A commercial general liability (CGL) insurance policy that contains a requirement that the loss occur and be reported by the policyholder within the same policy year, and does not include retroactive coverage was in violation of Washington public policy. In Preferred Contractors Ins. Co. v. Baker & Son Construction, Inc., 2022 Wash. LEXIS 426(Aug. 11 2022), the court looked to RCW 18.27.050 which provides that registered contractors bear financial responsibility for bodily injuries and death, and found that a denial of coverage a policy stemming from a wrongful death on a construction site was contrary to the statutorily-supported public policy of protecting the public.
Facts of the Case
Cox Construction was hired to work as the general contractor in a remodeling project for the Roadway Motel in Long Beach, Washington. Cox hired Baker & Son Construction, Inc. (Baker) as a subcontractor on the project. During the course of the project, an employee of Baker allegedly caused a two by four to fall from a railing and hit Ronnie Cox, who was the owner of Cox Construction, on the head. Baker reported the incident to his insurance company, but he was advised that no action needed to be taken because at that point there was no known injury as a result of the incident. It was not until later that night when Cox died in his sleep that a potential claim erupted.
Angela Cox, Cox's widow, filed a wrongful death claim against Baker almost a year later. Baker notified his insurance company, Preferred Contractors Insurance Company (PCIC), but it denied the claim only agreeing to defend Baker under a reservation of rights. PCIC gave several reasons for denying the claim, but the one addressed in this case concerns the claims-made nature of the policy and the timing of the claim's submittal to the insurance company. PCIC issued two policies to Baker. One had a coverage period of January 5, 2019-January 5, 2020 and the other January 5, 2020-January 5, 2021. Both were claims-made policies. However, the insuring agreement provided coverage with language more similar to an occurrence policy:
This insurance applies to “bodily injury” and “property damage” only if: (1) The “bodily injury” or “property damage” is caused by an “occurrence” that first takes place or begins during the “policy period”. An “occurrence” is deemed to first take place or begin on the date that the conduct, act or omission, process, condition(s) or circumstance(s) alleged to be the cause of the “bodily injury” or “property damage” first began, first existed, was first committed, or was first set in motion, even though the “occurrence” causing such “bodily injury” or “property damage” may be continuous or repeated exposure to substantially the same general harm; (2) The “bodily injury” or “property damage” resulting from the “occurrence” first takes place, begins, appears and is first identified during the “policy period”. All “bodily injury” or “property damage” shall be deemed to first take place or begin on the date when the “bodily injury” or “property damage” is or is alleged to first become known to any person, in whole or in part, even though the location(s), nature and/or extent of such damage or injury may change and even though the damage or injury may be continuous, progressive, latent, cumulative, changing or evolving.
The policies were characterized as "claims-made" because a "claims-made and reported limitation endorsement" was added to the policy. Specifically it stated, "T]his policy shall apply only to claims first made against the insured and reported to us in writing during the policy period. Coverage under this policy will only apply to claims made against the insured and reported to us on or after the policy inception date and prior to the policy expiration date as shown on the Declarations page(s), subject to the extended reporting period provided below. If prior to the effective date of this policy, any insured had a reasonable basis to believe a claim may arise, then this policy shall not apply to such claim or any related claim. As a condition precedent to any coverage (defense or indemnity) under this Policy, You must give written notice to the Company of any claim as soon as practicable, but in all events no later than: (a) the end of the Policy Period; or (b) 60 days after the end of the Policy Period so long as such “Claim” is made within the last 60 days of such Policy Period."
The endorsement also stated that it did not provide for continuous coverage between policies that were renewed and limited the policy period to one year. Cox died in October 2019 and Ms. Cox did not informed Baker of her intent to sue until September 2020. The 2019 policy did not cover the claim because it was not reported within the policy period, and the 2020 policy did not cover the claim because the incident occurred during the 2019 policy period, which was no longer in effect. The certified question this court addresses is: "When a contractor’s liability insurance policy provides only coverage for occurrences and resulting claims-made and reported that take place within the same one-year policy period, and provide no prospective or retroactive coverage, do these requirements together violate Washington public policy and render either the occurrence or claims-made and reported provisions unenforceable?"
Occurrence and Claims-Made Policies
CGL policies are generally of two types: occurrence or claims-made. Am. Cont'l Inc. Co. v. Steen, 151 Wn.2d 512, 517, 91 P.3d 864 (2004). With occurrence policies, liability attaches when an event happens during the policy period. In a claims-made policy, liability attaches when the claim is reported to the insurer during the policy period. Gulf Ins Co. v. Dolan, Fertig & Curtis, 433 So. 2d 512, 515-16 (Fla. 1983). "Unlike occurrence policies, where the insurer contracts to cover risk that is by its very nature open-ended, claims-made policies attempt to define the risk so that it is ascertainable at the end of the policy period." Id. Most claims-made policies also contain a retroactive date, but this provision was not present in the policy in question in the current case. The purpose of this retroactive term is to prevent any gap in coverage for the insured. Without a retroactive date, the policy will not cover any incidents that occurred before the effective date, even if the claim was not known until after that date.
