Childress et al v. Liberty Mutual Fire Insurance Company, No. 2:2010cv00059 - Document 73 (W.D. Wash. 2011)
Court Description: ORDER granting pltfs' 44 Motion for Partial Summary Judgment re liability on their breach of contract claim; denying Liberty Mutual's 27 Motion for Summary Judgment by Judge Robert S. Lasnik.(RS)
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Childress et al v. Liberty Mutual Fire Insurance Company Doc. 73 1 2 3 4 5 6 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE 7 8 9 HENRY CHILDRESS, et al., 10 11 12 13 14 Plaintiffs, Case No. C10-059RSL v. LIBERTY MUTUAL FIRE INSURANCE COMPANY, et al., ORDER REGARDING CROSS MOTIONS FOR SUMMARY JUDGMENT Defendants. 15 16 I. INTRODUCTION 17 18 19 20 21 22 23 24 This matter comes before the Court on a motion for summary judgment filed by defendant Liberty Mutual Fire Insurance Company (“Liberty Mutual”) and a cross motion for partial summary judgment filed by plaintiffs Henry and Deborah Childress. Liberty Mutual seeks to dismiss all of plaintiffs’ claims, and plaintiffs seek summary judgment on their claim that Liberty Mutual breached their insurance contract by attempting to unilaterally add additional coverage to plaintiffs’ homeowners policy, then cancelling the policy when plaintiffs failed to pay for the additional coverage. At the parties’ request, the Court heard oral argument in this 25 26 27 28 ORDER REGARDING CROSS MOTIONS FOR SUMMARY JUDGMENT - 1 Dockets.Justia.com 1 matter on February 3, 2011.1 For the reasons set forth below, the Court grants plaintiffs’ motion and denies Liberty 2 3 Mutual’s motion. II. DISCUSSION 4 5 6 A. Background Facts. On January 1, 2008, Henry Childress spoke with a Liberty Mutual sales representative to 7 purchase a homeowners policy of insurance. Based on the telephone conversation and the 8 information Mr. Childress provided, Liberty Mutual generated and provided a quote of 9 $1,424.00 per month. On that day, Liberty Mutual e-mailed Mr. Childress several documents, 10 including an application form and an earthquake coverage form. The cover letter stated that he 11 was required to complete and return all forms “[t]o guarantee that you receive uninterrupted 12 coverage” and that the earthquake coverage form was “Required to validate rating variables and 13 other pertinent information.” Declaration of Carla Crick, (Dkt. #49-1) (“Crick Decl.”), Ex. 2. 14 The top of the earthquake coverage form, in all capital letters, stated, “Your policy does not 15 include coverage against the peril of earthquake.” Id. Underneath was the following language, 16 “Earthquake coverage, subject to policy provisions, may be purchased for an additional 17 premium. If the coverage is selected and premium paid, we will insure for direct physical loss to 18 property covered under Section 1 caused by earthquake . . . .” Id. The page listed available 19 earthquake deductibles and stated, “If coverage is being requested, please select a deductible 20 option from those listed above.” Id. Liberty Mutual placed an “x” in the box next to the 21 statement, “I reject Earthquake coverage.” Id. The sales representative who spoke with Mr. 22 Childress on that day has filed a declaration stating that the inclusion of the earthquake form in 23 the package “confirms that I discussed this form with the customer, was advised that the 24 25 26 27 28 1 Plaintiffs have also sued additional defendants who are not parties to these cross motions: Meritplan Insurance Company, Countrywide Home Loans, Inc., BAC Home Loans Servicing, LP, and Bank of America, N.A. ORDER REGARDING CROSS MOTIONS FOR SUMMARY JUDGMENT - 2 1 customer rejected this coverage and that I advised him that he needed to return the signed 2 rejection of earthquake coverage with the application within ten days for the rejection to be 3 effective.” Crick Decl. at ¶ 6. Mr. Childress states that he asked for “basic” coverage over the 4 phone and does not recall any discussion of earthquake coverage. Childress Dep. at p. 65. 