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ORDER REGARDING CROSS MOTIONS

FOR PARTIAL SUMMARY JUDGMENT - 1

UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF WASHINGTON

AT SEATTLE

AMERICAN STATES INSURANCE CO., 

Plaintiff,

v.

FIRST FINANCIAL INSURANCE CO.,

Defendant.

Case No. C05-2098RSL

ORDER REGARDING CROSS

MOTIONS FOR PARTIAL 

SUMMARY JUDGMENT

I. INTRODUCTION

This matter comes before the Court on a motion for partial summary judgment (Dkt. #57)

filed by defendant First Financial Insurance Company (“First Financial”). First Financial seeks

an order declaring that its insurance policy does not cover the partnership consisting of

Alexander Mun and Jason Mun doing business as Professional Home Builders (the “Mun

partnership” or the “partnership”). First Financial argues that its policy covered the Muns’

limited liability company but not their partnership, which is a separate legal entity. Plaintiff

American States Insurance Company (“ASIC”) has filed a cross motion for summary judgment

(Dkt. #66) seeking a ruling that the policy covered the partnership.

For the reasons set forth below, the Court grants defendant’s motion and denies plaintiff’s

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1

 Because the Court finds that this matter can be decided on the parties’ memoranda,

declarations, and exhibits, defendant’s request for oral argument is denied.

ORDER REGARDING CROSS MOTIONS

FOR PARTIAL SUMMARY JUDGMENT - 2

motion.1

II. DISCUSSION 

A. Background Facts.

The facts relevant to this motion are undisputed. In 2003, the Mun partnership was sued

by a third party, Residential Investment Partners 1997, LLC (“RIP”), for allegedly defective

construction work (the “underlying action”) on the Heritage Ridge construction project (the

“project”). The matter was submitted to an arbitrator pursuant to an agreement between the

partnership and RIP. The arbitrator found the partnership liable and a judgment of

approximately $1.9 million was entered against the partnership. To resolve the underlying

action, the partnership entered into a settlement agreement with RIP and the partnership’s

insurer, ASIC. The partnership had liability insurance with ASIC for the policy period

September 19, 1997 to September 19, 2000. During that policy period, the partnership

undertook work on the project and completed the work by October 1999. ASIC defended the

Mun partnership in the underlying action, paid all of the defense fees and costs, and paid the full

amount of the judgment. The partnership assigned all of its rights to ASIC. 

In July 2000, the Muns formed Professional Homebuilders, LLC (“PHB LLC”). ASIC

declined to quote a price for coverage for PHB LLC. First Financial subsequently issued an

insurance policy for the period of October 10, 2000 to October 10, 2001 (the “Policy”). The

Policy included coverage for any covered liability resulting from the completed construction

work of the policyholder. First Financial denied coverage for defense and indemnity in the

underlying action. First Financial argues that the Policy covered PHB LLC, but not the

partnership. It further notes that the judgment in the underlying action is only against the

partnership, and not against its insured, PHB LLC.

The contract for the Policy was negotiated by Daniel Welch, the insurance broker for the

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 Insurance companies typically require an Acord Application as a preliminary means of

deciding whether to provide a quote for coverage. Welch’s office uses an electronic form. 

ORDER REGARDING CROSS MOTIONS

FOR PARTIAL SUMMARY JUDGMENT - 3

Muns, and Merry Beth Palmer, the general agent for First Financial. Welch had negotiated and

obtained insurance coverage for the partnership for many years prior to negotiating the Policy,

including negotiating and securing liability insurance for the partnership with ASIC.

In September and October 2000, Welch sent an Acord Commercial Insurance Application

(“Acord Application”)2

 and supplemental questionnaire, which he signed as agent for PHB LLC,

to Palmer at Trinity Insurance E&S Services, Inc. (“Trinity”). Welch used the Acord

Application form he had on file, which still referenced the partnership as the applicant. 

However, Welch informed Palmer that coverage was being sought for PHB LLC. Declaration of

Daniel Welch, (Dkt. #57-4) (“Welch Decl.”) at ¶ 9. The supplemental questionnaire also stated

that the applicant was PHB LLC. Id., Ex. 8.

