Opinion ID: 1355713
Heading Depth: 1
Heading Rank: 2

Heading: coverage under the agreement

Text: [5] Insurance policies are to be construed as contracts, and interpretation is a matter of law. State Farm Gen. Ins. Co. v. Emerson, 102 Wn.2d 477, 480, 687 P.2d 1139 (1984). The entire contract must be construed together in order to give force and effect to each clause. Morgan v. Prudential Ins. Co. of Am., 86 Wn.2d 432, 434, 545 P.2d 1193 (1976). The court must enforce the contract as written if the language is clear and unambiguous. Morgan, at 435. However, if the language on its face is fairly susceptible to two different but reasonable interpretations, the contract is ambiguous, and the court must attempt to discern and enforce the contract as the parties intended. Greer v. Northwestern Nat'l Ins. Co., 109 Wn.2d 191, 198-200, 743 P.2d 1244 (1987); Morgan, at 435. In the event of an ambiguity, the contract will be construed in favor of the insured. Greer, at 201; Morgan, at 435. [6] The court will determine the parties' intent by viewing the contract as a whole, examining its purpose, objective, and subject matter, the circumstances of its making, the subsequent conduct of the parties, and the reasonableness of their respective interpretations. Greer, at 200 (quoting Stender v. Twin City Foods, Inc., 82 Wn.2d 250, 254, 510 P.2d 221 (1973)). The contract will be given a practical and reasonable interpretation that fulfills the object and purpose of the contract rather than a strained or forced construction that leads to an absurd conclusion, or that renders the contract nonsensical or ineffective. Morgan, at 434-35. Clallam argues that the Agreement is unambiguous and that the coverage in question is provided. Paragraph 11 of the Agreement clearly states that WPUDUS will pay from the fund  any amount which any officer, commissioners or employee of a member shall become legally obligated to pay while acting within the scope of his duties ... (Italics ours.) Clerk's Papers, at 473. It is important to keep in mind that neither party disputes the authority of a municipal corporation, i.e., a PUD, to indemnify its officers against claims made by third parties; the specific point of contention focuses on claims made by the PUD itself or its ratepayers. Washington courts have not examined this question of coverage for claims by a municipal corporation against its own employee for loss of the corporation's funds. However, two recent decisions in federal district courts have reached the merits of an analogous dispute in the context of regular corporations. [2] In National Union Fire Insurance Company v. Seafirst Corporation, No. 85-396R (W.D. Wash. Mar. 19, 1986), the first decision on the subject, the court granted the insured, Seafirst Corporation, summary judgment on its claim that Seafirst's director and officer liability (D&O) policy covered an action brought by Seafirst Corporation itself against certain of its former officers and directors involved in loan participation losses. The directors and officers had originally been sued in several shareholder derivative actions and the corporation decided to prosecute the claims itself. Applying Washington law, the court reasoned: After carefully reviewing the language of the policy, the court concludes that the policy plainly and unambiguously covers direct action by Seafirst itself against its own directors and officers. According to the policy terms, National Union must pay for loss suffered as a result of  any claim or claims against the directors and officers. The phrase  any claim or claims clearly includes direct actions, and no other provision in the policy purports to limit the scope of the phrase so as to exclude them from coverage. National Union Fire Insurance Company v. Seafirst Corporation, No. 85-396R at 6 (W.D. Wash. Mar. 19, 1986). Similarly, in National Union Fire Ins. Co. v. Continental Ill. Corp., 666 F. Supp. 1180 (N.D. Ill. 1987), the court rejected National Union's argument that industry custom supported exclusion of an insured corporation's claim against its own officers and directors. The court stated: What Insurers want to prove via custom and practice is that the terms any claim and any claimant in fact mean some claims and some claimants. That cannot be viewed as anything but an attempt to contradict the express Policy terms.... [N]othing in the Policies even hints at a limitation on coverage because of the indemnity [ sic ] of a claimant, and that is the kind of unstated limitation Insurers are seeking to add by excluding claims by Continental against its own directors and officers. Continental, at 1192-93. [7] These cases illustrate the point that if policy language unambiguously covers direct actions, then it is not anomalous to allow a corporation to sue its own employee and seek coverage for that employee under its professional errors and omissions policy. While claims against directors and officers traditionally took the form of third party lawsuits or shareholders' derivative actions, courts are recognizing that coverage for direct actions is not antithetical to the objects and purposes of these policies. If insurers do not want to provide coverage for such claims an exclusion can be easily written into the contract. In this case, we find that the language of the Agreement unambiguously covers direct actions by the PUD against its own officer. The language of the Agreement is not susceptible to two different meanings: any claims or actions has only one meaning; it does not mean some claims or some actions. See, e.g., National Union Fire Ins. Co. v. Continental Ill. Corp., supra . In fact, WPUDUS concedes that there is no apparent limitation contained in this language [of paragraph 11] which would preclude coverage for a claim by a Member against its own Employee. (Italics ours.) Brief of Appellant, at 78. WPUDUS argues, however, that while the literal language of the Agreement may provide coverage, the exclusions incorporated into the Agreement take it away. We disagree. Paragraph 11 of the Agreement, which contains the Agreement's only reference to applicable exclusions, states: No payment shall be made under this Agreement with respect to any event or situation which is excluded from coverage under the terms of the Policy. The original policy is in the possession of the Board and the policy is incorporated herein and made a part hereof. Clerk's Papers, at 473. On its face, there is no ambiguity, as WPUDUS asserts, in this incorporation clause. The plain meaning of the language is that any events or situations excluded under the F&C policy will also be excluded under the Agreement. The only excluded event or situation arguably applicable to this case is described in exclusion (k) of the F&C policy. Exclusion (k), which essentially prohibits coverage of property damage to property owned, used, or controlled by the insured, provides in part: This insurance does not apply: (k) [to] property damage to (1) property owned or occupied by or rented to the insured, (2) property used by the insured, or (3) property in the care, custody or control of the insured or as to which the insured is for any purpose exercising physical control; Clerk's Papers, at 269. The F&C policy defines property as tangible property. Thus, the event or situation excluded by the F&C policy was the loss of tangible property in the care, custody, or control of the insured. Consequently, the Agreement excludes coverage for the loss of tangible property in the care, custody, or control of the insured. In this case, coverage for a claim relating to the loss of district funds is not prohibited by exclusion (k) since the loss resulting from the securities investment is not damage to tangible property. [3] WPUDUS counters that the parties intended to incorporate only the exclusions of the F&C policy, not the definitions. See Clerk's Papers, at 603. Thus, it would be necessary to look elsewhere in order to define the term property damage. WPUDUS argues that the leading Washington cases define property damage to include loss to both tangible and intangible property. See Labberton v. General Cas. Co. of Am., 53 Wn.2d 180, 332 P.2d 250 (1958); Yakima Cement Prods. Co. v. Great Am. Ins. Co., 93 Wn.2d 210, 608 P.2d 254 (1980). On this view, WPUDUS asserts, exclusion (k) denies coverage for claims related to the loss of the securities (intangible property) in the care, custody, or control of the insured. First, both Labberton and Yakima Cement can be distinguished on their facts; both involved general comprehensive liability policies, not errors and omissions policies as in the case at bar, and both cases were construing tangible property damage in the context of a grant of coverage as opposed to an exclusion. In any event, assuming arguendo that we were to accept WPUDUS's analysis on the definition of property damage, its interpretation would force a strained construction of the contract that conflicts with the Agreement's purpose of providing broader coverage than the F&C policy (Clerk's Papers, at 608), and it would render the errors and omissions coverage for officers and employees provided by the Agreement (see Clerk's Papers, at 598-600) meaningless and ineffective. Paragraph 11 of the Agreement describes two distinct types of coverage. The first is liability protection for member districts: The System [WPUDUS] shall pay from the fund any amount which any member may become legally obligated to pay, subject to the other provisions of this Agreement, arising out of any occurrence which happens during the time that the member was a party hereto. (Italics ours.) Clerk's Papers, at 473. Second is protection for members' officers and employees: The System shall also pay from the fund, subject to the other provisions of this Agreement, any amount which any officer, commissioner or employee of a member shall become legally obligated to pay while acting within the scope of his duties as an officer, commissioner or employee during the time that the member was a party hereto; provided no such amount shall be paid in any case where the Court has found that such person was not acting in good faith. Clerk's Papers, at 473. The latter provision describes the professional errors and omissions coverage that the parties included in the Agreement, but that was not described in the F&C policy. The F&C policy insured against bodily injury and property damage; it was a straightforward, comprehensive general liability policy. When the PUD's dropped the F&C policy and self-insured they added this language commonly referred to as errors and omissions coverage. The PUD's also secured the Evanston excess insurance policy, which similarly provided errors and omissions coverage. Clerk's Papers, at 252, 246. Errors and omissions coverage is designed to cover loss related to the good faith acts of an officer or official that are within the scope of employment. C. Kulp & J. Hall, Casualty Insurance 123 (4th ed. 1968). Exclusions for intangible property damage and property in the care, custody, or control of the insured are anathema to errors and omissions coverage. Casualty Insurance, at 123-24. The exclusion of intangible property in the control of the insured would effectively eliminate the professional liability, or errors and omissions, coverage the parties intended to provide through the Agreement. This court cannot adopt an interpretation of an exclusion in an insurance contract that is contrary to the objectives and purposes of the coverage defined in the contract. Moreover, exclusionary provisions are contrary to the fundamental purpose of an insurance policy; and, therefore, will be narrowly construed in favor of the insured. Phil Schroeder, Inc. v. Royal Globe Ins. Co., 99 Wn.2d 65, 68, 659 P.2d 509 (1983), modified, 101 Wn.2d 830, 683 P.2d 186 (1984); Dautel v. United Pac. Ins. Co., 48 Wn. App. 759, 762, 740 P.2d 894 (1987); see McDonald Indus., Inc. v. Rollins Leasing Corp., 95 Wn.2d 909, 915, 631 P.2d 947 (1981). The most reasonable interpretation of this insurance contract is that it was intended to provide coverage for any liability of a PUD's officers and directors acting in good faith and within the scope of their duties, and that the exclusions were incorporated as the parties understood them, in other words, as they were defined in the F&C policy. On this view, we conclude that the Agreement covers indemnification against the claims by Clallam against its treasurer/controller (Childress), and that no other language in the policy excludes such coverage. Finally, since we find no ambiguity in the language of the contract, we conclude that the trial court erred in admitting affidavits containing evidence of the parties' intent. CR 56(e) provides that affidavits shall set forth such facts as would be admissible in evidence. Any statements consisting of inadmissible evidence must be treated as mere surplusage and disregarded. [4] Henry v. St. Regis Paper Co., 55 Wn.2d 148, 151, 346 P.2d 692 (1959). Extrinsic evidence offered to alter and interpret the terms of an unambiguous contract is inadmissible. Harding v. Warren, 30 Wn. App. 848, 850, 639 P.2d 750 (1982). Extrinsic evidence of the parties' intent is admissible only if the contract is ambiguous. McGary v. Westlake Investors, 99 Wn.2d 280, 286, 661 P.2d 971 (1983). We reverse the trial court's order denying Clallam's motion to strike portions of the affidavits submitted in support of WPUDUS's motion for summary judgment. However, this error does not affect our disposition of the case at bar.