5 The next day, Liberty Mutual mailed to plaintiffs a copy of the policy, a policy 6 declarations page showing the initial premium due, and another copy of the earthquake coverage 7 form. Declaration of Robin Smith, (Dkt. #32) (“Smith Decl.”), Ex. 2. The cover letter stated, 8 “Your homeowners policy is enclosed. It describes the coverage you selected . . . .” Id. The 9 policy was effective as of January 2, 2008 and it excluded earthquake coverage. Meitler Dep. at 10 pp. 35-36. Defendant Countrywide Home Loans, plaintiffs’ mortgagee, paid the initial premium 11 on or around January 14, 2008, and Liberty Mutual accepted the payment. 12 Liberty Mutual has an internal policy requiring a signed application that specifically 13 selects or rejects earthquake coverage to avoid misunderstandings regarding the scope of 14 coverage. Declaration of Robbie Meitler, (Dkt. #30) (“Meitler Decl.”) at ¶ 4. On February 19, 15 2008, the policy came up for review. At that time, plaintiffs had not submitted a signed 16 application or a written declination of earthquake coverage. Liberty Mutual sent a “courtesy” e- 17 mail to Mr. Childress stating, “As of today, we have not received the signed application forms 18 back in our office. We do need to receive the signed forms back within 5 business days or your 19 coverage will increase in accordance with state insurance regulations.” Smith Decl., Ex. 5. Mr. 20 Childress did not return either document because he thought it was a “scam.” Declaration of 21 Henry Childress, (Dkt. #26-2) (“Henry Childress Decl.”) at ¶ 8. Because the signed forms were 22 not returned, on February 29, 2008, Liberty Mutual issued an endorsement that added earthquake 23 coverage to the policy and provided notice of the addition to plaintiffs. Smith Decl. at ¶ 6, Ex. 6 24 (noting a premium increase of $353.00 as a result of the additional coverage). On the same day, 25 Liberty Mutual e-mailed Mr. Childress a copy of the policy application and another copy of the 26 earthquake form with a check next to the box stating, “I reject earthquake coverage.” Id., Ex. 8. 27 28 ORDER REGARDING CROSS MOTIONS FOR SUMMARY JUDGMENT - 3 1 2 Mr. Childress did not sign or return the form. On or around March 3, 2008 and again on April 2, 2008, Liberty Mutual generated and 3 mailed premium notices to plaintiffs for the earthquake premium, reflected in the notices as 4 “new policy balance” and “Endorsement 01.” Smith Decl., Exs. 9, 10. The notices also stated 5 that payment was required to ensure uninterrupted coverage. After receiving the second notice, 6 Mr. Childress called Liberty Mutual to question why he was being billed for earthquake 7 coverage. He was informed that the coverage was added because he failed to return the signed 8 application and signed earthquake coverage declination form. Smith Decl. at ¶ 11. Although 9 Liberty Mutual sent him duplicate forms at his request, he did not sign them and return them to 10 Liberty Mutual. Subsequently, monthly premium invoices were generated and mailed to 11 plaintiffs for May to September 2008. Plaintiffs did not pay the outstanding premium, return the 12 signed forms, or contact Liberty Mutual again. Mr. Childress believed that because he had paid 13 the annual premium in advance to Countrywide, which was copied on all of the notices, that 14 Countrywide would respond and make the payments. Henry Childress Decl. at ¶ 10. 15 On September 25, 2008, Liberty Mutual’s automated system generated a cancellation 16 notice that was issued to plaintiffs cancelling their policy for nonpayment of the earthquake 17 premium effective October 10, 2008 unless they paid the current amount due. Smith Decl., Ex. 18 13. Plaintiffs did not pay the allegedly outstanding premium or contact the company. Their 19 policy was cancelled effective October 10, 2008 for nonpayment of the earthquake premium.2 20 Thereafter, plaintiffs suffered a devastating home fire on December 21, 2008. Liberty 21 Mutual refused to pay for the loss because its policy was no longer in effect. The policy states 22 that it may be cancelled for nonpayment: “When you have not paid the premium we may cancel 23 at any time by notifying you at least 10 days before the date cancellation takes effect.” Smith 24 25 26 27 28 2 After the Liberty Mutual policy was cancelled, Countrywide obtained a lender placed policy for the home to protect its security interest. Declaration of Sarah Eversole, (Dkt. #29) Ex. 3. ORDER REGARDING CROSS MOTIONS FOR SUMMARY JUDGMENT - 4 1 Decl., Ex. 3 at p. 18 of 19. 