Washington State Public Policy and Claims-Made Insurance Contracts
Chapter 18.27 of RCW provides a statutory basis for Washington public policy that contractors take financial responsibility for bodily injuries suffered at the work site, or as a result of work on the project. Although generally insurance policies are considered private contracts, they may be subject to a public policy exception. "Insurance contracts are private contracts and parties are ordinarily free to exercise their freedom of contract to limit the liability covered in the policy." Mut. Ins of Enumclaw Ins Co. v. Wiscomb, 97 Wn.2d 203, 210, 643 P.2d 441 (1982). The exception to this general rule occurs where the court finds that the insurance policy is in violation of public policy. State Farm Insurance v. Emerson, 102 Wn.2d 477, 481 (1984). "Public policy is generally determined by the Legislature and established through statutory provisions. The proper starting place for determining public policy then is applicable legislation." Cary v. Allstate Ins Co., 130 Wn.2d 335, 340, 922 P.2d 1335 (1996).
Mrs. Cox relies on section 18.27.050(1) of the RCW as the statutory basis for a public policy exception in this case. This section requires contractors to maintain insurance coverage, or take financial responsibility for losses caused by their negligence. This includes death to any person. This statute states its purpose, "to afford protection to the public including all persons, firms and corporations furnishing labor, materials, or equipment to a contractor from unreliable, fraudulent, financially irresponsible, or incompetent contractors." ECW 18.27.050
Washington courts have previously found public policy exceptions in the arena of insurance coverage. In Enumclaw Ins. Co. v. Wiscomb, 97 Wn.2d 203(1982), the court found that there was strong public policy against allowing a family or household exception after a car accident injured others in addition to the insured driver. The court reasoned that "The financial responsibility act created strong public policy in favor of assuring monetary protection and compensation to those persons who suffer injuries through the negligent use of public highways by others."
On the other hand, Washington courts have also refused to find a public policy exception to claims-made policies in cases where a statutory basis for a public policy exception does not exist. The statute relied upon must clearly show the Legislature's intent to compensate injured parties who would otherwise find themselves without monetary recourse. Here the Registration of Contractor's Act plainly states that every registered contractor must retain insurance coverage for bodily injury or death in the minimum amount of $100,000. RCW 18.27.050. The statute clearly communicates that its purpose is to protect the public from unreliable or negligent contractors. Although, it is not an express insurance mandate, it does sufficiently establish a statutory basis for a public policy exception promoting insurance coverage to compensate the injured or survivors suing for wrongful death.
Non-Retroactive Claims-Made Policies Without Prospective or Retroactive Coverage
As detailed above, the court found that a public policy exception is statutorily supported in this case, which requires that the contractor be financially responsible for negligent acts that causes bodily injuries and death to others. The court then considered the specific policy provisions at issue in this case. The declarations pages of the policies state: "CLAIMS MADE AND REPORTED: THIS POLICY PROVIDES COVERAGE ONLY FOR CLAIMS MADE AGAINST THE MEMBER/INSURED AND REPORTED TO PCIC IN WRITING DURING THE POLICY PERIOD (See Endorsement Form . . . .) Doc. 24, at 41, 104. The policy specifies it applies only if the “‘bodily injury’ or ‘property damage’ is caused by an ‘occurrence’ that first takes place or begins during the ‘policy period’.” Id. at 109. This language reflects that of an occurrence policy, but the attached endorsement language is that of a claims-made policy. It states: "The policy does not provide continuous coverage between renewed policies and additionally applies only to claims first made and reported within the policy period. " Id. at 149.
Reading these documents in conjunction with one another, the court found that PCIC only provides coverage for losses that occur or are reported within the written one year policy period. Claims-made policies generally do not violate public policy, but those without a provision for retroactive coverage may in some circumstances. In the case at hand, the insured was not even aware of the claim until the policy period following that in which the injury occurred. It was impossible for the insured to report the claim within the same time period that the incident occurred. The court noted that not many courts have addressed this issue. It looked to a case out of New Jersey for guidance.
In Sparks v. St. Paul Insurance Co., 100 N.J. 325, 339, 495 A.2d 406 (1985), the New Jersey Supreme Court determined that nonretroactive claims-made policies “combine the worst features of occurrence and claims-made policies and the best of neither by providing neither retroactive nor prospective coverage found in those policies." The court also noted the nature of liability reporting is such “that it would be the rare instance in which an error occurred and was discovered with sufficient time to report it to the insurance company, all within a twelve-month period.” Id. It ruled that the provisions in the nonretroactive policy limiting recovery to those claims occurring and reported within the policy period to be unenforceable. Id. at 341.
Washington values the right of parties to freely enter into contracts, including insurance contracts. In the case of the contract in question here. however, the legislature has clearly stated its policy that contractors bear financial responsibility for bodily injury or death caused by their negligence. Although the statute does not mandate insurance, it clearly mentions that insurance is the preferred method to support that financial responsibility. "While RCW 18.27.050 does not require insurers to issue occurrence policies, or provide retroactive coverage to contractors switching from an occurrence to a claims-made policy, insurers should not issues policies that essentially cause contractors to default on their statutorily mandated financial responsibility."
The insurance policy issued to Baker by PCIC did not provide for retroactive coverage and made it impossible to achieve coverage for an incident and a reporting of an incident that occurred during different coverage periods. The restrictive nature of this coverage was contrary to public policy. RCW 18.27.050 and RCW 18.27.140 support public policy that requires contractors to be financially responsible for any injuries caused by their negligence. In accordance with this public policy, a contractor's CGL policy that requires the loss to occur and be reported in the same policy year and does not provide retroactive coverage is unenforceable in Washington.