Court Opinion

ID: 4712364
Source: CourtListenerOpinion
Date Created: 2021-08-12 00:38:05.988476+00
Date Added: 2024-06-11T08:07:13.100315
License: Public Domain

Bridge, J.
(dissenting) — This court has been asked to determine whether Truck Insurance Exchange (TIE) had a duty to defend and/or indemnify VanPort Homes, Inc. (VanPort) for claims filed against VanPort by its customers. TIE states in bold print in its petition for review, which we accepted, that it “seeks review of only that part of the Court of Appeals decision finding coverage.” Pet. for Review by Appellant Truck Ins. Exch. at 5. Yet, the majority avoids this critical issue. Thus, although ultimately I agree with the majority that as an insurer TIE possessed a general duty to defend VanPort and that this duty is broader than an insurer’s duty to indemnify its insured, I conclude that because TIE possessed a reasonable basis for denying coverage, it did not act in bad faith.
I
Commercial General Liability Policy Coverage
The Court of Appeals evaluated the applicability of the commercial general liability (CGL) policy exclusions, TIE’S duty to defend VanPort against its customers’ claims, and *767the reasonableness of the customers’ settlements. Truck Ins. Exch. v. VanPort Homes, Inc., noted at 99 Wn. App. 1051, 2000 WL 239592. Although TIE has contended throughout the proceedings that the CGL policy does not cover the customers’ claims against VanPort, the Court of Appeals failed to directly address this issue. See Am. Opening Br. of Appellant Truck Ins. Exch. at 2. Ultimately the Court of Appeals, in an unpublished decision, affirmed the trial court’s grant of summary judgment in favor of VanPort and its customers, but remanded the case for evaluation of the settlements in light of several “reasonableness” factors enunciated in Glover v. Tacoma General Hospital, 98 Wn.2d 708, 658 P.2d 1230 (1983), and Chaussee v. Maryland Casualty Co., 60 Wn. App. 504, 803 P.2d 1339 (1991). Truck Ins. Exch., 2000 WL 239592, at *6. TIE petitioned for review in this court. We granted review and then remanded the case to the Court of Appeals for reconsideration in light of Hayden v. Mutual of Enumclaw Insurance Co., 141 Wn.2d 55, 1 P.3d 1167 (2000).
On remand, the Court of Appeals distinguished Hayden on its facts and adhered to its original decision. The majority also distinguishes Hayden, and in doing so limits its significance to a few sentences:
In section 1A of its policy, Truck Insurance agreed to pay all sums the insured becomes obligated to pay because of property damage resulting from an occurrence within the policy period. [Clerk’s Papers] at 526. In Hayden, we specifically considered a policy exclusion for loss of use of tangible property, instead of a general grant of coverage. Hayden, 141 Wn.2d at 66. Hayden may be helpful in analyzing a similar exclusion within a similar policy, but certainly does not limit the coverage that an insurer may agree to provide to an insured.
Majority at 762.1 find neither the Court of Appeals nor the majority’s cursory distinctions of Hayden persuasive.
TIE agreed to cover
those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to *768which this insurance applies. We will have the right and duty to defend any “suit” seeking those damages. We may at our discretion investigate any “occurrence” and settle any claim or “suit” that may result.
Clerk’s Papers (CP) at 526. Furthermore, the policy clarifies, “This insurance applies to ‘bodily injury’ and ‘property damage’ only if. . . the ‘bodily injury’ or property damage is caused by an ‘occurrence’ that takes place in the ‘coverage territory.’ ” Id. These provisions are consistent with the general policy that “insurers that issue general liability policies only provide coverage for damages arising out of an ‘occurrence.’ ” Thomas V. Harris, Washington Insurance Law 22-1 (1995 & Supp. 1999-2001).
The language is also nearly identical to the proposed wording from the Insurance Services Office, Inc.’s 1973 Standard Provisions for Comprehensive General Liability Insurance.8 Similarly, in Hayden, the insurance company, Mutual of Enumclaw, had granted a comprehensive general liability policy indemnifying the insured for all damages that he became legally obligated to pay because of property damage caused by an occurrence to which the insurance applied. Hayden, 141 Wn.2d at 59. Thus, for the majority to imply that TIE somehow agreed to cover more damages than the standard CGL policy, or than the policy in Hayden, is simply incorrect.