2 Plaintiffs originally filed this case in King County Superior Court, and defendants 3 removed it to this Court in January 2010 based on diversity jurisdiction. Plaintiffs assert claims 4 for breach of contract, bad faith, negligence,3 and violations of Washington’s Administrative 5 Code and Consumer Protection Act. 6 B. Summary Judgment Standard. Summary judgment is appropriate when, viewing the facts in the light most favorable to 7 8 the nonmoving party, the records show that “there is no genuine issue as to any material fact and 9 that the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). Once the 10 moving party has satisfied its burden, it is entitled to summary judgment if the non-moving party 11 fails to designate, by affidavits, depositions, answers to interrogatories, or admissions on file, 12 “specific facts showing that there is a genuine issue for trial.” Celotex Corp. v. Catrett, 477 U.S. 13 317, 324 (1986). 14 All reasonable inferences supported by the evidence are to be drawn in favor of the 15 nonmoving party. See Villiarimo v. Aloha Island Air, Inc., 281 F.3d 1054, 1061 (9th Cir. 2002). 16 “[I]f a rational trier of fact might resolve the issues in favor of the nonmoving party, summary 17 judgment must be denied.” T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass’n, 809 F.2d 18 626, 631 (9th Cir. 1987). “The mere existence of a scintilla of evidence in support of the 19 non-moving party’s position is not sufficient.” Triton Energy Corp. v. Square D Co., 68 F.3d 20 1216, 1221 (9th Cir. 1995). “[S]ummary judgment should be granted where the nonmoving 21 party fails to offer evidence from which a reasonable jury could return a verdict in its favor.” Id. 22 at 1221. 23 C. 24 Analysis. Because the Court’s jurisdiction is based on diversity, it applies Washington law. See, 25 26 27 28 3 The parties’ memoranda do not address the negligence claim, so that claim is not currently before the Court. ORDER REGARDING CROSS MOTIONS FOR SUMMARY JUDGMENT - 5 1 e.g., Jorgensen v. Cassidy, 320 F.3d 906, 914 (9th Cir. 2003). Under Washington law, summary 2 judgment is proper where the decision turns on the interpretation of an insurance policy, which is 3 a question of law. See, e.g., Allstate Ins. Co. v. Peasley, 131 Wn.2d 420, 423-24 (1997). 4 1. Breach of Contract Claim. 5 Pursuant to the terms of the policy, Liberty Mutual was permitted to cancel it “only for 6 the reasons stated below.” Policy at p. 18. One of those listed reasons is nonpayment of 7 premium. It is undisputed that plaintiffs paid the premiums for the basic coverage they 8 requested. Liberty Mutual’s contention that it properly cancelled the policy for nonpayment of 9 the earthquake premium begs the question of whether the earthquake premium was actually due. 10 Liberty Mutual contends that its representative informed Mr. Childress during his initial 11 telephone call that the company required a signed earthquake coverage declination form to 12 waive coverage, so that term was part of the offer of insurance. That term, however, was not 13 made a part of the contract, which was effective January 2, 2008. Liberty Mutual admits that it 14 issued plaintiffs a policy without earthquake coverage. Meitler Dep. at pp. 35-36. In 15 Washington, an insurance policy must contain the entire contract. RCW 48.18.190 (“No 16 agreement in conflict with, modifying, or extending any contract of insurance shall be valid 17 unless in writing and made a part of the policy.”). An