Direct physical loss, bad faith failure to adjust coverage update

Direct physical loss – Washington

Hill and Stout, PLLC v. Mut. by Enumclaw Ins. Co.— P.3d —, No. 100211-4, 2022 WL 3651805 (Wash. Aug. 25, 2022)

The Washington Supreme Court unanimously found that a business property insurance policy issued to a pediatric dental practice did not cover loss of business income suffered when the dental practice had to close as a result of the COVID-19 epidemic.

Two dentists operated a practice, Hill and Stout PLLC (Hill and Stout) with two offices. Hill and Stout purchased a commercial property insurance policy from Mutual of Enumclaw Insurance Company (Enumclaw). The policy provided coverage for loss of business income due to “direct physical loss or damage” to property listed in the policy. It also contained a virus exclusion excluding coverage for “loss or damage caused directly or indirectly by ‘”[a]any virus…that induces or is capable of inducing physical distress, illness or disease.

In an effort to stop the spread of COVID-19, the Governor of Washington issued a proclamation banning non-emergency dental care for a period of time. Hill and Stout sought coverage for lost income while their dental offices were closed for all procedures except emergencies and sued Enumclaw for a statement that the policy issued to them covered their loss. business income. The trial court initially denied Enumclaw’s motion to dismiss Hill and Stout’s complaint, but later granted Enumclaw’s motion for summary judgment after discovery. Hill and Stout appealed the district court’s decision directly to the Washington Supreme Court.

The Supreme Court upheld the trial court’s granting of summary judgment. The high court ruled that any loss suffered as a result of the governor’s proclamation did not constitute “direct physical loss”, as required by the policy to allow cover for business income. Specifically, the Supreme Court held that “[i]It is unreasonable to read “direct physical loss of … property” in a property insurance policy to include the implied loss of the intended use of the property. Such a loss is not “physical”. The High Court rejected Hill and Stout’s request to apply a “loss of functionality test” to the claim, noting that Hill and Stout’s cover claim would nevertheless fail under that test.

Although in some cases business income cover may be available to an insured in the absence of physical alterations to the property on the grounds that the property loses its functionality, this was not the case with respect to Hill and Stout offices. The dental offices have suffered neither physical alteration nor physical loss of functionality of the property. “The proclamation did not result in any loss of functionality of the property as it continued to be functional.”

Although the Supreme Court noted that it “did not need to consider” the applicability of the policy’s virus exclusion, it nevertheless held that the virus exclusion applied as it concluded that there was no doubt that the COVID-19 virus, a peril excluded under Enumclaw’s policy, “initiated a chain of causation”, resulting in the losses claimed by Hill and Stout, and was therefore applied to exclude hedging.

Bad Faith Failure to Settle – California

Palma v. Mercury Ins. Co. B309063, 2022 WL 3592722 (Cal. App. Ct. 2d Dist. Aug. 23, 2022)

The California Court of Appeals affirmed the trial court’s order granting summary judgment in favor of defendant Mercury Insurance Company (Mercury) and against plaintiffs, Julio Palma and Miriam Cortez (plaintiffs) in a case seeking to recover damages arising from a wrongful death action involving plaintiffs’ sons. The appeals court ruled that Mercury did not fail to accept a settlement offer in bad faith.

In September 2012, Frank McKenzie (McKenzie) was driving a vehicle that struck and killed the applicants’ son, who was driving a moped. Mercury insured McKenzie under a policy with bodily injury limits of $15,000 and property damage limits of $10,000. The plaintiffs’ attorney, the firm of Carpenter, sent a settlement letter to Mercury asking it to submit all policy limits to resolve the claim against the deceased’s estate. Mercury’s retained attorney, Jeffery Lim (Lim), responded by letter and indicated that Mercury would submit the policy limits of $15,000. The Carpenter firm did not respond to the letter. A few days later, Lim contacted McKenzie to discuss the settlement offer. McKenzie agreed to accept the offer and signed a statement stating that there is no other insurance covering the loss.

Lim sent a letter to the Carpenter Company with a check for $15,000 attached and said that aside from the Mercury policy, there were no other policies in force for the loss. He inadvertently omitted to attach McKenzie’s statement. Lim also included a standard claims release form for signature and asked the company to provide any changes to the release by October 29, 2012. The Carpenter Company did not respond. In January 2013, Lim wrote to the company and requested the signed Claim Release Form. The Carpenter firm responded and said there was no settlement because the claim was for full policy limits, which included property damage limits of $10,000. In a subsequent letter sent six months later, the Carpenter firm also pointed to Lim’s failure to deliver McKenzie’s statement in a timely manner.

The Carpenter firm then filed a wrongful death lawsuit against McKenzie and won a $3 million judgment in favor of the plaintiffs. In particular, the judgment was not pronounced in favor of the estate of the deceased. Mercury paid the plaintiffs the police limits of $15,000 in personal injury. McKenzie assigned its rights against Mercury to plaintiffs who subsequently filed a bad faith action against Mercury. The trial court entered summary judgment in favor of Mercury and ruled that the offer was made in the name of the deceased’s estate – not the plaintiffs. Therefore, the offer was to settle all survivorship claims for medical expenses on behalf of the estate and not a wrongful death claim on behalf of the plaintiffs.

The California Court of Appeals first explained that a bad faith failure to settle a claim requires proof that the third party made a reasonable offer to settle claims against the insured for an amount within the police. The appeals court held that the letter could not reasonably be construed as an offer to settle the plaintiffs’ wrongful death claims. Wrongful death claims belong to the heirs, and the offer in the letter was only to settle the survivorship claim on behalf of the deceased’s estate. Additionally, the appeals court held that even if the offer had been made, Mercury had not acted in bad faith because, at most, Lim’s failure to deliver McKenzie’s statement was negligent. Mercury had taken all the necessary steps it could, and the Carpenter company’s inaction for about nine months was clear evidence that it was preparing for litigation for future bad faith action. According to the appeals court, “if anyone acted in bad faith, it was the plaintiffs and the Carpenter firm.

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