In October 2000, at Welch’s request, Alex Mun signed a Commercial Insurance Premium

Finance Agreement in his capacity as a “member” of PHB LLC, reflecting his intent to obtain

insurance on behalf of that entity. Welch Decl., Ex. 9. Later that month, Palmer provided

Welch a quote for Commercial liability insurance from First Financial for PHB LLC. After

discussing the coverage with Alex Mun, Welch instructed Palmer to bind the coverage for PHB

LLC with First Financial. Palmer subsequently sent Welch a Confirmation of Bind document

which reflected the name of the insured as PHB LLC. Id., Ex. 10. Welch then informed the

Muns that coverage had been secured for PHB LLC. Shortly thereafter, Alex Mun requested

from Welch a certificate of insurance and an additional insured endorsement for a current

project. In response, Palmer prepared and forwarded the documents to Welch; both reflected the

named insured as PHB LLC. Declaration of Merry Beth Palmer, (Dkt. #57-6) (“Palmer Decl.”),

Ex. 6. After the policy number was changed, Palmer sent Welch a revised Confirmation of

Bind, facsimile cover sheet, and revised certificate of insurance, all of which reflected the named

insured as PHB LLC. Welch forwarded the certificate of insurance and later, the revised

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ORDER REGARDING CROSS MOTIONS

FOR PARTIAL SUMMARY JUDGMENT - 4

certificate, to the Muns. Neither Palmer nor Welch was ever informed that the documents

contained any error.

In late October 2000, Palmer sent the Policy to Welch. Her transmittal letter stated that a

“completed, signed and dated application” was still needed in accordance with the terms of the

policy. As requested, Welch prepared a final Acord Application which named the insured as

PHB LLC. Alex Mun and Welch both signed the final Acord Application, and Welch forwarded

it to Palmer. In the following months, at Welch’s request, Palmer sent him two certificates of

insurance at different times, both of which reflected the named insured as PHB LLC. Palmer

Decl., Exs. 13, 17. Welch forwarded the certificates of insurance to the Muns and heard no

objection from them. 

Several months after the Policy was issued, in January 2001, Welch noticed that the

Policy included an “X” in the declarations page indicating that the “Form of Business” of the

named insured was a “partnership.” Palmer Decl., Ex. 19. He requested that First Financial

correct the error, which it did by issuing a Correction Endorsement. Welch Decl., Ex. 20;

Palmer Decl., Ex. 20. Welch then forwarded the Policy to Alex Mun.

This action was initially filed by “Alexander Mun and Jason Mun doing business as

Professional Home Builders and Professional Homebuilders, LLC.” The Court granted

defendant’s motion for summary judgment because those plaintiffs were not the real parties in

interest. The parties subsequently agreed to substitute ASIC as the plaintiff. The Court has

jurisdiction based on diversity of the parties. ASIC alleges that First Financial breached its duty

to defend, investigate, indemnify, and settle. It also alleges that First Financial’s conduct

violated the Washington Consumer Protection Act and its statutory duties, and amounted to bad

faith.

B. Summary Judgment Standard.

On a motion for summary judgment, the Court must “view the evidence in the light most

favorable to the nonmoving party and determine whether there are any genuine issues of material

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ORDER REGARDING CROSS MOTIONS

FOR PARTIAL SUMMARY JUDGMENT - 5

fact.” Holley v. Crank, 386 F.3d 1248, 1255 (9th Cir. 2004). All reasonable inferences

supported by the evidence are to be drawn in favor of the nonmoving party. See Villiarimo v.

Aloha Island Air, Inc., 281 F.3d 1054, 1061 (9th Cir. 2002). “[I]f a rational trier of fact might

resolve the issues in favor of the nonmoving party, summary judgment must be denied.” T.W.

Elec. Serv., Inc. v. Pacific Elec. Contractors Ass’n, 809 F.2d 626, 631 (9th Cir. 1987).

