, we cannot enforce the insurance provisions that make the coverage so narrow that it is illusory. Although RCW 18.27.050 does not require insurers to issue insurance policies or provide retroactive coverage to contractors changing from an accident policy to a loss policy, see HB Dev., LLC v. W.Pac. Mut. Ins., 86 F. Supp. 3d 1164, 1181-82 (ED Wash. 2015), insurers should not issue policies that essentially cause contractors to default on their statutory financial responsibility. The insurance policies issued by PCIC to [the contractor] not provide prospective or retroactive coverage and create limited one-year windows for claims to occur and be reported to be eligible for coverage. Such restrictive coverage violates Washington public policy. Accordingly, we answer the certified question in the affirmative. By RCW 18.27.050 and RCW 18.27.140, the legislature has created a public policy in which contractors must be financially responsible for injuries they negligently inflict on the public. With such public policy established, a contractor’s CGL policy that requires the loss to occur and be reported to the insurer within the same policy year and does not provide prospective or retroactive coverage is unenforceable.
The ruling suggests that with the inclusion of a retroactive date, such a policy would be enforceable. An unanswered question is whether such a policy would be enforceable if not issued to a contractor or whether the Washington Supreme Court would find that the insurance policy violates another Washington state “public policy.” .