Title: Phil Schroeder, Inc. v. Royal Globe Ins.
Citation: 659 P.2d 509, 99 Wash. 2d 65
Docket Number: 48699-9
State: Washington
Issuer: Washington Supreme Court
Date: February 24, 1983

99 Wn.2d 65 (1983) 659 P.2d 509 PHIL SCHROEDER, INC., Respondent, v. ROYAL GLOBE INSURANCE COMPANY, Appellant. No. 48699-9. The Supreme Court of Washington, En Banc. February 24, 1983. *66 Johnson, Metzler, Gierke &amp; Curwen, by Bradford M. Gierke and Sandra B. Bobrick, for appellant. Rush, Kleinwachter &amp; Hannula, by Daniel L. Hannula and Ross E. Taylor, for respondent. DORE, J. Royal Globe Insurance Company (Royal Globe), defendant below, appealed the trial court's judgment for the replacement cost of a carpet in the amount of $8,337.90 plus interest of $1,127.37 plus a judgment for attorney fees under the provisions of Washington's Consumer Protection Act, RCW 19.86. We affirm the trial court, holding that an insurance policy issued to a carpet cleaning company, which contains an exclusion for damage to property "in the care, custody or control of the insured", covers the cost of replacement of wall-to-wall carpeting damaged as a result of the malfunctioning of a cleaning machine being operated by an employee of the insured. An employee of the insured Phil Schroeder, Inc. (Schroeder), a carpet cleaning business, was cleaning the carpeting at a bank on December 31, 1977. During the cleaning process, a diaphragm on the cleaning machine broke, causing oil to mix with the steam and spray onto the carpet. The carpet was badly damaged and had to be replaced, at a cost *67 of $8,337.90. This cost was paid by the insured who then presented a claim to its insurer, the Royal Globe Insurance Company. Coverage under the insured's policy was limited by a clause excluding coverage for property damage to "property in the care, custody or control of the insured or to which the insured for any purpose is exercising physical control". Exclusion (k)(3). The policy also set forth the following definition of "insured": Royal Globe denied Schroeder's claim solely on the basis *68 that it was excluded under exclusion (k)(3), with Royal Globe claiming that the property was under the "care, custody or control" of the insured, Schroeder. This denial was made despite the fact that employees of Schroeder are not within the definition of the term "insured" under the contract, nor are they named or specified in the exclusionary clause. When Royal Globe denied the claim, Schroeder brought suit to require the insurer to provide coverage. It also sought damages under RCW 19.86, Washington's Consumer Protection Act (WCPA). The trial judge found that the property in question was under the "care, custody or control" of the employee who was operating the cleaning machine, but the employee was not within the definition of "insured" under the terms of the insurance policy. The trial court further found the insurer had violated the WCPA, and awarded the insured its costs and attorney fees. [1] There are certain basic principles that apply in any examination of exclusionary clauses in insurance contracts. Chief among these is that exclusionary clauses are to be most strictly construed against the insurer. West Am. Ins. Co. v. State Farm Mut. Auto. Ins. Co., 4 Wn. App. 221, 480 P.2d 537 (1971); Murray v. Western Pac. Ins. Co., 2 Wn. App. 985, 472 P.2d 611 (1970). The policy should be interpreted in accordance with the way it would be understood by the average person purchasing insurance. Zinn v. Equitable Life Ins. Co., 6 Wn.2d 379, 107 P.2d 921 (1940). It must not be forgotten that the purpose of insurance is to insure, and that construction should be taken which will render the contract operative, rather than inoperative. Scales v. Skagit Cy. Med. Bur., 6 Wn. App. 68, 491 P.2d 1338 (1971). A construction which contradicts the general purpose of the contract or results in a hardship or absurdity is presumed to be unintended by the parties. Nautilus, Inc. v. Transamerica Title Ins. Co., 13 Wn. App. 345, 534 P.2d 1388 (1975). *69 These are principles that are not confined to Washington law, but are of nationwide application. The courts of other states have elaborated upon these rules. As stated by the court in Aetna Cas. &amp; Sur. Co. v. Haas, 422 S.W.2d 316 (Mo. 1968): Aetna, at 331 (quoting from Boswell v. Travelers Indem. Co., 38 N.J. Super. 599, 120 A.2d 250 (1956)). As noted by the court in Harris, Jolliff &amp; Michel, Inc. v. Motorists Mut. Ins. Co., 21 Ohio App.2d 81, 85, 255 N.E.2d 302 (1970): (Italics ours.) Harris (quoting from Home Indem. Co. v. Plymouth, 146 Ohio St. 96, 64 N.E.2d 248 (1945)). The Harris court went on to note at page 85 that: The definition of "insured" under the Royal Globe policy is set out in the earlier part of this opinion. It very carefully limits the term as it applies to a corporation: (1) to specifically named individuals; (2) to the corporation and any executive officers, directors or shareholders thereof; and (3) for operation of motor vehicles only, to an employee of the insured, but only while operating such a vehicle in the *70 course of his employment. The exclusionary clause (k)(3), on the other hand, specifies that coverage is excluded for property damage to The word "insured" not only appears twice in the exclusionary clause but is set forth in bold letters on the policy. [2] We find persuasive the reasoning of Holter v. National Union Fire Ins. Co., 1 Wn. App. 46, 459 P.2d 61 (1969). In that case, the court was faced with