C. Analysis.

1. The Policy Covers Only PHB LLC.

The insured has the burden of proving that insurance coverage exists. McDonald v. State

Farm Fire & Cas. Co., 119 Wn.2d 724, 730 (1992). An insurance contract is governed by

ordinary contract principles. Courts seek to effectuate the intent of the parties, which is the

“touchstone of contract interpretation.” Tanner Elec. Coop. v. Puget Sound Power & Light Co.,

128 Wn.2d 656, 674 (1996). “Washington follows an objective manifestation test for contracts,

looking to the objective acts or manifestations of the parties rather than to the unexpressed

subjective intent of any party.” Wilson Court Ltd. P’ship v. Tony Marconi’s, Inc., 134 Wn.2d

692, 699 (1998). Here, the parties’ objective manifestations reflect their intention that the

Policy was to insure PHB LLC. Welch and Palmer were acting as agents for the Muns and First

Financial, respectively, in negotiating and securing the Policy. Both have stated unequivocally

that they intended to secure coverage for PHB LLC. The vast majority of the numerous

documents they exchanged reflected that intent, including three certificates of insurance that the

Muns sought for PHB LLC. Moreover, the Muns never objected after receiving numerous

documents listing the insured as PHB LLC. The Muns instructed and authorized Welch to

obtain quotes, conduct negotiations, and secure insurance coverage for PHB LLC. Although

Alex Mun states in a declaration that he instructed Welch to obtain coverage for “my company’s

liabilities,” he never states that he instructed him to obtain Policy coverage for the partnership,

which no longer existed. Declaration of Alex Mun, (Dkt. #66-3) (“Mun Decl.”) at ¶ 13. 

Instead, his “company” at that time was PHB LLC.

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ORDER REGARDING CROSS MOTIONS

FOR PARTIAL SUMMARY JUDGMENT - 6

Plaintiff argues that two documents reflect the named insured as the partnership. 

Although the first Acord Application references the partnership, the negotiating parties

understood that coverage was being sought for PHB LLC. Also, a final, signed Acord

Application was required from the insured, and was obtained from PHB LLC. The declarations

page of the Policy references the partnership; First Financial argues that it reflects a scrivener’s

error. “A scrivener’s error occurs when the intention of the parties is identical at the time of the

transaction but the written agreement errs in expressing that intention.” Reynolds v. Farmers

Ins. Co., 90 Wn. App. 880, 885 (1998). When a contract contains a scrivener’s error, the court

may reform the contract to correct the error. Id. A party seeking correction “only has to show

that the parties agreed to accomplish a certain objective and that the instrument is insufficient to

execute their intention.” Wilhelm v. Beyersdorf, 100 Wn. App. 836, 844 (2000). As set forth

above, the parties intended for the Policy to cover PHB LLC, not the partnership. ASIC’s

interpretation of the Policy is irrelevant because it was not a party to the Policy and was not

involved in the negotiations leading up to it. The “X” in the wrong box represents a scrivener’s

error. 

Plaintiff argues that the Correction Endorsement lists an “effective date” of January 15,

2001, signifying that the partnership was insured by the Policy until that time. That argument is

inconsistent with the three certificates of insurance the Muns sought and received for PHB LLC

during the Policy period prior to the correction. Also, when Welch requested the Correction

Endorsement, and when Palmer prepared it, both intended that the correction was to correct the

clerical mistake and make it clear that the named insured was, and had always been, PHB LCC. 

Welch Decl. at ¶ 19; Palmer Decl. at ¶ 18. The Correction Endorsement stated that the Policy

was “amended” to show that the insured was PHB LLC. First Financial uses the word “amend”

to correct an error. It would have used the word “changed” if the entity actually changed. Cole

Dep. at p. 31. Furthermore, there was no reason to change the named insured mid-way through

the Policy period, particularly because, during the entire Policy period, the partnership was no

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3

 The lack of evidence on that point also undermines plaintiff’s argument that the “past

partnership” provision does not apply.