By limiting our holding in Hayden, the majority undermines the significant principle that applies to all CGL policies: a CGL policy is not intended to be “ ‘a performance bond, product liability insurance, or malpractice insurance.’ ” Hayden, 141 Wn.2d at 64 (quoting Aetna Cas. & Sur. Co. v. M&S Indus., Inc., 64 Wn. App. 916, 921, 827 P.2d *769321 (1992)). “A general liability policy is not intended to encompass the risk of an insured’s failure to adequately perform work. . . .” Westman Indus. Co. v. Hartford Ins. Group, 51 Wn. App. 72, 80, 751 P.2d 1242 (1988). Rather, CGL policies are most often intended to cover unforeseeable accidents. Hayden, 141 Wn.2d at 59. In fact, before “occurrence-based” policies were written, comprehensive general liability policies were “accident-based.” Harris, supra, at 21-2. The standard form was revised in 1966 to an “occurrence-based” policy, but occurrence was then defined as “ ‘ “an accident, including injurious exposure to conditions . . .” which resulted in a loss.’ ” Id. (quoting Queen City Farms, Inc. v. Cent. Nat’l Ins. Co. of Omaha, 126 Wn.2d 50, 76, 882 P.2d 703, 891 P.2d 718 (1994) (quoting CGL)). Consistent with this latest revision to the standard form policy, TIE’s Commercial9 General Liability Policy defines “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” CP at 536. These governing principles are applicable whether the court focuses on the exclusions to a given policy or the policy as a whole.
In Hayden, Hayden Farms had hired a self-proclaimed grafting expert, James Krause, to assist it with grafting scion wood. 141 Wn.2d at 57. A series of mishaps led Hayden Farms to eventually fire Krause and hire a replacement to perform the grafting. Id. at 58. First the grafting was postponed because the buds were damaged while in Krause’s care. Id. When new scion wood was provided, Krause used the wrong kind of tape, and less than 10 percent of the grafts were successful. Id. The following spring, Krause again attempted to graft a new section of scion wood, but another postponement occurred because Krause had improperly stored the wood. Id. Subsequently Hayden Farms sued Krause for breach of contract and negligence. Id. at 58-59.
I conclude that Hayden is similar to the factual scenario presented, hence the same general principles recognized in *770Hayden should apply here. VanPort had contracted with various customers to complete consulting work in the construction of their respective homes. Pet. for Review by Appellant, Truck Ins. Exch. at 3. Construction defects occurred as a result of poor work by the subcontractors. Suppl. Br. of Pet’r Truck Ins. Exch. at 3-10. The customers subsequently claimed that VanPort failed in its duties and they suffered damages as a result. Id. For example, one of the customers claimed that one subcontractor had failed to properly fasten the roof deck and some of the windows were square instead of trapezoid. CP at 341, 345.
VanPort is one step removed from Krause. VanPort did not perform the work that caused the physical damage. The consulting contract states that VanPort’s role was limited to the advice it provided and that the homeowners were building the homes:
[VanPort] is not a guarantor nor shall it have responsibility for any of the work performed by any subcontractors or material-men retained by client, nor shall [VanPort] have any responsibility for the selection of said contractors or materialmen or for any contracts or agreements between client and said subcontractors or materialmen. [VanPort’s] duties hereunder shall not result in any responsibility or guarantee as to any work performed by said parties.
CP at 430-31. VanPort retained authority to give orders to the contractors concerning matters of only a minor nature. According to the contract, a matter is considered minor if "a decision or order regarding such manner [sic] does not substantially affect the design or value of the home.” CP at 428. If we were to hold VanPort liable for the physical damage caused by the subcontractors hired by the customers, then VanPort’s CGL policy would indeed be a performance bond, product liability insurance or malpractice insurance, contrary to our express language in Hayden. Not only did VanPort not cause the damage to the customers’ homes because it was a result of faulty workmanship by a subcontractor, but VanPort did not have direct control over the subcontractors.
*771The conclusion that TIE had no duty to indemnify VanPort is bolstered by a factually similar case from Maryland, which we cited favorably in Hayden. See Reliance Ins. Co. v. Mogavero, 640 F. Supp. 84 (D. Md. 1986). The Mogavero court reasoned that property damage does not include defective work performed by the insured, and, more importantly, that an “ ‘occurrence’ does not include the normal, expected consequences of poor workmanship.” 640 F Supp. at 86.
The VanPort customers attempt to distinguish Hayden and Mogavero by noting that in those cases the contractors themselves were sued and the insurance directly covered the contractors who performed the defective work. Resp’ts’ Suppl. Br. at 11. As noted, this distinction removes VanPort only one step further from the liability. Considering that the policy would likely not cover the poor workmanship performed by the actual subcontractors, surely it would not apply to VanPort who is indirectly related to the faulty workmanship. Additionally, although Washington courts have not directly addressed the applicability of this “performance bond” rule for CGL policies covering construction contractors who provide advice, a recent decision in California suggests that the same exclusion may apply. See Ray v. Valley Forge Ins. Co., 77 Cal. App. 4th 1039, 92 Cal. Rptr. 2d 473 (1999). Adopting the reasoning from Mogavero and Ray and following the principles articulated in Hayden, therefore, the customers’ claims against VanPort are not covered by TIE’s commercial general liability policy.
