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This Is [Not] How We Do It: Insurer Gets Schooled on the Consequences of a Bad Faith Refusal to Defend



Washington State goes to great lengths to protect policyholders from insurance company misconduct and overreach. This is especially true when it comes to an insurer’s duty to defend its policyholder against third-party claims.

But the insurer in Alaska Airlines, Inc. v. Endurance American Insurance Co. appears to have lost sight of this, flouting its duty to defend Alaska Airlines and ultimately paying a gruesome price.

Alaska contracted with Huntleigh USA Corporation to provide wheelchair escort services to Alaska passengers at Portland International Airport. When no one showed up to escort a wheelchair-bound passenger, she tried to navigate unaided to her connecting gate. Her trip ended in tragedy, with a fall down an escalator that proved fatal.

The passenger’s estate sued both Alaska and Huntleigh. Among other things, the complaint alleged that the passenger’s injuries and death resulted from Huntleigh’s breach of its duty to provide gate-to-gate escort service to the passenger, which had left her to navigate the airport alone.

Huntleigh had agreed to defend and indemnify Alaska for acts or omissions in the performance or nonperformance of Huntleigh’s contractual obligations. Huntleigh had also named Alaska as an additional insured under its general liability policy, which covered (among other things) bodily injury from Huntleigh’s “aviation operations.”

Hence, on four occasions spanning over two years, Alaska tendered the defense of the passenger’s claim under the indemnity agreement and under Huntleigh’s insurance policy. Each time Endurance (Huntleigh’s insurer) rejected the tender. Disregarding the complaint’s contrary allegations, Endurance denied both that Huntleigh had been engaged to provide wheelchair services for the passenger and that the passenger’s injuries resulted from Huntleigh’s acts or omissions.

Alaska sued Endurance in federal court in the Western District of Washington, seeking damages for breach of contract, bad faith, and violation of various Washington statutes. The court granted summary judgment on coverage, holding that Endurance had breached its duty to defend Alaska against claims for bodily injury resulting from the vendor’s “aviation operations.” Endurance, who by this point had changed counsel, doesn’t appear to have disputed that it breached its duty to defend.

Alaska then moved for summary judgment on Endurance’s statutory and tort liability for what it alleged was Endurance’s unreasonable refusal to defend. The court readily granted this motion, too.

The court began with Alaska’s claim that Endurance’s unreasonable coverage denial breached its duty of good faith as a matter of law. Washington follows the “eight corners” rule, which means the insurance company must defend if the policy, liberally construed, could conceivably cover the allegations in the complaint. In Washington these allegations must be construed in favor of coverage, and the insurer may not refuse to defend based on facts not alleged in the complaint. Yet Endurance’s reasons for refusing to defend Alaska weren’t based on allegations in the complaint. Rather, the court noted, they “directly contradicted” the complaint—a clear no-no. Nor could Endurance square its defense of Huntleigh with its abandonment of Alaska, when both had the same coverage for bodily injury due to Huntleigh’s aviation operations.

From here, things went from bad to worse for Endurance.

First, the court confirmed that under Washington law, its bad faith ruling resulted in a presumption of harm to Alaska. Endurance claimed that Alaska could prove no harm because its defense costs were paid by Alaska’s own insurance company. The court rejected this argument, characterizing it as an improper attempt to shift the burden of proving damages back to Alaska. Because Endurance failed to rebut the presumption of harm, the court held that Alaska had proven its bad faith claim and was therefore entitled to coverage by estoppel.

Second, the court held that Endurance’s unreasonable coverage denial established its liability under Washington’s Consumer Protection Act as well as under its Insurance Fair Conduct Act (IFCA).

Though the court did not address Alaska’s alleged damages, Endurance found itself on the losing end of an evidentiary ruling regarding Alaska’s proof of damages. Endurance sought to exclude Alaska’s risk management director from testifying to the impact of Endurance’s misconduct on Alaska’s future insurance premiums. Endurance principally argued that the director’s opinions were unreliable because his methodology for computing damages was neither peer-reviewed nor used by others in the field. The court concluded that the director’s methodology, premised on the “common knowledge” that “claims drive premium costs,” wasn’t “particularly complex,” and required no peer review for validation. The court therefore declined to exclude the director’s testimony.

The court’s summary judgment ruling left Endurance in an unenviable position. Having lost on liability, it was left to face a trial on Alaska’s damages, whether or not covered by the policy and without regard to policy limits, plus the specter of an award of attorney fees and treble damages under IFCA.

To hear the court tell it, by fairly flaunting its willful refusal to comply with Washington law, Endurance richly deserved this outcome. Frankly, Endurance’s missteps were so significant and so obvious, it’s difficult to discern exactly how Endurance could have made such a botch of things. One thing that stands out about Endurance’s misconduct is just how strenuously and consistently it stuck to its initial wrong call, refusing to back down until it was too late. The court’s opinion suggests that Endurance may have confused its own duty to defend under Huntleigh’s insurance policy with Huntleigh’s duty to defend under its contract with Alaska. Perhaps.

Whatever the root cause of the problem, the fact that it arose highlights the lengths to which some insurance companies will sometimes go to avoid their defense obligations. To insurers, the ruling presents a cautionary tale: courts will impose severe consequences for trying to evade your duty to defend in Washington.

To policyholders, meanwhile, the decision offers an encouraging reminder of Washington’s unflagging commitment to see that insurance companies fulfill their defense obligations. If you’re facing a lawsuit and your insurance company won’t commit to defend you, this ruling is one of several that may help you turn things around and get you the help and protection you’re owed.

This article is provided for informational purposes only—it does not constitute legal advice and does not create an attorney-client relationship between the firm and the reader. Readers should consult legal counsel before taking action relating to the subject matter of this article.

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