ORDER REGARDING CROSS MOTIONS

FOR PARTIAL SUMMARY JUDGMENT - 7

longer operative and the work was being performed solely by PHB LLC. Plaintiff has offered

no other explanation for changing the insured mid-way through the Policy period, other than to

correct the error. Indeed, if ASIC’s argument was accepted, then PHB LLC would have had no

insurance coverage between October 2000 and January 2001, which was clearly not the

contracting parties’ intent.

Alex Mun also argues that he “understood” that the Policy would cover the company’s

completed projects. Mun Decl. at ¶ 13. His subjective understanding, however, does not

control, particularly because he never communicated that understanding or intent to Welch, and

Welch never communicated it to Palmer. Moreover, the partnership’s completed projects were

already insured by the ASIC policy. Declaration of Steve Harrison (Dkt. #66-4) at ¶ 4. The

completed projects coverage in the Policy covered projects that PHB LLC would compete during

the Policy period.

Plaintiff argues that the arbitrator concluded that PHB LLC “is the successor to PHB.” 

Declaration of Gregory Harper (Dkt. #66-6), Ex. E. However, the arbitrator did not make any

finding of successor liability. Instead, the arbitrator found that the partnership performed all of

the work on the project and never made any finding of liability against PHB LLC.

Finally, plaintiff argues that First Financial charged a premium to insure the risks

associated with the Muns’ completed projects. However, there is no evidence to support that

assertion.3

Based on the foregoing, the Court finds as a matter of law that the Policy did not insure

the partnership. The contract is reformed to reflect that PHB LLC was the only insured under

the Policy for the entire Policy period.

2. PHB LLC Is Not Legally Obligated to Pay for the Damages Award Against

the Partnership.

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ORDER REGARDING CROSS MOTIONS

FOR PARTIAL SUMMARY JUDGMENT - 8

ASIC argues that even if the Policy does not cover the partnership, PHB LLC is liable for

the judgment in the underlying action. Therefore, it argues, First Financial must pay the defense

costs and judgment in the underlying action. Plaintiff asserts that PHB LLC is liable under the

“mere continuation” and “de facto merger” exceptions to the traditional rule that a successor

corporation is not liable for the debts of the corporation it purchases. However, under the terms

of the Policy, First Financial is obligated to pay only “those sums that the insured becomes

legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which

this insurance applies.” Declaration of Everett Jack (Dkt. #57-2), Ex. 6 at p. 9. PHB LLC has

never been found to be legally obligated to pay any portion of the damages owed by the

partnership. No such finding will occur in the future because the underlying action has been

settled. 

In addition, the merger exception “only occurs when the consideration flowing to the

selling corporation is shares of the purchasing corporation’s stock, as opposed to cash,” which

was not the situation here. Uni-Com Northwest, Ltd. v. Argus Publ’g Co., 47 Wn. App. 787,

802 (1987). Similarly, the continuation exception has been narrowly applied in Washington to

protect the interests of the predecessor entity’s creditors, minority shareholders, or customers

who purchased an unreasonably dangerous product manufactured by the predecessor and who

might otherwise have no recourse. See, e.g., Martin v. Abbott Labs., 102 Wn.2d 581, 609-610

(1984). There is no evidence that the partnership changed forms for any improper purpose, such

as to evade creditors. ASIC presents no authority or policy reasons to support extending the

doctrines to allow an insurance company to avoid paying for damages its insured caused and it

contractually agreed to insure.

First Financial argues that even if PHB LLC was liable for the damages awarded against

the partnership, coverage is precluded by the “past partnership” Policy provision. The Court

need not reach that argument in light of its other findings.

3. First Financial Did Not Breach Its Duty to Defend.

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ORDER REGARDING CROSS MOTIONS

FOR PARTIAL SUMMARY JUDGMENT - 9

ASIC seeks a declaration that First Financial breached its duty to defend PHB LLC in the

underlying action. The duty to defend is broader than the duty to indemnify. See, e.g., Truck

Ins. Exchange v. Vanport Homes, Inc., 147 Wn.2d 751, 760 (2002). The duty to defend “arises

when a complaint against the insured, construed liberally, alleges facts which could, if proven,

impose liability upon the insured within the policy’s coverage.” Id. (internal citation and

quotation omitted). The insurer is relieved of the duty to defend only if the claim alleged is

clearly not covered by the policy. Kirk v. Mt. Airy Ins. Co., 134 Wn.2d 558, 561 (1998)

(internal citation omitted).