II
Exclusions
The exclusions that TIE relied upon when it denied VanPort coverage reinforce the principle that “liability policies do not insure against the simple cost of poor performance.” Peter J. Kalis, Thomas M. Keiter, & James R. Segerdahl, Policyholder’s Guide to the Law of Insurance Coverage 10-3 (1997 & Supp. 2002).
*772“The consequence of not performing well is part of every business venture; the replacement or repair of faulty goods and works is a business expense, to be borne by the insured-contractor in order to satisfy customers. There exists another form of risk in the insured-contractor’s line of work, that is, injury to people and damage to property caused by faulty workmanship. Unlike business risks of the sort described above, where the tradesman commonly absorbs the cost attendant upon the repair of his faulty work, the accidental injury to property or persons substantially caused by his unworkmanlike performance exposes the contractor to almost limitless liabilities. While it may be true that the same neglectful craftsmanship can be the cause of both a business expense of repair and a loss represented by damage to persons and property, the two consequences are vastly different in relation to sharing the cost of such risks as a matter of insurance underwriting.”
Id. at 10-3 through 10-4 (quoting Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 405 A.2d 788, 791 (1979)). Accordingly, consistent with the general applicability of CGL policies to accidents or “occurrences,” many CGL policies contain “business risk exclusions.” Id. at 10-4.
A. Operations Exclusion
TIE denied coverage in accordance with one such common business risk exclusion referred to as an “operations exclusion.” The operations exclusion relieves TIE from covering “that particular part of real property on which [VanPort] or any contractors or subcontractors working directly or indirectly on [VanPort’s] behalf are performing operations, if the ‘property damage’ arises out of those operations.” CP at 528. The majority contends that a trial court would need to interpret what is meant by an operation and whether VanPort was performing an “operation” in its supervisory role. This added step is unnecessary when approached from the logical standpoint that the operations actually relate to the subcontractors and their construction of the customers’ homes. This is evident from the customer claims for property damage that resulted from the subcon*773tractors’ faulty work. Although the subcontractors were working directly on behalf of the customers, they were working indirectly on VanPort’s behalf as evidenced by the contract between VanPort and the customers. The clear language of this exclusion makes it evident that this case presents the type of business risk that the exclusions were intended to cover.
B. Impaired Property Exclusion
Another exclusion justifying TIE’s denial of coverage is the impaired property exclusion, also a common provision in CGL policies implemented to limit business risk. Kalis, supra, at 10-20, 10-21. The impaired property exclusion in TIE’s policy for VanPort applied to:
“Property damage” to “impaired property’ or property that has not been physically injured, arising out of
(1) A defect, deficiency, inadequacy or dangerous condition in “your product” or “your work;” or
(2) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.
CP at 528. The exclusion does not apply “to the loss of use of other property arising out of sudden and accidental physical injury to ‘your product’ or ‘your work’ after it has been put to its intended use.” Id. The insurance policy defines “impaired property” as:
tangible property, other than “your product” or “your work” that cannot be used or is less useful because:
a. It incorporates “your product” or your work“ that is known or thought to be defective, deficient inadequate or dangerous; or
b. You have failed to fulfill the terms of a contract or agreement;
if such property can be restored to use by:
a. The repair, replacement, adjustment or removal of “your product” or “your work;” or
b. Your fulfilling the terms of the contract or agreement.
CP at 535. The policy defines “your product” as:
*774a. Warranties or representations made at any time with respect, to the fitness, quality, durability, performance or use of “your product;” and
b. The providing of or failure to provide warnings or instructions.
CP at 537. In turn, the policy defines “your work” as:
a. Work or operations performed by you or on your behalf; and
b. Materials, parts or equipment furnished in connection with such work or operations.
Id. The policy indicates that “your work” includes:
a. Warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of “your work;” and
b. The providing of or failure to provide warnings or instructions.

