Opinion
CASE NO. C17-5098 BHS
07-20-2017
TRAVELERS PROPERTY CASUALTY COMPANY OF AMERICA, et al., Plaintiffs, v. NORTHWEST PIPE COMPANY, et al., Defendants.
ORDER GRANTING IN PART AND DENYING PART PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT, GRANTING DEFENDANT'S MOTION FOR PARTIAL SUMMARY JUDGMENT, AND GRANTING DEFENDANT'S MOTION FOR LEAVE TO FILE AN AMENDED ANSWER
This matter comes before the Court on the following motions: Defendant Norwest Pipe Company's ("NPC") motion for partial summary judgment (Dkt. 14); Plaintiffs Travelers Property Casualty Company of America's ("Travelers") and The Phoenix Insurance Company's ("Phoenix") (collectively "Plaintiffs") motion for summary judgment (Dkt. 17); and NPC's motion for leave to amend its answer to the complaint (Dkt. 26). The Court has considered the pleadings filed in support of and in opposition to the motions and the remainder of the file and hereby rules as follows:
I. FACTUAL BACKGROUND
The factual background of this action and the underlying litigation between NPC and the Greater Vancouver Water District are set forth in the Court's previous order. Dkt. 38.
On February 8, 2017, Plaintiffs filed their complaint in the instant action. Dkt. 1. Plaintiffs seek a declaratory judgment that they owe no duty to defend or indemnify in the underlying dispute between NPC and the Water District. Id. at 21.
On March 30, 2017, NPC moved for partial summary judgment on the issue of whether Plaintiffs have a duty to defend in the underlying lawsuit. Dkt. 14. On April 13, 2017, Plaintiffs moved for summary judgment. Dkt. 17.
On May 4, 2017, NPC moved for leave to amend its answer to the complaint and to assert new counterclaims. Dkt. 26.
On May 12, 2017, NPC and the Water District responded to Plaintiffs' motion for summary judgment. Dkts. 28, 29. Also on May 12, 2017, Plaintiffs responded to NPC's motion for partial summary judgment. Dkt. 31. On May 15, 2017, Plaintiffs filed a response to NPC's motion for leave to amend its answer. Dkt. 33. On May 26, 2017, NPC and Plaintiffs filed replies on their respective motions for summary judgment. Dkts. 36, 37.
On June 22, 2017, the Court entered an order that included findings of fact regarding the scope of coverage under NPC's insurance policy with Plaintiffs. Dkt. 38. After finding that the underlying litigation constituted a "mixed" action involving some allegations which stated covered claims, the Court requested additional briefing on whether there exists a reasonable basis for allocating the costs of NPC's defense in the underlying litigation. Id. The Court also requested that the parties address whether NPC's proposed amended answer (which seeks to add new counterclaims) would be futile in light of the Court's findings. Id.
On July 7, 2017, the parties submitted their supplemental briefs. Dkts. 39, 40, 43. On July 14, 2017, the parties filed their supplemental replies. Dkts. 44, 46.
II. DISCUSSION
A. Allocation of Defense Costs
In its previous order, the Court concluded that the underlying litigation raised allegations conceivably covered by the policy. Specifically, the underlying complaint appears to allege "property damage" to the circumferential welds. The Court noted that such "property damage" could come in the form of either physical injury or loss of use, as either is conceivable under the allegations set forth in the underlying complaint. However, the Court further found that the other damages alleged in the underlying complaint, which are the primary focus of that lawsuit, either fail to qualify as "property damage" or are subject to exclusion.
In Washington, "mixed" lawsuits involving both covered and uncovered claims do not require the insurer to defend the entire lawsuit if an "effective means exists for prorating the costs of defense between the claims for which the defendant insurer provided no coverage from those which it did cover." Nat'l Steel Const. Co. v. Nat'l Union Fire Ins. Co. of Pittsburgh, 14 Wn. App. 573, 576 (1975). Indeed, the Washington Supreme Court has "held that defense costs must be allocated when there exists a reasonable basis for doing so." Baugh Const. Co. v. Mission Ins. Co., 836 F.2d 1164, 1173 (9th Cir. 1988) (citing Waite v. Aetna Cas. & Sur. Co., 77 Wn.2d 850, 853 (1970)).
