Washington Supreme Court Reminds Insurers That the Benefit of the Doubt is Not Theirs in Questions of Coverage Denial

From the desk of Kyle Riley: When a consumer purchases a policy of insurance, there is little doubt that they expect to be able to rely on their coverage when disputes arise.  Washington courts have made the state’s policy clear: when there is a potential for coverage, any uncertainty must be resolved in favor of providing coverage to the insured, even if it is done under a reservation of rights.  What about questions of law?  If an insurer believes that coverage may not exist due to its own interpretation of state law, may it present that finding as a reason for denying an insured’s claim?  In this case, the Washington Supreme Court addressed that very issue, and although the answer may not surprise you, this update is worth a read so that you can see for yourself how Washington’s policies favoring consumer protection could affect your own practice.

Case Pointer: In this case, the Washington Supreme Court was presented with a case involving a denial of coverage based upon a viable interpretation of Washington case law surrounding easements and profits.  Unfortunately for the defendant insurer, there was more than one viable interpretation, which caused the insurer to fall into one of Washington’s harshest pits – bad faith.  In general, an insurer’s duty to defend is triggered when an insured makes a claim under their policy and there is a conceivable possibility that coverage is proper.  In the following case, the defendant insurer denied coverage based on its own interpretation of certain Washington laws.  The Washington Supreme Court held that the denial violated the insurer’s duty to defend, as it had failed to resolve ambiguities in favor of its insured and had instead given itself the benefit of the doubt.  In so doing, the insurer also exposed itself to bad faith claims.  Insurers operating in Washington State are best served by defending their insured where there is any possibility that the policy covers the loss.  A reservation of rights is a solution far more optimal to the costly and time consuming alternative of post-denial litigation.

Robbins v. Mason County Title Ins. Co., 195 Wn.2d 618, 462 P.3d 430 (May 7, 2020).

The underlying facts to this case involved a piece of property, shellfish beds, and a Native American Tribe’s assertion of its rights pursuant to a longstanding treaty to harvest shellfish from the beds located on the subject land.  In short, the Robbins (“Robbins”) purchased a plot of land that included some tidelands and clam beds.  Robbins purchased a title insurance policy from Mason County Title Insurance Company (MCTI) which would insure them against “loss or damage sustained by reason of any defect in, or lien or encumbrance on” the insured property.  The policy included an exclusion for “public or private easements not disclosed by the public records,” with “public records” being defined as records which “impart constructive notice with respect to said real estate.”

Robbins had contracted with various harvesters to come onto their property to harvest the clam beds.  When Robbins entered a new contract with a new harvester in 2015, that harvester notified the Squaxin Island Tribe (the Tribe), as a treaty enacted in 1854 gave the Tribe the rights to harvest shellfish from private lands so long as the shellfish beds were naturally occurring ones.  The Tribe responded with a letter stating that it disagreed with Robbins, who had asserted that the clam beds were not naturally occurring.  Ultimately, the Tribe sent a letter to Robbins demanding to enter upon their land to harvest clams.  At that point, Robbins tendered a claim to MCTI to defend against the demand.

MCTI denied coverage on the grounds that the Tribe’s asserted right was an easement, and the treaty between the federal government and a Native American Indian tribe does not impart the “constructive notice” required by the applicable policy.  Put another way, MCTI took the position that the “public or private easements not disclosed by the public records” exclusion applied to bar coverage.  After a series of appeals, the case ended up before the Washington Supreme Court, which was tasked with determining, among other issues, whether or not MCTI had a duty to defend against the Tribe’s demand and whether MCTI acted in bad faith in failing to accept Robbins’ tender.

The first issue was to determine whether a duty to defend existed in the first place.  There was no question that the Tribe had not instituted legal proceedings, so the question became whether the Tribe’s demand letter triggered MCTI’s duty to defend.  Because the policy did not define “demand,” the Court used a legal dictionary definition, which defined the term as “the assertion of a legal or procedural right.”  The Tribe had asserted its legal right under the applicable treaty to harvest shellfish from Robbins’ clam bed, which brought the Tribe’s letter within the purview of MCTI’s policy since it was a “demand.”  Thus, the duty to defend had been triggered when the Tribe sent its letter to Robbins. 

In order to get around the duty to defend, MCTI would have to establish that its proffered exclusion (easements and constructive notice), applied.  While there was an argument that the relevant exclusion did apply, the ambiguity proved to be MCTI’s downfall.  Washington law requires that exclusions be strictly and narrowly construed, with any uncertainty being resolved in favor of the insured.  A long discussion of easements and servitudes made clear that there was significant dispute as to whether or not the Tribe’s right was actually an easement as MCTI was asserting.  In fact, the Court ultimately concluded that it was a profit, which itself is not clearly an easement.  Washington law was unclear as to that point – an ambiguity which resulted in the strict and narrow construction of MCTI’s exclusion against it and in favor of Robbins.

The court made quick work of Robbins’ bad faith claim, as an “unreasonable, frivolous, or unfounded” breach of the duty to defend constitutes bad faith.  “Unreasonable” became the downfall of MCTI’s case.  Unfortunately for MCTI, Washington case law has established that where an insurer follows an arguable, but not conclusive interpretation of law and then gives itself the benefit of any doubt and denies the claim, the insurer has acted unreasonably and therefore, in bad faith.  As previously discussed, the law as to whether the Tribe’s asserted right was an easement or a profit was unclear, and MCTI had relied on its argument that the right was an easement in deciding to deny Robbins’ claim.

Ultimately, MCTI had breached its duty to defend Robbins’ case, and in so doing, exposed itself to bad faith liability.  However, the case was remanded to the lower court for purposes of addressing MCTI’s affirmative defenses because it had not initially done so and Robbins had not moved for summary judgment on them.  For that reason, the issue of attorney fees was also premature, although that was not to say MCTI was not exposed to them. At the end of the day, the takeaway from this case is simple.  Insurers must err on the side of providing coverage where any potential argument for coverage exists.  Insurers are free to provide coverage subject to a reservation of rights.  Ultimately, insurers in Washington should tread lightly when denying claims and only do so when they are able to conclusively establish the applicability of a policy exclusion.