Judge: Decision To Deny Coverage Was Not In Bad Faith, Did Not Violate Washington’s Insurance Fair Conduct Act

Judge: Decision To Deny Coverage Was Not In Bad Faith, Did Not Violate Washington’s Insurance Fair Conduct Act

SEATTLE, Wash. -- An insurer's coverage denial was founded on its claims investigator's opinion on the cause of the loss, the cause cited is specifically excluded by the policy and the insurer's denial cites the policy exclusion; therefore, an insured has presented no evidence that any of the insurer's decisions or actions were conducted in bad faith, a Washington federal judge recently ruled in Naaman Shepard v. Foremost Ins. Co. Inc., No. C08-0434 RAJ, W.D. Wash.; 2008 U.S. Dist. LEXIS 99051.
 
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Naaman Shepard filed a claim for damages to his 25-foot boat with his insurer, Foremost Insurance Co. Inc., which retained Larry Montgomery to investigate the cause of the loss. Montgomery concluded that the flooding was caused by an engine exhaust elbow inside the starboard riser that overheated because it was clogged by rust.
 
Foremost denied coverage, citing the policy's exclusions for losses caused by rust, the accumulation of water and/or "[l]ack of reasonable care or due diligence in the maintenance."
 
Shepard sued Foremost in the Skagit County Superior Court for breach of contract, bad faith denial of coverage and violation of Washington's Consumer Protection Act (CPA) and Insurance Fair Conduct Act (IFCA). Foremost removed the action to the U.S. District Court for the Western District of Washington and moved for partial summary judgment on the bad faith, CPA and IFCA claims. Both parties moved for summary judgment on the coverage issue.
 
No Bad Faith
 
Judge Richard A. Jones found that there is no fact dispute as to the reasonableness of Foremost's actions in investigating and denying Shepard's claim.
 
"It is true that Montgomery's report notes that data on the engine's flow volume and the condition of the salt water pump could not be performed at the time the report was written, due to the location of the boat. Though Shepard asserts that Foremost should not have denied coverage without that data, Montgomery did not qualify or limit his causation opinion due to the lack of that information; indeed, his report twice notes that the salt water pump was unrelated to the flooding cause," the judge said.
 
Jones concluded that Montgomery submitted an unequivocal opinion that Shepard's loss was caused by rust.
 
"Foremost's denial was founded on Montgomery's opinion on the cause of the loss, the cause cited by Montgomery is specifically excluded by the policy, and Foremost's denial cites the policy exclusion. Shepard has presented no evidence that any of Foremost's decisions or actions were conducted in bad faith," the judge said, granting summary judgment in favor of Foremost in the bad faith and CPA claims.
 
Judge Jones also granted summary judgment to Foremost on the IFCA claim, finding that the IFCA does not apply in the present case.
 
Causation
 
Judge Jones denied both parties' motion for partial summary judgment on the coverage issue.
 
"The court agrees with the parties that the factual dispute regarding causation prevents an evaluation of whether, as a matter of law, the loss was covered by the policy. Because the parties dispute the cause of the loss, the court also cannot address the issues of ensuing loss or proximate cause," the judge noted.
 
Charles Maurice Davis of Bow, Wash., represents Shepard. Rory W. Leid III and Ryan J. Hall of Cole Lether Wathen & Leid in Seattle represent Foremost.
 
This article originally appeared in the December 2008 issue of Mealey’s Insurance Litigation Report: Insurance Bad Faith. To subscribe to this publication, click here.