Id.

This was the exclusion at issue in Hayden, where this court noted that “the loss of use’ exclusion applies to claims arising out of the loss of use of tangible property, which has not been physically injured, resulting from either the insured’s delayed performance of a contract, or, an insured’s faulty performance of that contract.” 141 Wn.2d at 65-66. In Hayden, this court held that the loss of use exclusion clearly and unambiguously applied and supported a denial of the duty to defend where the gravamen of the complaint was the failure of the “grafts or grafting work to live up to the parties’ expectations.” Id. at 66. Consistent with Hayden, the exclusion also applies here.
The customers in this case filed claims against VanPort alleging that it was negligent in performing its duties under the consulting agreement. Br. of Resp’ts Allison, et al. at 7. The customers “sought damages occasioned by the defective workmanship and defective materials that VanPort should have protected them against through adequate inspection and proper construction management.” Id. Similar to the clause in the insurance policy at issue in Hayden, the *775exclusion in VanPort’s policy applied to “[a] delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.” CP at 528. Thus, whether this court examines the subcontractors’ or VanPort’s allegedly negligent work, this exclusion would apply. Either the subcontractors’ work was faulty and it could be corrected by “the repair, replacement, adjustment or removal” of the subcontractors’ product or work or the complaint pertains to VanPort’s contract and the exclusion covers “[a] delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.” CP at 535, 528.
C. Professional Services Exclusion
I would also conclude that the professional services exclusion exempts TIE from a duty to indemnify VanPort. TIE amended its policy to include an exclusion for supervisory or inspection services rendered by engineers, architects, or surveyors. CP at 538. The exclusion stated:
EXCLUSION—ENGINEERS, ARCHITECTS OR SURVEYORS PROFESSIONAL LIABILITY
This endorsement modifies insurance provided under the following:
COMMERCIAL GENERAL LIABILITY COVERAGE PART. This insurance does not apply to “bodily injury,” “property damage,” “personal injury” or “advertising injury” arising out of the rendering or failure to render any professional services by or for you, including:
1. The preparing, approving, or failure to prepare or approve maps, drawings, opinions, reports, surveys, change orders, designs, or specifications; and
2. Supervisory, inspection, or engineering services.

Id.