insurer is bound by the premium rate 18 stated in the policy and may not alter it mid-term absent certain conditions not present in this 19 case. RCW 48.18.180(1) & (2); WAC 284-30-590(2). A telephone conversation cannot alter 20 the terms of the policy where it was not made a part of the policy. National Indem. Co. v. 21 Smith-Gandy, Inc., 50 Wn.2d 124 (1957) (finding that “the telephone conversation and the letter 22 of confirmation did not change the terms of the policy subsequently issued.”). Therefore, Ms. 23 Crick’s conversation with Mr. Childress did not alter the terms of the policy. Nothing in the 24 policy or application stated that Liberty Mutual could or would add earthquake coverage and 25 correspondingly increase plaintiffs’ premium if they failed to return the form. Even if extrinsic 26 evidence could be used to alter the policy’s terms, the January 1 and 2, 2008 letters upon which 27 28 ORDER REGARDING CROSS MOTIONS FOR SUMMARY JUDGMENT - 6 1 Liberty Mutual relies do not warn of a premium increase. Instead, those letters stated that failure 2 to return the earthquake form could result in cancellation of coverage. The company’s 3 subsequent cancellation of the policy was not due to the failure to return the forms; it was due to 4 the nonpayment of the earthquake premium. Although the effect of cancellation was the same, 5 the legal import is not. Quite simply, neither the policy nor applicable law permitted Liberty 6 Mutual to unilaterally add the previously declined earthquake coverage and increase the 7 premium as they did in this case.4 Liberty Mutual therefore breached the contract. 8 Although the case law is scant, the Washington Supreme Court has held that a 9 cancellation of an insurance policy must “be in accordance with the provisions of the policy to 10 be effective.” Blomquist v. Grays Harbor County Med. Serv. Corp., 48 Wn.2d 718, 721 (1956) 11 (quoted in Olivine Corp. v. United Capitol Ins. Co., 147 Wn.2d 148 (2002) (holding that the 12 insurer’s failure to follow statutory notice provisions left the policy in effect)); see also Franklin 13 v. Northern Life Ins. Co., 4 Wn.2d 541 (1940) (explaining that when an insurer wrongfully 14 cancels a policy, the insured may recover its value, have the policy adjudged in force, or tender 15 premiums and if refused, wait until the policy becomes payable and test forfeiture in a proper 16 action). Because the cancellation in this case was not in accordance with the policy or with 17 applicable law, it was ineffective. Accordingly, it remained in effect when plaintiffs suffered 18 their loss. The Court therefore grants summary judgment in plaintiffs’ favor on their breach of 19 contract claim. 20 21 22 23 24 25 26 27 28 4 Liberty Mutual also alleges that plaintiffs accepted the benefit of the earthquake coverage and were therefore bound to pay for it. Liberty Mutual’s Reply at p. 11 (citing Restatement Second, Contracts § 69(3)) (stating inaction can constitute acceptance of an offer where “an offeree takes the benefit of offered services with reasonable opportunity to reject them and reason to know that they were offered with the expectation of compensation.”). There is no authority for applying that provision in the insurance context, where a clear statute requires all terms to be contained in the policy. Even if it were applicable, plaintiffs never made a claim for earthquake coverage or otherwise accepted its benefits. ORDER REGARDING CROSS MOTIONS FOR SUMMARY JUDGMENT - 7 1 2. Consumer Protection Act and Bad Faith Claims. 2 Liberty Mutual contends that plaintiffs cannot establish any of the five elements 3 necessary to state a CPA claim: (1) an unfair or deceptive act or practice, (2) in trade or 4 commerce, (3) that impacts the public interest, (4) which causes injury to a party in his business 5 or property, and (5) which injury is causally linked to the unfair or deceptive act. Hangman 6 Ridge Training Stables, Inc. v. Liberty Title Ins. Co., 105 Wn.2d 778, 784-85 (1986). By 7 statute, the “business of insurance is one affected by the public interest,” RCW 48.01.030, so the 8 third element is met. The second element is also met because the practices at issues occurred in 9 trade or commerce. Although Liberty Mutual argues that plaintiffs have not suffered damages, 10 they have sufficiently demonstrated that the uninsured damage to their home constitutes an 11 injury to support their CPA and bad faith claims. 