In 2013, the Washington Supreme Court concluded that defense costs paid by an insurer are not subject to reimbursement, even in the event that it is subsequently determined that there was no duty to defend. Nat'l Sur. Corp. v. Immunex Corp., 176 Wn.2d 872, 887 (2013) ("Immunex"). In reaching this conclusion, the Washington Supreme Court cited favorably to the reasoning in Shoshone First Bank v. Pac. Employers Ins. Co., 2 P.3d 510, 514 (Wy. 2000), where the Wyoming Supreme Court "refus[ed] to allocate costs between covered claims and uncovered claims in a 'mixed' action." Immunex, 176 Wn.2d at 883. This is a strong indicator that the Washington Supreme Court may be receptive to an argument that, in a mixed lawsuit, the duty to defend attaches to the entire lawsuit and not just the covered claims. All of the Washington cases dealing with allocation of defense costs predate the Washington Supreme Court's decision in Immunex. As the Court is faced with in this situation, it seems nearly impossible to prorate defense costs before the underlying litigation even occurs, a practical reality that makes it difficult to reconcile decisions like Waite with the subsequent holding of Immunex that defense costs under a reservation of rights are not recoupable by insurers. Nonetheless, as the law exists presently, the Washington Supreme Court's decision in Waite remains controlling law. --------
Plaintiffs argue that there are aspects of the underlying litigation that can be segregated from the covered claim of property damage to the circumferential welds. As an example, they point to the anticipated fees and costs related to financial expert discovery on damages stemming from delay to the Twin Tunnels Project. However, the Court is not convinced by this argument or this particular example. For instance, while the majority of such an expert's testimony would likely address many issues unrelated to alleged damage to the circumferential welds, it is also just as likely that such testimony would discuss, at least in some part, the delay costs directly attributable to the removal and replacement of the damaged circumferential welds. More importantly, however, the most central aspects of this litigation involve issues that are substantially interrelated with NPC's potential liability for damage to the circumferential welds: e.g., the causation of the grout plug and circumferential weld failures. Therefore, the Court finds that there is no reasonable basis upon which to allocate defense costs that exist at this time.
This is not to say that Plaintiffs must necessarily continue the defense through the conclusion of the underlying litigation. Indeed, "an insurer is required to give the insured the benefit of the doubt, and must continue its defense until it can conclusively establish a claim is not covered by the insurance policy." State Farm Fire & Cas. Co. v. El-Moslimany, 178 F. Supp. 3d 1048, 1062 (W.D. Wash. 2016) (citing Expedia, Inc. v. Steadfast Ins. Co., 180 Wn.2d 793, 803 (2014)). Therefore, if at some later point Plaintiffs can conclusively establish that the underlying litigation does not include a claim stemming from property damage to the circumferential welds, they may renew their motion for summary judgment. Plaintiffs should be cautious, however, that any renewed motions do not prejudice its insured's tort defense. See id. at 1061-62 (citing Mut. of Enumclaw Ins. Co. v. Dan Paulson Constr., Inc., 161 Wn.2d 903, 918 (2007)).
Accordingly, the Court finds that the claims in the underlying litigation are (at least at this point) substantially interrelated and Plaintiffs' duty to defend presently extends to the full breadth of the underlying lawsuit.
B. Duty to Indemnify
As noted in the Court's previous order, the only allegations in the complaint conceivably covered by NPC's policy with Plaintiffs are those that implicate damages arising from physical injury or loss of use of the failed circumferential welds. Because the underlying litigation is ongoing, it is premature for the Court to enter an order concluding that Plaintiffs are or are not liable on covered claims in the underlying litigation. However, this does not prevent the Court from prospectively finding that, should the Water District prevail in the underlying lawsuit, Plaintiffs will only be liable for "property damage" to the circumferential welds, as that term is defined in the policy.
C. Motion for Leave to Amend Answer
NPC has also moved for leave to amend its answer. Dkt. 26. NPC seeks to add extra-contractual counterclaims for bad faith and violations of the Washington Consumer Protection Act ("CPA"). Plaintiffs oppose the amendment on the basis that amendment would be futile.
Leave to amend an initial pleading may be allowed by leave of the Court and "shall freely be given when justice so requires." Foman v. Davis, 371 U.S. 178, 182 (1962); Fed. R. Civ. P. 15(a). Granting leave to amend rests in the discretion of the trial court. Internat'l Ass'n of Machinists & Aerospace Workers v. Republic Airlines, 761 F.2d 1386, 1390 (9th Cir. 1985). In determining whether amendment is appropriate, the Court considers five potential factors: (1) bad faith, (2) undue delay, (3) prejudice to the opposing party, (4) futility of amendment, and (3) whether there has been previous amendment. United States v. Corinthian Colleges, 655 F.3d 984, 995 (9th Cir. 2011). The Court's decision is guided by the established practice of permitting amendments with "extreme liberality" in order to further the policy of reaching merit-based decisions. DCD Programs Ltd. v. Leighton, 833 F.2d 183, 186 (9th Cir. 1987). In light of this policy, the nonmoving party generally bears the burden of showing why leave to amend should be denied. Genentech, Inc. v. Abbott Labs., 127 F.R.D. 529, 530-31 (N.D. Cal. 1989).
