Circumstantial Evidence Sufficient to Prove Duty to Defend and Bad Faith

The United States District Court for the Western District of Washington, applying Washington law, held that a “clear and convincing” standard for establishing the material terms of a lost insurance policy can be met by strong circumstantial evidence. Additionally, the District Court held that the insurer’s refusal to defend the insured was in bad faith.

The underlying litigation, alleging bodily injury due to alleged asbestos exposure in the 1970s and 1980s, was filed against the insured, PM Northwest, Inc. (“PM Northwest”). PM Northwest’s office manager then began a search for the company’s insurance policies from the years of alleged exposure, contacting the insurer, United States Fidelity and Guarantee Company (“USF&G”), to ask if they had any copies. Ultimately, PM Northwest located five certificates of insurance, showing that PM Northwest held general liability policies with USF&G from 1977-1982. These certificates contained the policy number, names of the insurer and insured, dates of expiration, a description of the type of insurance, and the limits of bodily injury liability. Those limits of liability were listed at $500,000. Citing a need for more information regarding the lost policies, however, USF&G never defended PM Northwest against the underlying claim.

Ultimately, PM Northwest settled the underlying litigation for $4.5 million. USF&G paid to the underlying plaintiffs $2.5 million, the total limits of its five policies. USF&G filed the present declaratory judgment action, seeking a judgment that it had exhausted its obligations. PM Northwest, however, alleged that USF&G breached its duty to defend and indemnify, denied coverage in bad faith, and violated the Washington Insurance Fair Conduct Act and the Washington Consumer Protection Act.

At issue in the litigation is whether the material terms of the lost insurance policies provided for USF&G’s duty to defend PM Northwest and whether any exclusions barred coverage. As such, USF&G and PM Northwest disagreed on the standard of evidence needed to prove the existence of material terms, whether PM Northwest met that standard, and whether USF&G refused to defend PM Northwest in bad faith.

First, the District Court agreed with USF&G that PM Northwest must prove by “clear and convincing” evidence that the insurance policies included a duty to defend, rejecting PM Northwest’s argument that a “preponderance of the evidence” standard applied. Nonetheless, the District Court also held that PM Northwest had met the “clear and convincing” standard necessary of proving material terms. PM Northwest had relied on an expert’s combined inferences from certificates of insurance, “extracts” from an internal USF&G database containing policy transaction details, specimen policy forms, and handwritten notes on USF&G policy documents that USF&G had a duty to defend. Though this evidence was circumstantial, the District Court found that a reasonable jury, looking at the evidence in its entirety, could reasonably conclude that the underlying claim fell within the terms of the USF&G policy, and, thus, dismissed USF&G’s argument that PM Northwest failed to prove the material terms.

Moreover, the District Court held that because USF&G refused to offer PM Northwest a defense without a reasonable investigation into whether it had issued the five policies reflected in the certificates of insurance, a reasonable jury could find that the insurer put its own interests ahead of the insured and unreasonably denied PM Northwest a defense. Indeed, comparing the certificates of insurance to the underlying complaint, no reasonable jury could conclude that coverage was inconceivable. Therefore, the District Court held that USF&G’s failure to defend on the basis of the certificates was indeed bad faith. As such, in addition to ruling on a number of other matters, the District Court granted PM Northwest’s motion for partial summary judgment on the existence and terms of its USF&G policies . United States Fidelity and Guaranty Company v. Ulbricht, 2022 WL 110457 (W.D. Wash. Jan. 12, 2022).