TIE asserts that “[t]hroughout the history of the coverage, TIE had identified VanPort as an engineering company,[*77610] and therefore had argued that this exclusion applied to it.”11 Suppl. Br. of Pet’r Truck Ins. Exch. at 10. This exclusion appears straightforward and would exclude TIE from insurance coverage for VanPort’s consulting services. Therefore, I would conclude that even were we to determine that the CGL policy overall coverage applied, this and the other exclusions would exempt TIE from providing coverage.
Ill
Bad Faith
On December 7, 1993, TIE sent a letter to VanPort denying both insurance coverage and its duty to defend based upon a list of policy exclusions, including those presented here. VanPort’s attorneys requested a more detailed explanation of the denial, with a clarification of relevant facts or applicable law. In response, TIE instituted a declaratory judgment action against VanPort, its principals and the customers, seeking confirmation that it was not obligated to afford coverage. In response to this action, VanPort alleged bad faith for TIE’s delayed reply and an alleged failure to investigate the customers’ claims. The trial court agreed with VanPort’s allegations.
On a subsequent motion for summary judgment, the trial court found that TIE acted in bad faith when it failed to defend VanPort and awarded VanPort attorney fees.12 TIE opposed the bad faith claim arguing that the denial letter established the applicable exclusions and unless its reliance on those terms was frivolous and unfounded, the court could not find bad faith. CP at 647-49. The trial court ignored both of these arguments, however, instead relating *777those issues to its Consumer Protection Act (chapter 19.86 RCW) claim. CP at 722, 746.
When breaching a duty to defend, an insurer acts in bad faith when it refuses to defend its insured and the refusal is “unreasonable, frivolous, or unfounded.” Kirk v. Mt. Airy Ins. Co., 134 Wn.2d 558, 560, 951 P.2d 1124 (1998). “A denial of coverage based on a reasonable interpretation of the policy is not bad faith.” Transcontinental Ins. Co. v. Wash. Pub. Utils. Dists’ Util. Sys., 111 Wn.2d 452, 470, 760 P.2d 337 (1988) (citing Castle & Cooke, Inc. v. Great Am. Ins. Co., 42 Wn. App. 508, 518, 711 P.2d 1108, review denied, 105 Wn.2d 1021 (1986)). Even if incorrect, the denial “does not violate the Consumer Protection Act if the insurer’s conduct was reasonable.” Transcontinental, 111 Wn.2d at 470 (citing Villella v. Pub. Employees Mut. Ins. Co., 106 Wn.2d 806, 821, 725 P.2d 957 (1986)).
Furthermore, an insurer’s incorrect denial of coverage does not constitute an unfair trade practice and, hence, a violation of the Washington Consumer Protection Act, if the insurer had a reasonable justification for denying coverage. See generally Keller v. Allstate Ins. Co., 81 Wn. App. 624, 634, 915 P.2d 1140 (1996). Considering that at least one of the exclusions applies, and a CGL policy does not cover the type of claims presented, TIE possessed a reasonable justification for denying coverage and its duty to defend. Accordingly, TIE did not act in bad faith.
This court should find that TIE has no duty to indemnify VanPort and did not act in bad faith, but that it still had a duty to defend. Hayden, 141 Wn.2d at 64 (“It is well settled that the duty to defend under a CGL policy is separate from, and broader than, the duty to indemnify.”). Given this broad duty, I would agree with the majority that TIE possessed a duty to defend VanPort, but I disagree that TIE breached this duty in bad faith.
For these reasons, I dissent.
Alexander, C.J., and Smith and Madsen, JJ., concur with Bridge, J.

 We will pay those sums that the Insured becomes legally obligated to pay as damages because of bodily injury or property damages to which this insurance applies. This insurance applies only to bodily injury and property damage which occurs during the policy period. The bodily injury or property damage must be caused by an occurrence. The occurrence must take place in the coverage territory.
Harris, supra, at 21-1.

 ‘Comprehensive” evolved to “Commercial.” Harris, supra, at 21-2.

 CP at 220, 246.

 CP at 192.

 CP at 656, 721. The trial court’s finding of bad faith results from a motion for summary judgment, hence we review the record de novo and can reach our own conclusions. Duckworth v. City of Bonney Lake, 91 Wn.2d 19, 21-22, 586 P.2d 860 (1978).