In the proposed amended answer, NPC alleges that Plaintiffs refused to provide a defense in the underlying litigation for two months subsequent to NPC's tender of defense before finally agreeing to defend under a reservation of rights, notwithstanding the timely investigation requirements of WAC 284-30-330 and WAC 284-30-370. Dkt. 26 at 16-18. Even in the absence of a duty to defend or indemnify, "where a violation of chapter 284-30 WAC is shown, the first two elements of a CPA claim are proved." St. Paul Fire & Marine Ins. Co. v. Onvia, Inc., 165 Wn.2d 122, 133 (2008). NPC further alleges that Plaintiffs have still refused to reimburse it for a portion of the defense costs incurred while waiting for Plaintiffs to assume its defense. Id. at 18. "[T]he duty to defend arises not at the moment of tender, but upon the filing of a complaint alleging facts that could potentially require coverage." Nat'l Sur. Corp. v. Immunex Corp., 176 Wn.2d 872, 889 (2013). The Court finds that such allegations adequately allege facts that support a plausible claim. The Court has already determined that the underlying complaint implicates a duty to defend under NPC's policy with Plaintiffs. Therefore, NPC states a plausible claim that Plaintiffs have acted in bad faith and in violation of the CPA by alleging that (1) Plaintiffs have refused to reimburse costs associated with the initial defense of the underlying lawsuit, and (2) Plaintiffs unreasonably delayed in their investigation of the claim and the issuing of a defense under a reservation of rights.
NPC additionally alleges that Plaintiffs have breached their duty of fairness to NPC "by seeking adjudication in this coverage suit of factual matters disputed in the underlying litigation in furtherance of its own financial interests but to the detriment of Northwest Pipe's interests." Dkt. 26 at 19. Plaintiffs argue that such a claim is futile because they have acted lawfully in seeking a declaratory judgment on coverage and the duty to defend. Dkt. 39 at 11-12. However, Washington courts have held that, "[w]hile defending under a reservation of rights, an insurer acts in bad faith if it unjustly pursues a declaratory judgment that it has no duty to defend and that action might prejudice its insured's tort defense." Dan Paulson Const., Inc., 161 Wn.2d at 918 (quotation omitted). Accordingly, a declaratory action such as this one can constitute bad faith if it prejudices the NPC's defense in the underlying litigation. Because Plaintiffs have failed to address whether this action had the potential to prejudice NPC's defense, they have failed to satisfy their burden in establishing that this proposed amendment is futile.
Based on the foregoing, the Court concludes that NPC's proposed amendment is not futile and therefore grants NPC's motion for leave to file an amended answer.
D. Future Proceedings
The Court has concluded that (1) Plaintiffs have a duty to defend NPC, and (2) if the Water District prevails against NPC in the underlying litigation, Plaintiffs' duty to indemnify will only extend to damages resulting from the physical injury or loss of use of the circumferential welds. However, this does not completely resolve this case.
Because the underlying litigation is ongoing, and the underlying complaint conceivably alleges damages covered by NPC's policy with Plaintiffs, it is premature for the Court to enter a final order on the issue of indemnity. Additionally, future circumstances may arise where it becomes absolutely clear that the underlying litigation does not include a claim for damages to the circumferential welds, at which time Plaintiffs would no longer owe NPC any duty to defend.
The Court's decision to grant NPC's motion for leave to amend its answer may complicate how this case proceeds. While the above-described issues are not ready for consideration, the Court sees no reason why NPC's newly asserted counterclaims should not move forward. Accordingly, it appears that Plaintiffs' declaratory action and NPC's extra-contractual claims may require bifurcation at some future date. However, this issue is not presently before the Court, so the Court need not consider it.
III. ORDER
Therefore, it is hereby ORDERED as follows:
1. Plaintiffs' motion for summary judgment (Dkt. 17) is GRANTED in part and DENIED in part. Plaintiffs' motion is GRANTED to the extent that it seeks declaratory judgment that the only claims covered by the underlying litigation are claims asserting property damage to the circumferential welds. Otherwise, the motion is DENIED.
3. NPC's motion for partial summary judgment (Dkt. 14) is GRANTED. The underlying complaint contains allegations which could impose liability upon NPC within the policy's coverage. Accordingly, Plaintiffs owe NPC a duty to defend in the underlying litigation and Plaintiffs have failed to establish that a reasonable basis exists to prorate the costs of defense.
4. NPC's motion for leave to file an amended answer (Dkt. 26) is GRANTED.
Dated this 20th day of July, 2017.
/s/_________
BENJAMIN H. SETTLE
United States District Judge