Nat’l Fire & Marine Ins. Co. v. Certain Underwriters at Lloyd’s London

Full title: NATIONAL FIRE & MARINE INSURANCE COMPANY, a Nebraska corporation…

Court: COURT OF APPEALS OF THE STATE OF WASHINGTON DIVISION ONE

Date published: Jul 16, 2012

Facts

The material facts are not disputed. This duty to defend dispute arises out of a construction defect suit against Wellington Cheswick LLC and its related entities and individuals. Wellington developed the 71-unit Cheswick Lane Condominiums in three phases from March 20, 2000 to June 30, 2002. After completion, Wellington turned over control of the Condominiums to Cheswick Lane Condominium Owners Association in July 2002. The Association sued Wellington in December 2004, alleging mainly that construction defects breached common law, statutory, and contractual warranties. The Association also alleged Washington Uniform Fraudulent Transfer Act, chapter 19.40 RCW, violations.

After receiving the Association’s complaint, Wellington tendered its defense and indemnity to its primary insurers, National Fire & Marine Insurance Company and Certain Underwriters at Lloyd’s, London.

Wellington also purchased an umbrella policy from Liberty Mutual Insurance Company. Liberty’s umbrella policy was effective in year two (at the same time as Lloyd’s policy II) from February 1, 2001, to March 10, 2002.

Wellington tendered its defense to National Fire on November 4, 2004. Several months later, National Fire retained defense counsel for Wellington and issued a letter reserving its rights to deny indemnity. National Fire provided Wellington with a complete defense to all allegations in the underlying suit, incurring $1,457,188.17 in defense costs. Wellington tendered its defense of the underlying suit to Lloyd’s on March 2, 2005. Lloyd’s responded in December 2005 and neither accepted nor denied the tender. Wellington initially tendered its defense to Liberty on August 11, 2005, requesting that Liberty “determine whether or not it has an obligation to drop down and provide a defense and indemnity to [Wellington] in light of the failure of [Lloyd’s] to respond to the tender of defense and immunity.” Liberty responded the following month and neither accepted nor rejected the tender. Instead, Liberty reserved its rights based solely on policy exclusions excusing its duty to indemnify.

In February 2006, after failing to reach settlement in the underlying suit, the Association amended its complaint to add the builder (Wellington Builders of Washington, Ltd.), five individuals alleged to be members/shareholders of Wellington, and an ownership entity (Wellington Organization, Ltd.) as defendants. This resulted in a second wave of tender letters, including Wellington’s re-tender to Liberty in June 2006—to which Liberty did not respond. Lloyd’s responded to the second tender in August 2006 by agreeing to participate in the defense of the five individual principals and Wellington Organization, Ltd., subject to a reservation of rights to deny coverage. Lloyd’s expressly declined the builder’s tender of defense. The builder was one of Liberty’s named insureds. Lloyd’s never updated its December 2005 equivocal tender response to the developer and its principal (Wellington Cheswick LLC and First Wellington Crown Corporation), each of whom Liberty also insured.

Wellington and the Association settled the underlying suit for $2,497,000 in August 2006. Lloyd’s and National Fire each contributed $600,000 and Liberty contributed $300,000 toward the settlement amount. To recoup its defense costs incurred in Wellington’s defense, National Fire sued Wellington’s other insurers—including Lloyd’s and Liberty—alleging equitable contribution by each defendant insurer based on its respective share of these defense costs.

In a series of summary judgments,  Liberty moved unsuccessfully to dismiss National Fire’s equitable contribution claim. The court also denied Liberty’s summary judgment motion on the duty to defend and allocation issues and granted National Fire’s cross-motions for summary judgment, finding Liberty owed Wellington a duty to defend and liability for contribution to National Fire’s defense costs, including accrued prejudgment interest. Liberty appealed the court’s adverse summary judgment rulings that (1) concluded that it owed a duty to defend Wellington and (2) imposed contribution liability for defense costs incurred by National Fire.

Issue

Decision

Because it is conceivable, when considering the Association’s complaint and the insurers’ respective policies, that gaps exist in the underlying coverage that required Liberty to provide primary coverage in those areas, Liberty owed a duty to defend Wellington. Accordingly, we affirm the trial court’s order granting summary judgment in National Fire’s favor.

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