Time’s Up: Washington Rules Some Nonretroactive Insurance Policies Unenforceable

Insurance companies are typically free to contract to limit the liabilities covered by their policies. However, Washington courts will not enforce an insurance policy if it violates public policy. Recently, the Washington Supreme Court was asked to decide whether an insurance policy that only provides coverage for claims that occur and are reported in the same policy year, and provides neither prospective nor retroactive coverage, is unenforceable under Washington public policy. No Washington court has considered this question until now.

Claims Pointer:

In this case, the Washington Supreme Court decided for the first time whether insurance policies that require loss and reporting to occur in the same year, without providing prospective or retroactive coverage, are enforceable under Washington’s public policy requiring general contractors to procure liability insurance.

Preferred Contractors Ins. Co. v. Baker and Son Constr. Inc., 100466-4, 2022 WL 3270083 (Wash. Aug. 11, 2022).

Facts:

Plaintiff was the insurance provider for Defendant, a construction company. At the time of this case, Defendant held two, almost identical, commercial general liability (“CGL”) policies with Plaintiff. The only substantial difference between the policies was the coverage period: one policy had a coverage period of January 5, 2019 to January 5, 2020 and the other had a coverage period of January 5, 2020, to January 5, 2021.

Both policies were claims-made policies, meaning that the carrier’s liability for a claim would attach if the claim was reported to the carrier within the policy period. Additionally, endorsements to both policies stated that the carrier would only cover claims for bodily injuries that occurred and were reported within the policy period. Further endorsements stated that there was no continuous coverage between policies that were renewed, limiting each policy period to one year.  

In October of 2019, a separate construction company, owned by a man named Mr. Cox, hired Defendant as a subcontractor for a project. On October 31, 2019, an employee of Defendant’s allegedly caused a two-by-four to fall from a railing and strike Mr. Cox in the head. Mr. Cox died in his sleep later that night.

In September of 2020, Mr. Cox’s widow filed a wrongful death claim against Defendant.  A few days later, Defendant then reported that claim to his insurance carrier. That carrier then filed a declaratory action in U.S. District Court to ask for a declaration that they had no duty to defend or indemnify Defendant for Mr. Cox’s death. Plaintiff argued that because Mr. Cox died in October 2019 and Ms. Cox did not notify Defendant of her intent to sue until September 2020, the occurrence and the reporting dates did not occur in the same policy period as required by Defendant’s policy.

Ms. Cox, joined by Defendant, filed a motion for certification to the Washington Supreme Court, arguing that Plaintiff’s insurance policy violated Washington public policy, making provisions of the insurance policy unenforceable.

The certified question for the Washington Supreme Court was:

When a contractor’s liability insurance policy provides only coverage for “occurrences” and resulting “claims-made and reported” that take place within the same one-year policy period, and provide no prospective or retroactive coverage, do these requirements together violate Washington public policy and render either the “occurrence” or “claims-made and reported” provisions unenforceable?

Law:

Commercial general liability (“CGL”) policies can be classified into two common types: occurrence policies and claims-made policies. Occurrence policies generally provide coverage for damages that occur during the policy period, regardless of when the loss is discovered, as long as the loss is reported within a reasonable time. Safeco Title Ins. Co. v. Gannon, 54 Wn. App. 330, 337-38, 774 P.2d 30 (1989). On the other hand, claims-made policies generally provide coverage for losses reported within the policy period regardless of when the loss occurred. Id.

Most claims-made policies are effective from a set “retroactive date.” Carolyn M. Frame, “Claims-Made” Liability Insurance: Closing the Gaps with Retroactive Coverage¸60 Temp. L.Q. 165, 173 (1987). When the retroactive date is set before the policy period, it can prevent a gap in coverage. Id. However, nonretroactive claims are claims-made policies that do not offer continuous coverage and instead reset the date that a claim can be brought to the start of each new policy period.

Revised Code of Washington 18.27.050(1) requires contractors to have insurance or financial responsibility to cover $100,000 “for injury or damage including death to any one person” to obtain registration with the state. RCW 18.27.140 states that this law’s purpose is to “afford protection to the public including all persons, firms, and corporations furnishing labor, materials, or equipment to a contractor from unreliable, fraudulent, financially irresponsible, or incompetent contractors.

Analysis:

The Washington Supreme Court began its analysis of the certified question by first determining whether RCW 18.27 establishes a public policy of ensuring that contractors are financially responsible, through insurance, for losses caused by negligence. Plaintiff argued that RCW 18.27 did not provide a statutory basis for a public policy holding because RCW 18.27.050 protects only those not in privity with (or not in contract) a contractor. Therefore, Plaintiff continued, because Mr. Cox was in privity with Defendant through the general contractor-subcontractor relationship, RCW 18.27.050 did not apply in this case. The Court rejected Plaintiff’s privity argument and found that the requirements of RCW 18.27.050, coupled with the purpose outlined in RCW 18.27.140, “heavily incentivized” contractors to get insurance. Therefore, the statutes articulated a public policy that a contractor should provide insurance to the members of the public that they injure.

After holding that RCW 18.27 established a public policy requiring contractors to be financially responsible to the members of the public injured by their negligence, the Court turned to whether the specific insurance provisions at issue violated that public policy.

The Court found that the policy provisions at issue stated that Plaintiff’s policies provided coverage only for losses that occur and were reported to Plaintiff within the one-year policy period. The Court held that while RCW 18.27.050 does not require insurers to issue occurrence policies or provide retroactive coverage, insurers should not issue policies that cause contractors to default on their statutorily mandated financial responsibility. Since the policies Plaintiff issued required the loss to occur and be reported to the insurer in the same policy year and failed to provide retroactive coverage, the Court held that the carrier’s restrictive coverage violated Washington’s public policy.

Big Picture:

Insurance carriers should be mindful of the insurance policies they issue to ensure that they don’t violate Washington’s public policy. Washington’s public policy is generally governed by statute.  For instance, Washington has a statute mandating that every driver carry a minimum $25,000 insurance policy. The public purpose of that statute is to ensure that people injured in a motor vehicle accident do not become wards of the state and shift the costs of their medical care onto the public. Any policy that seeks to violate that public policy (for instance, a clause that excludes claims brought by family members) is not enforceable. In this case, Washington has a statute mandating that general contractors “be fiscally responsible.” Any clause that de facto forces a general contractor to fail to live up to that statutory requirement violates public policy and, as such, is not enforceable. Keeping up to date on the movements of both the legislature and the courts can ensure that insurers avoid issues that may run contrary to public policy.

Special attention needs to be given to the coverage that is applicable during any overlap of coverage, or gaps of coverage between policy periods. A policy will be deemed unenforceable if it is so restrictive that it results in the insured being unable to meet their statutorily mandated obligations, or if it requires a loss to occur and be reported to the insurer in the same policy year, while also excluding prospective or retroactive coverage.