Courts don’t look kindly upon insurance company shell games. In Preferred Contractors Ins. Co. v. Baker & Son Construction, the Washington Supreme Court slapped down an insurer’s attempt to manipulate the type of general liability “trigger” it wrote to sell coverage that was illusory.
General liability insurance policies are generally written as either “claims-made” or “occurrence” forms. Claims-made policies generally cover claims that are made during a given policy period where the accident or other insured event often occurred before the policy issued. Occurrence policies generally cover claims where the accident or other insured event occurs during the policy period, where the claim is often not made until after the policy expires. Sometimes the insurer tries to combine the concepts so that an accident occurring during the policy period is not covered unless the lawsuit is also filed during the same period. Given the oft-significant delay between accidents and lawsuits, such coverage can end up offering no coverage at all.
In Preferred Contractors, the Washington Supreme Court rejected such an effort by an insurance company, finding such illusory coverage to be against public policy. Cox Construction was a general contractor on a motel construction and renovation project, and retained Baker & Son as a subcontractor. During construction in October 2019, a Baker employee allegedly caused a two-by-four to fall from a railing, which then struck the owner of Cox Construction, Ronnie Cox, in the head. Mr. Cox passed away in his sleep later that night.
Baker allegedly called an insurance agent to alert them of what occurred, but the agent indicated there was no action to be taken because, at that time, no claim existed. Almost one year later, in September 2020, Baker received a notice from counsel for Mr. Cox’s widow, indicating that she was pursuing a wrongful death claim against Baker. Baker thereafter notified its insurer, Preferred Contractors Insurance Company (PCIC) of the claim.
PCIC issued two manuscript, claims-made CGL policies to Baker. However, the policies incorporated some aspects of occurrence-based policies, including an insuring agreement that provided coverage only for bodily injury or property damage caused by an “occurrence” and first taking place during the policy period. Contrary to the norm for claims-made policies, the PCIC policies were “nonretroactive,” meaning they did not maintain the same “retroactive date” across policy renewals. Both policies were also non-prospective—they did not provide coverage for any claim made after the end of the policy period. Consequently, coverage under each PCIC policy was effectively limited to provide coverage for a single calendar year, and only for claims that both occurred and were first reported within that policy period.
Following Baker’s notice of the claim, PCIC denied coverage. Because the injury to Mr. Cox occurred in 2019, and the wrongful death lawsuit was not filed until 2020, the occurrence and reporting dates for the incident did not occur within the same policy period. PCIC therefore asserted that the first policy did not provide coverage because the claim was not made during the policy period, and that the second policy did not provide coverage because the “occurrence” that the claim arose from—the injury to Mr. Cox—happened before that policy incepted.
PCIC filed a declaratory judgment action in federal court, seeking a declaration that it was not obligated to provide coverage to Baker for Mrs. Cox’s claim. Based on arguments presented by Cox and Baker, the federal court presented a certified question to the Washington Supreme Court, asking whether a policy that only provided coverage for “occurrences” and resulting from claims reported within the same one-year policy period, without providing prospective or retroactive coverage, violated Washington public policy.
The Washington Supreme Court held that policies like those issued by PCIC were “so narrow” that the coverage afforded was “illusory” and contrary to public policy. In Washington (like several other states), contractors and subcontractors are required by statute to maintain a minimum amount of financial responsibility or liability insurance; the Washington Supreme Court therefore reasoned that the state had a stated public policy of ensuring that contractors are financially responsible for injuries caused by their alleged negligence. The court determined that the PCIC policies violated this public policy in providing such narrow coverage, and that the policy’s limitations were therefore unenforceable.
Although claims-made CGL policies are much less common than their occurrence-based counterparts, Baker & Son is a reminder more generally that overly restrictive policy limitations may well be unenforceable. But such disputes often can be avoided at the outset. Policyholders should be sure to engage coverage counsel both when preparing to review or renew their risk management programs to help ensure that they are getting the coverage they paid for, and when confronting severe policy limitations in an insurance coverage dispute.