12 Plaintiffs contend that Liberty Mutual violated WAC 284-30-330(4)5 by “[r]efusing to 13 pay claims without conducting a reasonable investigation.” Plaintiff argue that a reasonable 14 investigation would have shown that plaintiffs had prepaid their annual premium “and that the 15 cancellation was the result of earthquake coverage being imposed without their consent.” 16 Plaintiffs’ Cross Motion at p. 22. The regulation, however, contemplates a reasonable factual 17 investigation, which plaintiffs do not address. Plaintiffs’ claim is premised on defendant’s 18 wrongful premium increase, not an inadequate factual investigation. Therefore, the regulation is 19 inapplicable. 20 Plaintiffs also argue that Liberty Mutual violated WAC 284-30-590(2), and the violation 21 constitutes a per se unfair trade practice violation for purposes of the CPA. That regulation 22 provides, “In the unusual situation where a contract permits a midterm change of rates or terms, 23 24 25 26 27 28 5 Plaintiffs also contend that Liberty Mutual violated the Insurance Fair Conduct Act (“IFCA”) by violating the insurance regulations. The Court denied plaintiffs’ belated request to amend their complaint to add an IFCA claim. Even if that claim were properly asserted, it would fail. Plaintiffs premise their IFCA claim on defendant’s alleged failure to comply with WAC 284-30-330 and WAC 284-30-590(2), but they have not shown a violation of either provision. ORDER REGARDING CROSS MOTIONS FOR SUMMARY JUDGMENT - 8 1 other than in connection with a renewal, it is an unfair practice to effectuate such change with 2 less than forty-five days advance written notice to the named insured, or to utilize a contract 3 provision which is not set forth conspicuously in the contract under an appropriate caption of 4 sufficient prominence that it will not be minimized or rendered obscure.” That regulation, 5 however, is inapplicable because, as plaintiffs contend, the policy does not permit a midterm 6 change or rates or terms. 7 Instead, Liberty Mutual violated RCW 48.18.180(1) and (2), which provide: 8 (1) The premium stated in the policy shall be inclusive of all fees, charges, premiums, or other consideration charged for the insurance or for the procurement thereof. 9 10 (2) No insurer or its officer, employee, appointed insurance producer, or other representative shall charge or receive any fee, compensation, or consideration for insurance which is not included in the premium specified in the policy. 11 In this case, Liberty Mutual charged plaintiffs for an additional premium that was not included in 12 the premium set forth in the policy. In fact, until it billed plaintiffs for the earthquake coverage, 13 Liberty Mutual never informed them of the amount of such coverage. A violation of the statute, 14 however, does not constitute a per se unfair or deceptive trade practice. For that reason, 15 plaintiffs must show that Liberty Mutual’s conduct has the capacity to deceive a substantial 16 portion of the public. Hangman, 105 Wn.2d at 785. That issue presents an issue of fact. Id. at 17 789-90; Holiday Resort Cmty. Ass’n v. Echo Lake Assocs., LLC, 134 Wn. App. 210, 226-27 18 (2006). Although Liberty Mutual states that its forms, letters, and e-mail clearly informed 19 plaintiffs that a failure to return the form would result in the addition of coverage and premium 20 increase, a review of the actual documents reveals otherwise. In fact, the earthquake form itself 21 clearly states that the coverage had been declined and explained how it could be added. 