ASIC argues that the duty to defend was triggered because PHB LLC was insured under

the Policy, and Residential sued PHB LLC in the first amended complaint in the underlying

action. However, the complaint was based on (1) the contract between the partnership and RIP,

and (2) work performed solely by the partnership and damage caused by that work. Although

PHB LLC was sued as a “successor in interest” to the partnership, the Policy contained a “past

partnership” exception. Section II of the Policy, entitled “Who is an insured,” includes the

following provision: “No person or organization is an insured with respect to the conduct of any

current or past partnership, joint venture, or limited liability company that is not shown as a

Named Insured in the Declarations.” Based on the allegations in the complaint and the Policy

terms, there was no potential coverage for the underlying action. First Financial had no duty to

defend.

Nevertheless, ASIC argues that First Financial breached its duty because its Specialty

Claims Handler, Roy Leeds, admitted that he could not “rule in or out” the potential that the

allegations against PHB LLC could give rise to insurance coverage. Plaintiff’s Cross Motion at

p. 32 (quoting Leeds Dep. at pp. 73-75). ASIC, however, misstates Leeds’ testimony. In fact,

he explained several reasons for the denial of coverage, including the fact that the Policy

covered PHB LLC and not the partnership. He explained that if the named insured was not an

issue, he could not rule out damage that would have escaped the “loss of progress” exclusion. 

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ORDER REGARDING CROSS MOTIONS

FOR PARTIAL SUMMARY JUDGMENT - 10

Leeds Dep. at p. 75. ASIC also argues that Leeds improperly used extrinsic evidence to deny

coverage. However, Leeds concluded, based on the complaint and the Policy, that no coverage

existed. Id. at 78-79. Even though the complaint contained no allegation that PHB LLC

performed any of the work on the project, he investigated to confirm that fact. Id. at pp. 62, 79-

81; id. at p. 81 (“given the greatest doubt to my insured”). Leeds appropriately considered

extrinsic evidence to investigate and to attempt to find coverage, not to deny coverage. See, e.g.,

Woo v. Fireman’s Fund Ins. Co., 161 Wn.2d 43, 53-54 (2007) (explaining two exceptions to the

rule that the duty to defend must be determined only from the complaint). Therefore, Leeds’

testimony does not support ASIC’s position. 

In addition, no notice of the underlying action was given to First Financial until more

than two years after it was filed. First Financial suffered a detriment as a result of the late

notice: by the time the claim was tendered to First Financial, the underlying action had already

been submitted to binding arbitration. ASIC argues that First Financial suffered no detriment

because arbitration was contractually mandated. That argument, however, ignores the fact that

First Financial’s insured, PHB LLC, was not a party to the contract that required binding

arbitration. PHB LLC’s assent to have the claims against it considered in binding arbitration

precluded First Financial from pursuing judicial remedies it otherwise had. Those actions

prejudiced First Financial. Therefore, the late notice relieved First Financial of any duty to

defend that it may have had. See, e.g., MacLean Townhomes v. Am. States Ins. Co., 138 Wn.

App. 186 (2007) (finding prejudice to the insurance company where its insured, without notice,

submitted its claims to binding arbitration, thereby “remov[ing] judicial remedies that the insurer

may have had”).

III. CONCLUSION

For all of the foregoing reasons, the Court GRANTS First Financial’s motion for partial 

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ORDER REGARDING CROSS MOTIONS

FOR PARTIAL SUMMARY JUDGMENT - 11

summary judgment (Dkt. #57) and DENIES ASIC’s cross motion for partial summary judgment

(Dkt. #66).

DATED this 28th day of December, 2007.

A

Robert S. Lasnik

United States District Judge 

Case 2:05-cv-02098-RSL Document 77 Filed 12/28/07 Page 11 of 11