an insurance policy containing a word-for-word identical exclusionary clause, and a nearly identical definition of "insured". There, an employee of the plaintiff had damaged an elevator while operating it. The insurance company refused to provide coverage and the employer brought suit against it. The insurance company argued that the care, custody or control provision of the policy excluded coverage, even though the employee, and not the insured, was operating the elevator. The company argued that under the doctrine of respondeat superior, the acts of the employee were the acts of the master, so that the exclusionary clause would be operative. The court rejected the argument of the insurance company, holding, at pages 49-51, that the exclusionary clause did not apply: The reasoning employed by the Holter court is also applicable in the present case. In Holter, "employee" was entirely omitted from the definition of "insured". In the subject policy, however, "employees" are specifically included, but only for operation of motor vehicles. They are not included for anything else in the "insured" definition. Thus, Royal Globe has, by its definition of "insured," assured that employees are excluded only when operating motor vehicles. Only two other cases from other jurisdictions have directly confronted the precise issue now before the court. In Crist v. Potomac Ins. Co., 243 Or. 254, 413 P.2d 407 (1966), the Oregon court discussed the issue in one paragraph, and resolved it adversely to the insured. The Crist court did not mention any of the standards applied by the Washington court in considering an exclusionary clause in an insurance policy. In Lindell v. Ruthford, 183 Mont. 135, 598 P.2d 616 (1979), the Montana court considered the matter at more *72 length, applying the same doctrines of insurance coverage that are utilized by the Washington courts. The Lindell court noted the decisions of the Washington court in Holter and the Oregon court in Crist, and found the Washington court's interpretation in keeping with the way an average person buying insurance would interpret the clause. Appellants rely heavily upon the Washington cases of S. Birch &amp; Sons Constr. Co. v. United Pac. Ins. Co., 52 Wn.2d 350, 324 P.2d 1073 (1958) and Madden v. Vitamilk Dairy, Inc., 59 Wn.2d 237, 367 P.2d 127 (1961). The records of Birch and Madden, however, fail to tell us whether or not the exclusion of the insured under the policy involved in the subject cases also included the employee. Without the benefit of such information, such cases are of little value in analyzing the present case. We conclude the exclusionary provision of the policy does not apply under the circumstances of this case, as the employee operating the cleaning machine at the time of the accident was not within the policy definition of "insured". We next consider the remaining issue of whether or not Schroeder is entitled to attorney fees in the trial and appellate courts. Where an insurer refuses to pay a claim that is usually within the coverage of a policy, its refusal is unjustified and the insurer is in breach of contract, regardless of its motivation in refusing to pay. 44 Am.Jur.2d Insurance § 1546, at 426-27 (1969); Nautilus, Inc. v. Transamerica Title Ins. Co., 13 Wn. App. 345, 534 P.2d 1388 (1975); Kong Yick Inv. Co. v. Maryland Cas. Co., 70 Wn.2d 471, 423 P.2d 935, 23 A.L.R.3d 1226 (1967). Common law damages for breach of the insurance contract include the amount of the settlement paid by the insured and all costs incurred in adjusting the claim, including attorney fees. Nautilus, Inc. v. Transamerica Title Ins. Co.; *73 supra. [3] The ultimate issue is whether, in refusing to pay the claim, Royal Globe breached its duty of good faith and fair dealing under Washington's Consumer Protection Act, RCW 19.86.020. There are no Washington cases discussing what constitutes a breach of a duty of good faith in refusing to pay a claim, but numerous cases have discussed the basis of a breach of duty of good faith within the related context of bad faith failure to adjust or settle a claim within policy limits. In Tyler v. Grange Ins. Ass'n, 3 Wn. App. 167, 173-74, 473 P.2d 193 (1970), the court engaged in a lengthy discussion of the concept of good faith in the insurance situation, stating: (Footnote and citations omitted.) See also Hamilton v. State Farm Ins. Co., 83 Wn.2d 787, 523 P.2d 193 (1974). Generally, the insurance company must have a reasonable and valid ground on which to oppose payment of the claim to avoid the application of penalties and attorney fees. (Italics ours.) 16 G. Couch, Insurance § 58:168 (2d ed. 1966). (Footnote omitted.) 16 G. Couch, Insurance § 58:165 (2d ed. 1966). (Footnote omitted.) 16 G. Couch, Insurance § 58:173 (2d ed. 1966). In the present case, Royal Globe relied upon cases from other jurisdictions and the Washington cases of Birch and Madden in its refusal to recognize coverage. Therefore, we cannot say Royal Globe breached its good faith fiduciary duty in refusing to extend coverage in the absence of litigation. We reverse the trial court's holding that the appellant insurance company breached its duty of good faith and fair dealing in violation of RCW 19.86, and deny the plaintiff's claim for attorney fees. All other aspects of the trial court judgment are affirmed. *75 WILLIAMS, C.J., STAFFORD, UTTER, BRACHTENBACH, DOLLIVER, DIMMICK, and PEARSON, JJ., and CUNNINGHAM, J. Pro Tem., concur. Review granted by Supreme Court May 31, 1983.