22 Moreover, the e-mail Liberty Mutual sent to plaintiffs threatened a rate increase “in accordance 23 with state insurance regulations,” suggesting to the recipient that Liberty Mutual’s actions were 24 compelled by state law, when in fact they were contrary to law. Smith Decl., Ex. 5. A jury 25 could find for plaintiffs on the capacity to deceive issue because Liberty Mutual’s conduct in this 26 case reflects its standard practices, not just isolated conduct. Meitler Decl. at ¶ 4; Meitler Dep. 27 28 ORDER REGARDING CROSS MOTIONS FOR SUMMARY JUDGMENT - 9 1 at pp. 26-31. A jury must also decide whether plaintiffs’ damages are the result of Liberty 2 Mutual’s conduct or their own failure to sign and return the forms despite repeated requests. 3 Therefore, Liberty Mutual’s motion for summary judgment on plaintiffs’ CPA claim is denied. 4 The Washington Supreme Court has declared that insurers have a duty of good faith to 5 their policyholders “and to succeed on a bad faith claim, a policyholder must show the insurer’s 6 breach of the insurance contract was unreasonable, frivolous, or unfounded.” Smith v. Liberty 7 Ins. Co., 150 Wn.2d 478 (2003). The determination of reasonableness must be made in light of 8 all the facts and circumstances of a particular case. See, e.g., Anderson v. State Farm Mut. Ins. 9 Co., 101 Wn. App. 323, 329-30 (2000). “[A]n insurer must deal fairly with an insured, giving 10 equal consideration in all matters to the insured’s interests.” Tank v. State Farm Fire & Cas. 11 Co., 105 Wn.2d 381, 385-86 (1986). In light of that duty, an insurer acts in bad faith when it 12 “overemphasizes its own interests.” Anderson v. State Farm Mut. Ins. Co., 101 Wn. App. 323, 13 329 (2000) (citation omitted). In this case, Liberty Mutual unilaterally added, and billed 14 plaintiffs for, earthquake coverage that it admits they expressly declined. They did so to protect 15 themselves from a later claim that plaintiffs had such insurance. Meitler Dep. at pp. 26-27 16 (explaining that Washington shows a “significant earthquake risk” and “the company is at risk 17 without getting something signed from [insureds] that they are rejecting the coverage.”). Liberty 18 Mutual’s representative further explained why the company requires a signed declination form, 19 even though it is not required under Washington law: 20 21 22 There is a court system that could rule against any – you know, we wanted the extra protection to have the signed form, of our worry of losing if there is an earthquake, if Mr. Childress – if there was an earthquake post him not returning the rejection form, would we be able to defend that and be able to exclude earthquake from his policy? Our determination was we are in a better – we are in a better company position to either obtain the rejection form or add the coverage. 23 Meitler Dep. at 28. Based on that testimony and the facts of this case, a reasonable jury could 24 conclude that Liberty Mutual acted unreasonably by placing its own pecuniary and risk25 avoidance interests above the interests of its insured. Therefore, Liberty Mutual’s motion for 26 summary judgment on the bad faith claim is denied. 27 28 ORDER REGARDING CROSS MOTIONS FOR SUMMARY JUDGMENT - 10 III. CONCLUSION 1 2 For all of the foregoing reasons, the Court DENIES Liberty Mutual’s motion for 3 summary judgment (Dkt. #27) and GRANTS plaintiffs’ motion for partial summary judgment 4 regarding liability on their breach of contract claim (Dkt. #44). The remaining issues include 5 plaintiffs’ CPA and bad faith claims and the amount of damages related to plaintiffs’ breach of 6 contract claim. The parties are directed to attempt settlement with the guidance given by the 7 Court in this order and during oral argument. 8 9 DATED this 7th day of February, 2011. 10 11 A Robert S. Lasnik 12 United States District Judge 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 ORDER REGARDING CROSS MOTIONS FOR SUMMARY JUDGMENT - 11
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