The coverage that wasn’t there
In May 2008, a teenager purchased alcohol at Myong Suk Day’s grocery store and shared it with his underage friends. The teenagers raced through Point Defiance Park and injured two pedestrians, William Lee and Dawn Smith, who sued Day in 2009.
Day contacted her independent agent, Michael Huh. Although Day and Huh had different versions of their first meeting and whether Day asked for liquor liability coverage, it was undisputed that Day’s general liability policy did not provide liquor liability coverage. Subsequent automatic annual renewals occurred without any coverage review. All renewed policies lacked liquor liability coverage.
Day claimed Huh told her she had insurance that covered the lawsuit and that she should contact her insurer, Mutual of Enumclaw Insurance Company (MOE). Huh tendered the claim to MOE for Day. MOE instructed Day “to contact her personal attorney.” The MOE claims adjuster had no explanation for why MOE did not interview Day about the coverage issue or ask Day what she had discussed with Huh or why she thought she had liquor liability coverage. MOE did not tell Day that Huh claimed she had declined liquor liability coverage.
MOE notified Day that it would appoint an attorney to defend her, but because she did not have liquor liability coverage, MOE would defend under a reservation of rights. MOE also informed Day that it might bring a declaratory judgment action to ascertain its obligations under the policy.
MOE filed a declaratory judgment action (the coverage case) to ascertain its obligation to defend or indemnify Day for Lee and Smith’s personal injury claims. In her answer, Day sought reformation of the policy to include liquor liability coverage or to otherwise provide her coverage.
Day amended her answer to allege bad faith, Consumer Protection Act and Insurance Fair Conduct Act (IFCA) violations, and coverage by estoppel. The amended answer also added Huh as a third-party defendant.
The parties in the personal injury lawsuit reached a settlement in June 2011. MOE paid Lee and Smith $125,000 on Day’s behalf. Day agreed to entry of judgments for Lee and Smith against Day totaling $7,986,222. Lee and Smith agreed not to execute on the agreed judgments except as to Day’s claims against Huh. Day assigned Lee and Smith all rights, privileges, claims, and causes of action that she might have against Huh but retained her claims against MOE. The settlement included an obligation to fully satisfy the judgments against Day once the claims against Huh were concluded. The agreement also contemplated a hearing to ascertain the reasonableness of the settlement.
The court dismissed the personal injury lawsuit with prejudice as “fully settled and compromised,” including all claims against Day. But the agreed judgments were not entered, there was no reasonableness hearing, and the plaintiffs did not sign and deliver a satisfaction of the agreed judgments to be filed when claims against Huh were resolved.
Lee and Smith, as assignees of Day, later reached a settlement with Huh in the coverage lawsuit. Huh paid Lee and Smith $600,000, and the court dismissed all claims against Huh with prejudice.
Almost a year later, the court granted an agreed motion to reopen the personal injury action. The court also consolidated the personal injury action with the coverage case. The court entered an order on June 27, 2014, finding the settlement reasonable, and entered the agreed judgments in favor of Lee and Smith against Day.
The remaining claims in the coverage case were scheduled for trial. Before trial, the court ruled that the jury would determine whether MOE breached its duty of good faith and would assess any damages for Day’s emotional distress; the judge would decide whether to impose the remedy of coverage by estoppel and whether to reform the policy.
The jury found that MOE’s bad faith caused Day emotional distress damages in the amount of $300,000. Based on the IFCA multiplier, the court awarded Day an additional $600,000 in damages. The court authorized the entry of a supplemental judgment for attorney fees to Day, but no supplemental judgment was entered.
The court denied Day’s claim to reform the policy, but applied coverage by estoppel to award Day a judgment against MOE in the amount of the agreed judgments for Lee and Smith, with interest, totaling $10,460,366.14.
MOE appealed; Day cross appealed.
On appeal, MOE argued that Day was not entitled to a presumption of harm and coverage by estoppel, because the court concluded that, even if a presumption of harm applied in this case, such presumption was rebutted because of the settlement provision to fully satisfy the agreed judgments once the claims against Huh were resolved in any manner. The court reversed the $10,460,366.14 judgment in favor of Day against MOE, based on coverage by estoppel.
The coverage trial addressed whether MOE engaged in bad faith by failing to adequately investigate Day’s claim and by failing to keep Day advised about that claim. MOE challenged the trial court’s refusal to give its proposed instructions on the legal standards related to policy reformation. The appellate court found that the trial court adequately instructed the jury on the requirements for a showing of bad faith and the elements Day was required to prove to establish bad faith.
On cross appeal, Day challenged the denial of her claim to reform the policy. She argued that the trial court erred as a matter of law and should have inquired “whether clear and convincing evidence of inequitable conduct by the insurer deprived the insured of the full benefits of the policy to which she believed she was entitled.” The appellate court concluded that the trial court did not commit an error of law, rely on insufficient evidence, or abuse its discretion when it concluded that Day had not met her burden of clear, cogent, and convincing evidence to support reformation of the policy to include liquor liability coverage.
The court affirmed the judgment in favor of Day for $300,000 for emotional distress damages and the $600,000 of multiplied damages under IFCA awarded by the trial court.
Mutual of Enumclaw Insurance Company vs. Day-Court of Appeals of Washington, Division 1-February 6, 2017- No. 75633-8-I.